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The "Senkaku islands incident" of September 2010 triggered global speculation about China's alleged export ban on rare earths as a geopolitical manoeuvre. However, a deeper analysis suggests that attributing the subsequent spike in rare earth prices solely to this incident is oversimplified. China's prior export restrictions in July 2010 had already caused significant price spikes, casting doubt on the direct correlation with the Senkaku incident. Furthermore, the economic and reputational costs incurred by China from such a ban, coupled with potential WTO penalties, raises questions about the rationale behind such a move.
 
Given this view, and given the persistent and deeply-held fears of future Chinese export bans, this paper questions how seriously should the West treat recent Chinese export restrictions on gallium, germanium, graphite and rare earth processing technology? Are they more symbolic retaliations than strategic moves designed to win specific geopolitical advantage? 
 
This paper argues that misinterpreting the Senkaku incident could exacerbate tensions between China and the West, potentially leading to military escalation. It is critical to approach such incidents with a nuanced understanding of market dynamics and geopolitical motivations, rather than relying solely on initial impressions or media narratives. Although the Senkaku incident underscored the Western need for diversified supply chains and strategic planning, attributing singular geo-strategic reason to complex market fluctuations may overlook the broader economic and environmental factors at play. 

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The Senkaku islands are a group of islands to the north of Taiwan and off the south coast of Japan in the East China Sea. The islands are the focus of a century-old territorial dispute between China and Japan. Although China claims the islands, Japan has controlled them since 1895. As a consequence of this ongoing territorial dispute, the public has no access to the islands, and the Japanese Coast Guard and Navy patrol the maritime boundary watchfully.
 
On 7 September 2010, a Chinese fishing trawler sailed into these Japanese waters and the captain and crew were arrested by two Japanese Coast Guard vessels. A major diplomatic dispute between the two nations occurred. China cut off high-level communications with Japan, arrested four Japanese construction workers in China, and threatened ‘strong counter measures’. The incident was reported on extensively and almost exclusively in the New York Times (NYT) by journalist Keith Bradsher. On 22 September 2010, the NYT reported that China had imposed an embargo on rare earth exports to Japan; on 24 September that the Chinese captain and crew were now released; on 10 October that the embargo was still in place and was potentially extended to the U.S. and EU; and on 19 November, that China’s rare earth exports to Japan had recommenced. The then Chinese Prime Minister, Wen Jiabao, explicitly denied any export ban on industrial minerals for political purposes and stated that China had no intention of imposing a ban at any point in the future. And yet this event has lasted long in the memory. Western counter-strategy of China's much vaunted control of critical mineral supply chains is often predicated on this incident. 
 
What makes the incident more complex than is its connection to the ongoing export restrictions that started earlier that year in June 2010, three months before the Senkaku islands incident. In June, China began to reduce its export quota for rare earths by 70%. As a result of these actions, before the alleged embargo in September, rare earth prices had already spiked by 850%. These actions precipitated a significant and ongoing spike in REE prices and, of course, in the share prices of associated companies. For example, from June 2010 to August 2011, the average price of Cerium Oxide (Ce2O3) increased by 2400% from US$6/ kg to US$149.5/kg. The price of Neodymium Oxide (Nd2O3) increased by 991% from US$33/kg to US$360/kg and the price of Dysprosium Oxide (Dy2O3) increased by 700% from US$300/ kg to US$2400/kg during the same period. By the time the NYT had written its first article on 22 September, rare earth prices were already extremely high. But in the eyes of the world the unprecedented surge of rare earths prices was directly linked to the alleged ban following the fishing trawler incident, not the export restrictions from June earlier in the year. Ever since, China as been accused of manipulating and leveraging its stranglehold on the global supply of rare earth elements specifically to effect geopolitical gains. There is no argument here that China didn’t impose restrictions on rare earths in 2010, as the WTO ruling in 2014 confirmed it did, but this report does argue that the Senkaku incident a coincidence not a cause of this rare earth market volatility at the time.

 
 

One reason this paper further doubts the full embargo is on the grounds of the rational actor model. On what rational basis would China wish to incur the reputational damage that inevitably ensued? Applying even a rudimentary Bayesian analysis to the incident, the consequences would clearly would have been foreseeable: the outcome of intentionally targeting Japan with a ban on exports of rare earths would not be worth the consequences. For example, on a global scale, after years of building a trusting relationship with the West since accession to the WTO in 2001, China was now perceived to have targeted its neighbour in retaliation and as punishment for perceivable geopolitical gains over territory under dispute for over a century. It doesn't quite make sense. 

