Digging a deep hole: rare earths debacle puts U.S. trade policy under scrutiny

Original Reporting | By Mike Alberti |

New directions

According Eileen Appelbaum of the Center for Economic and Policy Research, if the U.S. had had an industrial or innovation policy at the time when rare earth production and manufacturing were moving offshore, it couldn’t have missed the fact that rare earths are a critical input for high-tech products.

As it stands now, she said, “We are so far behind the eight-ball that we have to re-learn how to produce this stuff.”

“There needed to be a new way of thinking,” said Margonelli of the New America Foundation. “The U.S. is a resource rich country, and we should have been thinking about how to put some of those resources to use in an environmentally sound way, both to create jobs and to create security of supply.”

According to economists like Economic Policy Institute’s Scott, the U.S. should have been imposing import taxes on rare earths to “adjust for the differences in environmental costs associated with U.S. production of those goods relative to the dirty production that occurs in China.”

By believing that “global free trade will provide all the answers that we need in terms of an industrial policy, we made a big mistake,” said the vice-president of an Indianapolis manufacturer that relies on rare earths.

Though Scissors and others say that this approach would have simply raised energy costs, Scott argues that this is desirable.

“If we are vulnerable because of our reliance on rare earths, then we should raise their costs so that people look for alternatives,” he said. “Use the market intelligently to send signals to private actors to change behavior and you will get an economy that works better.”

Green and Scissors argue that it is unfair to blame policy-makers for not anticipating how valuable rare earths are, but people in industries that rely on them say that they have been warning the Pentagon and the Department of Energy of the value of rare earths ever since the Mountain Pass Mine closed in 2002.

“When the Mountain Pass Mine closed, there certainly was concern that went through the magnet industry,” said Ed Richardson of Thomas and Skinner. “It was very difficult to get anyone to pay attention.”

Similarly, Jim Kennedy, the president of Wings Enterprises — a company that owns the Pea Ridge Mine in Missouri, which has heavy deposits of rare earths — says that he has been warning officials for years that a policy was needed to address supply shortages of the minerals (see box on next page).

In response to the pressures exerted by the Chinese in recent months, some policy makers have put forth proposals aimed at reviving the rare earths sector.

In the House, Rep. Mike Coffman of Colorado has introduced a bill — the RESTART Act — that would promote the consideration of loan guarantees for rare earths suppliers. Senator Lisa Murkowski has proposed a similar bill in the Senate. In September, the Rare Earths and Critical Materials Revitalization Act, sponsored by Rep. Kathleen Dahlkemper of Pennsylvania, passed the House by a wide margin. The bill, if enacted, would allow the Department of Energy to make loan guarantees to companies in every part of the supply chain and support research and development.

According to Jack Lifton, loan guarantees and research and development are a start but, for the next two years at least, “the Chinese own the game.”

“We did ourselves in,” Lifton added. “We used to be the world’s great industrial power. Now, that title is shifting east. We have no one to blame but ourselves.”

A rare earths cooperative?

As a potential solution, Kennedy has argued for a federally sanctioned domestic “rare earth cooperative,” which would function along the lines of agricultural cooperatives, where producers share capital costs, transportation lines and infrastructure, and access to credit from the government. The cooperative would then guarantee supply to the Pentagon and other producers while maintaining environmental standards and technical safeguards not currently present in China.

In an effort to get the focus off of price, Margonelli has proposed changing the way people think about the ownership of rare earths.

“If you’re going to start down this path of making electric vehicles, all of which are dependent on rare earth magnets, you need to start thinking about these things as other than commodities,” she said.

She suggests that the government require the manufacturer of products like rare earth magnets to retain the title to them after they are sold, to encourage producers to recycle and repurpose the minerals after the consumer is finished with the product.

“Then, they’re making more of a capital investment than they are making a commodity investment,” she said. “If we change our thinking about the ownership of these strategic components, then it also starts to change the price points and the decisions that are made.”

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