"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, September 23, 2010

China, Rare Earths, and a Fishing Boat

Foreign Policy  magazine has an interesting take on China and rare earths, an issue that is extremely important for not only world trade, but for the national security of many nations.  Here's the article:

Is China overplaying its hand?

Beijing is denying that it has pushed its fishing boat spat with Japan to the limits. It has not, Beijing says, attempted to cripple the pinnacle of global commerce, Japan's auto industry, because a fisherman is sitting in a Japanese jail after ramming two Japanese patrol boats.

That's the wise course. Because if China truly has cut off rare-earth metal supplies in an effort to show who is boss of Asia, it will create serious ripples around the world.

Paul Kennedy is the main teacher in this sphere. In his seminal The Rise and Fall of Great Powers, Kennedy argues that, when a country gets too big for its boots, smaller nations gang up, Lilliputian-style, and give it a comeuppance. As of now, the prevailing thinking that the United States is in the boots, and China is the Lilliputian.

But one could easily see the opposite occurring should China play its hand wrong. If the world gets the idea that a strong China is going to mean an economically crippling regime over piddling perceived slights, the number of those supporting Beijing's economic rise (such as its neighbors and companies like Nissan) may grow smaller.

OK, so who is this writer kidding?  China is merely flexing its muscle.  For example, Japan get's annoyed at the increased competition from China due to an artificially pegged Yuan, and in turn China doesn't mind the NY Times writing an article about the end of exports of rare earths to Japan.  China just needs to say, oops, just kidding, we never really meant to do that.  And the message is still heard, loud and clear.  That's how nations remind others of their leverage. 

It was never about a fishing boat.  It's about Yuan manipulation and Yen intervention.  Don't forget,  the Chinese economy just recently surpassed Japan's economy.

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