I will now review a book that I haven't read. I have read the Economist's Review of "The Elements of Power" . David Abraham wants to educate Western readers about the key role that "Rare Earths" metals play in all of our key day to day work toys such as our computers and cell phones. He wants to tell a "hold up" story that we have made ourselves dependent on those few nations that mine and export these materials to companies such as Apple. In a cascading networks scenario, he wants you thinking about what would happen if the global supply chains of these materials was disrupted. The Economist Magazine claims that Abraham claims that "The West" is ignorant of how reliant we are on the exporters. So, Mr. Abraham is celebrating his own "Paul Revere" ways of alerting us "fools" about our ignorance.
There is some key economics buried here.
Point #1: China is the major exporter of these materials. So, there is some crowd pleasing China bashing taking place here. You don't have to be an international trade scholar at the level of Paul Krugman to ask; "Why does China have a comparative advantage in rare earth mining and exports?" Is this simply that China's geography is such that these materials are only located there? I doubt it.
Point #2: China charges low prices and this discourages domestic U.S mining firms from entering the market. Read this high quality Forbes blog piece. The USA does have deposits of rare earths. Read this report. This report says that California and Wyoming have plenty but we still import 97% of our consumption from China. For profit mining firms will only enter the market if their profits will be positive. China's low prices are strategically selected to discourage U.S entry into this market but you can't infer that these companies wouldn't enter if there is a global supply shock (i.e a Chinese rare earths boycott).
Point #3 Rare earths are highly dirty and dangerous to dig up and prepare for export. Given wage premiums for "combat pay" in the U.S are higher than in China, US mining may not be cost competitive with China at current output prices. Also more stringent environmental regulation for mining in the U.S than in China will also create a cost advantage for Chinese firms. It would interest me if any empiricist has quantified this last point.
So, I don't know why Mr. Abraham has written such a long book on such a narrow subject unless he simply enjoys stirring up anti-China sentiment.
Point #4
One theme that blogging economists have not discussed is whether "intellectuals" are trying to stimulate a backlash against international trade by arguing that "we" are becoming overly reliant on "them" and this places us at huge risk if political fights break out. Such a worldview would embolden protectionists to argue that we need to "brew our own". This would benefit our workers in industries that are not cost competitive on the global stage but it would hurt U.S consumers.
The simple answer to concerns about supply shocks is to have backup plans. Hold inventories and to have the human capital and redundancy to implicitly insure your operations against such shocks. To only rely on China for an input is to hold an undiversified portfolio. There are investors who can hold asset stocks of rare earths and these assets will become more valuable in those states of the world where trade in rare earths with China breaks down.
There is a link here between Abraham's pessimism about "hold up" problems in global supply chains and my optimism about adapting to climate change through free markets. In a free market, supply comes from many different sources and none is large enough to have market power. Abraham wants to argue that China has market power but he forgets the "competitive fringe" argument of Baumol. When such a fringe exists, we are insured against political risks even if it appears that there is one dominant exporter.
Prof. Barry Howorth explains it well;
"A dominant firm differs from a monopolist in one important respect. The only constraint on the monopolist's behavior is the market demand curve: if the monopolist raises price, some customers will leave the market. Like the monopolist, the dominant firm is large enough to recognize that a price increase will drive some customers from the market. But the dominant firm faces a problem that the monopolist does not: the possibility that a price increase will induce some customers to begin to buy from firms in the fringe of small competitors. That dominant firm, in other words, must take into account the reaction of its fringe competitors."