Monday, October 18, 2010

Facing Down WWIII

The great wars of the 20th century were at bottom economic wars. Everybody would like to think we have "gotten past" all that. I used to think we had "gotten past" Great Depressions, but I watch at how political and economic leaders around the world flail about ignoring sound economic advice to bring back the failed "solutions" of 80 years ago. So I now fear that the great wars of the 20th century are not behind us.

I very much respect Paul Krugman's viewpoint on all issues (except global warming where I think he has drunk the kool-aid). Here's a bit from an article that he just published on the NY Times:
Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials.

And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go.

I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. 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.
People like to give China a past by saying they have no history of "world conquest". But they do have a history of border skirmishes. Think of the war with the USSR over the Amur river, with India in the Himalayas, with Vietnam at the end of the American Vietnam war, and it intervened in the Korean war. All of these appear to be bizarre. So how "trustworthy" is China?

The funny thing about "strategic thinking" in the US is that they are in the hands of greedy speculators. So the US stockpiles oil (petroleum interests like the extra purchasing) and weird things like camel hair (I don't remember exactly what, but it has "strategic" materials that date back to the 19th century and make no sense today). But the US has no strategic reserves in rare earth minerals? It has no economic policy to ensure multiple sources of supply? You might as well stick you head in the noose and taunt your opponent and dare him to pull the rope. Nutty!
“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.

The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants. And even before the trawler incident, China showed itself willing to exploit that monopoly to the fullest. The United Steelworkers recently filed a complaint against Chinese trade practices, stepping in where U.S. businesses fear to tread because they fear Chinese retaliation. The union put China’s imposition of export restrictions and taxes on rare earths — restrictions that give Chinese production in a number of industries an important competitive advantage — at the top of the list.

Then came the trawler event. Chinese restrictions on rare earth exports were already in violation of agreements China made before joining the World Trade Organization. But the embargo on rare earth exports to Japan was an even more blatant violation of international trade law.

Oh, and Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. All of China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right.
The joke is that the Republicans are the ones who claim "national security" as their speciality, but in reality they are the "sell your mother if you can get a good price" party.

Here is the major strategic concern of the next 30 years:
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.
The US is in the midst of mid-term Congressional elections. Has anybody heard any politicians talking about this threat? Oh sure, there are lots of "hard debating point" about gay marriages, and a contest to see which party can offer the voters the most "tax cuts". But when it comes to serious threats, is there any party willing to tell the voters what its party policy is? I don't think so...

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