By All Means Necessary (29 page)

Whether Chinese reluctance to support stronger Security Council sanctions against Iran has been tied to its interest in Iranian oil and gas is more difficult to determine than whether the presence of Chinese companies has helped Iran avoid the impact of investment-focused sanctions. China has a long-established pattern of avoiding support for Security Council sanctions against countries for what it judges to be their internal activities, a pattern that extends well beyond countries in which Chinese companies maintain oil interests.
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Moreover, some (controversial) scholarship on nuclear proliferation also suggests that Beijing may not be particularly eager to prevent Iranian nuclear progress either, as a simple matter of geopolitical calculation.
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That said, to the extent that the Chinese government is interested in slowing the Iranian nuclear program, the prospect that oil and gas interests of powerful Chinese companies might be endangered by aggressive moves surely weighs in the leaders' calculus.

It is also important to distinguish here between an interest in investing in Iran and a desire to continue buying oil and gas from the country. Losing investment positions, particularly after Chinese companies have sunk considerable time and money, is a major blow. Losing the ability to buy Iranian oil is, at least in principle, far less problematic; Chinese refiners can simply source oil from the broader market. Nonetheless, to the extent that leaders worry about the ability to source new supplies this way (a fear that, however unreasonable, extends well beyond China), fears of losing the ability to buy oil from Iran may genuinely scare decision makers in Beijing. Moreover, it is far from clear that other countries would have been enthusiastic about oil-related sanctions had China not been in a position to continue buying oil; many in Western governments considered continued Chinese purchases to be critical to squaring efforts to squeeze Iran with the need to keep oil markets well supplied and prices from rising sharply. The alternative to Western sanctions that China does not fully comply with may have been no sanctions at all—and with even less impact on Iran.

The standoff with Iran suggests that the existence of major Chinese energy firms weakens Western abilities to affect the behavior of countries such as Iran by imposing sanctions directly
on energy. But it also demonstrates continuing Western leverage, both through the critical role of U.S. and European firms in providing high-technology equipment and through the ability of the United States to use access to its own oil and gas reserves as leverage. Whether Chinese involvement in resource markets has also led Beijing to water down otherwise tough sanctions is more difficult to determine from experience thus far.

Increasing Chinese demand for resources is also likely to change relations between China and major producing countries even where it has no investments on the ground. These go well beyond the market impacts we explored earlier. Instead, they will have much broader consequences for international politics too.

Economists have long argued that the geography of oil trade does not matter much. If a consumer faces a producer that refuses to sell it oil, the consumer can easily buy from others. Similarly, if a producer faces a consumer that refuses to buy its oil, it can easily sell to others. Analysts have casually extrapolated this logic to other resources. But there are two problems with this: not all resource markets are like the oil market, and economics is not the only source of friction for oil. The upshot is that as China becomes a much bigger buyer of natural resources, more and more countries will want to curry favor well beyond the commercial sphere. This may have broad consequences for international relationships, particularly between China and the Middle East.

China occupies a far more dominant position as a consumer in minerals markets than it (or any other country) does in oil markets. Chinese refusal to buy iron ore, bauxite, copper, or other minerals from any reasonably sized producer could leave the producer with great difficulty in finding alternative customers; it is not illogical, then, for minerals producers to want and seek good relationships with China.
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To be certain, this risk has been reduced by the move toward spot markets in minerals in recent years. And China itself could be hurt by too broad a refusal to buy minerals that are critical to its industry. Nonetheless, the risk here is greater than for oil.

What about natural gas? The consumer side of the liquefied natural gas market is far more diversified than it is for minerals. This makes China less central. But LNG terminals are typically built with long-term supply contracts attached. This means new additions to supply must find interested consumers to take the other side of long-term contracts. In Asian LNG markets, Japan and South Korea are vastly preferred to India or China as customers; they are seen as having a long track record of amicable dealings with suppliers and a clear pattern of not defaulting on contracts.
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As a result, LNG project developers can more easily take Japanese and South Korean commitments to buy gas to potential financiers when looking for financing. But attracting Chinese buyers still remains an important goal for many producers, and because those buyers (and many sellers) are government owned, this deal making can take on a political cast. This is most consequential for new or growing producers (such as Australia or Mozambique) that need to secure new buyers for their additional supplies. Suppliers with low-cost gas and contracts in place—Qatar chief among them—will not need Chinese buyers to achieve their goals.
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The politics of oil markets are subtler. Under almost all circumstances, flexible markets mean countries should not care whether they sell oil to China or to other consumers. They also should not worry about building strong relationships with China in case they want to have the option of selling China oil in emergencies. But the recent experience with oil-related sanctions against Iran suggests that some producers are reasonable to want good relations with China. In recent years, many of the biggest oil consumers in the world collectively declined to buy Iranian oil. More consequentially, perhaps, broader sanctions interfered with oil tanker traffic and with settlement of payments for Iranian crude. The consequence was a steep drop in Iranian oil sales and revenues. Had Iran been on bad terms with China and India, leading them to consider joining the effort, there is a reasonable prospect that the damage to Tehran would have been even worse. Indeed, other countries, particularly in the Middle East, that (in contrast with Iran) are not engaged in defiant behavior also worry about this “security of demand.”
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When oil sales are the
lifeblood of an economy, even a tiny chance that markets won't suffice is enough to encourage political efforts to backstop relationships with major oil buyers. The result is likely to be closer ties between China and major oil producers in the coming years.

