Bad Policies, Not Just Beijjing, Responsible for Rare Earth Shortage

With President Hu’s visit to Washington this week, media outlets are devoting a great deal of coverage to ways in which China’s economic, energy, and climate policies are hampering U.S. economic recovery. Many of its economically motivated regulations — including questionable currency policy, tight export controls on rare earth elements, and large subsidies to wind power — impact the economies of others in the global market.

Yet moves such as these should come as little surprise, since China (like every other nation) acts in its own self interest. Given that fact, divisive rhetoric like that from Senator Chuck Schumer (D-NY) who claims that Beijing’s Yuan policy is “like a boot to the throat of our recovery” is just distracting and threatens to impede our diplomatic efforts for a more productive trade relationship with China.

Our economic well being is ultimately our responsibility. Onerous government regulation and a corresponding dearth of fiscal discipline made our current economic bed. If the 112th Congress succeeds in legislating more enlightened and responsible policies, Washington has a shot at correcting that mess. If federal lawmakers, instead, focus their energies on verbally kicking strawmen (both foreign and domestic), those chances drop considerably.

Not many decades ago, concern gripped the nation that Japan and then Russia would surpass America as the world’s largest and robust economy. The scenario didn’t come to fruition because both countries imposed unsustainable subsidies and economic policies. Now, there is concern that China will over take us as the world’s dominant super power. That might happen, but it will not be because China uses unfair practices; it will be because we did not adopt policies that are in our own economic best interests.

The WTO can address unfair trade practices on a global basis. We need to welcome competition and take up the challenges it provides.

The Obama administration complains about our trade deficit, citing oil imports as a major reason. At the same time, it has imposed an embargo on exploration and production offshore, in the Gulf of Mexico, and on the coastal plain in Alaska. Increased domestic production not only reduces imports barrel for barrel but creates good paying jobs here. All strong, robust economies require affordable and abundant energy. We have those resources and should be making greater use of them.

Congress and the White House also complain about “off-shoring” jobs to countries like China. Some of this is simply a consequence of the economic law of comparative advantage. If another country can produce a product or service cheaper and at a comparable quality as us, it would be a waste of resources for us to produce that good domestically.

It was not long ago that members of Congress lamented car imports from Japan. Yet, the change resulted from their very own policies. Auto imports grew because of the costs imposed on domestic manufacturers by U.S. CAFE regulations in tandem with Japan’s ability to produce cheaper, better cars.

The same phenomenon was true for another manufacturing industry that moved offshore. Though the U.S. use to rank as a primary producer of rare earth elements (REE) — a class of 17 chemical elements necessary for producing iPods, certain cancer treatments, cruise missiles, solar panels, and even hybrid engine technology — China now provides 97 percent of the world’s supply.

While some of the shift was inevitable due to China’s cheap labor supply, short sighted U.S. policies and negligence made what would have been a healthy challenge a serious economic and strategic problem. Just last month, China tightened its export controls on REEs — a move which will drive up the cost of everything from hybrid vehicle batteries to weaponry.

We can reverse this situation but not immediately and not until the Obama administration and Congress take prompt action. Our leaders inside the Beltway must strive to create incentives for U.S. firms to develop our REE resources while searching also for viable alternatives.

Whether in REEs or some other commodity, China’s production leadership is not foreordained or inevitable. Our ability to compete with China is as much a function of our own doing as it is China’s resources and skills.

Long term, our economic well being will be determined by policies that reflect global considerations as well as domestic ones. Those include tax, energy, environmental, education and technology policies. The future belongs to those who do not impose discriminatory tax and regulatory policies, who recognize the benefits of market forces, who stimulate capital investments in the future, and who capture and maintain the lead in technological innovation by promoting science and engineering.

We do not have to go the way of other great nations that slipped into obscurity. Our leaders should read Barbara Tuchman’s The March of Folly for an important lesson in history.