How the free market beat Chinese protectionism
Ha ha, you got owned: that is the short version of the story I'm about to tell, the story of how the spontaneous order of the free market managed to decisively outmaneuver the People's Republic of China after it tried to exploit its global market dominance in rare earth metal mining in two years.
I'm writing this story because of two items I saw in the news Monday morning which seemed to come into conflict. The first, reported in The New York Times, was President Obama's announcement that the US government was filing a complaint with the World Trade Organization against China, which had used export tariffs and quotas to restrict the flow of rare earth metals to foreign customers, mainly technology firms which used the substances in high-tech electronics. The second, reported on CNBC, was the collapse in share prices of publicly-traded rare earth metal mining firms over the past year, including Molycorp, Rare Element Resources, Avalon Rare Metals, etc.
How did we get here?
On August 31, 2009, New York Times reporter Keith Bradsher wrote that "China is set to tighten its hammerlock on the market for some of the world’s most obscure but valuable minerals." Although it had been the paper's first story on rare earths in twenty years, the Bradsher article set off a flurry of activity: prices of rare earth metals jumped, mining companies began to look through old records of long-closed mines, and politicians agitated to vilify China for its unfair trade practices.
The Chinese Ministry for Industry and Information Technology had been reducing export quotas for three years to preserve access to the minerals for domestic corporations, and also to compel foreign firms to relocate to China. An obscure dispute with Rio Tinto and the Australian government further soured the Ministry's willingness to furnish rare earth metals to global commodity markets. Then, in the fall of 2010, a territorial dispute with Japan led China to restrict all shipments to the country. Next there was a worry that the ban had been expanded to the West, which proved incorrect, and the ban on shipments to Japan was lifted at the end of the year. Yet in 2011 China nationalized its rare earth mining industry, as its government moved to consolidate its grip on domestic production. (One can follow the headlines from the Times here; it's really a fascinating exercise, and I'm summarizing most of the articles in this post.)
Prices for rare earth metals soared with each bit of news, setting off a global scramble for rare earth metals. Stock prices for the mining firms I listed before took off, the firms released bond offerings to finance exploration and mine construction, and planning began in earnest to quickly tap into idled supplies around the world. Electronics firms redesigned their production methods to avoid or reduce the use of rare earths. No government had ordered any of this -- all the firms responded autonomously to the unambiguous and dramatic price signal.
Oh, I suppose in the meantime, Western politicians and trade ministers condemned China in global meetings like the G-20, but found they had little ability to change the situation.
Fast forward to the present. All around the world, the rare earth metal mines are going to operation and pushing their minerals onto the global commodity market -- in Canada, in the United States, in Malaysia, in Kazakhstan, in Vietnam, and in Australia -- and the price of rare earths is collapsing across the board. The Chinese share of this market is plummeting. Their ability to coerce foreign electronics firms, now deeply distrustful of the priorities of the Chinese government, has vanished. China is even unable to sell all of the rare earths its lowered export quotas would allow.
Make no mistake, this is a total humiliation for the Chinese government, which behaved like a banana republic, not a world power, and is paying the price for it. At this point, there's little need for the WTO to intervene -- it could even be harmful to the mining boom in the US -- not that President Obama or other governments were able to do anything significant in the first place on this matter.
Think about it another way: the free market lost a key and distinctive resource suddenly and almost entirely; within two years, it had almost fully replaced the resource. This is why libertarian economists (and junior ones like me) regard the free market as the greatest invention of mankind -- indeed, the genesis of all invention. Advocates for free trade and free markets should sing the story of the rare earth metal crisis from the rooftops.