On April 10, a team of 21 Japanese scientists discovered a 16 million ton patch of mineral-rich deep sea mud near Minami-Tori, an island 790 miles off the coast of Japan. The patch appears to contain wealth of rare earth elements, including 780 years’ worth of yttrium, 620 years’ worth of europium, 420 years’ worth of terbium and 730 years’ worth of dysprosium. This find, the scientists concluded, “has the potential to supply these materials on a semi-infinite basis to the world.”
The happy discovery provides us with an opportunity to revisit the last crisis over the availability of natural resources and recall the ingenuous ways in which humanity tackled that particular problem.
In September 2010, a Chinese fishing trawler and a Japanese coast guard vessel collided in waters disputed by the two countries. The Japanese detained the captain of the Chinese vessel and China responded by halting all shipments of rare earths to Japan. The latter used the imported metals in a number of high-tech industries, including production magnets and Toyota Priuses. At the time of the embargo, China accounted for 97 per cent of rare earths production and a large part of the processing business. Predictably, global panic ensued.
In the United States, where these rare elements are used in defence systems, wind turbines and electric cars, the great and the good rang the alarm bells. Writing in The New York Times, the Nobel Prize-winning economist Paul Krugman opined: “You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policymakers simply stood by as the US rare earth industry shut down… The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fuelled tyrants. Couple the rare earth story with China’s behaviour 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 Congress convened a hearing on “China’s monopoly on rare earths: Implications for US foreign and security policy”, with Rep. Donald Manzullo (R-IL) declaring, “China’s actions against Japan fundamentally transformed the rare earths market for the worse. As a result, manufacturers can no longer expect a steady supply of these elements, and the pricing uncertainty created by this action threatens tens of thousands of American jobs.” Rep. Brad Sherman (D-CA) argued that “Chinese control over rare earth elements gives them one more argument as to why we should kowtow to China,” while a report by the Government Accountability Office warned that “rebuilding a US rare earth supply chain may take up to 15 years.”
So, what really happened?
In a 2014 Council on Foreign Relations report, Eugene Gholz, an associate professor of public affairs at the University of Texas at Austin, revisited the crisis and found that the Chinese embargo proved to be a bit of a dud. Some Chinese exporters got around the embargo by using legal loopholes, such as selling rare earths after combining them with other alloys. Others simply smuggled the elements from of China. Some companies found ways to make their products using smaller amounts of the elements while others “remembered that they did not need the high performance of specialised rare earth[s] … they were merely using them because, at least until the 2010 episode, they were relatively inexpensive and convenient.”
Another effect of the embargo was that companies around the world started raising money for new mining projects, ramped up the existing plant capacities and accelerated plans to recycle rare earths.
The market response, then, diffused the immediate crisis and prices of rare earths, which spiked in 2011, came down again. In the long run, as the Minami-Tori find suggests, future supply of rare earths seems promising.
The broader lesson from the rare earths episode is concerns human ingenuity: we are intelligent beings capable of innovating out of shortages. We have done so many times before. In some cases, we have relied on greater efficiency. An aluminium can, for example, weighed about 3 ounces in 1959. Today, it weighs less than half an ounce. In other cases, we have replaced hard to come by resources with those that are more plentiful. Instead of killing whales for lamp oil, for instance, we burn coal, oil and gas. Finally, we have gotten better at identifying natural resource deposits. Thus, contrary to a century of predictions, our known resources of fossil fuels are higher than ever.
As such, there is no a priori reason why human ingenuity and market incentives should not be able to handle future shortages as well.