The following was written by Ian Fletcher, Senior Economist of the Coalition for a Prosperous America. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

I wrote in a previous article about why America’s manufacturing sector, despite record output, is actually in very deep trouble: record output doesn’t prove the sector healthy when we are running a huge trade deficit in manufactured goods, i.e. consuming more goods than we produce and plugging the gap with asset sales and debt.

But this analysis of the problem only touches the quantitative surface of our ongoing industrial decline. Real industries are not abstract aggregates; they are complex ecosystems of suppliers and supply chains, skills and customer relationships, long-term investments and returns. Deindustrialization is thus a more complex process than is usually realized. It is not just layoffs and crumbling buildings; industries sicken and die in complicated ways.

To take just one example, when American producers are pushed out of foreign markets by protectionism abroad and out of domestic markets by the export subsidies of foreign nations, it is not just immediate profits that are lost. Declining sales undermine their scale economies, driving up their costs and making them even less competitive. Less profit means less money to plow into future technology development. Less access to sophisticated foreign markets means less exposure to sophisticated foreign technology and diverse foreign buyer needs.

When an industry shrinks, it ceases to support the complex web of skills, many of them outside the industry itself, upon which it depends. These skills often take years to master, so they only survive if the industry (and its supporting industries, several tiers deep into the supply chain) remain in continuous operation. The same goes for specialized suppliers. Thus, for example, in the words of the Financial Times’s James Kynge:

The more Boeing outsourced, the quicker the machine-tool companies that supplied it went bust, providing opportunities for Chinese competitors to buy the technology they needed, better to supply companies like Boeing.

Similarly, America starts being invisibly shut out of future industries which struggling or dying industries would have spawned. For example, in the words of tech CEO Richard Elkus:

Just as the loss of the VCR wiped out America’s ability to participate in the design and manufacture of broadcast video-recording equipment, the loss of the design and manufacturing of consumer electronic cameras in the United States virtually guaranteed the demise of its professional camera market… Thus, as the United States lost its position in consumer electronics, it began to lose its competitive base in commercial electronics as well. The losses in these related infrastructures would begin to negatively affect other down-stream industries, not the least of which was the automobile… Like an ecosystem, a competitive economy is a holistic entity, far greater than the sum of its parts. (Emphasis added.)

One important example of this is the decline of the once-supreme American semiconductor industry, visible in declining plant investment relative to the rest of the world. In 2009, the whole of North America received only 21% of the world’s investment in semiconductor capital equipment, compared to 64% going to China, Japan, South Korea, and Taiwan. The U.S. now has virtually no position in photolithographic steppers, the ultra-expensive machines, among the most sophisticated technological devices in existence, that “print” the microscopic circuits of computer chips on silicon wafers. America’s lack of a position in steppers means that close collaboration between the makers of these machines and the companies that use them is no longer easy in the U.S. This collaboration traditionally drove both the chip and the stepper industries to new heights of performance. American companies had 90% of the world market in 1980, but have less than 10% today.

The decay of the related printed circuit board (PCB) industry tells a similar tale. An extended 2008 excerpt from Manufacturing & Technology News is worth reading on this score:

The state of this industry has gone further downhill from what seems to be eons ago in 2005. The bare printed circuit industry is extremely sick in North America. Many equipment manufacturers have disappeared or are a shallow shell of their former selves. Many have opted to follow their customers to Asia, building machines there. Many raw material vendors have also gone.

What is basically left in the United States are very fragile manufacturers, weak in capital, struggling to supply [Original Equipment Manufacturers] at prices that do not contribute to profit. The majority of the remaining manufacturers should be called ‘shops.’ They are owner operated and employ themselves. They are small. They barely survive. They cannot invest. Most offer only small lot, quick-turn delivery. There is very little R&D, if any at all. They can’t afford equipment. They are stale. The larger companies simply get into deeper debt loads. The profits aren’t there to reinvest. Talent is no longer attracted to a dying industry and the remaining manufacturers have cut all incentives.

PCB manufacturers need raw materials with which to produce their wares. There is hardly a copper clad lamination industry. Drill bits are coming from offshore. Imaging materials, specialty chemicals, metal finishing chemistry, film and capital equipment have disappeared from the United States. Saving a PCB shop isn’t saving anything if its raw materials must come from offshore. As the mass exodus of PCB manufacturers heads east, so is their supply chain.

