What Adam Smith Taught Beijing

As of this writing, the boys in Beijing are frightened. Their closed political economy was symmetrically ordered to match China’s geography as an island, cut off by vast oceans and an interior unfit for governance.  Prior to Deng’s reversal, Beijing continually turned inward and mastered the art of repression known to autocracies.

The calculus has changed.  Beijing must now consider its interests as global.  This heightened exposure made its political economy fragile beyond historical comparison. This fraught mien usually played out socially inside China’s interior where the State’s apparatus worked unchallenged.

Not so with China’s competitors.

The rare Earth minerals used to foster western innovation was a boon to China’s political leadership.  Given that they weren’t used to operating openly with competition, they never anticipated how to parry market trends whose origin lay outside its frontier.  Prior to 2010, Beijing produced nearly 95% of global rare earth metals.  It sought to hold its customer base hostage by restricting exports.  It cut quotas by nearly 40%, publicly pushing foreign buyers to move factories onto China’s southern littoral region.  Beijing openly blocked shipments to Japan.  Given Beijing’s dominance of over 17 rare minerals used in missiles, cars, turbines, smartphones and electric cars, its customer base sought diversification. Beijing forgot that its foreign competition wasn’t domestic.

Beijing’s mercantile gambit lost and it damaged Beijing badly.  They clearly never heard of Julian Simon.

Dr. Simon taught that monopoly power over natural resource based scarcity would eventually have to reconcile to the flexibility of a market based order.  Hayek’s extended order buckled Sinic monolithic authority.  Adam Smith beat the boys in Beijing.

Remember the warning of peak oil?  We were blindsided to fracking.  This is what happened to the rare-earth doomsayers.  The autocrats failed to acknowledge the moral superiority of capitalism.  They simply failed to foresee how Beijing’s supply squeeze would goad its customer base to invest in new technologies, new suppliers, new substitutes.

Metal firms began recycling dysprosium, lanthanum and numerous other coveted minerals and elements from industrial waste.  Companies like Honda, Samsung and Siemens accelerated indigenous research to field products less dependent on Beijing’s supply base.  All this happened while Beijing sought to consolidate the industry it suffocated.  This is typical of monopolies, and political bases emulating rent-seeking.

There are lessons here for all mercantilist economies.  Either seek out to master the field of competition through overt diversification or fail.

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About William Holland

Systematic Theologian/International Relations
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