On the surface, REEs have all the telltale signs of a key import vulnerability. According to a 2013 Congressional Research Service report, the U.S. was once self-reliant in REE production; however, in the 15 years prior to the report, the U.S. developed a 100 percent reliance on REE imports, the vast majority from China. The U.S. Geological Survey (USGS), on the other hand, indicates that from 2011-2014, U.S. import reliance for REEs was only at 76 percent, with China averaging approximately 71 percent of that supply. It is not only the U.S.’ import reliance that makes REEs a good case study for relative trade vulnerability – the portion of the market China has cornered also does.
According to the latest figures available, China has produced 89 percent of the world’s total REEs in 2016. China currently has a monopoly over REEs, and it would be a powerful point of leverage to use in its relationship with the U.S. if China was able to enforce that monopoly. However, the U.S. is able to produce REEs if it absolutely needs to. Molycorp was one of the main companies involved in domestic REE production, and potential top production at its Mountain Pass mine in California was estimated at just over 19,000 metric tons in 2014, enough to satisfy almost all current U.S. REE consumption. The amount of REEs required by the Department of Defense is thought to be only 5 percent of total U.S. REE consumption, according to the Congressional Research Service, so U.S. domestic REE production can easily handle the load for the nation’s most important REE requirements. Molycorp has since ceased operations and declared bankruptcy because REE prices were too low to make U.S. production profitable for private enterprise. This happened when China removed its export quotas to prevent dilution of its market share if other countries tapped into their domestic REE reserves. According to the USGS, the REE market was also oversupplied because some Chinese companies produced REEs illegally, hoping to generate extra profits.
REEs are often thought of as one of China’s most powerful tools in trade negotiations because of China’s dominance in terms of international supply. The reality is that China’s dominance in the REE export business is much more powerful as a threat leading to temporary shortages and instability. If China were to stop exporting REEs to the U.S. because the U.S. slapped a tariff on Chinese imports, the result would be a few chaotic months in the U.S. as well as higher costs for some cellphones and other electronics with REE components. However, the result would not be a catastrophe and actually would spawn a capacity for REE production in the U.S. or another country, such as Australia, from which the U.S. could import. In the long term, reduced REE imports from China would be a minor inconvenience for the U.S. and would cripple an entire industry in China.
Further studies of key U.S. imports from China will be undertaken in future pieces, but our preliminary research suggests that there is no single commodity for which the U.S. depends on China that cannot be obtained elsewhere. REEs happen to be a particularly clear example, but they are not idiosyncratic – they are a representative case.
Furniture
The second trump card the U.S. can play in any trade negotiation with China is the great deal of unused capacity within the U.S. manufacturing system. This can clearly be seen in the case of furniture production in the U.S. We chose furniture as a category because although classification systems for U.S. domestic production and international trade often differ, furniture is a category where the classification systems line up well enough to make a rough comparison. Furniture production is also a good example of an industry in which Chinese imports to the U.S. hurt American workers. In 2008, personal consumption expenditures in the U.S. for furniture were $160.5 billion, according to the U.S. Department of Commerce. Total U.S. imports of furniture were $41.9 billion, of which a little more than half came from China. That means in 2008, 13.7 percent of furniture bought domestically was imported from China. In 2015, U.S. personal consumption expenditures of furniture increased to $181.1 billion, and Chinese exports of furniture to the U.S. increased by 41 percent, the result being that roughly 17 percent of furniture bought in the U.S. came from China.
This shows that when it comes to furniture, U.S. consumers are buying more imports –specifically, more imports from China. What these numbers don’t show, however, is the current relationship between the amount of furniture being produced domestically and the amount of furniture that could be produced domestically (the sector’s capacity utilization). This information is kept by the U.S. Federal Reserve, which shows that in the U.S., furniture producers have had significantly underutilized capacity in recent years. The 2008 average for capacity utilization was 78.4 percent, and in 2015 the monthly average has hovered around 76 percent. In practical terms, this means that if U.S. capacity utilization had been increased to 85 percent in 2015, U.S. domestic production of furniture could make up for more than half of all furniture imports from China. This is true not just in the furniture sector but across many U.S. industry groups.
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