From Marginal Revolution:
Four years ago we were being warned that China’s monopoly on rare earths was a threat to the United States. Since rare earths are key resources for both national defense and green technology, the crisis united right and left in fear and anger.
Paul Krugman titled his column Rare and Foolish and he was hardly alone when he wrote:
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….The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants.
…, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials.
Yet you probably haven’t heard much about this crisis recently. Why not? Ans: The crisis was exaggerated and what wasn’t exaggerated the market alleviated. Eugene Gholz of CFR has a balanced examination of what happened. I summarize:
- The Chinese government might or might not have wanted to take advantage of their temporary monopoly power (it’s still unclear what the fishing incident was all about) but Chinese producers did a lot to evade export bans both legally and illegally.
- Firms that had been using rare earths when they were cheap decided they didn’t really need them when they were expensive.
- New suppliers came on line as prices rose.
- Innovations created substitutes and ways to get more from using less.
Even the government did some good by funding competitions to support basic and applied research in substitute products and processes. Gholz draws a simple lesson:
…policymakers should not succumb to pressure to act too quickly or too expansively in the face of raw materials threats.