 

Nevertheless, in the eyes of the world, largely it should be said, thanks to the New York Times articles, the paradigm shifted. In Washington, Congress was quick to come to its conclusion that this was a geopolitical manoeuvre. In September 2011, the Subcommittee on Asia and the Pacific on “China’s Monopoly on Rare Earths: Implications for U.S. Foreign and Security Policy” cited China’s “willingness to use economic tools to achieve diplomatic goals”. The opinion of the rest of the world swiftly followed. The U.S., EU and Japan all complained to the World Trade Organisation (WTO) and initiated legal proceedings against China. An additional sixteen WTO countries reserved their rights to join these consultations with the WTO on China’s behaviour; and all argued that China has breached the terms of the 2001 Protocol of Accession to the WTO. China repeatedly denied they had banned exports of rare earths and later argued that the July restrictions were imposed for domestic environmental reasons. The WTO ruled against them, and ever since, China has been established as a potential threat to the security of Western rare earth (and now all critical mineral) supply chains.
 
 

Asides from the significant immediate reputational damage that ensued, China’s rare earths market also suffered severe economic damage after the incident. For one thing, there was a significant  upsurge in Chinese illegal rare earth trading. This began to undermine China's state monopoly of the market, and as a consequence, China’s 97% control of the global rare earths market in 2010 had dropped to 85% by 2014. On top of which, China was then (inevitably) forced to abandon its June 2010 economic policy on export restriction quota for rare earths in order to comply with the WTO ruling against it. The WTO also ruled that if China breached its rules on export restrictions again, its trading partners could invoke immediate and substantive penalties. Meanwhile, Japan, the U.S. and EU all began to diversify their rare earth supply chains by funnelling investment into reopening legacy rare earth mines, such as the Mountain Pass mine in the U.S., and the Mt. Weld mine in Australia. Furthermore, for the first time, many governments around the world began to evaluate their exposure to critical mineral supply chain risks. The list of consequences was exhaustive. Given this, why would it do so; and why risk doing so again in the future?
 
 

Ever since the incident, mentioning Senkaku reiterates the fear that China would be prepared to leverage its dominance of rare earths supply chains again for geopolitical gain. Western scholarship argues widely that China could impose an export ban in the future in an act of economic manipulation and geopolitical coercion. The West is intent on loosening the Chinese Communist Party’s grip on critical mineral supply chains. In large part to do with Senkaku, China’s dominance is perceived as a weapon of great geo-economic power. 
 
In fact, it is now irrelevant whether China did or didn’t impose an export ban on rare earths to Japan in September 2010. What matters is that it was perceived to have done so. As one mineral trade expert put it, the Senkaku islands incident resulted in ‘years of demand destruction as many end-users looked to reduce their consumption or switch to alternatives’. To prove the point, China, rather than denying it anymore, has in fact leveraged this reputation to its own strategic advantage. For example, in 2019, in the context of the Trump administration’s trade war with China and the ongoing hostile rhetoric at the time, President Xi Jinping made a rare public tour of a rare earths processing facility. This was widely interpreted as a show of intent to threaten an export ban on rare earths. Indeed, the editorial that followed in the Chinese state-run Global Times newspaper argued explicitly that exports of rare earths could be used as a potential weapon in the ongoing trade war.

 

China has turned a PR nightmare into a success story. It has leveraged its reputation for banning rare earths and critical minerals of other kinds. It has weaponised its intentions. This offers China an advantage. Notwithstanding the defensive deterrence it retains in its ongoing trade war with the U.S., it offers an offensive capability that unnerves Western policymakers. This causes a great deal of time to be wasted arguing about and planning for the next set of export controls on a critical mineral or the technology related to part of the critical mineral supply chain. China can observe readily, with relatively little effort, how Western coalition behaves under relatively little duress. Such strategic advantages are hard to create quickly. 
 

A majority of analysts take as fact the NYT articles in September 2010 and argue that China’s quasi-monopolistic presence in the rare earth market was translated into considerable diplomatic and political power. But others are more sceptical and are cautious to attribute political motive to the episode. Writing for the Council on Foreign Relations, Brookings scholar Professor Eugene Gholz argues that China’s advantages in the rare earths market were already slipping away as early as 2010 due to normal market behaviour, but particularly from increases in non-Chinese production and processing capacity, as well as innovations that helped reduce demand for some of the most crucial REEs. Some scholars are even sympathetic to the Chinese position; and others even question outright that China imposed an export ban on Japan entirely.
 
