Future Of Technology In China’s Hands – What Can The USA Do?

in Economics/World by

The USA depends almost entirely on Chinese imports of rare earth elements (REEs) that are used in cellphones, military weaponry, TVs, cameras, lasers and in magnets, among many other things. Over the past few years, China has established a worldwide monopoly over these materials, claiming 89 percent of all REE production in 2015. Given the escalating tensions between the two nations along the South China sea, many believe that the US should reduce its dependency on China’s REEs through government intervention. However, such an approach would be misguided as history has shown that government interference in the free market is invariably detrimental, and eventually leads to waste of money and resources.

Before China had a monopoly on the REE industry, the US was the world’s largest producer. Domestic producers only shut down their operations because they could not remain competitive faced with cheaper labor and lax environmental rules in China. To further add to the troubles of domestic producers, it takes an average of 7-10 years to obtain a mining permit in the USA – among the longest wait times in the world. It is a known fact that something has to be done to address this problem, but it is important that the government approach this national security issue in a correct manner.

Unnecessary government intervention through the National Strategic and Critical Minerals Policy Act of 2013 (S. 1600) would have authorized a $60-million-dollar subsidy to support USA’s struggling rare earths industry. This would have been a blatant waste of taxpayer money because this subsidy would not have made any difference at all without the government first addressing the policy and permitting complications involved with the mining industry. Thus, the mines would eventually either have to be shut down or require more subsidies to continue operations because prevailing regulations would make it unfeasible for USA’s REE market to compete with China’s. This suggests that government programs funded by taxpayers are not the answer and neither are they necessary.

Free market thinkers like Derek Scissors and John Kemp propose a better solution than government intervention. Namely, short-term dependency on China is not actually a big problem after all. It would be foolish not to import inexpensive REEs from China while they last because consumers are benefitting from the cheap goods. As the Chinese inevitably get weary of the environmental impacts after years of unchecked REE mining, restrictions will eventually be put in place which will cause prices to rise – resulting in it becoming more economical to mine in other countries instead. This happened in 2010 when China tried to take advantage of its monopoly and raised prices of REEs by restricting exports. The supply shortage caused various companies to invest in REE mining activities in other countries and at one point there were almost 400 different projects being explored all over the world. This eventually made the prices of REEs fall again and thus, the free market worked to temporarily break the Chinese monopoly.

Japan was in a similar situation of complete REE dependency on China and experienced problems when China restricted exports of REEs to Japan in 2010 over the arrest of a Chinese fishing captain. To combat this problem, Japan diversified its import sources of REEs and also co-produced the world’s first hybrid car engine that doesn’t use REEs, allowing it to cut reliance on imports from China and reducing their bargaining power. The USA could learn from this example and take similar measures to reduce their dependency on Chinese imports.

According to Roderick Eggert of the Colorado School of Mines, the US government’s role in a scenario like this should be to encourage international trade, allow for more research and facilitate education on this issue. Some of the biggest hurdles American companies face are tedious regulations that they have to comply with before they can start operations. The government must take careful steps to reduce the complications of this process. At the same time, the US should increase its REE recycling capabilities and increase imports from other countries, like France and Estonia.

Conclusively, the choice is either to let the government force billions of dollars of taxpayer money in subsidies as has been done with the renewable energy industry, or to use a more effective approach by letting the free market decide when it is finally time for the USA to start its own REE production. When the time is right, the US can grasp the opportunity and produce REEs from the many resources it has economically, and not forcefully.

Shikhar Darbari is a senior majoring in Energy Engineering at the Pennsylvania State University. As a Koch Fellow, he is currently working at the Independence Institute as an energy policy analyst.

  • Zigman

    Great article Shikar, the essence of your specific example has happened over and over throughout history in other markets. Assuming the lack of government interference,even if a monopoly exists on a good, that monopoly maybe beneficial as long as it is being sold at the best possible value. If the Monopoly starts to raise price or lower quality, other producers always enter the market (unless restricted by some external entity such as a government).

    With protectionism on the rise in the US your work is much appreciated.

    • Shikhar Darbari

      Exactly! The fact that the Chinese monopoly is contestable is what changes everything.
      Thank you for your kind words! @disqus_PNNhVODwGz:disqus