National Security & Defense

Bad Trade Policies Are Hurting U.S. National Security

A Molycorp ore control supervisor displays samples at the company’s Mountain Pass facility in 2015. (Reuters photo: David Becker)
American negligence has allowed China to seize control of the rare-earth elements critical to our national defense. President Trump should reverse this sorry state of affairs.

That our government sat idly by as we became completely dependent on other countries to supply us with defense-critical rare-earth elements (REEs) is scandalous. That the country we are now dependent on for REEs is China, a hostile power, is unforgivable. China is not our friend; any objective analysis of its actions and comments over the last 30 years would conclude that Beijing views the U.S. as its primary enemy. That is why Republican congressman (and former Marine) Duncan Hunter of California has proposed a bill to redress this dangerous situation by allocating 1 percent of the Department of Defense’s administrative-overhead budget — about $50 million per year — to incentivize the resumption of domestic production of defense-critical REEs.

The summary of Hunter’s METALS (Materials Essential to American Leadership and Security) Act warns that the rights to the largest REE mine in the United States, Mountain Pass in California, are in danger of being purchased by a company with strong ties to Russia. Incredibly, the Pentagon has also issued multiple waivers allowing the use of Chinese-made military-grade magnets in building the radars for our F-35s. The waivers were issued because of the dramatic shift in production of these magnets to China. Alarmingly, as that shift has occurred, the U.S. has begun spending less money on research into the magnets, which are critical to our defense. This state of affairs is unacceptable. REEs are used extensively in jet-fighter engines, night vision, radars, missile-guidance systems, missile-defense systems, satellite and communication systems, high-tech rare earth permanent magnets, and many other technologies critical to our national defense. Such critical natural resources need to be produced in the U.S. by U.S.-owned and -controlled companies.

The U.S. did not always depend on China to supply the specialty metals/REEs critical to our defense industry. Up through 1990, the U.S., blessed with one of the three richest reserves of REE ores in the world, was the world’s largest producer. Today no REE mining or refining is done on U.S. soil; China controls nearly 100 percent of worldwide REE production. A 2012 report by the Congressional Research Service describes how China used anti-free-trade tactics to destroy American REE mining:

[China] flooded the market by more than tripling the previous world supply of the materials. During this time, Chinese rare earth-producing firms were largely unprofitable but were allowed to survive through direct and indirect support by the Chinese government. This backing enabled China’s rare earth industry to continue to mine and export these materials at prices far below the actual costs of production. . . . Mines in the United States and elsewhere, unable to remain profitable against cheap Chinese exports, went out of business. [Emphasis added.]

In 2012, U.S.-based Molycorp, attracted to the higher prices that resulted from the Chinese government’s efforts to boost profits by restricting REE exports, made plans to ramp up domestic REE production, investing nearly $800 million in state-of-the-art mining operations in California. At the moment when the project was poised to succeed, China flooded the market with REEs just long enough to knock Molycorp out of the market. After its Chapter 11 bankruptcy reorganization, Beijing is allowing Molycorp to continue operations in China. But once again, the U.S. has no domestic REE production.

America’s dependence on China for its supplies of specialty metals, including REEs, as well as for military-grade magnets critical to our defense industry, is just one result of the unilateral trade war China has waged against the United States for the last 30 years. Its tremendous success has given China the money and technology to build a far more capable military.

From a national-security perspective, the trade status quo is a bad one on many levels.

Much of the opposition to instituting a sound defense-industry trade policy comes from those who mistakenly believe that efficient use of capital should be the only factor to consider in trade deals. Efficient use of capital is of course very important. But a conservative view of the world also recognizes that good public policy involves considering other important factors, including national security. And even those for whom efficient capital allocation trumps all else should realize that the status quo serves China’s determination to gain an across-the-board absolute economic advantage using a wide array of predatory tactics. Indeed, a recent study by the Hong Kong Institute for Monetary Research found that the pattern of trade between the U.S. and China is actually the inverse of what it should be in a genuine free-trade relationship based on comparative advantage.

All those who understand that the world is a dangerous place in which peace must be secured through strength should be unified in their support of trade-policy changes that ensure that the U.S. is not dependent on other countries for defense-critical resources. A genuine superpower maintains not only a powerful standing military but also a heavy-industrial base with the capacity to rapidly boost production of military equipment should the need arise. The U.S. was such a superpower in World War II, but over the last 40 years our defense-industrial base has been severely weakened. For example, as of 2015, America produced only 0.6 percent of the world’s ships by tonnage, driving up costs for our Navy’s warships owing to a lack of domestic competition.

It will take many years to fully revive our heavy industry, but domestic REE production could be restored quickly. With the right incentives, Molycorp’s state-of-the-art mining facilities in California could restart production within a year or two. In the meantime, any attempt to gain control of our REE ores by foreign entities must be thwarted.

From a national-security perspective, the trade status quo is a bad one on many levels. Given the predictable and ongoing ineffectiveness of the World Trade Organization in reining in Communist China’s anti-free-trade policies, it is up to the U.S. Congress and the Trump administration to protect American security interests through bilateral trade negotiations. The Trump administration should make it a top priority to implement policies mandating that defense-critical materials and components be produced stateside by U.S-controlled companies. Doing so would fall in line with President Trump’s campaign promises, while shoring up our national security and creating many thousands of new, well-paying jobs for American citizens who need them.

That truly would be a good deal.

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