By All Means Necessary (2 page)

This is not a new phenomenon. Ancient Athens disdained international commerce but found itself seeking timber in Macedonia and corn in Egypt. England and Spain built colonies in the New World partly to sate demand for gold, silver, wood, and furs. In the first half of the twentieth century, as European powers fought over Africa and the Middle East, they were driven in part by competition for natural resources that they lacked at home; Japan sought control over much of East Asia at the same time for similar reasons. After World War II, the United States extended its influence over distant resource-producing lands and spent large sums to protect seaborne commerce, in part to assure itself of reliable access to the resources lacking at home.
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China is thus hardly the first power whose quest for resources promised far-reaching consequences. It is not even the first emerging power to generate alarm in the last fifty years. That distinction belongs to Japan.

In the 1950s and 1960s, as Japan emerged from World War II, the country consistently posted growth rates similar to those seen more recently in China.
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In the 1960s, Japan also turned heavily to resource-intensive investment to drive economic growth. The consequences were most prominent for oil and iron ore. Between 1965 and 1973, Japanese oil use rose from 1.7 to 5.3 million barrels a day.
(The latter figure was 9 percent of global consumption.) Japanese oil imports accounted for a considerably larger part of the world market than Chinese imports do today. Japan boosted its share of world steel production, the main source of demand for iron ore, from 6 percent in 1960 to 17 percent by 1973, nearly passing the United States, and spurring demand for iron ore imports that greatly exceeded U.S. demand.
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Just as rising Chinese commodities consumption in the 2000s coincided with growing popular fears that the world was running out of natural resources, so too did growing Japanese demand collide with worries about “limits to growth” rooted in resource scarcity.
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Surging Japanese oil demand also appeared to usher in a new world of geopolitics when, in 1973, growing world oil use shifted the balance of power toward the Organization of Petroleum Exporting Countries (OPEC), which used the opportunity to hike prices and inflict economic turmoil on the West.

Rising Japanese resource demand also manifested itself in overseas Japanese investment in resource development, from Australia to Africa.
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And, as is the case today with China, there was widespread concern about the methods and goals that the Japanese pursued. Among U.S. analysts, much of it could be chalked up to how fundamentally different the Japanese approach was from that of the United States. U.S. resource producers typically operated independently of government and of each other. Americans were inclined to believe in the reliability and inevitability of markets, which they turned to in order to ensure secure supplies. Japan appeared to operate differently. Its island geography and lack of domestic resources meant the country had a longer history of import dependence. The structure of Japanese industry, its relationship with government, and the attitudes of both industry and government toward markets were also different. Industry, through powerful business organizations, worked far more closely with government than U.S. companies did. Government could also direct industry to make moves for national, rather than corporate reasons, as when it required the Japanese conglomerate Mitsui to stay in the Iranian petrochemicals market “long after the firm was eager to withdraw.”
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Japanese firms entered competition for overseas resources with some of the same controversial trappings that Chinese companies bring today. They availed themselves of government financing at relatively low rates in order to facilitate overseas investment. Starting in 1967, the government-owned Petroleum Development Corporation subsidized overseas exploration and production by Japanese firms. Together with private efforts, this led to a tenfold rise in exploration and production expenditures between 1968 and 1973. In 1973, in the wake of the first oil crisis, corporate Japan came together to create the Japan Cooperation Center on the Middle East, which aimed to facilitate better relationships between Japanese firms and oil-rich Middle Eastern countries. This was followed the next year by a government effort to use diplomacy and government coordination to open doors for Japanese firms; the effort was also boosted by support from the country's Export-Import Bank and Overseas Economic Cooperation Fund. In terms of sheer scale, Japan's oil strategy was remarkably successful, and by 1980, 45 percent of Japanese imports came from resources owned or otherwise controlled (through long-term purchase contracts) by Japanese firms.
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The Metal Mining Agency of Japan, created in 1963, matched these efforts when it came to raw metallic ores. In addition to taking ownership stakes abroad, Japanese buyers entered into long-term purchase contracts that could help mine owners obtain financing for development and production. They also organized themselves into consortia in order to leverage their market power in price negotiations with potential suppliers. Japan came to be a dominant player in many critical markets; by the late 1970s, it was the main buyer of iron ore from Australia and India, the top purchaser of Australian copper ore, and a major buyer of Brazilian iron ore.
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At first, Japanese efforts were, in many ways, less oriented toward “locking up” resources than were the efforts of many Western firms; American firms “were relying heavily on vertical integration for the security of their foreign supplies of bauxite, copper ore, and iron ore.”
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Eventually, as Japanese firms built up capital, this shifted, and the companies increasingly took ownership (“equity”) stakes in overseas mines.

Yet for all the portent of change and disruption, three decades later no one would claim that Japan fundamentally altered how global oil and mineral markets function. This is not because the United States and others mobilized a forceful response to the rise of Japan. The latter's economy never became the overwhelming force analysts had anticipated; instead, it stagnated, and as the rest of the world grew, Japan's share declined. At the same time, as resource prices rose and geopolitical worries intensified, consumers cut back and production grew, leading to plunging prices across a range of commodities. Australia did not become a Japanese mine, and not because Canberra blocked Japanese access; instead, other parts of the Australian economy inevitably grew. Meanwhile the United States remained the dominant power in the Middle East, despite the fact that an ever-larger fraction of the region's oil exports was destined for Asia and not for Europe and the United States.

The rise of Japan came at a time when China was a tiny player in world markets. The Chinese economy was relatively isolated during the 1960s and 1970s. In the 1980s, as Japan first surged and then sputtered, China's economy began to take off. But it was starting from a long way behind and was able to avoid becoming dependent on foreign natural resources for a time. Ultimately, sustained economic growth through the 1990s and 2000s, which spurred ever-higher demand for natural resources, made isolation impossible. Today Chinese demand for natural resources appears to be changing the world even more so than people once predicted for Japan.

