How China Plans to Leapfrog the American Economy
Politics / Protectionism May 25, 2011 - 10:01 AM GMTBy: Ian_Fletcher
(And it’s Not What You Think) -
Many Americans are already concerned about China’s growing economic challenge to the United States. Indeed, the challenge itself is hardly news anymore. But a new book, Red Alert by Stephen Leeb, argues that Americans have radically misunderstood just what this challenge consists of.
Everyone who has “woken up” to the problem (i.e. not the administration, the U.S. Chamber of Commerce, or the Republican leadership) understands the threat posed by China’s cheap labor and low standards for everything from child labor to environmental protection. Most people who aren’t hopeless laissez-faire ideologues are twigging to the fact that China’s state-directed capitalism is running rings around America’s private-sector capitalism right now. But what few people realize is that China has an even more radical economic strategy up its sleeve, a strategy that aims not just to equal the United States but to surpass it and quite possibly shut America out of the economic future.
The basis of China’s strategy is the fact that the world is heading rapidly into the era of fundamental resource constraints.
Up until the present time in human history, although various natural resources have been scarce enough to fight over, no important natural resource have ever been scarce enough that humanity simply ran out of it. (Dodo birds don’t count.)
This, the author argues, is going to change.
The interesting thing is that the resource in question isn’t the usual suspect: oil—though oil is certainly going to become prohibitively expensive as we hunt down the last few drops in harder-and-harder-to-reach places that require more-expensive drilling and extraction techniques for less return. It isn’t gas or coal, either, though these have similar futures.
(Any reader who believes these resources will last indefinitely can stop reading right here; those who are unsure should consult the persuasive analysis in the book itself.)
The resource, paradoxically, is every environmentalist’s dream: green energy.
Huh? How can the world run out of green energy? Isn’t that the whole point?
Oops. In our rush to green energy, we’ve forgotten something. Those pretty blue photovoltaic cells glinting in the sunlight don’t grow on trees. Neither do those magnificent 300-foot windmills or their smaller cousins.
They have to be made, and they are made out of some very scarce materials.
Like Indium. And antimony. Beryllium. Gallium. Germanium. Tungsten. Lanthanum. Tantalum. Neodymium. Niobium. Rhenium. Cobalt. Tantalum. Even familiar platinum, silver, and chromium. Even humble graphite.
Go look on the periodic table that you vaguely remember from high-school chemistry. These elements are the ones whose names you had to memorize but which nobody had much significant use for until recently. These obscure substances may one day be more strategic than the oil of the Middle East.
These are elements, remember. That means—basic chemistry—that you can’t make them out of anything else. You either have them or you don’t.
Why are they important? For example, the so-called rare earths among these materials are needed to make the super-strong magnets that are needed whenever you want to mechanically generate (or consume) electricity efficiently. The authors estimate that a three-megawatt wind turbine contains nearly two tons of rare earths of various kinds. Even a humble Toyota Prius contains 22 pounds of lanthanum in its battery.
No lanthanum, no electric cars.
“Fine,” you say. “Surely clever scientists will find other ways of making all these products if their present ingredients become unavailable?”
Not so fast. The problem here is that, unlike inventing a new computer program, what these products do is closely constrained by fundamental laws of physics. There simply aren’t an infinite number of ways to make, say, a small but powerful magnet or a silicon wafer that will generate electricity when exposed to the sun.
It’s like trying to find a substitute for water.
Innovation and creativity will probably loosen some of these raw-materials constraints a little, as alternative ways of making things are discovered. But only a little. Mother Nature bats last.
What about the old American faith that “innovation can solve anything.” Well, be careful with that word “anything.” If you look at the successfully innovative parts of our economy, they are all industries where innovation isn’t blocked by fundamental physical laws. So we simply cannot assume that technology is going to bail us out of this one.
It is equally unjustified to retort that all gloom-and-doom analyses are wrong because gloom-and-doom analyses have been wrong in the past. So they have. (Club of Rome, anyone?) This proves, on its own, nothing but the need to examine every analysis on its own factual merits.
How about the “magic of the marketplace” ? Nope. Having a market economy will (more or less) guarantee that whatever physical resources we have will be used in the way that adds the most economic value. It cannot itself magically bring those resources into being.
Here’s where China comes in. China is seeking to establish a strategic lock on these key raw materials. It plans to build itself an economy powered by this energy and then just sit back and watch the United States run out of gas.
This strategy doesn’t only consist in establishing a monopoly on key raw materials, though this is its hardest point of ultimate leverage. China also aims to dominate the industries that convert these materials into green energy products. It is using price competition to squeeze out the American solar industry, for example, which it hopes to dominate as Japan now dominates consumer electronics
If China’s master plan reaches even partial fruition, it will gain a gigantic economic advantage over the U.S. Americans will be left struggling with $10/gallon gasoline and its likely inflationary and recessionary consequences. Our living standard will be hobbled for decades.
And if China’s master plan reaches its full fruition, the game is simply over for us as a superpower. Indeed, under some scenarios, it may well be over for us as a developed nation.
This is grand strategy on a civilizational scale.
It is possible that economic and military decline will prove mutually reinforcing. If the world decisively moves—as it is already gradually moving—away from market allocation of natural resources to political allocation and so-called resource nationalism, then the inability to project sufficient power to guarantee access to key resources will itself curtail that access, weakening the economy that supports that military strength.
There is a huge controversy right now about whether China is sincere about cleaning up its environmental act. The authors argue that in significant part, it is indeed, as evidenced by the fact that China is now the world’s largest producer of green energy technologies.
But they’re not doing it because they’ve joined the Sierra Club. They’re doing it for the same reason they do everything: because it is a component of their plan for advancing national power.
Beijing makes plans in very long increments. They, unlike our own election-cycle worshiping rulers, think through where they want their country to be 100 years from now.
This is why China is busy economically colonizing Africa—now home to an estimated one million Chinese workers—and is making fools of us in Afghanistan, where American military power is currently protecting huge Chinese investments in coal, copper, and other resources.
We, on the other hand, sold off most of our own strategic minerals reserve in 1992, confident that the end of history had arrived and the Soviet Union was the last enemy we would ever face. We allowed Molycorp’s Mountain Pass mine in California’s Mohave desert—historically one the entire world’s largest sources of rare earths—to be shut down by cheap Chinese competition.
We almost allowed China to buy this mine outright in 2005, when it was owned by a subsidiary of Unocal petroleum. We didn’t. So there may be hope for us yet. Congress passed a strategic minerals bill , the Rare Earths and Critical Materials Revitalization Act,in 2010, albeit a tiny sop compared to Beijing’s grand strategy on the issue. Australia similarly checked a Chinese buyout in 2009.
James Schlesinger, who served under President Carter as our first Secretary of Energy, once noted that the American public has only two attitudes towards energy policy: “complacency and panic.” I suspect, after reading this book, that a little bit of salutary panic might be in order.
Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.
© 2011 Copyright Ian Fletcher - All Rights Reserved
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