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The lesson for China: Power means responsibility

No one could have been surprised when the G20 finance ministers left their two-day confab in the tourist-drawing South Korean coastal city of Gyeongju without any agreement on what to do about widening trade imbalances and misaligned currencies.

Until the leading culprits, er trading partners -- namely the U.S. and China -- decide it's in their best interests to have new multilateral rules of international conduct, nothing is going to happen.

The we're-all-in-this-together attitude that flourished all too briefly after the near-collapse of the world financial system is gone. And it probably won't come back until the next near-death experience.

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China has long coveted the power and prestige that comes with being a major economic force. Now that it has become just that, Beijing has an obligation to drop its old reliable thuggish ways and play by fairer rules.

As French economist Nicolas Véron told me recently: "The big fact is not that some countries are manipulating their currencies, because this is not new. The big fact is that one country which is manipulating its currency and has for a long time has become one of the pillars of the global economy. I don't think anybody accuses China of having worse behaviour than before. It's just that China has become so important that the requirement that it should play by the rules is gaining prominence."

Yet the evidence shows that just the opposite is happening. The Communist leadership seems eager to deploy its growing financial and economic muscle to further its political aims, as the Japanese inadvertently discovered when they arrested the captain a Chinese trawler in Japanese waters (Beijing says the area belongs to China).

Suddenly, Chinese exporters of unpronounceable materials like ytterbium and praseodymium found a reason not to fill Japanese orders for what are called rare earth metals. Which is problematic, because these happen to be vital in the manufacture of a host of high-tech, communications and environmentally friendlier stuff, ranging from hybrid car batteries and magnets used in wind turbine generators to recycling processes.

And it so happens that China has a stranglehold on the production of this stuff – not because it can't be found all over the world, but because the Chinese have buried their competition, much as they did in, say, bicycles and toys, by attacking the market with overwhelming, cheap supply. On their way out the door, some overmatched American producers even gladly sold the Chinese the equipment they needed to produce the stuff.

Now, the Japanese have released the fishing boat captain without charges, and the rare-earth exports appear to be flowing again, but everyone else suddenly realizes this could become a serious problem. The G20 leaders have the item on the agenda for their own South Korean holiday in November. And the World Trade Organization is entering the fray, because China is a member, and it is not permitted under the rules to use trade as a political bargaining chip.

But in the to-hell-with-everyone-else style that seems to be back in vogue on the world stage, Ulrich Grillo, chairman of the German Industry Federation's committee on raw materials policy, offers a better way to ensure a steady supply from China while developing new sources, which can take a decade or more: Simply barter the German goods and technologies (along with the cash) sought by the Chinese. "We have to put our foot on the accelerator. Our rivals aren't waiting around," Mr. Grillo declared.

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The Beijing bureaucrats must be laughing all the way to the bank at the prospect of even higher prices and bidding wars to win their favour.

The whole mess ought to serve as a sobering reminder to any government foolish enough not to protect and develop its own crucial mineral assets.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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