Economics

On rare earths, America must also let the market work

Yesterday morning, President Obama announced that the United States, in concert with Japan and the European Union, would bring a trade case against China regarding its export restrictions on rare earth minerals. These nations are reacting to significant cuts in Chinese rare earths exports (REEs), which dropped from 50,145 tons in 2009 to 30,184 tons in 2011. Exports levels for this year remain uncertain.

From the president’s statement, it’s obvious what this action is about for the United States: jobs, jobs, jobs. In the course of making this argument, Obama explained:

We want our companies building those products [that require rare earths elements] right here in America. But to do that, American manufacturers need to have access to rare earth materials — which China supplies. Now, if China would simply let the market work on its own, we’d have no objections. But their policies currently are preventing that from happening. And they go against the very rules that China agreed to follow.

The case against China, and the president’s larger concerns, certainly has merit. But in pursuing his desire to revitalize domestic manufacturing, hopefully the president will not ignore his own advice to China “to let the market work on its own.” The well-intentioned aim to create jobs and to keep jobs here should not lead the U.S. government to insert itself into the rare earths market.

The truth is, the market is adjusting on its own to correct the distortions resulting from China’s export quotas. Derek Scissors makes this argument convincingly: “China’s extreme dominance can only last as long as it is willing to offer REEs at below-market prices … As soon as Beijing stopped undercutting market prices, price rose and the hunt for alternatives began—which has started to bring prices down.” In other words, global market forces reacted to high prices throughout 2010 and much of 2011, and prices have dropped precipitously in the latter half of 2011. Additionally, as Scissors points out, China may control 90 percent of current supply, but it only has 50 percent of current REEs reserves, which means there is plenty of opportunity for other producers, miners, and manufacturers along every point of the complex REEs supply chain to enter the market. This will allow all nations  to decrease their dependence on China for REEs.

In other words, the federal government should not use REE supply problems as an excuse to pick favorite industries or manufacturers in the American domestic market, but rather should allow research and development initiatives to proliferate on their own. Yet the president’s assertion yesterday that America must “take control of our energy future,” and a number of bills introduced in the 112th Congress prescribing government support for domestic REE production, troublingly suggest that market intervention may be on the horizon.

2 thoughts on “On rare earths, America must also let the market work

  1. I actually guffawed when I read Obama’s call for China to “…let the market work on its own.” If the Chinese have been watching Obama ‘administer’ America’s car manufacturing and energy markets, they must have at least chuckled. It’s too bad that it isn’t really a laughing matter.

  2. You didn’t address the underlying problems with Rare Earth Metals.

    1) They are dirty to get out of the ground, so the market will only work with proactive legislative changes. And, it will take time to re-build a plant to extract the Rare Earths. Normally, this isn’t a problem given appropriate EPA changes, but see point #2 and consider the lag time between plant construction and completion.
    2) There are definite strategic advantages to controlling the Rare Earths market, hence China will react to undercut any serious, non-government funded, foreign competitor in order to maintain the monopoly. For the advantages, see below then imagine the state of trade between two warring nations.
    3) You never address the crucial, critical, and above all others important problem with Rare Earths, especially between the US and China. Rare Earths are, as you know, necessary for most advanced weapon systems. Thus it is a matter of national security, that overused term, for the US to have a source of Rare Earths that is not controlled by the most likely superpower military adversary to the US.

    As you did not address the problems above, your article badly misses some of the key causes of the Rare Earth debate.

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