Breaking Free from Reliance on China
Happy Friday! Here’s your weekly economic recap. Since last week, China has shown that it can’t be counted on as a reliable supplier, a concept of creative destruction has earned a Nobel Prize, and the Dallas Fed has pointed to companies hiring many Americans as a potential “weakness.”
Let’s dive into this.
The People’s Employment Matters
This week, the Dallas Fed noted that labor market ‘weakness’ is slowing job growth in Texas. But calling it a “weakness” overlooks part of the Fed’s goal to maximize employment.
The report argues that the economic slowdown isn’t because of low demand; rather, it’s tied to restrictions from immigration policies during the Trump era. Fewer foreign workers are entering the labor market due to various factors, making it seem like we’re reaching near maximum employment.
The Dallas Fed also recognizes that companies are responding by increasing hours and raising wages. They are looking to hire more legally recognized U.S.-born workers to bridge the gap. This, it seems, would actually strengthen the labor market.
Furthermore, the Dallas Fed warned that restrictive immigration policies might create “speed limits” for the economy. But, historically speaking, this concern may be overstated. Following World War II, the U.S. experienced significant economic growth—averaging around 4% annually—despite low immigration rates. In fact, by 1959, only 5.4 percent of the U.S. population was foreign-born, yet the economy grew at 6.9 percent.
The Case for a Price Floor on Rare Earths
China’s recent decision to limit rare earth exports underscores the hazards of depending on China for these vital minerals. While rare earths are globally sourced, China dominates the processing, accounting for nearly 90 percent.
The crux of China’s advantage lies in its government’s extraordinary support for the rare earth industry. In essence, if a competitor emerges, Chinese producers might sell rare earths at a loss indefinitely until they drive their rival out of business. Thus, China’s prices could remain irrationally low for far longer than private entities can withstand.
But this doesn’t necessarily help other countries that are playing the market. The fear of predatory pricing has left many hesitant to invest, effectively allowing China to maintain higher monopoly prices than those seen in a competitive environment. Consequently, nations continue to rely on China without seeing an actual benefit from lower prices.
This week, the Trump administration suggested the idea of a “floor price” for U.S. rare earths. If prices plunge too low, the government would step in to buy them, aiming to mitigate fears of dumping by China. This could help U.S. production to draw in investments. Plus, the rare earths acquired could form a strategic reserve, useful in case of supply disruptions.
Creative Destruction in Trump’s Era
Part of this year’s Nobel Prize in Economics recognized two economists for creating formal models that support Joseph Schumpeter’s theory. Specifically, he argued that economic progress emerges through creative destruction. Schumpeter emphasized that economic disruptions may ultimately lead to prosperity.
I think this perspective can also apply to Trump’s tariffs. Many economists have brushed past this idea. While these tariffs are shaking up global trading practices, they are doing so in a way that fosters creative destruction. New trade networks are forming, and investments are flowing back into U.S. manufacturing, leading to increased productivity. Unlike traditional economic models that view tariffs as primarily protective of inefficient monopolies, Trump’s approach aligns more closely with Schumpeter’s views.