China's quest for natural resources is beginning to have consequences for international politics and security far from its shores. But those developments are largely unfolding more slowly than ones closer to home. China is subtly changing the world: it is making it tougher for Western countries to influence others through sanctions on resource investments; adopting new approaches to international cooperation in the few instances where it participates in security missions far from home; and redrawing the patterns of resource trade, changing political attitudes in the countries it does business with in the process. But China itself is also shifting, becoming more trusting of international markets and reliant on the U.S. power that underpins them, and learning that seeking friendly relations in resource-producing countries can sometimes run counter to the goal of promoting stability.

In the coming decades, though, China is likely to shape the international environment more. The Chinese military will become more capable—particularly if a strong Chinese leadership provides the resources needed for rapid expansion—and with that will come increasing interest, at least in some powerful Chinese quarters, in becoming less reliant on the United States for security in resource-producing regions or on the high seas. Chinese companies will become less dependent on U.S. and European ones for the technologies they need to produce resources abroad—and hence will have greater ability to undermine Western sanctions. And as resource trade between China and other regions, particularly the Middle East, continues to rise, foreign leaders and strategists will concern themselves more than ever with ensuring that their relationships with China are strong.

AT THE OUTSET OF
this book we asked a simple pair of questions: is China's natural resource quest changing the world? Or is China itself being changed as it seeks secure supplies of natural resources abroad? The reality is that both types of transformations are under way—and often in surprising forms.

China has already changed the world through its rapidly rising consumption of a host of natural resources. Contrary to the prevailing belief in some quarters, it does not secure them mainly by buying up resource deposits abroad, but rather it procures resources through trade. Indeed, the consequences of this, primarily in the form of rising prices for commodities ranging from oil to iron ore, are the largest that China's resource quest has had—and are more far-reaching than the impacts of investment abroad. China has also changed the very structure of critical markets, but not as Chinese policy makers sought or international observers feared. A decade ago, many people worried that China would steer the global oil trade away from its market-based foundations, yet this hasn't happened. Meanwhile, the emergence of thousands of small Chinese steel mills ultimately led to a much more transparent and competitive system for trading iron ore—an outcome that Beijing actively resisted.

Chinese investment abroad has also transformed resource-rich economies, but more subtly than what Chinese leaders promise or skeptics of Chinese investment often warn about. Resource
investment in most sectors and countries remains a small part of their overall FDI pie. Moreover many of the tools China uses—for example, loans tied to resource production—are variations on ones that Western firms use too. And Chinese firms' labor, environmental, and financial practices are often no worse (but certainly no better) than what some of their competitors bring to bear.

Yet Chinese firms regularly export the ways of doing business that they have learned at home. Indeed, this is a theme pervading China's natural resource quest: understanding Chinese behavior abroad requires understanding Chinese behavior at home. The same political and economic practices that shape its development model at home are reflected in Chinese behavior when investing in natural resources abroad. The central government and state-owned enterprises, which set the strategic direction for the domestic economy, are similarly powerful actors in establishing the overall strategy for China's international actions. As a matter of broad policy, these players approach the country's resource needs through a loosely coordinated trade, aid, and investment strategy that mixes a powerful role for market forces with a much stronger role for the state (including state-owned companies) than is familiar in the West.

Just as in China, though, significant economic activity takes place outside the central government's purview. Large SOEs typically (though not universally) explore resource investments as purely commercial endeavors, though still helped by Beijing through cheap capital and other assistance. And smaller nonstate firms—either private ones or those supported at the provincial or township level—are increasingly going out not as part of a coordinated effort to ensure Chinese resource security but with a mind to heed Deng Xiaoping's 1992 admonition to get rich quick. Even individual Chinese, like the gold miners who caused trouble in Ghana, now independently seek their fortunes abroad, relying on personal funds and connections to support their ventures. When things go awry, Beijing only reluctantly becomes involved.

Institutional weaknesses within China, including in the areas of environment, labor, transparency, and the rule of law, are often exploited by Chinese firms when they operate at home. Similarly,
firms often take advantage of weak state capacity abroad. Chinese players often assume it is the responsibility of the host government to enforce its own environment, labor, and governance rules. In this respect they are not so different from many other multinationals. Yet unlike Western multinationals, which sometimes export relatively good social and environmental practices when they invest abroad, Chinese companies have little to contribute on this front.

The impact of China's resource quest on international politics and security has been more modest thus far. Warnings of resource wars and political tie-ups with resource-rich despots have largely come to naught; claims that Chinese pursuit of natural resources has been a core contributor to civil conflicts like the one that raged in the 2000s in the Sudan fail to withstand scrutiny. Yet there is little question that China's resource quest is changing the international political landscape in important ways. Willingness on the part of Chinese companies to invest in some Iranian oil and gas production has helped blunt the impact of Western sanctions. Chinese efforts to build pipelines that circumvent the Strait of Malacca are lessening—though far from eliminating—Chinese vulnerability to potential resource cutoffs in wartime. Conflict with neighbors in the South and East China Seas—driven in part by pursuit of resources and a desire to secure the sea lanes through which they are transported—is becoming more heated every year. Chinese efforts to use large volumes of water from rivers that cross international boundaries have stoked tensions with some neighbors, even as pipelines that connect China with nearby oil and gas deposits draw Beijing closer to others.