Elizabeth C. Economy

The Diplomat’s Justin McDonnell speaks with Elizabeth C. Economy about her recent book on China’s quest for resources.

Elizabeth C. Economy

The Diplomat’s Justin McDonnell speaks with Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies at the Council on Foreign Relations and co-author with Michael Levi of the book By All Means Necessary: How China’s Resource Quest is Changing the World, about the international impact of Chinese demand for resources.

There is inevitably a lot of hype and miscalculation with regards to China’s need for resources. What are some of these myths?

Many myths have developed around China’s resource quest, and my co-author Michael Levi and I ended up debunking some and refining or adding nuance to others. Let me give you two examples. One of the most basic myths is that China is somehow unique in its search for resources outside its borders. In fact, we found that every major rising power, dating back to ancient Athens and continuing through to Japan in the 1970s and 1980s, has sought resources from abroad. In fact Japan, in the early 1970s, with only 120 million people, commanded about 10 percent of global oil supplies. China, today, with 1.3 billion people consumes roughly 11-12 percent of world oil supplies. Looking across countries in this way helps bring much needed perspective to China’s resource quest. China is not the first—nor is it likely to be the last—rising power that needs the resources of other countries to fuel its growth.

A second common assumption that we found needs some refinement is that Chinese companies have an unfair advantage in competition with Western multinationals because of the heavy involvement of the state. While it is true that Beijing can bring resources to bear that other countries cannot, such as low-cost financing and low-cost labor, it is a double-edged sword. Chinese state-owned enterprises must also contend with the perception that they are simply agents of the Chinese state—a perception that often contributes to a nationalistic backlash in the countries in which they try to invest. We found this in Kazakhstan, Mongolia and Brazil, among other countries. In addition, not all Chinese resource investment is driven or overseen by Beijing. In some sectors—such as mining—a vast number of Chinese firms that are “going out” to secure resources are not state-owned; and in some cases, such as in Ghana, these independent miners can cause serious political problems for Beijing when they don’t abide by the host countries’ laws. In the case of Ghana, despite the fact that thousands of Chinese gold miners came of their own accord, Beijing was nonetheless held responsible for their actions by the Ghanaian government.

What are the real ramifications of China’s continual demand for energy and influence in the commodities market, both for producers and consumers? 

For producers, there are obvious benefits to be had from Chinese demand. In addition to rising prices for commodities, Chinese companies have often invested in mines that firms from other countries have deemed unprofitable, thereby bringing jobs to areas where there otherwise would be none. But some producer countries have concerns as well. For example, we repeatedly heard that that the Chinese are simply securing resources and doing the higher value-added processing back in China; they are not transferring technology or otherwise contributing to the development of the host country economies; and particularly in countries with higher value products and better-developed service sectors such as Australia and Brazil, there is a desire to see their exports more evenly balanced and not so reliant on raw materials. For consumers, of course, the price rises are a downside of Chinese demand, although different markets behave differently. For example, price rises have been more significant in iron ore and oil than in aluminum because of several factors related to the nature of the supply structure and markets for each of the commodities. Rising prices can also have a beneficial impact on consumers by promoting resource conservation and greater efficiency, as well as a search for substitutes—this is what we saw happen, for example, when prices rose initially when China began to cut its quota for rare earths exports that it was mining domestically.

We often, almost exclusively, hear about China’s cultural and economic inroads in Africa. Yet, in your book, you take a look at the entire landscape throughout the developing world. Where might we be surprised to learn of Beijing’s demands for regional commodities?

We were continually surprised by what we learned as we looked across Chinese investment in different commodities and countries. One unexpected finding was that for all of China’s much vaunted diplomacy, it doesn’t really tailor its approach to different regions. For example, it has tried to develop a forum similar to what it has with Africa, the Forum on China-Africa Cooperation (FOCAC), with the countries of Latin America and the Caribbean. However, when I was in Brazil, officials there dismissed the Chinese effort, saying that while some Caribbean countries might appreciate such a Chinese effort, Brazil was of equal standing with China and wouldn’t be part of such a regional arrangement that placed China at the center. In fact, officials in many countries outside Africa were adamant that their countries were “not Africa” and that the Chinese would not be able to do business in the same way. One specific example: Brazilian officials reported to me that when Chinese agricultural delegations traveled to Brazil to seek investment in land, they thought that the officials could simply sign away the land, because that it is the way it is done in China and the Chinese had had success in other countries doing business this way. In Brazil, however, this type of backroom dealing didn’t fly.

