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Barack Obama has teamed up with Japan and some European countries and asked the World Trade Organisation to investigate China’s stranglehold on rare earths.
The move comes as China, which produces around 95 per cent of the world’s rare earths, again moves to restrict exports of the strategically important minerals.
US President Barack Obama said China was not playing by global trade rules and its actions put manufacturing in other countries at risk.
"Now if China would simply let the market work on its own we’d have no objections," he said.
"But their policies currently are preventing that from happening. And they go against the very rules that China agreed to follow."
European Union Trade Commissioner Karel De Gucht also criticised China’s actions.
"China’s restrictions on rare earths and other products violate international trade rules and must be removed," he said in a statement.
But the China Foreign ministry said its decision to cut rare earths trade was legitimate and within the rules of the WTO.
"Exploiting rare earths affects the environment, so in order to protect the environment and resources and to realise sustainable development, China is implementing some management policies," it said.
"We believe these polices are in line with WTO rules."
In a piece run by China’s state-owned Xinhua news agency commentators also said the row "may hurt economic relations between the world’s largest and second-largest economies".
Lynas Corporation executive chairman Nick Curtis told The Australian China had a "complex and possibly legitimate argument" about suspending rare earths production to protect its environment.
Late last year China’s largest rare earths producer suspended processing and said the move was about "balancing supply and demand".
Rare earths prices have been falling in recent months after climbing sharply from the beginning of 2009.