Rare Earth Controversy Is Latest Evidence Of Need For U.S. Industrial Policy

The rapid growth of China’s state-influenced industrial complex is the big economic success story of the new century. The anemic performance of America’s free-enterprise system is a different kind of story. Somehow, the neo-socialists who run China have managed to sustain double-digit growth during a decade when America produced no net new jobs at all. U.S. policymakers are beginning to suspect it is no coincidence these divergent trends emerged after China was welcomed into the World Trade Organization in 2001.

One reason for the difference in performance is that China and America are at very different stages in their development. Another reason is that China has continued to practice mercantilist policies in promoting its exports despite membership in the WTO. But when you get beyond these two fairly obvious factors, it is hard to escape the conclusion that America’s poor performance is also traceable to some serious defects in the U.S. system. For instance, its corporate tax rate is twice the global average, and environmental policies are applied to industry in a fragmented, sometimes capricious manner. And then there is the issue of industrial policy: China has one, and America doesn’t.

A September 29 report by Gopal Ratnam and Peter Robison of Bloomberg Business News on the arcane topic of rare earths illustrates what happens in the economic relations between two industrial powers when one country has a carefully executed plan and the other just leaves things to the marketplace. Rare earths are exotic minerals long used in a variety of high-tech applications that now are in short supply due to surging demand for green technologies. As prices have risen, policymakers have belatedly discovered that China has built a virtual monopoly in rare earths, including those needed to make smart bombs, naval radars and other military systems.

Of course, many countries enjoy advantageous circumstances due to their unique mineral endowments, such as Russia’s role in supplying uranium and South Africa’s role in gold and chromium. What’s interesting about China’s position as supplier of 97% of all rare earths last year, though, is that it is way out of whack with the country’s share to relevant mineral deposits. Although it has the dominant position with 36% of global reserves, America is number two with 13%, according to the Bloomberg reporters. Yet America produces no rare earths. Why is that? The answer is complicated, but much of it comes down to the fact that Beijing has had a plan since 1986 to be a key player in rare earths while Washington has let the market decide. That plan was highlighted by former communist-party leader Deng Xiaoping, who said in 1992, “The Middle East has oil, and China has rare earths.”

End result: 18 years after Deng made his remark, China is the leading supplier of a vital commodity and America — which once operated the biggest rare earth mine in the world — is not a player. How many industries does America have to lose before Washington wakes up to the fact that leaving economic outcomes to the marketplace won’t work in a world of mercantilists and state-owned enterprises?