Every society carries a few shared ideas that function like public heuristics. The social value of a heuristic is that it spreads widely and enables mass coordination without requiring everyone to understand the underlying logic. The risk is that simplicity invites misuse. If we do not understand what makes a principle work, we will apply it in places where it does not.
In the United States, one of the strongest of these axioms is the unwavering faith in free markets. While our commitment to market solutions has driven our greatest successes, it becomes a recipe for failure when we treat it as a universal rule rather than a principle with specific requirements. Markets only function properly when competition is undistorted, and firms face similar costs, risks, and rules. But we invoke this maxim so reflexively that we fail to recognize when foreign subsidies have destroyed these preconditions.
China’s recent rare earth export bans have weaponized our lack of nuance for geopolitical leverage. Decades of state support helped China gain a stranglehold on critical supply chains. These subsidies drove down the expected returns needed to attract private investment in the West, even as we assured ourselves that the market will provide. In the face of such distortions, market fundamentalism does not deliver supply, it delivers dependency. If the U.S. wants capacity in these essential industries, we must match subsidies, but in a limited, transparent, pro-market way.
China’s dominance of critical supply chains doesn’t negate the merits of capitalism; it only shows the danger of relying on a heuristic that we refused to qualify.
The Rare Earth Example
In 2010, Molycorp completed an initial public offering to finance the restart of its Mountain Pass mine, aiming to establish itself as the United States’ only domestic rare-earth producer and challenge China’s dominance in processing and refining. When China restricted exports to Japan after a maritime dispute that year, rare earth prices spiked and Molycorp’s stock soared over 400%.
After using export pressure for political leverage, Beijing lifted the export restrictions and flooded the market, driving prices below what any unsubsidized Western producer could sustain. Despite being America’s only player in this critical industry, Molycorp couldn’t compete against state-backed rivals and went bankrupt, ensuring U.S. dependency on China.
The lesson was that China would weaponize critical supply chains when needed, then use subsidies to prevent Western competition from emerging. We spent years warning policymakers, but the response was always the same: “In America, markets decide.” They couldn’t grasp that subsidized competition makes market-based investment impossible.
Management at MP Materials, Molycorp’s successor, explained to us that China operated “lotteries” in which firms could apply for free equipment. MP applied repeatedly. After consistent rejections, it became clear that the game was rigged and only their Chinese competitors would be allowed to win. These targeted giveaways to domestic producers constitute clear violations of World Trade Organization’s subsidy rules. When support isn’t genuinely broad-based and open, it qualifies as a specific subsidy subject to countervailing duties. The “lottery” system was a dog-and-pony show designed specifically to skirt WTO rules by creating the appearance of openness while, in practice, systematically excluding foreign competitors. MP management insists there’s no technological gap with their Chinese competitors, but that it’s impossible to compete when they must buy equipment that their rivals receive for free.
The Pro-Market Remedy
The solution isn’t to abandon markets but to restore their preconditions. When foreign subsidies distort returns, targeted risk-sharing can reestablish the payoffs necessary for private investment, while preserving competition, price discovery, and accountability.
Critics are right to worry about picking winners, creating uncompetitive firms, and crowding out private capital. These risks are real, which is why any intervention must be designed with market discipline at its core. This means maintaining competitive pressure throughout the process, ensuring private capital remains the primary driver, and letting public support play a catalytic rather than dominant role. The goal should be temporary intervention that corrects market distortions resulting from foreign interference, not a permanent government presence.
With those principles in mind, the recent Department of War investment in MP Materials is a textbook example of how to structure a pro-market partnership. The U.S. government took a 15% equity stake to give it real skin in the game and align the incentives of public and private investors. The DOW also committed to buy the company’s full output for ten years at $110 per kilogram, well above the current market price of $60 that’s improperly depressed by subsidized Chinese production. That floor price gives MP the revenue certainty it needs to justify capital expenditures necessary for building new facilities.
The MP deal is also a win for American taxpayers. If the company’s profits exceed $140 million, the government receives the first $30 million of additional profit, then receives half of anything above $170 million. In other words, taxpayers benefit twice. They gain a secure supply of a critical input, and then share in the profits if the project outperforms expectations. These government commitments unlocked $1 billion in private loans from J.P. Morgan and Goldman Sachs, proving that public financing can catalyze significant private investment when structured properly. Since the announcement, MP’s stock price has surged 135%, and the government’s stake has already appreciated by $700 million.
Industrial policy can therefore restore market incentives when foreign subsidies have destroyed them. The private sector leads, public support catalyzes, and both sides have aligned incentives to succeed. No permanent government presence, no endless subsidies, just support until domestic scale, know-how, and supply chains are built and the firm can compete on its own on a level playing field.
Tariffs may also serve as part of the industrial policy toolkit, but they are insufficient on their own. Tariffs can reallocate production to the U.S. by raising the cost of imports, but only if domestic capacity already exists. In industries where production is non-existent—like rare earth refining—there is no domestic supply to shift to.
Moreover, firms making decades-long capital investments can’t rely on tariffs that might disappear with the next election cycle. That’s why matching subsidies are essential. Equity stakes, guaranteed offtakes, and risk-sharing provide the certainty needed to trigger investment and build capacity that trade tools can then protect.
America’s Own Playbook
Critics calling the Trump administration’s recent strategic investments “un-American” ignore 230 years of precedent. Since Alexander Hamilton’s 1791 Report on Manufactures argued for supporting infant industries, the United States has consistently paired public capital with private enterprise when markets couldn’t deliver strategic capacity.
There has been a consistent pattern: identify critical supply chains, inject public support where private returns are insufficient, then return control to markets once expertise and capacity exist. The transcontinental railroad emerged from massive federal land grants. During World War II, the Defense Plant Corp. built thousands of factories, leased them to private firms, and then sold them back after the war. When Japan threatened our semiconductor industry in the 1980s, Sematech used funding and guaranteed demand from the U.S. government to restore American competitiveness.
The recent Trump administration investments —including its partnership with MP Materials—follow this exact template. When China controls 90% of the rare earth refining needed for defense systems, leaving it to “pure” market forces guarantees continued dependency.
Restoring Competition
China’s rare earth export licensing regime proves what we’ve long warned: when rivals subsidize critical industries, “letting the market decide” means letting Beijing decide.
The solution isn’t to abandon markets but to level the playing field so private enterprise can compete and build capacity. Today’s supply chain crisis demands limited, transparent risk-sharing that enables competitive domestic firms to match state-backed rivals.
If we refuse to subsidize these industries, we’ll remain dependent on geopolitical adversaries for materials essential to economic and military security. Our trillion-dollar defense budget will be rendered worthless if China controls the components needed to sustain operations. The real question isn’t whether to intervene, but how to do so while preserving market discipline. Our history provides the blueprint; we need only the wisdom to use it.
Editor’s note: the author works at a firm who took an equity stake in Molycorp in 2010. He has no current financial interest in the companies discussed here and the views are his own.
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