Given China’s restrictions on rare earths in June 2010 had already caused prices to spike by 850%, from the trading data available on the standard database of international trade - the United Nations Comtrade database - it is far from clear from the total value of monthly imports of rare earths to Japan from September to December 2010 whether this was unusual at all and due to an export ban, or merely the result of the sharp increase in prices caused by the June restrictions. Although this paper acknowledges that China’s export restrictions of rare earths by 70% in June 2010 did cause a sharp spike in rare earth prices, there is no compelling evidence this policy was directly targeting the Japanese market. And there is insufficient evidence that the price spike itself was caused by an export ban of rare earths in September after the incident. Furthermore, according to the UN Comtrade records of rare earths imports, if there was an export ban as a result of the dispute, it was not Japan that was most affected but Australia, who over the next nine years witnessed nine three-month periods where its share of Chinese rare earth exports dropped 75% below the average level. Yet Australia did not complain to the WTO nor raise any concern that they had experienced erratic shipments of its supply of rare earths from China, and yet there was ample justification to do so. In his piece in the journal International Security in 2013, Alistair Johnston says: “at the very least, the data suggests that the conclusion about an embargo requires considerably more evidence than much of the media and pundit coverage has heretofore provided”.  
 
 

In view of this analysis, there are other good reasons to cast doubt over the current and sustained narrative over the Senkaku incident.

 

1. There was and never has been any explicit claim to the outright ban on exports of rare earths to Japan by China, although there would have been no good reason not give one by now. Indeed, China has strenuously denied it since. 

2. When China’s Prime Minister Wen Jiabao announced ‘strong countermeasures’ in September 2010 immediately after the incident, it was not explicitly stated that this meant cutting exports to Japan. At the time, analysts and journalists were left to infer whether exports to Japan had been reduced or not specifically, or other trading partners.

3. In the years that followed, on more than three occasions until 2013, total monthly imports from China to Japan were as low (or lower) than during the alleged episode in 2010. Yet there were no reports made of any geopolitically-motivated export bans of rare earths to Japan in this period, or any other beyond the Senkaku incident. Surely the dip in monthly exports to Japan would have registered just as blatantly, and clearly as as result of further controls? Why no complaint?

4. Some have argued that as early as mid-August 2010, a month before the Senkaku incident, China’s intentions to alter their export quota were already known to the Japanese authorities. An article published in The Chinese Journal of International Politics in 2012 referencing Japanese and US news sources illustrated that the Japanese authorities and enterprises had prior knowledge of Chinese intentions to decrease their global exports of rare earths.

5. Ironically, in terms of the incident itself, the entire incident changed nothing over ownership of the islands, and the Chinese captain was released. Japan still administers the disputed islands and neither Japan nor any other country changed its legal views on the conflicting territorial claims. Given how famous the incident became, it is curious why the issue of sovereignty over the islands was not raised at the time once again. It would have been the ideal opportunity to do so for China. 

 
 
In July 2023, China announced restrictions (not a ban) on the export of two rare earths – gallium and germanium – both essential to the manufacturing and production of semi-conductors and advanced electronics. Once again, this raised the spectre of the 2010 incident. But China’s gallium and germanium restrictions were a symbolic retaliation to the U.S. CHIPS & Science Act 2022. They fell short of banning of exports of permanent magnets. Even if they had Japan would likely take over the supply chain anyway. In fact, many believe the significance of rare earth export restrictions or even full bans – or even the threat of them - are overrated. In October 2023 it imposed restrictions on exports of certain graphite products; and in December 2023, China banned the export of rare earths technology for extraction, separation and processing. All these export controls were underscored by reference to Senkaku. 
 
It should be stressed that multiple developed economies impose export quota on commodities of all sorts, including the U.S. imposing a wide range of sanctions and export controls on a wide range of countries. These are normative tools of foreign economic diplomacy and standard mechanisms for globally interdependent trading economies. In any case, so long as China benefits from having the global market integrated and uninterrupted, vast disruptions to global trade serve no-one. In fact, China would likely risk greater economic disruption than economic gains if it began issuing export bans on critical minerals at any point in the future.
 
If China did specifically targeted Japan with a ban on rare earth exports in 2010 as a result of the Senkaku incident, as it has been widely reported since, its strategy was not only unusually second-rate, but it backfired spectacularly in a number of ways as outlined above. But more importantly, misjudging the incident has had – and continues to have - serious geopolitical consequences. Recent tensions in the trading relationship between the U.S. and China are still exacerbated by an underlying appreciation and misjudgement of the Senkaku islands incident.
 
The legacy of Senkaku lives on. Western fear of Chinese export bans are real, and often founded on this misread incident from 2010. Perceptions of that incident are hard to shift. This is a classic example of a type of cognitive bias – 'anchoring' bias – that overvalues the significance of first impressions and ‘erroneously bases future judgements on this overvaluation’. But it actually has dangerous implications. Given the growing contentiousness between China and the U.S. over Taiwanese sovereignty, a timely export ban – or even the (mis)perception of one - on rare earths (or other critical minerals) could easily increase the risk of military escalation. Invoking the Senkaku islands incident will be inevitable. And it will cost lives. Although some analysts and scholars still debate Senkaku, Western journalists still too readily take as fact the NYT claims in 2010. They would do well to reappraise and not fan the hysteria. It plays directly into China’s hands, and risks lives.