All over America, other industries are quietly falling apart in similar ways.

Losing positions in key technologies means that whatever brilliant innovations Americans may dream up in small start-up companies in the future, large-scale commercialization of those innovations will increasingly take place abroad. A similar fate befell Great Britain, which invented such staples of the postwar era as radar, the jet passenger plane, and the CAT scanner, only to see huge industries based on each end up in the U.S. For example, the U.S. invented photovoltaic cells, and was number one in their production as recently as 1998, but has now dropped to fifth behind Japan, China, Germany, and Taiwan. Of the world’s 10 largest wind turbine makers, only one (General Electric) is American. Over time, the industries of the future inexorably become the industries of the present, so this is a formula for automatic economic decline. Case in point: nanotechnology is probably the first major new industry in a century in which the U.S. is not the undisputed world leader.

America’s increasingly patchy technological base also renders it vulnerable to foreign suppliers of “key” or “chokepoint” technologies. These, though obscure and of small dollar value in themselves, are technologies without which major other technologies cannot function. For example, China recently restricted export of the rare-earth minerals required to make advanced magnets for everything from headphones to electric cars. Another form this problem takes is the refusal of oligopoly suppliers to sell their best technology to American companies as quickly as they make it available to their own corporate partners. It doesn’t take much imagination to see how foreign industrial policy could turn this into a potent competitive weapon against American industry. For another example, Japan now supplies over 70 percent of the world’s nickel-metal hydride batteries and 60-70 percent of the world’s lithium-ion batteries. This will give Japan a key advantage in electric cars.

The Obama administration shows no awareness of any of this, despite scratching a hole in its head over why job creation has stalled. (Hint: it hasn’t stalled in the nations, from China to Germany, running trade surpluses with us in manufactured goods.) It is not yet too late to reverse these dynamics, but we are definitely running out of time. So the sooner we start questioning the sacred myth of free trade, which is largely responsible for this mess, the better.

The following article by Keith Bradsher appeared in the New York Times here.

HONG KONG — Premier Wen Jiabao of China and his cabinet decided Wednesday to “streamline” the country’s rare earth industry by consolidating production, clamping down on illegal mining and clearly deciding which government agencies would oversee it, the government said.

State media reported last summer that two government agencies had drafted proposals for the cabinet calling for a few state-owned rare earth mining enterprises to take over the country’s legal and illegal private rare earth mines and consolidate production.

In a statement on Wednesday, the government did not specify how production would be consolidated. But Beijing officials and industry executives have been predicting that the government would order mergers to produce as few as three state-owned businesses that would coordinate production and prices.

China mines 95 percent of the world’s rare earths, a group of 17 physical elements that are crucial for smartphones, computers, compact fluorescent bulbs, medical imaging equipment, oil refining and many military technologies. Chinese officials have complained for years that vigorous competition among many small rare earth mining companies had kept prices too low — a popular phrase recently has been that China was exporting “gold for the price of cabbages.”

The statement on Wednesday was vague about how regulatory authority would be clarified, but noted that the ministry of land resources in Beijing had asserted regulatory control last month over 11 rare earth mining districts totaling 965 square miles in southern Jiangxi province. Local and provincial agencies previously oversaw the districts but struggled to control environmentally destructive illegal mining by organized crime syndicates, whose huge profits allow them to buy influence with local officials.

China has been reducing its annual rare earth export quotas since 2006, and particularly in the last two years. The Chinese government set off international alarm in September when it imposed an unannounced embargo for two months on shipments of raw rare earths to Japan during a territorial dispute. It halted some shipments to the United States and Europe as well for a week in October.

The following article by Mark Landler and Sewell Chan appeared in the New York Times here.

WASHINGTON — The Obama administration, facing a confrontational relationship with China on exchange rates, trade and security issues, is stiffening its approach toward Beijing, seeking allies to confront a newly assertive power that officials now say has little intention of working with the United States.

In a shift from its assiduous one-on-one courtship of Beijing, the administration is trying to line up coalitions — among China’s next-door neighbors and far-flung trading partners — to present Chinese leaders with a unified front on thorny issues like the currency and their country’s territorial claims in the South China Sea.

