How China can win

Although the US cannot lose a trade war with China due to the fact that it is already $600 billion in the annual red thanks to the trade deficit, that does not mean that China does not have an ace or two up its sleeve:

Chinese President Xi Jinping is now exchanging threats of tit-for-tat tariffs with President Trump, who announced Thursday he’s considering raising the stakes another $100 billion. China vowed to defend itself “at any cost.”

Compared to the scale of the U.S. economy, the numbers are still relatively trivial and mostly theoretical. But if things do spiral into all-out trade war, it’s worth noting China has a nuclear option.

I’m referring to rare earth metals.

These are elements like dysprosium, neodymium, gadolinium, and ytterbium. They aren’t actually rare, but they do play crucial roles in everything from smart phones to electric car motors, hard drives, wind turbines, military radar, smart bombs, laser guidance, and more. They’re also quite difficult to mine and process.

It turns out the United States is almost entirely dependent on foreign suppliers for rare earth metals. More importantly, it’s almost entirely dependent on China specifically for rare earth metals that have been processed into a final and usable form.

Basically, if China really wanted to mess with America, it could just clamp down on these exports. That would throw a massive wrench into America’s supply chain for high-tech consumer products, not to mention much of our military’s advanced weapons systems.

In fact, China isn’t just America’s major supplier of rare earth metals; it’s the rest of the globe’s major supplier as well. And in 2009, China began significantly clamping down on its rare metal exports. Once, China briefly cut Japan off entirely after an international incident involving a collision between two ships. This all eventually led to a 2014 World Trade Organization spat, with America, Japan, and other countries on one side, and China on the other.

That forced China to abandon its quotas. But it also shows China is willing to use its advantage in rare earth metals to play hardball if it’s pushed far enough.

However, this is not an argument for free trade. In fact, it is precisely the opposite, it is a devastating disproof of Ricardian Comparative Advantage theory, which posits that manufacturing can move seamlessly between industries. In fact, if one were to argue that the USA must engage in trade due to its fear of its inability to process rare earth metals, one would have have to reject the theory of comparative advantage, and therefore, free trade.

This is the danger of engaging in the Ricardian Vice. It becomes all too easy to accidentally refute your own position when attempting to respond to protectionist arguments.