Hopefully Krugman is overreacting a bit. He doesn't seem that prone to do so IMHO. As an aside I think these rare metals exist in great quantities in Afghansitan IIRC. It seems like we should mine our own even if it is not profitable for private companies to do so. *********** Rare and FoolishBy PAUL KRUGMAN Published: October 17, 2010 Recommend Twitter comments (290) E-Mail Send To Phone Print Reprints Share Close LinkedinDiggMixxMySpaceYahoo! BuzzPermalink. Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials. Enlarge This Image Fred R. Conrad/The New York Times Paul Krugman Go to Columnist Page » .Blog: The Conscience of a Liberal.Readers' Comments Readers shared their thoughts on this article. Read All Comments (290) » And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go. I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation. Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in. “There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry. You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China. The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants. And even before the trawler incident, China showed itself willing to exploit that monopoly to the fullest. The United Steelworkers recently filed a complaint against Chinese trade practices, stepping in where U.S. businesses fear to tread because they fear Chinese retaliation. The union put China’s imposition of export restrictions and taxes on rare earths — restrictions that give Chinese production in a number of industries an important competitive advantage — at the top of the list. Then came the trawler event. Chinese restrictions on rare earth exports were already in violation of agreements China made before joining the World Trade Organization. But the embargo on rare earth exports to Japan was an even more blatant violation of international trade law. Oh, and Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. All of China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right. So what are the lessons of the rare earth fracas? First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices. Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status. Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law. Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it. http://www.nytimes.com/2010/10/18/opinion/18krugman.html?_r=1
I don't get China violated international trade law? Does he mean WTO general prohibition of export ban, but then there is exception to that such as national security concern? By his logic, US violated far more international trade laws by enacting the export of administration act of 1979, the LIBERTAD act and the TWEA.
Glynch, it would be helpful if you edited out the extraneous stuff in your Krugman post, to make it easier to read.
I was just reading an article about rare earth metals and China (partly because of a school presentation) but I think this article gives much more detail about the situation: http://pragcap.com/china-future-rare-earth-metals it even gives a blow by blow account of how important rare earth metals are in different components of high tech goods.
I know wikipedia isn't the most reliable of sources, but from what I read, it seems China's simply producing 97% of rare earth metals. This is due to the fact that they produce them cheaply, undercutting others, rather than they simply "own" 97% of the world's supply. There are apparently plenty of these metals elsewhere. No one simply bothered to look for them because before the technology boom, it wasn't profitable to do so. I may be wrong here, but it seems like this is just saying China's screwing us because they can make ipods for $4, dominate the world supply of ipods by forcing apple to make ipods there. Plus, they're are looking for rare earth metals in many places OUTSIDE the US. I mean, if they start mining in Australia or Brazil or South Africa, how is this helping the US economy? If US companies, instead of having to buy from China for $10(made up number) now has the alternative to buy from Brazil for $12(made up number), does this screw us less or something?
What's crazy is that Chinese businesses have bought the equipment of entire US facilities making/processing this stuff and shipped it to China. That's hardly their fault if we're stupid enough to let it go on. If the country is too dependent on China for this vital high tech necessity, and it certainly sounds like we are, then the government needs to give US companies incentives to produce them here, especially if the Chinese are undercutting the prices we can get for US produced rare earth by subsidizing Chinese busineses. We have plenty, so we should do the same. What's good for the goose is good for the gander, after all.
Well, that can be remedied by subsidies, such as tax breaks, from the US gov't. The US gov't wants to do it b/c national security interest. China is going to be happy and may have some counter measures, such subsidies of it own. From what I know China owns 30% of rare earth source of the world, but supplies 97%. Chinese rare earth manufacturers actually are not making much profit from the business, so there is also a question of dumping and predatory pricing on their part. Krugman is right that the US gov't has sat on this issue for too long.
We can't compete with China in production areas because they pay their workers a lot less, don't provide benefits, and don't have OHSA and don't have any environmental standards. So they can freely poison their own people to make competitive and cheap stuff. They only way for the world to level the playing field is to require that you can levy taxes on exports from China to set them at parity. I have long advocated taking a much tougher stance against China until it ends it's belligerent ways. Japan just got bullied, we get bullied all the time. Why? Because we are afraid of antagonizing a reactive child willing to throw a tantrum at everything? The world needs to help China grow up before it becomes a godillza let loose without reigns. Then it will be very difficult to deal with and an even bigger headache. But if dealt with now, China can become a mature and productive contributor to the international society.
Of course US could forgo all the WTO obligation and start a trade war w/ China. Then the question is the rest of the world on-board w/ US or China? After all, in many instances, US has been on the giving end of bullying herself. I don't think US is ready to take on China alone at this stage. There is also a reason why US expand GATT to WTO and later accept China into it. Put in other words, your proposal is just nuts for ignoring the multi-polar reality of the world.
There's a difference. Lobbyists run the US. The Chinese government runs China. The people lobbyists work for aren't hurting with Chinese selling stuff at little to no profit. So why in the world would US politicians start a trade war on China when the people they work for profit off such violations?
Which makes rare earth metals the same as other "outsourced" work American companies put in China. That is, they don't HAVE to get it from China, but they do it out of cost-cutting. This makes the article misleading in the sense that it creates the idea that metals and China are similar to oil and the Middle East. Let's face it, if China really does have a stranglehold on the world supply of rare earth metals, their prices would be jacked up so high the US govt would start thinking about ways to declare war on China.
Wouldn't that mean an indefinite and long term US presence in Afghanistan, something that you are on record opposing? In regard to the article I think Krugman is substantially right except in regard to why the PRC took a hard stand regarding the Chinese fishing boat captain. This wasn't just a matter of petty spite but the Diao Yu Tai Islands (Senkaku) have a been a sensitive issue between the PRC, Taiwan and Japan for 40 years. It has to do with access to the Asian continental shelf mineral rights, fishing rights and strategic position.
It's funny that glynch is defending a capitalist country that gives few civil liberties to it's people. Honestly, I would have guess glynch's favorite country would be the exact opposite. But since it's China vs US, glynch has to support the non- US country. In all seriousness, I do think Krugman is overreacting to China. A trade war is the last thing we need at this point.
actually, it would be the exact kind of war we DO need. A trade war would not be what businesses would want, but it would be highly beneficial to consumers. Why? For one, we're in a practical deflationary environment, a trade war would stem that for sure. It would help gov't raise revenue and thus pay off the deficit. It would also be a boost to all domestic industry. It would lead to greater short term employment as manufacturers here would scramble to fill demand created by the lack of Chinese imports. The costs would be to big business in terms of their margins since they would have to rely on more expensive (i.e. American or other) parts. So corporate profits would be squeezed a bit in the short term but it would be a boost. China's economy would be in serious trouble, and it would give us huge leverage. Not only that, it would help bring a fractured country together. Every American knows we are getting screwed by the Chinese...it would be great to have a gov't that actually cared more for us than big corporations.