The advantages and limitations of this new approach were on display over the weekend at a meeting of the world’s largest economies in South Korea. The United States won support for a concrete pledge to reduce trade imbalances, which will put more pressure on China to allow its currency to rise in value.

But Germany, Italy and Russia balked at an American proposal to place numerical limits on these imbalances, a step that would have further isolated Beijing. That left the Treasury secretary, Timothy F. Geithner, to make an unscheduled stop in China on his way home from South Korea to discuss the deepening tensions over exchange rates with a top Chinese finance official.

Administration officials speak of an alarming loss of trust and confidence between China and the United States over the past two years, forcing them to scale back hopes of working with the Chinese on major challenges like climate change, nuclear nonproliferation and a new global economic order.

The latest source of tension is over reports that China is withholding shipments of rare-earth minerals, which the United States uses to make advanced equipment like guided missiles. Administration officials, clearly worried, said they did not know whether Beijing’s motivation was strategic or economic.

“This administration came in with one dominant idea: make China a global partner in facing global challenges,” said David Shambaugh, director of the China policy program at George Washington University. “China failed to step up and play that role. Now, they realize they’re dealing with an increasingly narrow-minded, self-interested, truculent, hyper-nationalist and powerful country.”

To counter what some officials view as a surge of Chinese triumphalism, the United States is reinvigorating cold war alliances with Japan and South Korea, and shoring up its presence elsewhere in Asia. This week, Secretary of State Hillary Rodham Clinton will visit Vietnam for the second time in four months, to attend an East Asian summit meeting likely to be dominated by the China questions.

Next month, President Obama plans to tour four major Asian democracies — Japan, Indonesia, India and South Korea — while bypassing China. The itinerary is not meant as a snub: Mr. Obama has already been to Beijing once, and his visit to Indonesia has long been delayed. But the symbolism is not lost on administration officials.

Jeffrey A. Bader, a major China policy adviser in the White House, said China’s muscle-flexing became especially noticeable after the 2008 economic crisis, in part because Beijing’s faster rebound led to a “widespread judgment that the U.S. was a declining power and that China was a rising power.”

But the administration, he said, is determined “to effectively counteract that impression by renewing American leadership.”

Political factors at home have contributed to the administration’s tougher posture. With the economy sputtering and unemployment high, Beijing has become an all-purpose target. In this Congressional election season, candidates in at least 30 races are demonizing China as a threat to American jobs.

At a time of partisan paralysis in Congress, anger over China’s currency has been one of the few areas of bipartisan agreement, culminating in the House’s overwhelming vote in September to threaten China with tariffs on its exports if Beijing did not let its currency, the renminbi, appreciate.

The trouble is that China’s own domestic forces may cause it to dig in its heels. With the Communist Party embarking on a transfer of leadership from President Hu Jintao to his anointed successor, Xi Jinping, the leadership is wary of changes that could hobble China’s growth.

There are also increasingly sharp divisions between China’s civilian leaders and elements of the People’s Liberation Army. Many Chinese military officers are openly hostile toward the United States, convinced that its recent naval exercises in the Yellow Sea amount to a policy of encircling China.

Even the administration’s efforts to collaborate with China on climate change and nonproliferation are viewed with suspicion by some in Beijing.

Mr. Obama’s aides, many of them veterans of the Clinton years, understand that especially on economic issues, there are elements of brinkmanship in the relationship, which can imply more acrimony than actually exists.

But the White House was concerned enough that last month it sent a high-level delegation to Beijing that included Mr. Bader; Lawrence H. Summers, the departing director of the National Economic Council; and Thomas E. Donilon, who has since been named national security adviser.

“We were struck by the seriousness with which they shared our commitment to managing differences and recognizing that our two countries were going to have a very large effect on the global economy,” Mr. Summers said.

Just before the meeting, China began allowing the renminbi to rise at a somewhat faster rate, though its total appreciation, since Beijing announced in June that it would loosen exchange-rate controls, still amounts to less than 3 percent. Economists estimate that the currency is undervalued by at least 20 percent.

Meanwhile, trade tensions between the two sides are flaring anew. The administration recently agreed to investigate charges by the United Steelworkers that China was violating trade laws with its state support of clean-energy technologies. That prompted China’s top energy official, Zhang Guobao, to accuse the administration of trying to win votes — a barb that angered White House officials.

