Price on Trade: The foolishness of free trade with controlled economies

Unsurprisingly, China’s actions set off alarm bells in Washington (as well as London, Brussels, Tokyo, and other countries with large, advanced industrial bases). Around 70% of all rare earth elements are mined in China, and China processes nearly 90% of them. The situation is even worse for certain “heavy” rare earth elements. China’s export restrictions will severely limit or cut off access to battery components, magnets, and semiconductors used in automotive, energy, and defense applications.

Of course, strategic competition for critical minerals is not a new concept. In the 1940s, the United States scrambled to secure tungsten from South America and block exports from Spain. Not only was tungsten used in military equipment, but it was also used in tooling components fundamental to most US manufacturing. A bottleneck in tungsten meant a bottleneck in production in general. In that case, however, the United States and its adversaries were all courting the same third-country sources; the clear difference here is that the United States became reliant on a geopolitical adversary for important raw materials.

So, how did we get into this situation, especially since rare earth elements are not necessarily “rare”? Commentors will often cite noxious extraction and processing activities as the reason Western nations were happy to outsource rare earth reliance. While that may partially be the reason, China’s dominance follows a familiar pattern. As with many industries, including steel, Chinese companies purchased (or stole) intellectual properties needed to get a nascent industry off the ground. Then, these companies could combine subsidies, the lack of labor and environmental laws, and stolen intellectual property to create low production costs that tanked prices in other markets and drove competitors who had to earn profits out of business. With no cost-competitive alternative, global supply chains became dependent on the rare earth elements extracted and processed in China.

To illustrate how long this has been an issue, our firm, Wiley, started working on the systemic China problem around 2006 and began advising the US government on Chinese rare earth export restrictions starting around 2012. We worked closely with US government efforts to use WTO dispute resolution to address the problem and China’s initial attempts to restrain rare earth exports. And, despite several wins at the WTO (and the National Law Journal awarding its prestigious Trail Blazer award to Alan Price for his work calling out China’s WTO violations), nothing really changed with China’s system to maintain dominance of the supply chain industry because China lulled the United States and the rest of the world into complacency through our addiction to cheap goods.

China’s growing dominance in rare earth elements tracks the rising importance of these elements in manufacturing for modern life. Those in policy circles have seen this coming for years, but there was little market incentive to do anything about it. The common wisdom was that China was too reliant on the US economy to risk disrupting its trading relationship. That calculus has clearly changed. The Chinese government apparently believes it has greater leverage in the relationship. The clearest path to diluting this leverage is building out US mining and processing capacity where possible and as soon as possible.

Next week’s APEC annual meeting is a perfect opportunity to reset the board. China’s export restrictions will roll out in stages over the remainder of this year. President Trump responded with threats of a 100% tariff beginning on Nov. 1 if the export restrictions are not reversed. Since the announcement, the United States has also signed an agreement to develop rare earth processing facilities in Australia. Last Wednesday, the White House announced that President Trump and President Xi would meet on the sidelines of APEC on Oct. 30. Then, on Friday, the administration initiated a Section 301 investigation into China’s compliance with commitments under the 2020 “Phase One” agreement from President Trump’s first term. Don’t be surprised if more shoes drop before Oct. 30.

In the meantime, the United States can focus on developing a coordinated approach across critical industries like rare-earth processing. This will be no small feat given the complexity of the sectors and actors involved. While partnering with like-minded countries is an intermediate step, reliance on foreign industries is not an optimal solution. Doing so risks repeating the cycle that got the United States to this point in the first place. However, unlike sectors like steel that can be mostly self-sustaining within the United States, and despite great strides by North American processing operations, the reality is that rare earth processing does not yet exist at scale. The United States will need to face this headwind and shift supply chains without bargaining away other areas of needed trade action.

Efforts to develop domestic rare-earth processing should have begun 10 to 15 years ago, but policymakers largely ignored the issue because of all the steps needed to realign US trade and competitiveness policies. China’s export restrictions are the wake-up call the United States needed to kick its response into gear and to walk away from the failed policies of free trade that allowed “the factory of the world” to hollow out our national security through economic warfare.

Editor’s note

This is an opinion column. The views in this article are those of experienced trade attorneys on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.