Navigating geopolitical risks: The impact of the Senkaku/Diaoyu Islands dispute on global rare earth markets and diversification strategies

Abstract

In 2010, Japan and China experienced a geopolitical conflict known as the Senkaku/Diaoyu Islands Dispute. At the time, Japan had relied primarily on China for its imports of rare earth metals, raising speculations that China would impose a targeted retaliation against Japan and cause a significant increase in rare earth metal prices for Japan. Contrary to this forecast, this research shows that the dispute did not lead to a targeted impact on Japan; rather, China's decisions during the time of the dispute ultimately led to a global spike in the price of rare earth metals. Additionally, our empirical analysis suggests that international cooperation, particularly the WTO verdict in 2014, played a critical role in stabilizing prices and mitigating the initial price shocks caused by the dispute. Since then, Japan and other importers of rare earth metals have begun shifting their strategies of procuring rare earth metals by lowering their reliance on China. However, their strategies have not ultimately led to a successful diversification as importers still rely heavily on a select few source countries of rare earth metals, mainly China and Vietnam. Further, China retains its dominance as the primary processor of rare earth metals, leveraging protectionist-like policies to control global supply. As such, skewed market power over a single or limited suppliers of rare earth metal still poses substantial trade risks to importers. This paper presents strategies for importing nations of rare metal earth metals to better mitigate such risks.