I talked to the two authors by phone this week about China's "resource quest." A lightly edited transcript follows.
Brad Plumer: There have been countless books written about China’s rise. Why focus on the country's appetite for raw materials?
Elizabeth Economy: The rise of China is one of the great transformative processes of our time. And yet we still don’t have that great an understanding of the implications of that rise, either for governance or for international security or for the global economy. So we wanted to use this resource quest — to look at where China’s going abroad to get the resources to fuel its economy — to get at this question of what the rise of China means to the world.
BP: At one point you note that China's current rise actually has a lot of parallels to the rapid growth of Japan in the 1950s and 1960s. Back then Japan used about 9 percent of the world's oil. Today China uses roughly 11 percent. And Japan didn't fundamentally upend the global economic system. Does that suggest that China’s rise here isn’t totally unprecedented?
Michael Levi: That’s a fair suggestion. What the history tells us is that the emergence of a massive new consumer of resources — and a huge new investor in resources — that does things a bit differently from everyone else isn't destined to fundamentally change the international economic and political system.
What history doesn’t tell us is whether China will turn out more like Japan did or whether China will turn out differently. But at a minimum, it helps to clear the field and allow people to open their minds to the possibility that things can turn out in a broad variety of ways.
BP: Let's start with the economics of China's rise. The conventional wisdom typically suggests that China is going to keep growing and consuming an enormous amount of natural resources — and that will simply drive up prices for everyone else. Oil prices will keep spiking. Copper will become scarce. But you argue that it’s more complicated than that.
ML: It’s essential to look separately at the past and the future, and to not generalize across the range of resources. There’s no doubt that over the last decade, China has been central to driving up prices for a host of essential commodities. Without the rise of Chinese demand, we would not think $100-per-barrel oil was normal.
But the global system is responding, and while it takes time to develop new resources, or to develop the technology to make extraction cheaper, or to curb demand elsewhere in the world, those things do eventually happen. And we’re seeing the global system respond, not just for oil, but for other commodities as well. That means it would be extraordinarily foolish to take the five-fold rise in oil prices over the past decade and expect that we’ll see another five-fold rise over the next decade.
The other thing that comes across when you look at commodities is that they are different. Aluminum prices didn't respond nearly as strongly as iron ore did to the rise of Chinese demand in 2000s — because the world was already expecting a substantial increase in demand for aluminum and because suppliers could respond pretty quickly. So you do have to look element by element.
BP: One great example in your book is iron ore. Soaring Chinese demand actually ended up making the markets more flexible. Previously there had been a few large producers dominating the iron ore market and locking in long-term contracts with consumers. But the emergence of thousands of Chinese steel firms helped create a far more flexible spot market.
ML: I never thought I would find iron ore fascinating. But this is a case where you started off with a very rigid market structure, and because of the emergence of China, actually ended up with a more liquid market. China certainly wasn’t seeking to create a more flexible market for iron ore, but because China’s so massive, it altered the international system. So here China's rise had huge consequences, but you never could have predicted those correctly if all you did was ask what the Chinese government wants.
BP: Now China's not just sitting back and importing lots of natural resources. Its companies are actually going out into the world and making a lot of investments — drilling for oil overseas, buying up farmland. How would you define the country's strategy here?
ML: When China is the dominant consumer of a particular commodity, it has a strategic interest in making sure the market for that commodity is well-supplied. So here you see China following the same pattern Japan did, where it's constantly asking whether other producers will respond to growing demand by increasing demand with the same urgency that they think is essential. And if not, those are cases where stepping into investment on the supply side really can play a strategic role in making sure the Chinese economy is well-supplied.
And here, we’re typically talking about minerals rather than energy. China is a far larger part of the global market for a host of important minerals than for oil and gas. The United States has as much of an interest as China does in inexpensive oil. The same is not true when it comes to iron ore.
BP: So China's state-owned companies go out to Latin America or Africa or Southeast Asia in search of investments in resources like oil and copper abroad. What sorts of impacts do the arrival of Chinese companies have there?
EE: If you want to understand China’s impact abroad, you can look at how China manages its own economy at home — that’s exactly how it approaches its resource quest abroad.
So Chinese companies are not very strong in undertaking environmental impact assessments back at home, and you can see throughout Latin America, Southeast Asia, and Africa — they often don’t undertake environmental impact assessments abroad, either. Similarly, in their labor practices, Chinese miners are often poorly paid, and the conditions are challenging, to say the least in terms of labor safety. And we found across the board, in countries like Papua New Guinea to Peru, when miners are asked to compare the practices at Chinese mines with those at others, they uniformly rated the Chinese mines much lower.
And you can also see it in corruption: The way that the Chinese do deals at home for land, through the back door between officials and businesses to appropriate land. Well, when companies go to Brazil, they think that’s the way business can be done there as well. And China does have something akin to the Foreign Corrupt Practices Act, but they don’t have any monitoring or enforcement mechanisms.
So China has a different way of going out of securing resources than we typically see, and it’s impacts can be pretty substantial when you’re looking at a set of governance issues.
BP: But you also argue in your book that there's one common fear that isn't happening: China’s isn't investing abroad in order to monopolize natural resources for its own private use.
ML: I think that’s right. There’s obviously a basic difference in that when a Chinese state-owned company owns a stake in resources, then the Chinese state owning it. When Exxon Mobil owns a stake in resources, it’s not the United States owning it.
But the reality of how Chinese companies behave is that they take ownership of a resource, if they can, and then conduct their business largely as a commercial firm would. So China has equity oil ownership around the world, but most of that oil is sold on the open market. Chinese firms own or have access to a lot of copper around the world, and a huge amount of that does go back to China, but that's simply because of China’s position as a large consumer of copper. The pipeline isn't there because there’s a rigid arrangement of forces, that just happens to be how the patterns of supply and demand happen to be.
