It would not be the first time in the history of mankind that an expansionary or imperial state decides to grab instead of trading or, more in tune with modernity, instead of letting its subjects free to trade. Thus far, it is only a possibility, but it does not take much imagination to see what could happen. The current issue of The Economist (May 30, 2019), summarizes one possibly triggering issue:
The latest skirmish in the trade war saw China threaten to limit supplies to America of rare earths, a group of 17 metals vital to fast-growing businesses such as electric cars but also widely used in the defence industry. China accounts for the vast bulk of rare-earth production; for some of the metals it is the sole producer.
The threat is serious enough to have led to a price surge in rare-earth metals (“China Trade Fight Raises Specter of Rare-Earth Shortage,” Wall Street Journal, May 31, 2019).
Many of the rare-earth deposits, from which the precious elements or metals are extracted, are located in China, but they are also found in other countries, including the United States. The main problem is that their processing generates a large amount of pollution, the control of which implies larger production costs in the West. (In this case, we haven’t yet heard American protectionist rulers complain about the low wages and difficult working conditions of low-wage workers competing with American workers.) An export restriction by the Chinese government or, a fortiori, an export embargo would, perhaps dramatically, push up the price of important technologies in the West, besides threatening national security in a much more serious way than the sales of German Mercedes to Americans. As one of China’s state media said, rare earths are a “trade trump card” (“Xi Jinping Flexes China’s Trade Muscle With Visit to Rare-Earths Hub,” Wall Street Journal, May 21, 2019).
The Chinese government restricted rare-earth exports in the early 2010s, which Hillary Clinton saw as a “wake-up call.” But in 2014, the World Trade Organization ruled the restriction illegal, and the Chinese government dropped it. The WTO does not have this authority anymore, thanks to its sabotage by the US government. (See “America and China Are in a Proper Trade War,” September 20, 2018).
If the Chinese government restricted or forbade the export of rare-earth elements or products, substitutions would be possible, but would bring higher costs. Texas Mineral Resources wants the US government to protect a future American rare-earth processing industry, which also means higher costs.
Time to recall a few classics. In The Wealth of Nations, Adam Smith wrote:
By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expence for which at least equally good can be brought from foreign countries.
In a similar vein, Frank Taussig, the famous American economist who, more than a century ago, published several versions of his Tariff History of the United States, reflected:
It may be said that very good pineapples can be grown in Maine, if only a duty be imposed sufficient to equalize cost of production between the growers in Maine and those in more favored climes.
Even if the comparative advantage Chinese rare-earth processing industry comes partly from environmental regulations in the United States and other developed countries, it is still a comparative advantage. (I discussed this my EconLog blog post “Taking Comparative Advantage Seriously,” November 17, 2017.)
There are three ways one can get one’s hands on a something one wants: (1) do-it-yourself; (2) trade something else for it; or (3) steal it. If the “one” in question is a national state that has the power to impose a “deal” to all its subjects, the potential problems get worse. The alternatives for the state, whether it is acting out of its own interests or in the interest of those of his subjects who need the resource (the two motivations not necessarily being different), are between (1) enforcing autarky, (2) allowing trade, or (3) making war.
Will individual American importers or their intermediaries be allowed to make their own deals with Chinese processors of rare earths or manufacturers of derived products? Will the Chinese economy be welcome among international traders? If not—if the US government continues waging a trade war—the probability that the Chinese government will restrict rare-earth exports increases. And so does the probability that the US government will, at some point, decide to grab the rare-earth metals it wants? Nationalism and authoritarianism are contagious and they can snowball rapidly.
I suspect that the probability of war between the United States (and its allies, as it will probably still have some) and China is underestimated. Peter Navarro, a senior advisor of President Trump, appears to have been working on this goal all along (for some evidence, see “Peter Navarro’s Conversion,” Regulation, Fall 2018). When we say “war between the United States and China,” it means war between the US government and the Chinese government, each of which bringing all its “national resources”—that is, you—into the war (see Bertrand de Jouvenel’s 1945 book Du Pouvoir, translated in English as On Power). Despite the nationalist and collectivist frosting, it would not be a piece of cake.
