By All Means Necessary (30 page)

As China has ventured abroad, though, it is not only the world that is being changed. China is changing as well.

This is already apparent in efforts to respond to the high commodity prices spurred in large part by China itself. Since the mid-2000s, Beijing has sought with some success to improve energy efficiency and rebalance the Chinese economy away from heavy industry, in part as a way to blunt the impact of sky-high costs. It has also pressed
to increase its domestic resource production, most notably in grain, helping blunt the global impact of its rising resource demand.

The impact of the resource quest on China itself can be seen far more broadly in Chinese efforts to invest globally. Chinese firms' behavior is being altered by the laws and regulations of the countries where they invest, as well as by those countries' capacity to enforce their rules. Firms' interactions with other multinationals are also shaping Chinese behavior. In the oil and gas industry, for example, companies are partnering with foreign firms to acquire access to advanced technology and skills. In the mining industry, some of them have hired Western experts to help them address weaknesses in their corporate social responsibility practices.

Yet a consistent pattern remains: where state capacity to enforce laws and regulations on the books is stronger, the Chinese government and enterprises have been forced to adapt and comply. Where governance is weaker, Chinese behavior generally fails to move the bar. In some cases, China has been forced to confront this dichotomy in the face of rapid changes abroad, leading to bigger shifts in strategic thinking. China's experience in countries where there has been a significant government transition—particularly from a friendly authoritarian to a more democratic ruling party, as in Burma—is contributing to a debate within China over the traditional wisdom of not mixing business with politics. Some Chinese business leaders, as well as NGO activists, are reassessing the trade-off between the short-term economic gain from working with unpopular authoritarian governments and the longer-term damage to China's reputation and ability to do business when those regimes fall.

These trends are amplified by the diffusion of new ways of thinking that are taking hold within China itself. Corporate social responsibility has begun to rise on the domestic agenda, and some firms have extended that by beginning to place greater emphasis on adopting better practices abroad. Nongovernmental organizations in China are also in the first stages of investigating, reporting on, and in some cases advising firms investing abroad on issues of corporate social responsibility. Once again, China at home is influencing China abroad.

Experience in the world is also changing how China approaches the political and security entanglements that come with being a big consumer of imported resources. Chinese leaders today are more comfortable than their predecessors in relying on international markets to secure resources, even when those markets are underpinned by U.S. power. (They are, to be certain, still often jittery, particularly when thinking about the prospect of resource security during war.) Some argue that they are gaining instructive experience in handling crises, such as those that have flared up in recent years in the South and East China Seas, though the willingness to provoke appears still to be increasing, and the risk of heated conflict remains dangerously high. Chinese policy makers are also gradually becoming more open to data sharing and other technical cooperation that might defuse conflicts over water.

If would be foolish, of course, to assume that the next twenty years of China's resource quest will mirror the previous twenty. Indeed the changes already afoot point to further transformations down the road.

Rapidly rising Chinese resource demand no longer comes as a shock to the global system—and, as a result, radical price rises mirroring those seen over the last decade are unlikely. Indeed, if China successfully rebalances its economy and further boosts the efficiency of its resource use (or indeed, if there is a sustained slowdown in the economy), those moves could contribute to weaker resource prices over the coming decade, a mixed blessing for resource consumers and producers around the world. China may also continue to transform the structure of markets—many eyes are on the prospect for a transparent market in natural gas—but there the odds are lower.

The biggest changes in the offing for Chinese resource investment stem from its growing scale. Over time, investment positions will grow, as companies develop new resource deposits and buy existing ones from others. (This expansion could, however, slow if the Chinese economy weakens, not as a result of lower demand for
natural resources, but because of tighter credit.) Indeed, it is easy to forget that a mere five years ago China was a tiny player on the resource investment scene. Moreover, as Chinese oil and gas firms raise their technological capabilities, their ability to access resources requiring more sophisticated drilling techniques will also grow. Even firms' improvements in corporate social responsibility practices may open more investment doors, in developing and advanced industrialized countries alike.

Change is also in the offing on the political and security fronts. It was not long ago that China lacked the military capacity to rattle sabers over resources and other concerns in the South and East China Seas. This is no longer the case, and Chinese assertiveness is now increasingly threatening to spark instability, a trend that might be exacerbated by economic or political weakness at home, which could create new incentives for international confrontation (though perhaps sap funds from the military at the same time). Further abroad, as China accumulates a wider portfolio of investments, and as its companies become more technically capable of replacing Western ones, China's interest in stability abroad—and its ability to undercut Western sanctions—will grow.

Over the long haul, however, the biggest prospective changes may come on the high seas. To date, China has not had the option of supplanting the United States in its role as protector of global resource flows. Over the next decade, however, China plans a significant expansion of its naval capacity, including the deployment of several aircraft carriers. This naval expansion will, in principle, enable China to play a far more active role as a maritime power with global reach, a role currently played only by the United States. (This is highly unlikely to be matched by a similar capability to intervene on land, something that the United States has used, with a mixed record, to try to promote stability in resource-producing regions, most notably the Middle East.) Moreover, the outcome of an active Chinese debate over establishing a more permanent military presence overseas will be a significant factor in China's longer-term security posture globally. All that said, however, China will still have limited military resources for the foreseeable future, and it is likely
to focus them first on its top-tier concerns: preventing Taiwan from becoming independent, forestalling any blockade of its near seas, and advancing its related interests in the South and East China Seas. This—along with the backlash that a more active global role would undoubtedly provoke—augurs against China trying to supplant or match the United States as guarantor of safety on the seas anytime soon.