Another surprise was that China is not the largest investor in any part of the world: it is the fourth largest investor in Africa, third in Latin America, and third even in its own backyard, Southeast Asia. It is also only the third largest investor in land overseas. Of course, it is often the largest source of new investment and largest trading partner for many resource rich countries, but we were surprised that it didn’t rank first or second anywhere in the world in terms of overall investment.

What do you mean in the title of your book, By All Means Necessary?

“By All Means Necessary” refers to the fact that China brings a number of political and economic tools to the table that others do not. It is able to provide an overarching plan to secure the resources it desires that includes trade, aid, and investment. It has almost an unparalleled ability to provide low-cost financing and cheap labor, which it brings from home. And it lacks the governance strictures such as a monitored and enforceable foreign corrupt practices act that helps inhibit back room or side deals. Some of these practices do help win deals in the short term—but they can also backfire over the longer term, particularly when there is a change in the host government of a resource rich country. In countries such as Zambia and Myanmar, for example, new governments have reviewed Chinese natural resource investments and overturned or delayed a number of them on the grounds that they involved corrupt dealings with the previous government or otherwise didn’t serve the interests of the local people.

With the new leadership, will there be changes in policy to improve resource efficiency?  

The new Chinese leadership appears intent on improving resource—particularly energy—efficiency. However, it will take time to translate intent into action. Earlier this year, for example, the Wall Street Journal reported that the National Development Reform Commission—in some ways the brains trust for China’s resource quest—called on Chinese steel companies to continue to take stakes in iron ore deposits in Brazil and Australia despite the fact that there was overcapacity in China’s steel industry. Officials from some of the steel companies responded that they had no plans for new acquisitions, but for the NDRC it wasn’t about actually utilizing the resource efficiently as much as keeping a voice at the global trading table and maintaining China’s strategic security. Resource efficiency is thus just one part of a whole set of issues and concerns driving China’s resource acquisition policy.

How do the country’s energy concerns play a role in its foreign policy, particularly in the Middle East and the South China Sea?

Certainly China’s energy needs and its foreign policy are linked closely but they are not one and the same, and disentangling them can be difficult. For example, in the East and South China Seas, the driving force behind China’s expanding military activity is probably as much about history, nationalism, and growing military capabilities as it is about any real energy resources that Beijing might be able to exploit. Indeed, Beijing has previously called for joint development of the seas’ resources—although this is certainly off the table for now in the case of Japan and the East China Sea. In some cases, the international community can constrain Chinese energy investment even when Chinese foreign policy is supportive. In Iran, for example, Chinese oil companies initially took advantage of the withdrawal of Western firms due to nuclear-related sanctions. However, Chinese companies’ willingness to fulfill some of the deals they pledged to undertake has suffered likely partly because of their inability to access needed technology (due to those same international sanctions) and in part because of a fear that their investment opportunities in the U.S. oil and gas sector might be hindered. More broadly in the Middle East, I think that Chinese foreign policy is going to have to ramp up to keep pace with its need for oil, particularly if U.S. demand tapers off as a result of growing domestic supplies. China now imports more oil from Saudi Arabia than the United States does, for example, but it has yet to define a clear role for itself as a player in the region’s challenging security environment.

If you were advising U.S. policymakers, what tactics would you advise they undertake with China over the course of this year? 

We offer a set of recommendations for U.S. and other policymakers but let me just note three: 1) In the next few years, the United States should use China’s potential participation in international arrangements such as the Extractive Industries Transparency Initiative (which the United States has just joined) and the Trans-Pacific Partnership (which is under negotiation currently) to encourage China to improve its labor, environment and governance practices in its overseas resource investments; 2) Washington’s support for commercial diplomacy should expand to include not only extractive industries but also U.S. construction and other infrastructure-related firms. While the United States can’t hope to match Beijing’s low-cost financing and cheap labor, it can do a much better job of thinking through and promoting investment opportunities for U.S. firms in a more holistic manner; and 3) As Chinese naval capabilities grow, it may be tempting for the United States to invest less in protecting sea lanes such as the Straits of Hormuz and Malacca and shift some responsibility to China. This would be a mistake. Recent Chinese behavior in the East and South China Seas does not suggest that Beijing is committed to freedom of navigation and prepared to serve as a primary guarantor of maritime security. It is a role that the United States should be prepared to play for the foreseeable future.