Indeed, many observers have given credit (or assigned blame) to China's quest for natural resources for an extraordinary host of transformations around the world. In this telling, Chinese demand for imported resources is the root of record price rises for everything from oil and ores to wheat and soy, impoverishing consumers and making small resource-endowed countries rich.
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Chinese investment in overseas resources is transforming the commodities world from one governed mainly by free markets to one in which China
locks up reserves and creates its own mercantilist system for trade.
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Western companies, previously used to competing with each other on commercial terms, now face Chinese state-owned behemoths that secure resource deals by using every lever of the Chinese government—and availing themselves of ultra-cheap loans—to beat the competition, shifting the balance of economic power from free markets to state capitalism in the process.
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When the Chinese companies arrive, they variously enrich despots, despoil the environment, exploit labor, and intensify corruption.
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Meanwhile, China's resource quest appears to color the country's foreign policy too. China seemingly clashes with its coastal neighbors over the oil and gas riches of the South and East China Seas, uses its muscle to divert rivers to the detriment of other countries downstream, and strikes bargains with former Soviet republics and others to its west to secure new supplies of fuel and new routes to transport them.
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Chinese diplomats skew their votes in the United Nations Security Council (UNSC) on everything from the Iranian nuclear program to the Sudanese civil war, hoping to ensure reliable resource flows and harming international peace and security in the process.
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And, in the background, the People's Liberation Army Navy (PLAN) steadily builds strength and scouts overseas bases, preparing for a day when it, not the United States, will police the distant lands and narrow sea lanes through which much of China's and the world's critical resources trade flows.

Yet for nearly every contention that China's resource quest is transformational, there is a ready counterpoint on offer. Forces beyond China—scarce supplies, strong demand from other countries, nefarious speculators—are driving resource prices up.
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(And besides, the prices for many resources aren't that high by historical standards.)
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Far from locking up global resources and steering the world away from free markets, China is dependent on—and being drawn ever deeper into—the market arrangements that preceded its rise.
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Chinese companies are no different from Japanese and U.S. companies before them in investing in overseas supplies.
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Their performance on environment, labor, and corruption, many claim, is entirely within the mainstream, particularly when
it is measured against that of firms from other developing countries.
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And even though local populations often recoil at large Chinese investments, they have similarly hostile reactions to many non-Chinese incursions, including from Western multinationals, massive Middle Eastern sovereign wealth funds, and opaque global investment funds.
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Indeed, as China gains experience abroad, some contend, it is changing its own initially weak practices to meet high world standards, rather than the other way around.
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What about international security? To many eyes, Chinese disagreements with Japan, Vietnam, and other neighbors about resources in the South and East China Seas are much ado about nothing and unlikely to provoke significant conflict.
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India and others may raise a hue and cry about Beijing's efforts to dam international rivers, but in practice the threat posed by Chinese water diversion schemes is grossly overstated, particularly as China adjusts its plans in the face of downstream concerns.
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As for supposed Chinese intransigence at the Security Council, as China sees the downside to instability in a world where it depends on resources from around the world, some see it becoming more invested in the tools that the West has used to promote international stability.
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And despite U.S. worries, the PLAN has not built a single overseas base, and it possesses just one (secondhand) aircraft carrier.
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China appears to have accepted a world where the United States patrols the seas; if that eventually changes, perhaps the two countries will cooperatively share the burden of sea-lane security, rather than fight over control.
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Which vision is right? Is China's quest for energy, minerals, land, and water—pursued through a mix of trade, investment, political, and military means—fundamentally changing the world, whether for good or for ill? Or, as China seeks resources, is the quest in fact changing China, bringing it into the fold of existing international rules, practices, and institutions?

We argue in this book that the truth does not lie cleanly at either pole, or even in some neat place in between. Instead, as we will show by examining the many dimensions of China's resource quest, it is found in a host of places that depend on the aspect of China's
resource quest that one is looking at. Pundits, scholars, and policy makers have too often blown China's resource quest and its consequences out of proportion with reality: their warnings of intolerable rises in commodity prices, unprecedented social and environmental damage to countries where China invests, a competitive playing field ever more tilted against Western companies, and inevitable resource-related conflict—perhaps even wars—between China and other powers are not supported by the facts on the ground. Part of this is because China's resource quest occurs against a well-established global economic, political, and security backdrop that has considerable inertia of its own. Much of it, though, is because China is not simply pursuing its resource quest with reckless abandon; instead, it is adjusting its strategy and tactics as it learns from experience, moderating its global impact in the process.

This is not to say that China is not special, or that its quest for resources is entirely benign. Its behavior abroad is often distinctly shaped by long and dense roots at home: Chinese companies bring their domestic practices to the places where they invest, Chinese policy makers bring assumptions about markets forged through decades of domestic experience to their practice of international strategy, and Chinese security planners are spurred by nationalist pressures and domestic bureaucracies as much as by calculations of what will strengthen Chinese resource security abroad. These forces—along with China's sheer size—can create important frictions as China ventures abroad. Moreover, some observers have been too quick to extrapolate modest impacts from past Chinese efforts to secure natural resources into the future, thus blinding themselves to possible challenges down the road. For example, China's military could take on a far more prominent role in resource security in the coming decades than it did in the last two, as China's capability to project force far from its shores grows. Similarly, as the scale of Chinese overseas resource investment rises, its consequences for governance could become substantially larger, too. Still, not all future trends will be more disruptive than those seen thus far: for example, rising Chinese demand for oil is unlikely to lead to anywhere close to the
same sorts of staggering price increases over the next decade as it did arguably over the last one.