China's resource quest has consequences for nearly every country in the world. Each country will need to form its own response: to decide what challenges and opportunities China's resource quest creates for it and how best to respond. Countries will potentially be affected as resource consumers, resource owners, resource investors, and geopolitical players—and they would be well served to develop responses in all of these dimensions. The United States will be implicated in all four ways.

Many countries, including the United States, are most directly affected by China's natural resource quest through higher prices for many of the resources that their residents and businesses consume. High resource prices are not always problematic for all countries; high iron ore prices, for example, don't impose a special burden on the United States, because it is a net iron ore exporter.
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Other countries in similar positions for individual resources might be similarly indifferent to China. But high prices for other resources pose challenges.

High oil prices, for example, hurt the United States and the rest of the oil-importing world.
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They raise their oil import bills and sap strength from economies in the process. High oil prices mean bigger oil price spikes too—and large oil price spikes can do severe damage to national economies. For the United States, this will remain true even if the country were to become self-sufficient in oil, a distant but not entirely implausible possibility that experts have recently begun
debating. The United States is part of a global oil market, and disruptions overseas can lead to price spikes at home. Moreover, even if the United States became oil self-sufficient, rapidly rising prices would still strip U.S. consumers of cash, leading to damage to the broader economy; windfalls to oil producers wouldn't fully offset that.

The biggest thing the United States and others can do to reduce their vulnerability to high oil prices is to follow the lead of the European Union and Japan by reducing the amount of oil they consume. This can be done in a variety of ways, including creating or sustaining stricter fuel economy standards for cars and trucks, raising taxes on gasoline and diesel, increasing government support for innovation in efficient vehicles, or a combination of the three.
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Countries can also help reduce (or at least restrain) oil prices by working together—which means also with China—to reduce their demand for oil. Some efforts will be policy-driven. For example, the United States spurred a G-20 effort that encouraged all participants (including China) to reduce wasteful fossil fuel subsidies, including those that encourage excessive consumption of oil. Others will be technical: the United States and China, for example, have a joint forum in which they pursue harmonized standards for electric vehicle charging, with the goal of allowing innovations in the two countries to build on each other and accelerate progress.

High prices for rare earth metals—or, the equivalent, scarcity of rare earths—can hurt a host of high-technology and defense-related industries that rely on them. The United States, Japan, South Korea, and European countries such as Germany with strong technology sectors are particularly vulnerable. Here the biggest thing these countries can do is make sure the market is allowed to respond by boosting supplies. The United States and Canada, for example, have deposits of rare earth elements that can help alleviate shortages, and companies are already starting to invest. Policy makers should ensure that environmental and other rules don't unnecessarily restrict or slow development of those deposits. At the same time, Washington and others should follow Tokyo's lead to invest substantially in research on recycling rare earths. Recycling technologies are nascent and offer substantial potential payoff.

The last big area in which countries should pay attention as consumers is the continued openness of world resource markets. Thus far, China has not made world markets more rigid; indeed, for several mineral ores, it has actually (if inadvertently) made them more flexible. Still, as Chinese companies come to control larger amounts of resource production overseas, the possibility exists that Beijing will try to shift to more rigid trading arrangements, undermining the ability of the rest of the world to respond flexibly to major supply disruptions. Other market-minded countries should make sure they continue to support open markets for natural resources, even in areas (such as natural gas) where some (notably in the United States) have recently been tempted to erect barriers to trade. Interference with resource markets would weaken the United States and others legally and politically when trying to oppose problematic Chinese actions. Strategists should also keep watch on anti-market developments in China.

For many resource-rich countries, developing and developed alike, Chinese resource demand has been a critical source of revenue, even as the global economy as a whole has suffered through a serious financial crisis. Yet China's natural resource quest also challenges these same countries as owners of vast volumes of natural resources. Commodities markets are driving the most immediate impact; high prices for a range of resources are prompting expanded production of everything from oil to soybeans to rare earths. Policy makers must decide whether to abet the trend by opening up more public land to resource extraction or development. This can make sense—the economic benefits of opening up lands to resource development rise when resource prices go up—but countries will still need to take care with environmental protection as it brings new areas into resource production.

A group of resource-rich countries as diverse as the United States, Mongolia, and Vietnam moreover perceive security concerns when considering significant levels of Chinese investment in natural
resources. In the United States, for example, U.S. companies are not the only ones seeking to boost oil and gas production. A host of multinational resource producers have already entered the U.S. market. So far, Chinese companies have been careful to take minority stakes in joint development projects. As a result, there have not been any major confrontations since the CNOOC-Unocal debacle in 2005. If, however, a Chinese company seeks majority control of a major U.S.-based oil- or gas-producing company, policy makers will have tougher decisions to make.

There are good arguments for and against allowing ever-greater Chinese access in the United States. Chinese investors help boost U.S. resource production by bringing in capital. Moreover, as Chinese companies become more deeply involved in U.S. oil and gas production, the United States gains some leverage over them, because it can then link continued access to those companies' performance in areas of concern (such as Iran) abroad. At a more basic level, by allowing Chinese investment in domestic oil and gas, the United States strengthens its hand in encouraging others to be open too.