One obvious problem is dependence on subsidized Chinese minerals. A less obvious one is the expectation of future price controls.
A ndrew Stuttaford and Jim Geraghty noted recently that dependence upon foreign producers of inputs critical for the production of defense goods can be deeply problematic for U.S. national security. One example of such inputs is “rare earth” metals and magnets, central components of major weapons systems and subcomponents. (Such metals are “rare” not in the sense of existing only in a few locations, but instead because the ores usually contain low concentrations of the metals.)
China has been by far the dominant global producer and processor of rare earths, and it is obvious that it (1) has defense policy goals that conflict with important or vital U.S. interests and (2) bestows subsidies on its producers of such defense inputs so large so as to make competition from U.S. producers economically impossible.
What has not been noticed is that dependence upon the Chinese for these defense inputs is only part of the problem. Another is the likelihood of price controls during a future war or national emergency on such sales to the Department of Defense, and perhaps also on sales to private-sector buyers as part of a general wartime price control regime. Even without the problem of heavily subsidized competition from China, the expectation of a substantial likelihood of future price controls has the effect of suppressing domestic investment beforehand, as discussed in a classic paper by the late Professor Earl A. Thompson.
Thompson analyzed several policy options to address this underinvestment problem, and the recent acquisition of a 15 percent stake in MP Materials by the DoD is consistent with them. MP Materials owns the only operational rare earth metals mine currently at commercial scale in the United States (the Mountain Pass Mine in California), and also produces magnets. (Rare earth alloys are used to make powerful magnets which have many high tech applications including in the defense sector.) With this direct investment by the DoD, MP Materials will build a second production facility to meet the needs of the DoD, which has committed to a price floor and to a guarantee that all of the MP Materials output in the first ten years will be purchased.
The price and purchase guarantees are central to solving the underinvestment problem, and the DoD investment — $400 million, making DoD the largest single MP Materials shareholder — provides the federal government with a significant financial incentive not to renege on the agreement. Accordingly, this arrangement is appropriate on national security grounds even though government ownership of private capital usually is profoundly inconsistent with traditional conservative principles.
The MP Materials investment by the DoD is not like other acquisitions, such as the Trump “golden shares” arrangement used as a lever to grant permission for the merger of U.S. Steel and Nippon Steel. The prior refusal to approve the merger was justified in a Trump executive order on preposterous national security grounds. The golden-shares arrangement is irreconcilable with free-market capitalism and limited-government principles: Trump has the power to name one of the merged steelmaker’s three independent directors, and can veto nominations for the other two. He has veto power over a range of business decisions, among which are siting or closing of plants, the sourcing of inputs, employment decisions, and many more in perpetuity. This is an arrangement that will haunt America for decades or even permanently: Merely try to imagine the wreckage to be wrought by a future Democratic administration using this Trump action as a precedent.
Far more appropriate are a recent Trump executive order and administration deregulatory actions to remove permitting roadblocks on mining projects. These actions are consistent with national security needs and with a recent Supreme Court decision narrowing the scope of environmental roadblocks under the National Environmental Policy Act. This is the sort of policy focus that the Trump administration should continue to pursue.