The U.S. could be 100% bereft of “rare earths” while at war with and embargoed by rare earth rich China, but we’d still have all the rare earths we want stateside, and as though they were all sourced here. It’s simple because economics is simple.
To see why all the rare earth hysteria is much ado about nothing, consider a recent report from the Wall Street Journal’s Jon Emont and Raffaele Huang that read like this: “China plans to ease the flow of rare earths and other restricted materials to the U.S. by designing a system that will exclude companies with ties to the U.S. military while fast-tracking export approval for other firms.” Hopefully readers see from this how meaningless China’s export controls are.
That’s because there’s no accounting for the final destination of any good. While “China” won’t sell to companies with ties to the U.S. military, it will sell to those not so encumbered. Except that there’s no controlling whom those not so encumbered will sell rare earths to, which is the point. Which means China’s rare earths will always reach those who want or need them, including the U.S. military, and without regard to what China wants.
Not enough? Stop and imagine if China chose to cease all sails into the U.S. altogether. If so, no problem for the U.S. whatsoever. U.S. industries of all stripes, including military or military-adjacent, would still be able to buy China’s rare earths with ease from those sold to by China well outside the U.S.
It’s all reminder of what’s basic about economics: demand is an effect of production, and if you’re producing you’re importing from all over the world if you choose, including from your enemies. By extension, if you’re exporting you’re exporting to the whole world whether you want to or not.
Applied to China, it can’t be said enough that controls placed on countries sold to insults paper thin, and the reason why should be obvious: assuming China announced through Xi Jinping a cessation of rare earth sales specifically to the U.S., does anyone seriously think those sold to in other countries would turn their noses up to the biggest market in the world? Hopefully the question answers itself. If not, it’s the ultimate aim of producers the world over to crack the U.S. market given its size, which means a failure of the Chinese to export rare earths stateside would reveal itself through surging sales from other countries to the U.S. of Chinese rare earths plenty.
Except that in China’s case, as previously mentioned its existing industrial policy doesn’t even leave out the U.S. The selling will continue, albeit to American businesses not associated with the U.S. military. See above, while contemplating annual U.S. military spending or annual federal spending…No U.S. business will ever turn its proverbial nose up to the spending power of the federal government. The latter shouldn’t be construed as a defense of federal spending (it’s a hideous tax), but it should be construed as a simple statement that no U.S. business will turn away billions in sales.
Which means that while China can announce export controls to the U.S., and while the U.S. can announce the same vis-à-vis China, basic economics (the only kind) and market forces ensure that short of not selling the production at all, what China wants from the U.S. and what the U.S. wants from China will reach both countries as though it was produced in the exported to country. Yes, short of hoarding its rare earths, “China” won’t keep them out of the United States.
Originally posted to Real Clear Markets.
