Wednesday, February 1, 2012

China's resources policy attracts attention of congress...

China's resources policy attracts attention of congress...
By Benjamin Shobert

The congressional US-China Economic and Security Review Commission (USCC) last Thursday focused its attention on, as they put it, "China's Global Quest for Resources and Implications for the United States". As Commissioner C Richard D'Amato said when the hearing began, the USCC wants to learn more about China's pursuit of "water, fuel and non-fuel mineral resources, and fish". Each of these presents questions about what lengths Beijing is willing to go in order to ensure access to precious raw materials.

D'Amato went on to state "These are the resources upon which the Chinese 'economic miracle' depends. Although Mao-era policy emphasized economic, energy, and political self-reliance, China's endowment of natural resources no longer sustains its massive population and export-driven economy."

Aware of the extreme domestic natural resource limitations China faces, policy makers in Beijing have aggressively sought out alternatives. In doing so, the country has turned towards others like Iran and Venezuela which have been largely ostracized by the developed West.

As China would have these moves be understood by the international community, decisions to do business with countries such as Iran are ones born of extraordinary necessity. These decisions can also be seen as China going where other more developed nations have either chosen not to go, or are prohibited from going in the first place.

However, critics of China believe that much of what animates Beijing's willingness to do business with Chavez's Venezuela and Ahmadinejad's Iran is that China shares a similar distrust of modern democratic governments and Western institutions as do the leaders of these two countries.

In this vein, the opening statement of Commissioner Daniel Slane pointed out the many areas where China's pursuit of natural resources has, as he put it, "had significant security consequences worldwide". Referencing the numerous recent instances where China's involvement in Africa has drawn either formal sanctions or criticism from human rights groups, Slane noted that Beijing will not hesitate to use whatever leverage is at its disposal in order to continue its pursuit of those critical natural resources it requires.

Additionally, as China's power has grown in the world, it has come to understand that one of its few natural resources that the world desperately needs - rare earths in particular - can be used as a very effective tool at the negotiating table.

As Slane put it, "China's unofficial ban on rare earth exports to Japan in 2010 indicated to the world that China was willing to use critical resources as leverage in its diplomatic relationships." A World Trade Organization panel on Monday ruled that China had violated trading rules by curbing exports of raw materials that included bauxite, coke, magnesium, manganese and zinc - but limits on Chinese exports of rare earths were not part of the ruling.
China clearly understands the role natural resources plays in allowing countries to pursue its own domestic strategies and is signaling its willingness to use one of its few advantages in this area for its own gain.

This worries some who recognize that, as David Menzie the chief of the US Geological Survey (USGS) at the Department of the Interior who testified last week, "For many of the more than 80 mineral commodities tracked by the USGS, China ranks as the world's leading producer." Menzie went on to add "In a number of cases, China is not only the leading producer, but dominates world production."

He pointed to three minerals plus rare earths where China has more than 80% of the world's production and an additional 15 where China produces "between 50% and 80% " of the world's total.

Like many perspectives on China, interpreting what drives Beijing's willingness to leverage its natural resources for gain or how it goes about obtaining these needed materials in the first place says as much about the country's actual ideology as it does the frame of reference Western policymakers use when judging China's motives.

Washington is grudgingly coming to terms with a more sophisticated and confident Beijing, one that is more willing to put out and fight for its own interests. For those in DC who thought that China's evolution towards the poorly defined "responsible stakeholder" would mean the country would ultimately come to step in line with Western policies, China's pursuit of natural resources with little consideration of who they are doing business with has been disconcerting.

American and European policy makers certainly wish that Beijing would be more selective in who it chooses to do business with; however, as Mikkal Herberg, the Research Director for the Asian Energy Security Program at the National Bureau of Asia Research shared last week, "Energy security has become a critical political and economic concern for Beijing's leadership."

Herberg pointed out, "China's leaders fear that energy shortages and rising energy costs could undermine the country's social instability." As long-time China watchers know, these fears are central to understanding China's policies. Herberg made this point in his testimony when he stated, "For a regime that increasingly stakes its political right to rule on economic performance and living standard, the threat of economic stagnation could threaten the continued political monopoly of the Chinese Communist Party (CCP)."

Herberg's USCC testimony pointed out what he calls China's "energy nationalism"; namely, as he describes it, "an energy version of economic nationalism and mercantilism prevalent in Asia". He believes that China's fears - one he suggests are shared by other regional players who have similar concerns about access to oil and natural gas - are critical to understand why China acts as it does in pursuit of natural resources internationally.

Beyond how China's rapid modernization impacts the world's supply of natural resources, Beijing's efforts to not only secure supply but ensure safety during transportation into the country are making waves in the South China Sea. Herberg pointed out that "China's growing dependence on oil and liquid natural gas (LNG) flowing through the Indian Ocean, Malacca Straits and [the] South China Sea is also a key driver of its naval modernization and move towards 'Blue Water' power projection capabilities by the PLA Navy."

Experts like Herberg understand and fear that these moves by the PLA Navy are "setting off alarm bells across the region and contributing to a regional naval arms race."

While much of last Thursday's testimony focused on China's pursuit of oil and natural gas, Dr Elizabeth Economy, a Starr Senior Fellow and Director of Asia Studies at the Council of Foreign Relations, pointed towards China's pursuit of water as equally important. According to Dr Economy, "More than 40 mid- to large-sized cities in Northern China, such as Beijing and Tianjin, boast crisis-level water shortages."

Water shortages due to depletion are not the only problem. As she shared last week, "over 90% of groundwater [in China] is polluted by urban sewage, refuse and industrial waste." This means that, according to research by Jon Bowermaster that Dr Economy referenced, "estimates are that 400,000 people are driven from their homes annually as a result of lack of water". As with many challenges the Chinese government must face, this is another that poses a threat to the country's social stability.

In many ways, China's pursuit of each of these natural resources is understandable and should be seen as an inevitable outgrowth of the massive economic gains experienced across the country over the last several decades. The US Congress has at least three fears, as evidenced by last week's hearing.

First, whether China can be convinced to join the developed West in ostracizing countries like Iran specifically, or whether China's pursuit of natural resources will take precedent.

Second, Washington fears that China's model for obtaining natural resources through its national oil companies (NOC) and their "go-out" strategy may be locking up resources to which Western countries will also need access. Because the NOC approach is built on a state-to-state relationship, in many cases it prevents private operators in the West from competing.

China can, and has, brought to bear more than a simple commercial transaction for oil; rather, the NOC can weave together government-sponsored loans, infrastructure projects and other amenities to convince a foreign government to work with China. Washington thus far does not have a good answer to this.

Third, and perhaps most pernicious, is Washington's fear that China's pursuit of natural resources will destabilize the region, whether intentionally or accidentally. This fear might be made real by a military confrontation in the crowded South China Sea, where multiple borders and territorial disputes still exist, or this fear could be realized if China's modernization causes it to damn waterways that nourish the many river deltas throughout Southeast Asia.

Cumulatively, China's pursuit of natural resources brings together many concerns and criticisms about China's current position in the world. However, unlike many areas where outsiders are not clear as to Beijing's decision making or priorities, the country's single-minded pursuit of those commodities necessary to its economic growth are much easier, if no less unsettling, to understand....

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