The China Syndrome

October 19, 2010 Topic: Trade Blog Brand: Jacob Heilbrunn

The China Syndrome

After putting curbs on its rare earth minerals, Beijing has raised doubts about its self-proclaimed peaceful intentions: Is China the next Wilhelmine Germany?

The media is starting to excavate the story about China's monopoly on rare earth elements. Deng Xiaoping reportedly said in 1992 that "The Middle East has oil, China has rare earths." Indeed it does. But its curbing of sales to Japan during the controversy over the seizure of a Chinese national who rammed his boat into the Japanese Coast Guard and was temporarily imprisoned has raised eyebrows around the world.

Yesterday inveterate China-basher Paul Krugman weighed in to decry Beijing's muscle-flexing. Krugman 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. 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.

It might be tempting to dismiss Krugman as exaggerating the perils, but the Wall Street Journal, not exactly a customary ally of Krugman's, states today that China's behavior does provide some cause for alarm. It complains,

Perhaps Beijing's rare earth controls are a gambit to head off protectionist policies germinating in the U.S. and Europe. If so, a happy outcome is possible, which is that all sides abide by their commitments. But if Beijing is denying the world access to rare but vital elements as part of mercantile agenda to enhance its own nationalist advantage, then this is a rare case in which a trade dispute needs to be elevated to a security and political matter and China's access to other markets put squarely on the table. The rationale for enmeshing a rising China in a system of global rules breaks down if Beijing violates those rules with impunity.

It would be difficult to disagree. The question that has always been looming over China is whether it will follow the course of Wilhelmine Germany, where a burgeoning population and industrial development, coupled with a sense of historical and territorial grievances, produced an aggressive nationalism; or whether, by contrast, it will peacefully integrate itself into the global economy, subordinating its military ambitions to its commercial ones. To curb its exports of rare earths, as it has been doing, is bound to stir worries about its intentions. China should make it clear that it does not intend to use its near-monopoly as a cudgel.

But for the United States to place itself in a position where it is hostage to China's decisions when it comes to rare earth minerals, many critical for high-tech military weapons and many cutting edge environmental technologies, is myopic. Molycorp Inc., for example, is seeking to modernize a large mine in Mountain Pass, CA that contains samarium, among other rare metals. Those efforts should be encouraged, if necessary with government backing.

It is incomprehensible that Washington has allowed the industry to essentially shut down over the past decade. That America has outsourced much of its industrial base to Asia and elsewhere has had a devastating effect on the economy. But to jeopardize national security along the way adds insult to injury.