Heritage Foundation Misreads The Meaning Of U.S. Mineral Vulnerability

On October 6 the Heritage Foundation released an issue brief as part of its “Foundry” series that questioned the danger of U.S. dependence on China for so-called “rare earths.” Rare earths are exotic materials used in a wide range of military and commercial applications. There are no ready substitutes for those materials at present, and as the Heritage brief noted, China currently controls 95-97 percent of the global market. That’s a worrisome situation when Beijing has announced plans to limit exports. Nonetheless, the Heritage assessment criticizes the alarm expressed by U.S. politicians and businessmen, arguing that “the market has a built-in correction mechanism” that will remedy shortages.

That view is so shallow and wrongheaded that it can only have been written by somebody who has no real business experience. Why would any rational investor commit the vast funds required to develop competing sources or material alternatives when one country has absolute pricing power over a vital commodity? The risk of losing the investment is very high, and the likelihood of generating a reasonable rate of return is very low. China’s state-influenced producers could wipe out fledgling competitors at any time during the decade-long process of developing new sources by simply dropping their prices on rare earths to a level that would render the business case for investing untenable.

It isn’t news that the academics inhabiting think tanks often have no understanding of how markets actually work. However, the Heritage issue brief may tell us more than was intended about why conservative economics have come to grief in the first decade of the new millennium. President Bush implemented most of the key precepts in the supply-side playbook — tax cuts, deregulation, free trade — and yet somehow an economy that saw 20 percent job growth under Bill Clinton generated no net job growth under his supposedly pro-growth successor. Why is that?

There were lots of reasons, but the one conservatives have never quite grasped was that China joined the World Trade Organization in 2001 without abandoning its mercantilist trade and currency policies. Chinese products currently enjoy a 25-40 percent pricing advantage in the U.S. market due to currency manipulation, and Chinese producers benefit from an array of other unfair advantages ranging from state-sanctioned theft of intellectual property to domestic partnering requirements. Because conservatives have a vested interest in attributing poor U.S. trade performance to the federal tax and regulatory structure, they have largely ignored the fact that much of our trade deficit is caused by the mercantilist economic policies of a communist dictatorship.

If America had no trade deficit with China, the U.S. economic growth rate in the second quarter would have been twice the anemic 1.7 percent it actually produced. But conservatives don’t want to know that, because it’s more fun to bash President Obama’s economic performance. Some of these same conservatives opposed bailing out Detroit while their home states hosted Korean auto plants — without asking themselves why South Korean car companies export over a thousand cars per day to America while American companies export an average of 16 cars per day to South Korea. It’s just market forces at work, right? And the remarkable performance of Airbus in stealing most of the global market for airliners from Boeing — it’s due to market forces rather than the billions of dollars of illegal subsidies that the WTO says European governments give to Airbus, right?

For a political movement that likes the marketplace so much, it’s amazing how often conservatives seem to side with socialists. In the case of China, they manage to ignore the transgressions of a country that is both socialist and mercantilist. The notion that market forces will remedy our dependence on such countries for rare earths or anything else is really naive.