Now there are cases of vertical integration, where a Chinese steel company also owns iron ore for its own internal purposes and will ship that to itself. But that’s not fundamentally different from the vertical integration that has often existed in supply chains controlled by companies in the West.
EE: And to add on, it's important to note that the interests of the state are sometimes different from those of the companies. So for example, there’s a recent case where the National Development and Reform Commission [NDRC], which lays out the strategic plan for going out for resources, told the Chinese state-owned steel companies and take more stakes in iron ore. And the steel companies, facing overcapacity, simply didn't want to take greater stakes in iron ore. That was one surprising thing we found. These companies want to make money and they want to compete on global stage like other multinationals do, and sometimes that conflicts with the other strategic interests of the Chinese state.
BP: You also mention that China's lax regulations are changing over time -- in some cases, Chinese companies have found that overly lax regulations can actually be an impediment to investing abroad. Is there a good example of this?
EE: One thing we found was that when you’re looking at the Chinese companies’ engagement abroad, the starting point 10 to 15 years was a really low point in terms of governance. Peru is a good example. But if you look more recently at Chinese mining companies entering Peru, you see they’ve begun to adopt better practices.
Part of that is learning from the bad example of the initial Chinese entrants. Part of that has to do with taking advantage of infrastructure that’s been built up in Peru. So they might hire a local CEO or hire a Western consultant to do environmental impact assessments. And part of it has to do with sense, that these companies now want to be doing business in Australia or Canada or even the United States. And that means upping their game in terms of good governance.
It’s also the case that the Chinese government is bringing pressure to bear on these companies. Their activities are a source of bad press for China. So Foreign Ministry officials told me that they’re forced to have mini-consulates out by some of these mines to navigate and negotiate community and company relations. It’s a lot of work for them, and they provide a lot of guidance to these companies to pay attention to environmental impact assessments and doing these things. And they put into place a lot of regulations, through the stock exchanges, through the banks to try to enforce them. Enforcement is spotty, just like it is in China. But I think there is a general push to try to get Chinese companies to operate closer to world standards when it comes to these good governance issues.
ML: Another example here: I visited Zambia when we were researching this book and keep coming back to an encounter that reinforced to me how little control the Chinese government often has with what’s happening in these country. Zambia has a big problem with this company called Collumn Coal, where every few months it seems to be the case that someone gets shot at its mines, either the Chinese managers or the Zambian workers.
And when I went to Zambia, I had a meeting with the Chinese ambassador there. And he said to me, I keep on trying to call the people who run these mines in here and telling them to shape up, but they refuse to come a meeting. And he said, it’s such a pain, if you’re interested in buying this mine--and I can arrange it--we’ll do this. He was joking, but he had a serious point: The mine was becoming far more pain than it’s worth. And it’s important reminder that as powerful as the Chinese state is, it’s limited in its ability to shape things at home, and certainly limited in its ability to shape things abroad.
BP: So how do this compare to Western companies operating in these countries?
ML: It turns out that mining is a messy business. And if all you do is ask, are Chinese mining activities upsetting people, you will frequently find that the answer is yes. But if you ask if Australian mines are upsetting people, you will also find that the answer is yes. So it’s important to measure China’s impact both against the standard China sets for itself and the claims that it’s made about what it will do, but also against what would have happened had a company from another country go.
There’s another subtle way in which Chinese presence can sometimes even be unusually beneficial to the local economy. Some Chinese firms are willing to take on less profitable mines, or mines that require less advanced technology, or mines that wouldn’t be operating if it were only left to Western companies to develop them. Those sometimes end up supporting lower wages and creating concern as a result of that, but often the alternative is no one operating the mine and no one getting any wages at all.
BP: You also have several chapters in your book looking at how China's endless search for resources could affect international security. So the South and East China Seas potentially have oil deposits claimed by both China and neighboring countries. That could obviously become an issue. Or you have China's need for oil and gas affecting its relations with Iran. What's the best way to think more broadly about these potential flashpoints?
EE: I would say one of the most important things, is to take them case by case. For instance if you look at the South China Sea, it’s important to disentangle the resource issue from nationalism and sovereignty. Those are the issues that are really driving Chinese behavior. Resources play a role, certainly. But we’re really talking about is China’s ability to control its near seas and protect its resource access resources. So that’s one kind of story. You can't take the actual resources -- the oil, the gas, the fish -- out of the equation entirely, but you do have to realize that there are other interests that may predominate.
ML: Take Iran as another case. Iran is really illuminating. There was enormous Western fear that sanctions against investment in Iran would be gutted by Chinese willingness to step in. And while there’s been a willingness, we’ve seen several countervailing forces.
The West still controls a lot of the critical technologies that are needed, no matter who’s using them. On top of that, with the increasing attractiveness of the United States as a destination for energy investment, the U.S. government can at least subtly present the chinese with a choice between investing here and investing in places where we don’t want to see them step in. And there’s at least anecdotal evidence, that China paid attention to that in deciding whether to step in.
So the lesson to draw there is that you can’t only focus on Chinese intentions and Chinese wants. You have to also look at Chinese capabilities. That also is the calculus that leads you to focus on the near seas, rather than on Chinese activities in the Middle East. The reality is that its naval capabilities are stronger closer to its shores. And that will shape its actual behavior in the world.
EE: And I’ll just make one final point, we found that the international system acts as a much more powerful constraint on Chinese behavior than we often think. You see see that in the East and South China Sea, see it in Iran, see it in Sudan. So we tend to think of China as able to or not able to, but at the same time the international system shapes China’s behavior.
Interview has been very lightly edited for length and clarity.