On February 2, the Trump administration announced a plan—dubbed “Project Vault”—to spend $12 billion (funded mainly by borrowing almost all of the US Export-Import Bank’s available capital) to create a “critical” minerals stockpile. These stockpiled minerals are supposed to insulate American automobile, aerospace, and energy industries from supply shocks while also subsidizing the extraction and processing of a larger quantity of such minerals from within the US, though financing domestic production for strictly domestic uses is a legally dubious employment of ExIm funds under the ExIm bank’s charter. Large, politically-connected corporations like Boeing, Corning, GE Vernova, General Motors, Google, Stellantis, and Western Digital will commit to purchase specified quantities of materials from Project Vault stockpiles at fixed prices, paying carrying costs associated with storage and financing, and repurchasing equivalent quantities in the future.
On February 4, the administration followed up by hosting a conference attended by 55 foreign governments, where Vice President Vance advocated coordinated interventions to establish minimum prices for “critical” minerals to encourage new extraction and processing investments outside of China, to mobilize private equity funding, and to establish a “preferential trade center” to shield minerals markets in the anti-Chinese bloc from Chinese influence. So far, the European Union, Japan, and Mexico have agreed to join the minerals price-support/mining subsidy plan.
So what exactly condemns a given mineral to the status of “critical” and which minerals are on the official List of Critical Minerals (LCM)? To answer these questions, one must turn to an obscure annual report issued by the US Geological Survey (USGS). A law enacted in 2020 defines critical minerals as:
. . .the minerals, elements, substances, or materials that:
(i) are essential to the economic or national security of the United States;
(ii) the supply chain of which is vulnerable to disruptions (including restrictions associated with foreign political risk, abrupt demand growth, military conflict, violent unrest, anti-competitive or protectionist behaviors, and other risks throughout the supply chain); and
(iii) serve an essential function in the manufacturing of a product (including energy technology-, defense-, currency-, agriculture-, consumer electronics-, and healthcare-related applications), the absence of which would have significant consequences for the economic or national security of the United States
Congress has charged the USGS with an inherently impossible task of determining which minerals meet this definition, so it has had to come up with an economic model for mineral trade disruptions that exemplifies what Friedrich von Hayek famously dubbed the pretense of knowledge. To come up with its LCM, the USGS claims to know things like increases in prices and decreased quantities imported that would occur in a given trade disruption scenario, the corresponding decrease in America’s GDP, and the probability of such a trade disruption scenario occurring for those minerals that haven’t already been disrupted by China.
There is, of course, no way of knowing what the demand curve for a mineral looks like at any given time aside from a single point, namely, the point representing the actual price and quantity exchanged at that moment. Likewise, a given future disruption of trade in a mineral by a foreign state is not a member of a class of repeated events having similar causal factors where a frequentist probability can be estimated by observing the foreign state’s past behavior—the USGS’s machine learning algorithms for assigning probabilities are indulging in post hoc fallacies. Moreover, both supply and demand curves are constantly changing, and would likely be affected in unpredictable ways by the very causal factors that also gave rise to the trade disruption itself. Curiously, the USGS’s model also seems to lack any specific time frames for either disruption probabilities or GDP impairments.
As bad as the USGS’s attempts to quantify trade disruption risks and costs are, the folly of central planning only intensifies when we enter the realm of international price supports to subsidize mineral production, guarantees of fixed prices and fixed quantities to large mineral-consuming industrial firms, and redirecting savings towards investment in new mining ventures as methods for coping with the costs of potential disruptions. How are Project Vault’s planners supposed to know how to fix prices, stockpile levels, and quantities delivered for each mineral or how much savings to redirect for each mineral on the LCM?
A more realistic view of China’s system of export controls—one that does take timing issues into account—suggests that Project Vault is doomed to failure for a critical subset of the LCM, namely, the heavy rare earth elements dysprosium, terbium, europium, and yttrium. These four minerals are critical for high-performance permanent magnets, precision optics, and defense electronics. China controls 90 percent of the global supply through its domination of the chemical separation technologies required for processing such minerals from the raw ores. The system of export licensing China has instituted seeks to dictate what are acceptable end-uses, acceptable end-users, and acceptable supply chain routes.
Profit-and-loss-oriented entrepreneurs are already responding to China’s restrictions by building up their own stockpiles, paying hefty premiums for non-Chinese-sourced supplies, and investing in recycling projects and in American-based start-ups that are developing their own chemical separation technologies. Unlike the USGS and the Project Vault planners, these entrepreneurs are putting their own money at risk, mobilizing their unique knowledge about how fragile supply-chains can best be made more redundant, more resistant to disruptions, better buffered with reserves, and/or selectively replaced with substitutes, and making intelligent use of market prices to better judge what the costs as well as the benefits of China-proofing a supply chain might be.
To mitigate such fragility successfully, it is essential that governments stay out of the way of entrepreneurs. Governments should neither interfere with prices nor waste scarce savings on fragility-mitigation investments that are not informed by profit-and-loss-motivated cost/benefit calculations. Project Vault can only err by mispricing the premiums for non-Chinese-sourced minerals and by malinvesting in disruption-mitigation projects. In brief, investments in resistance, redundancies, and reserves to deal with supply chain disruptions are like any other investments, subject to the chaos of socialist central planning whenever bureaucrats sabotage the ongoing formation of competitive prices for productive inputs and for capital goods in a dynamic world and whenever they thwart the mobilization of knowledge relevant to planning that is uniquely possessed by non-bureaucratic actors.
Project Vault aims to interfere with investments in reserves and in new mining activities, and interfere with mineral prices, effectively subjecting at least some LCM sectors to all the evils of central planning. The rival group of central planners in China will undoubtedly respond with changes to their export licensing scheme meant to frustrate Project Vault’s goals or to drive up its costs. While the resulting socialistic chaos will be confined to just a few narrow sectors of the economy to begin with, it must be understood that the additional waste of capital will cost at least as much as whatever disruptive harms government investments are likely to mitigate. Meanwhile, Project Vault’s price supports for miners and price guarantees for manufacturers will subsidize both miners and manufacturers at everybody else’s expense, further compounding affordability problems and increasing government deficits that have already helped drive America’s net savings to zero and thus crippled growth in the manufacturing sector.
Indeed, Project Vault is but a makeshift expedient for coping with this scarcity of savings. It is only by restraint of present consumption—thrift—that one can direct more labor and natural resources towards investments that make more products available in the future. Thrift is required not only for investment in capital goods used for boosting everyday production. Thrift is also required for investments that increase reserves of goods, build up spare production capacity, and harden lines of production against failures precisely so that supplies can be sustained even under unusually adverse circumstances.
Seen in this context, Project Vault represents a desperate attempt to cannibalize capital from less-favored sectors of a stagnant industrial base to prop up more-favored manufacturers that the bureaucrats fear have become too vulnerable to a threat of economic sanctions imposed by China. However, hastening the decline of other sectors will only cause more supply chain fragilities and more strategic vulnerabilities to emerge, and cause the cancer of central planning and corporate cronyism to metastasize and spread across the entire economy.
What is actually needed to deal with threats of disruption is a revival of thrift-financed investment in the private sector, which in turn requires that the government drastically reduce its spending and that the government repudiate promises of economic security that deter Americans from taking personal responsibility for dealing with their own future needs and contingencies. America’s lack of net savings to grow its productivity is a far more critical problem than its lack of reliably-sourced heavy rare earth minerals. Government squandering of private thrift on malinvestments and government interference with producer prices, as in Project Vault, only makes this shortfall of savings worse.
