Rare Earths: Make Trade, Not War
It would not be the first time in the history of mankind that an expansionary or imperial state decides to grab instead of trading or, more in tune with modernity, instead of letting its subjects free to trade. Thus far, it is only a possibility, but it does not take much imagination to see what could happen. The current issue of The Economist (May 30, 2019), summarizes one possibly triggering issue:
The latest skirmish in the trade war saw China threaten to limit supplies to America of rare earths, a group of 17 metals vital to fast-growing businesses such as electric cars but also widely used in the defence industry. China accounts for the vast bulk of rare-earth production; for some of the metals it is the sole producer.
The threat is serious enough to have led to a price surge in rare-earth metals (“China Trade Fight Raises Specter of Rare-Earth Shortage,” Wall Street Journal, May 31, 2019).
Many of the rare-earth deposits, from which the precious elements or metals are extracted, are located in China, but they are also found in other countries, including the United States. The main problem is that their processing generates a large amount of pollution, the control of which implies larger production costs in the West. (In this case, we haven’t yet heard American protectionist rulers complain about the low wages and difficult working conditions of low-wage workers competing with American workers.) An export restriction by the Chinese government or, a fortiori, an export embargo would, perhaps dramatically, push up the price of important technologies in the West, besides threatening national security in a much more serious way than the sales of German Mercedes to Americans. As one of China’s state media said, rare earths are a “trade trump card” (“Xi Jinping Flexes China’s Trade Muscle With Visit to Rare-Earths Hub,” Wall Street Journal, May 21, 2019).
The Chinese government restricted rare-earth exports in the early 2010s, which Hillary Clinton saw as a “wake-up call.” But in 2014, the World Trade Organization ruled the restriction illegal, and the Chinese government dropped it. The WTO does not have this authority anymore, thanks to its sabotage by the US government. (See “America and China Are in a Proper Trade War,” September 20, 2018).
If the Chinese government restricted or forbade the export of rare-earth elements or products, substitutions would be possible, but would bring higher costs. Texas Mineral Resources wants the US government to protect a future American rare-earth processing industry, which also means higher costs.
Time to recall a few classics. In The Wealth of Nations, Adam Smith wrote:
By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expence for which at least equally good can be brought from foreign countries.
In a similar vein, Frank Taussig, the famous American economist who, more than a century ago, published several versions of his Tariff History of the United States, reflected:
It may be said that very good pineapples can be grown in Maine, if only a duty be imposed sufficient to equalize cost of production between the growers in Maine and those in more favored climes.
Even if the comparative advantage Chinese rare-earth processing industry comes partly from environmental regulations in the United States and other developed countries, it is still a comparative advantage. (I discussed this my EconLog blog post “Taking Comparative Advantage Seriously,” November 17, 2017.)
There are three ways one can get one’s hands on a something one wants: (1) do-it-yourself; (2) trade something else for it; or (3) steal it. If the “one” in question is a national state that has the power to impose a “deal” to all its subjects, the potential problems get worse. The alternatives for the state, whether it is acting out of its own interests or in the interest of those of his subjects who need the resource (the two motivations not necessarily being different), are between (1) enforcing autarky, (2) allowing trade, or (3) making war.
Will individual American importers or their intermediaries be allowed to make their own deals with Chinese processors of rare earths or manufacturers of derived products? Will the Chinese economy be welcome among international traders? If not—if the US government continues waging a trade war—the probability that the Chinese government will restrict rare-earth exports increases. And so does the probability that the US government will, at some point, decide to grab the rare-earth metals it wants? Nationalism and authoritarianism are contagious and they can snowball rapidly.
I suspect that the probability of war between the United States (and its allies, as it will probably still have some) and China is underestimated. Peter Navarro, a senior advisor of President Trump, appears to have been working on this goal all along (for some evidence, see “Peter Navarro’s Conversion,” Regulation, Fall 2018). When we say “war between the United States and China,” it means war between the US government and the Chinese government, each of which bringing all its “national resources”—that is, you—into the war (see Bertrand de Jouvenel’s 1945 book Du Pouvoir, translated in English as On Power). Despite the nationalist and collectivist frosting, it would not be a piece of cake.
I don’t believe that there cannot be a just war. Defending individual liberty against a foreign military attack would be a just cause. But defending the power of one’s own government to dictate trade deals or no-deals to one’s fellow citizens or to grab foreign resources or even to extend liberty by force over the world à la Napoléon are certainly not just causes.