Trade wars are never a good idea, because everyone loses. It’s widely known that it was a trade war that turned the 1929 crash into The Great Depression. Anyone with any sense has feared a trade war could do the same thing to The Great Recession.

Is one about to break out between the US and China, with the clean energy industry as the battlefield? It’s possible, but signals are very mixed. Here’s what’s going on.

Rare Earths

In order to make all the cool innards of clean energy technology – everything from batteries to flat-screen TVs to wind turbines – you need certain hard-to-find elements, known as rare earths.

How pervasive? Each Prius battery uses 1 kilogram (2.2 pounds) of neodymium (which makes for powerful magnets); another rare earth, lanthanum, is critical to old-tech petroleum refining.

These are a bit like the “unobtainium” of the film “Avatar”; and just like in “Avatar” they come from a very limited number of places. In the real world, more than 95% are currently mined in China.

“We are addicted to rare earths as much as we are addicted to oil,” Byron King, editor of Energy & Scarcity Investors, told Marketwatch. “Without these elements, much of the modern economy will just plain shut down… Really, if there are limited rare-earth supplies in world markets, then there will be a very limited ‘green’ future.”

Analysts have feared for some time that China might take advantage of its near-monopoly control of the rare earths market. They appear to have been doing that… but it’s been changing from day to day.

Timeline of the current issue:

2005-2010: China cuts back on exports of rare earths, imposing quotas and taxes.

July 2010: China reduces the quota a further 72%.

September 2010: China stops exporting rare earths to Japan, but denies it has stopped exporting rare earths to Japan. Why deny? So as not to officially start a trade war.

October 15: US trade officials announce they’re going to investigate China’s subsidies of its clean energy industry, calling them an unfair trade practice. How brilliant is that? Especially considering the billions of stimulus money the US has been pouring into our own clean energy sector…

October 18: Chinese officials respond to the US trade investigation by shutting down (or just delaying?) shipments of rare earths to the US and Europe. The New York Times quotes “China experts” as saying this might be a sign of “ascendance of economic nationalists”.

October 19: “We’re doing it to protect the environment,” says Chinese embassy official Wang Baodong. “But I don’t see any link between China’s reasonable rare earth export control policy and the irrational U.S. decision of protectionist nature to investigate China’s clean energy industries.” Suuure. “It’s also a bit hypocritical for the developed countries to ask China to reduce carbon emissions and reduce energy consumption, while criticizing China’s move to consolidate the rare-earth industry to preserve its own environment.” (This may be more than lip service; rare earth mining can be highly toxic, and China does appear to be shutting down the worst offenders.)

October 20: Chinese officials deny there is a policy of blocking shipments, and say they may even increase exports next year. But they also say “China will continue to export rare earth to the world, and at the same time, in order to conserve exhaustible resources and maintain sustainable development, China will also continue imposing relevant restrictions on the mining, manufacture and export of rare earths.”

That makes some sense; as a developing industrial powerhouse, China will need these elements for its own manufacturing. China doesn’t want to be a commodities exporter – that’s a dead end. They want good, lucrative manufacturing. And this is one way to push that. “Companies that want rare earths from China can get them. They just have to move their production facilities to China,” Sean Brodrick, a natural-resources analyst at UncommonWisdomDaily.com, told Marketwatch.

So what’s actually going on? We’ll let you know if and when we figure it out.

(Photo of neodymium magnet hearts by Jared under a creative commons license)