Of the halt in shipments of rare-earth minerals, Mr. Summers said, “There are serious questions, both in the economic and in the strategy realm, that are going to require close study within our government.”

Beijing had earlier withheld these shipments to Japan, after a spat over a Chinese fishing vessel that collided with Japanese patrol boats near disputed islands. It was one of several recent provocative moves by Beijing toward its neighbors — including one that prompted the administration to enter the fray.

In Hanoi in July, Mrs. Clinton said the United States would help facilitate talks between Beijing and its neighbors over disputed islands in the South China Sea. Chinese officials were livid when it became clear that the United States had lined up 12 countries behind the American position.

With President Hu set to visit Washington early next year, administration officials said Mrs. Clinton would strike a more harmonious note in Asia this week. For now, they said, the United States feels it has made its point.

“The signal to Beijing ought to be clear,” Mr. Shambaugh said. “The U.S. has other closer, deeper friends in the region.”

A

The following article by Andrew Ross Sorkin appeared in The New York Times here.

Are the Chinese coming?

That’s the important question now being asked in Saskatchewan, a prairie province in Canada. It is also the question of the moment on Wall Street.

Saskatchewan is home base for the Potash Corporation, the fertilizer company. If you care at all about the future of the world’s food supply, you care — whether you know it or not — about Saskatchewan.

A consortium of state-backed Chinese companies and financiers may make a takeover offer for Potash that rivals a $38.6 billion hostile bid from BHP Billiton, and that prospect has lawmakers in Washington, regulators in Canada and bankers on Wall Street all talking.

The politically charged subtext is this: Do we really want the Chinese to control the company that has the largest capacity to produce fertilizer?

If that reminds you of 2005, when the China National Offshore Oil Company, or Cnooc, sought to buy Unocal, until an outcry from Congress stopped it, you would be right.

But that outburst of protectionism was only about the nation’s oil supply, and this would be about something much more vital, food: 45 percent of Potash’s production is sold to farmers in North America. The big worry, in part, is that the Chinese could seek to redirect that supply to China, starving other countries of a much-needed commodity.

Even for free marketers who say they believe that transactions should be able to cross borders without political constraints, the questions being raised in Saskatchewan and elsewhere are the ones that need to be asked.

Indeed, concern that politics may drive Chinese deal-making has grown amid recent reports that China has banned exports of rare earth minerals to Japan. Prime Minister Wen Jiabao of China has denied that the country has issued such a prohibition, but he acknowledged that the owners of rare earth metals may have halted shipments because of their own feelings toward Japan.

(At the same time, however, another Chinese deal announced on Monday — Cnooc’s $1.08 billion investment for a third of Chesapeake Energy’s oil and natural gas shale assets in Texas — is not expected to meet political resistance because the stake is passive.)

In the case of Potash, the Sinochem Group, China’s largest fertilizer company, has been exploring a possible bid, according to several media reports, and may win backing from funds like the China Investment Corporation.

“It seems fairly certain that even if Sinochem puts together a financing consortium, the underlying motivation would be to secure access to a key commodity,” the Conference Board of Canada wrote in a report about possible Chinese interest in Potash. “Food security is an overriding concern in China, arguably even more important than access to industrial materials.”

It is that kind of talk that has many analysts betting that the Chinese do not ultimately move ahead with an offer.

“We believe that any bid from a Chinese state-owned entity would likely face significant Canadian regulatory scrutiny,” Glyn Lawcock, an analyst with UBS, wrote in a note to investors.

Under Canadian law the deal would have to pass muster with the government through Investment Canada, which would need to rule that the deal was a “net benefit” to the country.

You might ask why BHP, the Australian commodities giant that is steadily cornering the market on a variety of commodities, is not facing the same sort of scrutiny.

True, some questions are being raised, but the “back up against the wall” feeling doesn’t seem to be nearly as pronounced with BHP as it is with a Chinese state-sponsored bid.

For Saskatchewan, the deal boils down to which buyer is more likely to try to keep the price of fertilizer high, therefore helping the tax base. Of course, that would also help keep food prices high, which would arguably be bad for consumers all over the world, from Canada to China.

But Saskatchewan may be more concerned about local tax revenue. The Conference Board report noted: “As a state-owned enterprise acting on behalf of consumers of potash, we assume that Sinochem has strong incentives for lower prices and that it will not be guided by the same market discipline and profit motive as commercial players,” noting that “China was one of the few countries not to cut potash production in 2009 in response to falling demand and prices.”

