In today's column, Krugman writes about an incident involving a Chinese trawler colliding with Japanese coast guard vessels, and then turns it into yet another scare story involving trade that I would hope a Nobel Prize winner (for his trade material) would not be writing. We need some reasoned voices, and I would have hoped that Krugman would have been one of those, but apparently we have someone who thinks a trade war would be good for the country. Yes, and Smoot-Hawley brought prosperity to America.
According to Krugman, after the China-Japan incident, China refused for a time to sell rare earth materials to Japanese companies, which highlighted the vulnerability the rest of the world has regarding these materials, given their importance in manufacturing different components. He writes:
On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.In answer to the obvious question - How did the USA allow its own rare earth industry to falter? - Krugman writes:
Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.
“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.
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.Did the Chinese take these materials by force? No, they purchased them because conditions in the United States made it too costly to mine these resources, but instead of dealing with that fact, Krugman makes it sound as though the Chinese were engaging in something nefarious.
The mining of rare earths - like a lot of mining - is dirty and has a lot of environmental issues. American environmental law makes it very difficult to do some mining with any cost-efficiency, so we should not be surprised that the Chinese have managed to undercut what once was a profitable industry in the USA.
While Krugman does not make any real suggestions - other than "punish" China for not valuing its currency as high as Krugman says it should be valued - he is vague about the "solution" to this problem. Do we subsidize rare earth mining in this country? In other words, do we engage in these operations, paying union wages and other environmental costs, and do so by cannibalizing those industries that still are profitable? This is not an idle nor spurious question.
Does Krugman believe we should have tariffs against rare earth materials from China? That would have the same effect as a subsidy, and Krugman then would have to defend his position that tariffs somehow would make us "safer."
Unfortunately, Krugman finishes with some of the most naked hypocrisy that I have read. First, his own words:
So what are the lessons of the rare earth fracas?Yes, this is the same Paul Krugman who has written elsewhere that the formulation of an industry based upon state subsidies and rules forcing individuals and businesses to purchase higher-cost "environmental-friendly" items would be good for the economy. Don't think for a second that the U.S. government does not do many of the same things, and this country hardly is a bastion of free trade.
First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.
Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status.
Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.
Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.
And while I cannot heap praise on China for many of its oppressive domestic policies, nonetheless, the USA, with about a quarter of China's population, incarcerates many more people than does China. Yes, China, a country that had real death camps and gulags and summary executions does not imprison as many people, not to mention anything close to a percentage of its population, as the USA.
Furthermore, for all of the bellicosity that one may see in the trawler incident, China does not have troops scattered about the globe and other than Tibet, does not involve itself in "nation-building." I hate to say it, but China hardly poses a "threat" to the world economy and world peace. I wish I could say the same for my own country.