The U.S. plans to challenge China's trade policies at the World Trade Organization, including the restrictions it places on exports of rare earth minerals used in high-tech manufacturing. The Chinese were not pleased by the challenge and apparently have instituted an informal embargo on the valuable mineral resources. Daniel Drezner observes that this decision is short-sighted:
This is a pretty stupid way of thinking about how raw materials markets function, and it's going to encourage some obvious policy responses by the rest of the world. Non-Chinese production of rare earths will explode over the next five years as countries throw subsidy after subsidy at spurring production. ... Another possibility is that the rest of the world will operate as before in dealing with each other, but treat China differently, developing CoCom-like structures and fostering the creation of explicit economic blocs.... In going for the short-term gain, China is inviting a long-term containment policy. That might allow for some rally-round-the-flag support at home, but it's going to e a massive net loss for their economy.
Drezner's point is driven home by economic indicators from the People's Republic that suggest growth is slowing -- and perhaps that an asset bubble is emerging that could lead to a crisis down the road. China's extraordinary economic growth in the last decade is due almost entirely to exports. Were China to cut itself off from global trade with uncooperative policies and then face domestic economic woes, it would find itself in a very bad place indeed.
-- Tim Fernholz