In the new world of mergers and acquisitions — one that turns China into a central actor — the highest bid may no longer be the ultimate criterion for accepting a deal or the test of whether the deal is a success.

“The Chinese could justify a takeover premium as a sort of insurance premium to prevent BHP from exercising similar market power in potash,” the board wrote. “Yet given the state-owned nature of Sinochem, it becomes unclear whether this would be a corporate counterstrategy or state counterstrategy.”

The following opinion by Anne Applebaum appeared in The Washington Post here.

In April, the Chinese navy abruptly deployed 10 warships near the Japanese coast and sent helicopters to buzz Japanese ships. In July, the Chinese foreign minister angrily asserted his country’s claim to international waters in the South China Sea, along with some islands claimed by others. Last week, a Chinese fishing trawler smashed into two Japanese Coast Guard boats, possibly on purpose, leading to a Japanese arrest and a furious reaction from Beijing.

Throw in a few rhetorical outbursts — the Chinese U.N. official who ranted a couple of weeks ago about not liking Americans — and certainly it does seem as if Chinese military, territorial and diplomatic aggression is rising. It is an extraordinary development, largely because, from China’s point of view, it doesn’t make sense. Why on earth should China shout, bully and push its neighbors around? Over the past decade, China has kept silent, lain low and behaved more like a multinational company than a global superpower — and garnered enormous political influence as a result.

The fruits of this success are everywhere. Look at Afghanistan, for example, where American troops have been fighting for nearly a decade, where billions of dollars of American aid money has been spent — and where a Chinese company has won the rights to exploit one of the world’s largest copper deposits. Though American troops don’t protect the miners directly, Afghan troops, trained and armed by Americans, do. And though the mine is still in its early phases, the Chinese businessmen and engineers — wearing civilian clothes, offering jobs — are already more popular with the locals than the U.S. troops, who carry guns and talk security. The Chinese paid a high price for their copper mining rights and took a huge risk. But if it pays off, our war against the Taliban might someday be remembered as the war that paved the way for Chinese domination of Afghanistan.

America fights, in other words, while China does business, and not only in Afghanistan. In Iraq, where American troops brought down a dictator and are still fighting an insurgency, Chinese oil companies have acquired bigger stakes in the oil business than their American counterparts. In Pakistan, where billions in American military aid helps the government keep the Taliban at bay, China has set up a free-trade area and is investing heavily in energy and ports.

China has found it lucrative to stay out of other kinds of conflicts as well. Along with Western Europeans, Americans are pouring vast amounts of public and private money into solar energy and wind power, hoping to wean themselves off fossil fuels and prevent climate change. China, by contrast, builds a new coal-fired plant every 10 days or so. While thus producing ever more greenhouse gases in the East, China makes clever use of those government subsidies in the West: Three Chinese companies now rank among the top 10 producers of wind turbines in the world.

Quietly, the Chinese have also cornered the market in rare-earth metals, unusual minerals that have lovely names (promethium, ytterbium) and are vital for the production of cellphones, lasers and computers — not to mention hybrid cars, solar panels and wind turbines. Though China doesn’t control the world’s reserves of these elements, some of which aren’t all that rare, mining them is dirty, labor-intensive and ideally suited for cheap production in a country with low wages and lower environmental standards. Nobody else can compete, which is why China now controls 99 percent of the world’s supply of some of these elements.

Of course if they are so inclined, their monopoly could be used to raise the prices of solar panels and cellphones. They could do even more damage if they wished. Last week, it was reported that China had stopped shipping rare-earth metals to Japan in retaliation for the Japanese arrest of that Chinese fisherman. The glitch in supplies now appears to have been connected to a Chinese holiday — or that’s what the Chinese are saying — but markets and pundits sounded belated alarm bells nevertheless.

Which brings me back to my original point: Why on earth are the Chinese playing military games with Japan, threatening Southeast Asia or entering politics at all? When they stay silent, we ignore them. When they threaten boycotts or use nationalist language, we get scared and react. We still haven’t realized that the scariest thing about China is not the size of its navy or the arrogance of its diplomats. The scariest thing is the power China has already accumulated without ever deploying its military or its diplomats at all.

