Digging a deep hole: rare earths debacle puts U.S. trade policy under scrutiny

Free Traders: “Don’t Worry”

According to free market advocates, though, there is no reason to think that the disruption in the supply of rare earths means that industrial policy should be viewed in any terms other than price.

Derek Scissors, a research fellow at the Heritage Foundation, says that when the rare earths sector began to go overseas, it made perfect sense to allow it to do so because products manufactured in China were available at a lower cost.

“What’s the harm in allowing a single country to be your supply?” Scissors asked. “China can’t cut everyone off — they can cause a shortage over a certain period.”

That shortage, according to Scissors, will then be rectified by the market because domestic production will commence, and the intervening lag between foreign and domestic production as U.S. industries race to catch up cannot be blamed on a lack of government intervention. Rather, he says, it is the result of too much intervention in the form of environmental regulations.

“The market would have handled this just fine if it was allowed to, and it will still handle it, it just might take a while,” he said. Scissors claims that the value of rare earths has been exaggerated and that they are not important enough to warrant governmental intervention.

American Enterprise Institute resident scholar Kenneth P. Green agrees that it makes sense to buy a product on the world market if a country is unable to produce it economically domestically.

“You can’t suggest that companies should have continued to operate at a loss, or that the government take them over and run them at a loss,” he said. “That doesn’t make any sense.”

That’s exactly what some critics of the free market are suggesting, however, on the basis that rare earths are a strategic mineral that the U.S. has a vested interest in producing.

Green concedes that if rare earths had been deemed necessary by the military, it would have been justified for the government to intervene because, as he says, “the military has nothing to do with economics.”

But what about other reasons why rare earths might be regarded as valuable, such as facilitating the manufacture of green technology or other high-tech products in the U.S.?

Scissors argues that it is the market, not the government, which should set demand for green technologies.

“The Chinese are already providing cheap environmental equipment,” he said. “As an environmentalist, you don’t care where the equipment is coming from.”

But some environmentalists, like Brendan Cummings, do care where the equipment comes from. China has a poor record of environmental controls, so when Americans are buying hybrid cars that use rare earth minerals in their batteries, they might want to think about where those minerals come from, Cummings said.

Green says that intervening in the rare earths sector would be a mistake because the government would then have to intervene again to produce domestic demand, perhaps subsidizing the production of green technology, as well.

“These artificial markets are generally not competitive with private enterprises. The first mistake is creating them,” he said. “The second mistake is then to prop them up with another layer of government subsidy. You’re shifting more and more of the country’s capital into non-productive uses.”

Assisting domestic manufacturers would represent the imposition of “industrial policy,” and Green asserted that there are no proven examples that industrial policy works.

The case of rare earths has suggested to many experts that China’s policy is working, though, and that the U.S. might want to emulate it. In addition, Scott and other economists are looking toward other countries as illustrations of where industrial policy has been effectively implemented.

“You look at countries like Japan and Germany — these are high-wage developed economies that maintain large trade surpluses and large and viable manufacturing industries,” Scott added. “They do it with a wide variety of active government policies, and I think we should have been doing the same thing and we should do the same thing in the future.”

Green and Scissors were unmoved, maintaining that the market knows best and that the government should not intervene.

“The optimal answer is free trade and free markets,” said Green. “They are demonstrably the path toward human advancement.”