Last week China announced that it would adhere to a World Trade Organization (WTO) ruling from last year by removing export quotas among other restrictions on rare earth minerals (RE). After controlling the global market for a number of years and extracting handsome rents, why is Beijing suddenly deciding to comply?

It probably has little to do with the Chinese deciding to play by the rules and more to do with the realization that their attempt to use their dominant position to coerce political concessions has backfired. China’s monopoly of RE production has been quickly slipping away due to market forces since it “slashed” export quotas in 2010.

In 2010, China produced 97 percent of the world’s rare earth minerals, which are used in high-tech products such as wind turbines, cell phones, and hybrid cars. In the same year, China began restricting these exports and the price of many RE rose tenfold. At the time, there was a global scare that the Chinese would use the precious minerals as an economic weapon, particularly after they severely restricted exports to Japan due to a political dispute.

Fast forward four years. Today, the Chinese share of the RE industry has dropped to 70 percent and is set to fall much further. As we are witnessing in the crude oil industry, the best cure for high prices are high prices. The skyrocketing price of RE caused production to start or expand in Japan, Malaysia, and Australia. Manufacturers found ways to economize by recycling the minerals or finding substitutes. Chinese manufacturers of the minerals found ways to smuggle. By the late 2000s, it was believed that they were selling 15–30 percent of their RE outside China.

And there is a lot more in the pipeline. There are three very large mines coming online in the next two to four years. Molycorp in California, Lynas in Australia, and GFW in South Africa are expected to produce 30–40 percent of world demand. India is working with Japan on a 5,000-ton-per-year RE plant, and Russia has been developing a method to extract RE from uranium. In addition, there are countless smaller mines opening elsewhere.

What are the lessons here? First, as long as there is potential entry into a market, monopolies are nothing to worry about. Second, politicians do not understand nor appreciate the power of markets. The Beijing bureaucrats were as surprised at the rapid market response as the Organization of the Petroleum Exporting Countries was to the shale oil revolution. Maybe this will be an economics lesson for them, but I would not hold my breath.