I don’t believe that there cannot be a just war. Defending individual liberty against a foreign military attack would be a just cause. But defending the power of one’s own government to dictate trade deals or no-deals to one’s fellow citizens or to grab foreign resources or even to extend liberty by force over the world à la Napoléon are certainly not just causes.
READER COMMENTS
Benjamin Cole
Jun 1 2019 at 7:31pm
There is a possibility that a nation (or government) will make war to seize what it could not honestly get through trade. This seems to Define Japanese military occupations leading up to World War II.
The more recent pattern of the United States has been conduct war and occupations in order to keep another nation “open” for what is called “free trade.” Indeed Dick Cheney injudiciously and publicly said the war in Iraq was about oil.
It is not a stretch of the imagination to posit that US foreign, military, and trade policies are largely made by multinationals who have the most interest in such policies, and also the money to make sure Washington is brought to heel.
Indeed, the most powerful agglomeration of non-military power ever in world history is the combination of multinationals in collusion with the Communist Party of China. We see a marriage of the largest business enterprises of all time to the largest and most powerful political party of all time.
It is certainly one of the great theaters of all time that the vulgarian Reality TV talk show host, Don Trump, has chosen to confront this marriage of multinationals and the Communist Party of China. Trump does not choose his adversaries wisely.
Far from being a tool of nationalism, the US military has been used as a global guard service for multinationals. Indeed, some say that was what gunboat diplomacy was all about.
Pierre Lemieux
Jun 1 2019 at 9:11pm
Your first paragraph and certainly your first sentence are correct. Note however that waging war because what is wanted is too costly to produce domestically is included in my option #1: do-it-yourself would require the sacrifice of too much of other domestically-produced goods—do-it-yourself is not economical. It is indeed more convenient to speak in terms of cost: something that has an infinite cost is impossible, but wine can be produced in Scotland and pineapples in Maine at a non-infinite cost.
Benjamin Cole
Jun 2 2019 at 7:31am
Interesting question: Who will prevail? The multinationals, in combination with the Communist Party of China, or the elected president of the United States?
I would prefer another word to define “multinationals.”
That word “ultranationals” is correct, but the word “ultra” has become so associated with extremists that it sounds like I’m talking about nationalistic organizations.
Today’s multinational in fact floats above the plebeian world of nations and countries. Apple says it makes its money in Ireland or Cayman Islands or parts unknown in-between, and in fact even an earnest endeavor to ascertain the geographic source of Apple’s profits could be a vain undertaking.
So in many ways we have amoral supranational enterprises that are able to command the US military to do their bidding.
Pierre Lemieux
Jun 2 2019 at 11:39am
Benjamin: Why are multinationals dangerous? Because they can engage in rent-seeking and, as the theory of collective action teaches, they will be more successful in this than the general public. Whirlpool is an instructive example. Why do they spend resources in rent-seeking? Because Leviathan has the extraordinary power to give out nearly everything he wants to (although more for one supplicant means more burden to another). The ultimate danger is thus Leviathan.
I would suggest three other caveats against any Galbraith-like attacks on multinationals.
(1) As far as trade is concerned, the development of global supply chains has led many multinationals to side with consumers instead of against them, as we can see in the current trade wars.
(2) As a powerful intermediate institution, multinationals provide a check against Leviathan. In On Power, Bertrand de Jouvenel emphasized this crucial point (although not against multinationals, where he would probably have mistakenly sided against multinationals). Anthony de Jasay provides a more radical perspective: “Self-imposed limits on sovereign power can disarm mistrust, but provide no guarantee of liberty and property beyond those afforded by the balance between state and private force.”
(3) Compared to an “elected president,” American consumers vote every day (often at more than 33%, the percentage of registered voters who voted for Trump once) for Walmart, Google, or Amazon. A very large chunk of mankind could only dream to be governed by one of these multinationals instead of by their president, elected or not.
Benjamin Cole
Jun 2 2019 at 10:16pm
Pierre:
Thanks for your reply.
Well, there are more than one Leviathan on the planet, and multinationals have allegiance to none—but pay homage, amorally, to the Leviathans most convenient.