The following article by John Pomfret appeared in The Washington Post yesterday here.

China’s recent move to limit exports of minerals critical in the manufacture of a vast array of products such as missiles, car batteries, cellphones, lasers and computers is stoking alarm that its domination of the industry could give it enhanced leverage over the United States.

On Thursday, some traders of “rare earths,” 17 minerals that are used in small portions in almost every advanced industrial product, reported that China, which controls 97 percent of the industry, had halted the export of anything that contained traces of the minerals to Japan. The Chinese government denied the allegation.

The purported export ban was linked to a dispute between the two countries over an island chain called the Senakus in Japanese and Diaoyu islands in Chinese. Japan has detained the captain of a Chinese fishing vessel over a collision at sea with a Japanese coast guard ship. On Thursday, Chinese Premier Wen Jiabao demanded that Japan release the boat captain immediately. China also announced that it had arrested four Japanese near a Chinese military installation.

Analysts and manufacturers said regardless of whether China has indeed blocked these exports to Japan, the incident underscored China’s increasing economic leverage and its seeming willingness to try to translate that into political power.

This summer, China’s Commerce Ministry said that total exports of rare earths would be capped at about 30,300 metric tons - a 40 percent drop compared with last year. Most of that tonnage has already been shipped.

“The most important issue here is that China is able to wield power like this,” said Ed Richardson, the vice president of Thomas & Skinner, a magnet maker in Indianapolis. “Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It’s startling.”

Only in the past year has the issue begun to receive significant attention in Washington. In April, the Government Accountability Office reported that it could take as long as 15 years to rebuild the U.S. rare earth industry. The GAO report also found components in U.S. defense systems that use Chinese sources for rare earth materials. And it determined that the Defense Department had “not yet identified national security risks or taken departmentwide action to address rare earth material dependency.” The Defense Department, however, is studying this issue, and a report is slated to be delivered this month.

On Thursday, the House Committee on Science and Technology approved legislation that would provide funds for research and development of rare earths technologies as a first legislative step to break China’s monopoly.

“Rare earth materials are essential for our country’s technological competitiveness and our national security, yet China is cornering the market and we are falling behind,” said Rep. Kathy Dahlkemper (D-Pa.), who wrote the legislation.

For years, China has worked to dominate the rare earths industry. Starting in the late 1980s and early 1990s, China flooded the world with cheap rare earths. It sold neodymium and samarium, which form the basis of extraordinarily powerful magnets needed for precision-guided missile systems and the batteries used in hybrid or electric vehicles. It mined europium, which forms the basis of the high-efficiency lighting industry; lanthanum, without which it would be difficult to refine gas; and cerium, which is used to polish the glass on computer screens and cellphones.

China’s prices were so low that it led the once-biggest mine in the world - Mountain Pass in California - to shut its operations in 2002 after allegations of environmental violations at the facility.

“In the Western world, people were happy to give the Chinese this job,” said Jaakko Kooroshy, an analyst at The Hague Centre for Strategic Studies. “Mining rare earths is a dirty business. It is environmentally really dangerous. There’s radioactivity involved.”

From mining, China moved up to refining and advanced metallurgy. They drove rare earths refiners out of the market. They obtained patents for downstream work. They bought magnet makers around the world. They offered to massively overpay for three Japanese firms that dominate the production of magnets for computer hard drives. They made a run at Richardson’s firm as well.

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“We’re an employee-owned operation,” Richardson said, “so if they’d bought us up and shipped us to China . . . well, let’s just say it wouldn’t have sat well with the employees here.”

Today, China dominates not just the mining but also the refining of rare earths, and the profits are enormous. Prices of several minerals have jumped 200 percent in the months since China announced it was limiting exports.

Western countries and firms have been slow to respond to the challenge that China posed to key industries from defense to energy to information technology, said Jon Hykawy, an analyst at Byron Capital.

In the 1990s, as China sold cheap rare earths around the world, the United States, which used to stockpile rare earths for its defense industry, sold off its stocks and watched as its industry dismantled what was once a complete supply chain. Europe never maintained a strategic stash. Only Japan understood the challenge and several years ago began setting aside significant quantities of the minerals.

“We never really acknowledged that the Chinese were in a race to dominate this industry even though they publicly stated it,” Hykawy said.

