A Case for Calm about China

In the summer of 2013, my family and I took a vacation to Nassau, the Bahamas. As we descended on our hotel not far from the enormous Atlantis facility on Paradise Island, we drove past a depressing, dusty shantytown full of shipping containers and trash. With apologies to Thomas Friedman, we asked our taxi driver what it was.

“The Chinese,” he replied. In his telling, the Chinese had brokered a deal to build their own competitor to Atlantis, called Baha Mar, and reneged on their commitments to employ lots of Bahamians and bring economic development to the island. The workers, the food they ate, and the funds they earned all seemed to stay within the fences ringing the compound, as far as he could tell, and there was considerable local resentment toward the Chinese, who had even persuaded the Bahamian prime minister to move his own office to make room for the project.

By the fall of 2014, ominous news reports had begun noting that “delays and labor clashes [were] dulling the buzz” surrounding the $3.5 billion development, and a Baha Mar spokeswoman was left lamely admitting that as to their delayed opening, “we’re focused on late spring 2015.” They were focusing on late spring 2015, but as it turned out 2015 brought developments other than a triumphant opening. The project wound up in Chapter 11 bankruptcy in Delaware, the Chinese conglomerate began threatening that the project would begin cutting Bahamian jobs if the bankruptcy filing was not resolved to its satisfaction, and the Bahamas itself was placed on watch by Standard & Poor’s, which warned of at least a 50% chance of a downgrade of the Bahamas’ credit rating as a consequence of the project.

I bring up this anecdote because it stands in such stark contrast to the picture presented in Dambisa Moyo’s essay. Moyo presents China as a menacing and far-sighted antagonist in a zero-sum competition for increasingly scarce natural resources. In Moyo’s telling, China’s strategy of paying top dollar for commitments from other countries to provide access to natural resources “gives it the edge in the future struggle for global resources.” Moyo really is telling two stories: one about a future in which commodity prices skyrocket, and another about how China’s behavior today threatens to do harm to the United States and other major powers in such a world.

I expected to look at this argument from the point of view of someone who studies national security, but even as a non-economist, it is impossible to avoid beginning by saying that Moyo’s admission that “virtually every commodity across the composite—metals, minerals, energy, and foodstuffs—has suffered a decline in price over the past year” has a certain “other than that, Mrs. Lincoln…” quality to it. Moyo proffers no evidence in her essay that strategically valuable minerals or commodities are likely to become scarce to the extent that they produce security competition. More to the point, we have had mini-panics in the recent past about oil and rare-earths minerals that haven’t panned out.

Take rare-earths minerals first. A variety of people, including Chinese policymakers and Western pundits, concluded that rare-earths, which make all sorts of our gizmos and gadgets work, were a new economic weapon that the Chinese could exploit. Because so much of the world’s supply is located in China, the story went, China could use production and supply as a political and/or economic weapon against countries to which it had previously sold agreeably. Even at the time, naysayers pointed out that we bought most of our rare-earths from China because the Chinese rare-earths were cheapest. As soon as Beijing began trying to use them as a political weapon, the markets did what markets do and diversified. As a recent report from the MIT Technology Review put it,

Demand appears to have fallen mainly because companies stockpiled these materials in anticipation of shortages… As it turned out, China’s lower export quotas—which were deemed unfair by the World Trade Organization—didn’t constrain the world’s supply, and China recently stopped imposing those limits on rare earths.

I am not someone inclined to these sorts of just-so, leave-it-to-the-market type of arguments, but as it turns out, sometimes things are just so and can be left to the market. (For a recent victory lap on the argument about rare-earths, this from Tim Worstall should do.)

I am also old enough to remember apprehension about “peak oil”—the worry that the world was running out of petroleum, and an age of sky-high oil prices, with all sorts of attendant consequences for our way of life, were upon us. As anyone who’s gone near a car recently knows, something big didn’t happen, and something big did. Not only did we not hit peak oil, but a one-two punch of a revolution in shale gas production and hydraulic fracturing conspired to put serious downward pressure on oil markets.

For her part, in her 2012 book Winner Takes All, Moyo was down on shale, harrumphing that “as with many new technologies, panaceas, and potential economic saviors, much of the euphoria that surround shale and its prospects for transforming the energy sector is predicated on overly optimistic theoretical scenarios.” (p. 186)

What about the anecdote with which she opens her essay and book, the Chinese purchase of the Peruvian copper mine Toromocho in 2007? How has that worked out?

Toromocho is still a ways off the production targets set by the Chinese firm, and mining investment in Peru has dropped by 14% in the first quarter of 2015, due mostly to low copper prices and a wave of anti-mining opposition, including problems at Toromocho.

I expected my essay to focus on the aspects of how U.S.-Chinese competition for natural resources could produce political and even military tensions, but the underlying economic premise failed to persuade me. In order for Moyo’s story to work, one has to believe a number of things: That severe shortages of commodities will emerge in the coming years; that only the Chinese accurately understand this and have planned accordingly; and that when the price spikes hit, Chinese interests will be protected by contracts signed by governments in some of the world’s most volatile regions.

Why shouldn’t we believe the whole Chinese project will end up more like Baha Mar?

Also from this issue

Lead Essay

  • Dambisa Moyo sounds the alarm about China’s claims to the world’s natural resources. As its population advances economically, the Chinese government has kept pace, and then some, in securing natural resources that can be used in its domestic industries. These moves have consequences for the rest of us, she argues, in part because international conflicts over resources commonly turn violent. Increasingly, China wields market power and sets global commodity prices. Although Moyo does not profess to have all the answers, she believes the question is well worth asking: How should the rest of the world respond? One solution she recommends is to redirect spending from national defense to research and development - although even this may only be one piece of a much larger strategy.

Response Essays

  • Justin Logan is considerably more skeptical that China constitutes a grave threat in a resource-hungry world. He looks at several Chinese economic projects and finds their results haven’t been as successful as anticipated. Political and military tensions may well exist between China and the United States, but, he writes, they do not appear to be driven by economics. Commodity shortages have not been as damaging as feared, and China’s response to them has been less fearsome as well.

  • Ian Bremmer agrees that China’s international economic policies are driven by the need to soften domestic opposition. He laments that there is no single international institution that regulates investment competition and scarce global resources. But China’s actions have to be understood both as attempts to secure commodities and as attempts to find new markets for its industrial products. Like the United States and others before it, China may find itself increasingly committed to managing world conflicts in the process. Finally, the most important vulnerability that China poses to the rest of the world is not that it will continue to rise, but that it may fall: Should the people turn on the country’s leadership, China’s future would be highly unstable.

  • China would do well to abandon its attempts to manage world resources: they aren’t paying off, says Ronald Bailey. He invokes data from the study of economic supercycles, during which the world economy deploys new technologies in response to new and changing resource demands. This data suggests that the world economy has now priced in China’s rise as a manufacturing power - and even managed to supply more or less the mineral resources it will need. Commodity prices were high at the peak of the cycle, but they have since fallen, and there is no reason to think that things will change very soon.