China "Going Out"

The knee-jerk reaction against protectionism isn’t justified, just look at the military

Where do the benefits of free trade and free markets begin? These questions are — in our ideologically driven world — too rarely asked.

This article, by Lawrence Solomon, first appeared in the National Post

Protectionism gets a bad rap among the enlightened, as if protectionism is always bad, and free trade is always good. The knee-jerk against protectionism isn’t justified. In many areas, protectionism is prudent while free markets are foolhardy.

The need for protectionism is clearest seen in the case of the military. Consider what would happen if the U.S. could not protect its military industries from competition from abroad. A savvy military competitor with a command-and-control economy, such as China, would soon capture America’s strategic military markets. In an extreme example, the U.S. government would be buying its nuclear weaponry from the lowest cost supplier, i.e., China, losing the ability to manufacture its nuclear arsenal domestically. The U.S. military would then be dependent on the good will of an adversary, an entirely unacceptable outcome.

The need for protectionism is also clearly seen in the case of products and services that can be used for military purposes, whether cyber technology needed for military purposes, strategic infrastructure such as power plants or raw materials required for strategic industries. A live issue now concerns rare earths — naturally occurring materials that include scandium, yttrium, lanthanum and others in this group of 17 little-known chemical elements. Rare earths, which are ubiquitous in cell phones, computers, TVs and other consumer products, are vital in laser-guided missiles, catapults that launch fighter jets from aircraft carriers and the Pentagon’s showcase F-35 fighter jet.

The U.S. military cannot allow itself to be captive to an unreliable supplier yet, with the 2015 bankruptcy of Molycorp, a producer of rare earths in the Mojave Desert, it lost its last domestic supplier. The U.S. is now entirely dependent on imports from overseas, most notably China, whose 90 per cent of the rare earths world market has allowed it to control prices.

Once in control of the world market, the Chinese government leveraged its advantage.

President Obama was all too willing to see Molycorp collapse. Rare earths are environmental pariahs, requiring the excavation of vast tracts of land to obtain vanishingly small quantities of the minerals (they’re called “rare” because of their minute quantities in soil, not because they aren’t widely available throughout the world). He even sped Molycorp’s collapse, by taking action at the WTO at the behest of Apple and other consumer companies that objected to the high prices they had to pay in this China-cornered market. Obama’s success at the WTO led China to increase exports of rare earths, collapsing the price below levels that would allow Molycorp to remain in business.

President Trump would have been less likely to let Molycorp collapse, partly because he wouldn’t have been as fussed at the spectre of chewing up uninhabitable desert for rare earths mining, partly because he would want Apple to buy American, partly to protect Molycorp’s 500 jobs, and mostly to protect America’s military supremacy. The Trump administration may for these reasons be willing to renew American production. The U.S. Senate Committee on Energy and Natural Resources is now dealing with the fallout of the U.S. government’s failure to protect Molycorp, with Pentagon officials and mining interests alike pressing their case to end America’s vulnerability.

China did not corner the world rare earths market by accident. “The Middle East has oil. China has rare earth,” said Chinese leader Deng Xiaoping in 1992, in recognition that rare earths are commodities strategic in both military and economic planning. At the Chinese government’s direction, domestic state-owned firms, unrestrained by environmental niceties, then set about churning the Chinese landscape, while Chinese multinationals such as CNOOC, money being no object, scoured the world buying out rare earths producers abroad whenever foreign governments let them. In one attempt during the George Bush administration, CNOOC tried but failed to obtain Molycorp’s mine.

Once in control of the world market, the Chinese government leveraged its advantage. Economically, it coerced manufacturers in the U.S. and other foreign countries into moving their operations to China to get access to the rare earths, which China, after steepening the price, provided to local firms at one-quarter the price. And militarily, it used its rare earths advantage in a territorial dispute with Japan — after the Japanese navy detained a Chinese fishing boat, China blocked sales of rare earths to Japan, leading prices worldwide to soar 4,000 per cent.

China’s willingness to play the long game can be seen in its 1995 acquisition of U.S.-based Magnequench, a branch of General Motors established to capitalize on its invention of the rare-earth-based neodymium-iron-boron magnet. As a condition to the acquisition of this strategic business, the U.S. required that the Chinese maintain operations in the United States for five years. The Chinese accepted the condition. Five years later, China shut the doors to the U.S. operation, relocating the industrial processes and the intellectual property needed for the mastery and the monopolization of this market entirely to China.

The need to protect the rare earths market is clear: Rare earths are necessary components of products on which national security depends. But what about the airline industry, upon which the U.S. depends for its military aircraft? What about the automobile manufacturers, who produce the land-based vehicles the army needs? What about the steel manufacturers, who provide the inputs the military’s suppliers require? Or for an island nation such as Japan, what about the rice farmers whose staple could sustain the nation in the event of a sea-based blockade by a hostile China?

Where does the costly need for protection end? Where do the benefits of free trade and free markets begin? These questions are — in our ideologically driven world — too rarely asked and examined, even though their answers are ultimately vital to how we organize our societies to maintain the twin, co-dependent essentials: a safe-guarded and prosperous society.

Lawrence Solomon is policy director for Toronto-based Probe International.

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