Why Monopolies Don’t Exist or How I Learned To Stop Worrying and Love Globalization

Writing in Forbes, Tim Worstall writes brilliantly on a recent 60 Minutes piece regarding rare earth mining.  60 Minutes tries to raise the fear of the US being beholden to the Chinese since they are a virtual monopoly (90% of the world’s supply) of rare earth minerals, which are used in all kinds of things, but most worryingly, electrical components of defense equipment.  The news report discussed how, back in 2010, China disrupted global supply lines by raising their prices.  But, as Worstall reports, their move backfired:

If rare earths are so precious, why isn’t the United States working harder to collect them? The main reason is that, for these last 25 years, China has been supplying all we could eat at prices we were more than happy to pay. If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.

And what did happen? China did try to exercise its monopoly, the world did roll up its sleeves and both Molycorp and Lynas [two non-Chinese mines] went into production. Between the two of them they produce very much more than 10% of global consumption of rare earths (in fact, reasonable estimates are that they produce more than total non-China consumption of them) meaning that China simply doesn’t have that monopoly being talked of.

Emphasis Mine.

In short, China tried to exercise its monopoly power and found out very quickly a simple rule of Supply and Demand: when prices increase, it entices new suppliers into the market.

This is exactly why monopolies don’t last long is a free market situation.  They win their position by being the best (offering the best available for low prices), but if they try to exploit that, the market is swift in its retribution.

Many protectionists like to try to paint some fear that trade, for some reason, makes us beholden to foreign nations.  The exact opposite is true.  There is no “market power,” so to speak.  A monopoly does not have special powers over its costumers.  There are just firms competing with one another, and even if one has a monopoly, it must always fear competition.  That is why the only time you see monopoly abuses occur, it is done by firms that are legally protected from competition (think telecoms, utilities, police, most government services).

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