In terms of Leviathans, I consider the Communist Party of China and Red China a more ominous Leviathan than the US. I base this on the near-total elimination of any type of human rights inside mainland China. and the primarily dirigiste authoritarian economy they operate.
As for capitalists, remember that before the sovereign (the Leviathan) intervened, capitalists developed slavery as a business-model in American South. Yes, sadly the laws of the Southern states abetted slavery, but in the absence of law (which, as a practical matter, was often the case anyway) slavery would have persisted. Slaves were introduced to North America when the “Leviathan” hardly existed. Slave-owners could form privately-financed posses, compel slaves to their tasks. Bounty-hunting, paid for by slave-owners privately, was a profession in the pre-Civil War days.
Simple ideologies rarely answer the complexities of real life. The libertarian mind-set is interesting, and many times I am sympathetic, but does have some blind spots.
Pierre Lemieux
Jun 2 2019 at 11:18pm
These issues are certainly complicated and won’t be solved here, although such a conversation may help to apprehend the problems. I agree that some Leviathans are less bad than others. But note that it is because they are more effectively constrained. On slavery, I don’t think it can last long without the support of the state and its police and judicial machine. This is precisely why the governments of southern states insisted for the protection of slavery to be inscribed in the US Constitution (and were even willing to make concessions like federal import tariffs to preserve it). And it seems it is pretty clear that slavery would have crumbled before the Civil War with the development of the Underground Railroad and the increasing resistance. A civil war could perhaps have been averted.
Pierre Lemieux
Jun 2 2019 at 11:26pm
Benjamin: Oh! one other point. I suggest it is more realistic and more useful to think about libertarianism and classical liberalism as a set of theories that favor individual liberty and individual choices—instead of a unique and inflexible doctrine. Perhaps the word “mind-set” that you use convey the same idea.
Phil H
Jun 2 2019 at 11:31am
I remember reading about this problem when it came up ten years ago, and wondering what had happened to it. Wasn’t there also a discovery of more rare earths off Japan, that eased the potential for tension?
Still, the point remains that this trade war is stupid, unnecessary, and will harm world peace.
Tim Worstall
Jun 2 2019 at 12:34pm
Worth unpicking this just a little bit:
The Chinese contention was that the restriction was upon environmental grounfs, the pollution caused by the production. And therefore legal under WTO rules.
The american contention was that it was to persuade manufacturers to move their rare earth using processes to China. For only raw rare earth exports were limited. Exports of manufactures containing rare earths were entirely unlimited.
The US argument won at the WTO, the restrictions were ruled illegal. But note that if we’d all believed China was doing it for environmental reasons then it would have been entirely legal.
As I pointed out those 10 years ago, the Chinese do this we’ll all just go and open up new supply lines. They did it, we opened up new supply lines. Most notably a new mine in Australia which processes in Malaysia and the US mine reopened as well. We all did exactly what I said we would and the problem went away.
So, they’re trying again. There might well be a year or two of discomfort, dislocation. But the solution will be the same as last time. Open up new supply.
It would take a couple of hours to write up the complete document for you. Where there are rare earths in the US – already mined, sitting in waste products. The extraction techniques you should use. How to process from there. You could be supplying DoD with all their needs in perhaps 3 months* (their needs are small scale, some 1% of US demand, which is 9% of global demand). Assuming this was actually urgent, action this day stuff, so money is no object and also the environmental paper shufflers are kept well clear of it all.
In a peacetime commercial economy it would be more difficult of course. But in terms of basic availability and technological possibility there’s just no problem at all.
*OK, that’s a bit optimistic, but not much.
Pierre Lemieux
Jun 2 2019 at 5:21pm
Tim: Thanks for these details. They fit with what I read. Just one point—you write:
“Money” would be an object, because it would mean producing less of other stuff in the US. After the production of Sanders’s deodorants or Trump’s children toys is stopped, the production of baby milk would have to be reduced or the population’s rations of beef or whatever. I suspect you meant that the state (the federal government) would bulldoze individual preferences as states do during wartime, I agree.
Tim Worstall
Jun 3 2019 at 7:14am
“I suspect you meant that the state (the federal government) would bulldoze individual preferences as states do during wartime, I agree.”
Indeed so, “money is no object” being just a colloquialism.
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