China is already being sued at the World Trade Organization by the United States, the European Union and Mexico for export restrictions on raw materials, including some rare earth minerals. The U.S. trade representative is also considering filing a separate case purely on rare earths, U.S. officials said. And in industry, Molycorp Metals is working to reopen the California mine.

In June, the European Union issued its own report on rare earths that predicted that the minerals would become increasingly rare. While the United States has focused on China’s increasing leverage over its national defense, the EU report reflected worries that China would control the core of green technology in the future.

“This is the first time that the Chinese openly used rare earths as a geopolitical bargaining chip,” said Kooroshy in a telephone interview from The Hague. “They have built up a monopoly until now, but they have been very civil about it. They say things like, ‘You don’t need to be afraid. We’re a reliable supplier.’ But now the message is clear. It’s: ‘Look, guys, we’re your most important economic partner, and we want you to change the way you deal with us.’”

Staff writers William Wan in Ya’an, China, and Chico Harlan in Tokyo contributed to this report.

The following letter was faxed to Representatives Pelosi, Hoyer and Van Hollen regarding the House Democrats’ “Make It in America” Agenda.
September 16, 2010

Honorable Nancy Pelosi
Speaker of the House
U.S. House of Representatives
235 Cannon HOB
Washington, DC 20515

Honorable Steny Hoyer
Majority Leader
U.S. House of Representatives
1705 Longworth HOB
Washington, DC 20515

Honorable Chris Van Hollen
U.S. House of Representatives
1701 Longworth HOB
Washington, DC 20515

Re: House Democrats’ “Make It in America” Agenda
Dear Representatives Pelosi, Hoyer and Van Hollen:

The Coalition for a Prosperous America, a nonpartisan group, is pleased that you are developing a “Make It in America” agenda during the remaining days of this Congress. CPA represents the common interests of 2.7 million households through our manufacturing, agricultural and labor organization members.  We are united in support of making and growing things in America, generating jobs and wealth here, and rebalancing trade with the rest of the world.  We cannot recover from the Great Recession unless we produce more of what we consume.

Balancing trade is a top priority because the trade deficit subtracts directly from GDP and discourages net investment in the U.S.  Balanced trade would be a powerful driver of economic growth and full employment.  Our trading partners know this.  The countries with which we have the largest deficits have coordinated strategies to promote their trade interest; we often act as if we do not.

Past policies have wrongly focused on merely expanding exports or export opportunities. Under President Bush, for example, exports doubled from 2002 to 2008 but the “net trade” result was a series of debilitating record trade deficits.  An essential element of a smart trade policy is tough enforcement of the trade rules.  Whenever our trade rivals engage in illegal activities such as currency manipulation and technology theft, we must challenge them promptly, efficiently and effectively.

Just as important, we need goals and policies of our own.  We need a coherent national economic and trade strategy.  CPA is joined by over 400 organizations, companies and prominent individuals in supporting “Fixing America’s Economy II:  Rebuilding America’s Jobs, Wealth and Power” (see attached copy)  This is the sort of strategy we need to compete with state-managed economies which are currently causing the trade imbalances that harm America’s economy.

Your “Make It in America” plan is a commendable first step in defining that response.  Two elements are particularly relevant to our concerns.

1.    National Manufacturing Strategy Act, HR 492.  This bill was passed by the House on July 28, and was previously endorsed by CPA.  It is a positive bill which crafts an initial method to achieve a national strategy for manufacturing.  The bill needs more detail and execution, but is a positive step.

2.    A bill To establish the Emergency Trade Deficit Commission, HR 1875.  This bill passed the House by voice vote on July 28.  We appreciate its goal to establish a commission to devise a detailed plan to reduce the trade deficit.  Increased focus on both sides of the trade deficit is key so we no longer rely on misleading rhetoric like “double exports,” “expand export opportunities,” or mere “innovation.”

We would encourage you to consider the following additions to your “Make It in America” agenda to lay the groundwork for sustained prosperity in the U.S.

1.    The Currency Reform for Fair Trade Act, HR 2378:  This bipartisan bill, sponsored by Representative Tim Ryan, addresses the critical problem of currency manipulation by trading rivals.  We will never be able to balance trade and achieve prosperity and full employment unless we end this illegal mercantilist practice.  In the case of China, it amounts to a 40 percent hidden tariff on our exports and a 40 percent hidden subsidy to their exports and to foreign investors.  As such it is a major driver of outsourcing.  This bill would merely establish an enforcement mechanism by using WTO-consistent trade remedies under our trade laws.  It deserves to be included in your “Make It in America” plan and to be voted on this year.

