China's Rare Earth Advantage

The Week: How China can win a trade war in 1 move
Compared to the scale of the U.S. economy, the numbers are still relatively trivial and mostly theoretical. But if things do spiral into all-out trade war, it's worth noting China has a nuclear option.

I'm referring to rare earth metals.

These are elements like dysprosium, neodymium, gadolinium, and ytterbium. They aren't actually rare, but they do play crucial roles in everything from smart phones to electric car motors, hard drives, wind turbines, military radar, smart bombs, laser guidance, and more. They're also quite difficult to mine and process.

It turns out the United States is almost entirely dependent on foreign suppliers for rare earth metals. More importantly, it's almost entirely dependent on China specifically for rare earth metals that have been processed into a final and usable form.

Basically, if China really wanted to mess with America, it could just clamp down on these exports. That would throw a massive wrench into America's supply chain for high-tech consumer products, not to mention much of our military's advanced weapons systems.
China already severely damaged itself by cutting off rate earth exports to Japan in 2012. If it did this, it would make Trump's case for him and cause every nation that is wary of China's rise: Japan, Australia, Vietnam, Malaysia, Thailand, Indonesia, Russia and on and on to reduce their reliance on the Chinese economy. Just as the United States' abuse of the SWIFT system led China to create an alternative and for nations such as Iran to trade in gold rather than dollars. A monopoly position in a market can be maintained so long as potential abuse of its position is theoretical. Twitter, Google and Facebook are already spawning competitors and attracting government regulation for abusing their monopoly-like positions in the market.
America's problem has never been a lack of rare earth deposits — it has plenty. The problem has been maintaining a domestic industry to mine the minerals and transform them into final components. For a while, Colorado-based Molycorp made a go of mining rare earths at Mountain Pass. But it struggled to turn a profit, and eventually went bankrupt. In the middle of last year, a bankruptcy proceeding sold the mine to another China-involved consortium. The Chinese partner in the consortium, Shenghe, will have exclusive sales rights to the mined product for a period of time, according to sales documents.

That brings us up to date, and on to the final question: How do we fix things?

Free market types like to focus on environmental regulations. Mining rare earth metals is a nasty business, with a lot of chemical and radioactive byproducts. Properly disposing of that detritus is extremely costly, which makes mining rare earth metals for profit hard. In fact, regulators closed the Mountain Pass mine and fined it at one point for skirting the rules.

Of course, Molycorp was also badly damaged by the massive price swings brought on by China imposing and then ditching its export quotas.

But regardless, blaming the hippies for America's rare earth metal woes is doubling down on a bad strategy. Blinkered enthusiasm for free market solutions is how we lost domestic operations in the first place. Furthermore, China itself solved the environmental problem by just not caring, and created dystopian wastelands in the process.

If proper production of rare earth metals is too expensive for private profit, then government should step in. Either subsidize domestic industry, or nationalize it through direct industrial policy. Lots of companies are hard at work trying to find alternatives to rare earth metals as well, and we could be pouring public investment into that research.
Blinkered free trade theory is why it was lost. No one considered national security or the implications for high tech industries. "Potato chips, semiconductor chips, what is the difference?
It's easy to paint China as a villain here. The country does ride the uneasy line between ally and adversary. And it certainly wasn't prudent to allow China to corner the rare earth metal market. But ultimately China is just a hard-nosed global player, pursuing what it sees as its national interest. They've also taken a non-ideological approach to economics over the last few decades, picking market-based tools and big government policies as they see fit.

By contrast, America spent the same time period getting high on its own free market supply. And now it might just suffer the consequences.
The problem wasn't free market or even free trade theory, but the dominance of economic and financial considerations over national security, societal well being and other factors that should form a holistic view of a nation. Wall Street has too much power and Main Street too little. Part of the reason for the trade war is restoring a healthy domestic balance as well an an international one.

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