2.    RESTART Act (Rare Earth Supply-Chain Technology and Resources Transformation Act of 2010), HR 4866.  Backed by Representative Mike Coffman and 17 bipartisan cosponsors, this bill provides for a national strategy on rare earth elements in the face of China’s virtual monopoly on global production.  Rare earth elements are indispensable to our national defense and a wide range of advanced technology fields including advanced automotive propulsion batteries, electric motors, high efficiency light bulbs, solar panels and wind turbines.  To achieve expected gains in renewable energy, we must have a strategy to get there.  Developing a plan to mine and process rare earth elements and manufacture renewable energy relevant goods in America is a good start to achieving a national trade and economic strategy.  We hope you include this bill in your “Make It in America” plan.

Longer term, an effective national trade and economic strategy must address the problem of foreign border tax adjustments, which is quantifiably the biggest trade distorting factor we face abroad.  Nearly all our trading partners impose their value added tax on our exports of goods and services.  They also rebate their tax on exports.  The result is our exports are double taxed with both U.S. taxes and foreign border taxes (which are like tariffs).  We have no strategy for dealing with this massive two-way trade disadvantage.  Our bilateral trade agreements do not address this issue.

Lastly, we encourage you to expand the Buy America plan to all government procurement to the fullest extent permitted by our international obligations, and require technologies developed through government R and D funding to be utilized and manufactured in America.  There is no reason for – and no benefit to — U.S. taxpayers to develop new innovations which are then shipped overseas.

Thank you for your leadership.  We would like to have the opportunity to meet with you to further discuss the “Make It in America” plan.

Respectfully,

Brian O’Shaughnessy, Chief Co-Chair, Manufacturing Co-Chair

Joe Logan, Agriculture Co-Chair

Robert Baugh, Labor Co-Chair

FIXING AMERICA’S ECONOMY II:
REBUILDING AMERICAN JOBS, WEALTH AND POWER

America’s economy faces an ongoing structural crisis that contributed directly to the 2008-9 financial meltdown and limits the scope for a sustained recovery.   The old means of economic growth – over-consumption, off-shoring, and borrowing – have seriously undermined the national interest.  To resume sustainable growth, generate jobs and pay down our spiraling debt, we need to make fundamental changes in the American economy.  We also face a profound political crisis.  Our governmental system currently lacks the ability to articulate and pursue ambitious national goals.

A bold national vision is needed to equip America to compete successfully in a global economy.  America must reorganize its creative, financial and governmental resources to meet a few fundamental challenges coherently, effectively and urgently.   A successful strategy will improve the standard of living for current and future American families, restore value to our currency, realign corporate with national interests, and reinforce the U.S. position as the paramount world leader.

To that end, we challenge all holders and seekers of public office to commit to the solutions presented here.

ESTABLISH a comprehensive national economic strategy centered on investment and production - of agricultural and manufactured goods and services - in the United States.

REBALANCE our international trade by achieving genuine reciprocity, especially with systems of state capitalism whose practices are beyond the reach of existing international rules and domestic law.  This must include a review of all existing international agreements, as well as establishment by law of higher standards for future international agreements.

NULLIFY the subsidy effects of currency misalignments by the application of effective trade measures.

MODERNIZE the U.S. tax system to provide competitive incentives to invest in this country, ensure that imports pay their fair share of taxes, and remove government-imposed cost impediments to American exports.

DEVELOP and IMPLEMENT a national infrastructure plan to convert our communications, transportation and energy distribution systems into a national competitive asset.  A principal objective must be to maximize the use of domestically produced goods on all projects funded with taxpayer revenues.

ACHIEVE energy independence by expanding domestic production and efficiency through investment and the development and application of new technologies.

REGULATE financial and goods markets effectively to deter excessive risk-taking and abuse of market power, while ensuring the safety of all goods sold in the U.S, whether produced domestically or abroad.

REVAMP the federal government’s economic decision-making to facilitate the development, implementation, and continuous adaptation of a strategy to ensure that innovative technologies are applied in this country.

The challenge is great, and time is short.  We need action.  We need it now.