By All Means Necessary (31 page)

On the opposing side, there are concerns that during a major confrontation between the two countries, Chinese companies that control U.S. oil and gas production could exert leverage by shutting down production or by threatening to cause accidents. Similar fears over how China might exploit its resource investments during a political or military conflict exist in Vietnam, Mongolia, and elsewhere as well. And even though greater economic engagement can reduce the odds of such a confrontation, it cannot eliminate the possibility. The best approach may be the one apparently taken during the CNOOC takeover of Nexen, with the Chinese company required to function as if it were a minority owner when it comes to corporate operations, despite having a controlling financial stake.

The United States, Canada, and other rare earth producers should also be careful in the case of any attempted Chinese takeover of a major rare earth production operation. Given China's dominant position in the industry, and its past willingness to abuse the position for commercial and geopolitical leverage, rare earth producers should not allow China to acquire scarce deposits.

As Chinese commodities firms seek to enter and compete in the U.S. market, as well as those of other countries with strong governance such as Australia and Canada, there will also be an opportunity to enhance their environmental, labor, and corporate governance performance standards. For the United States, over the medium term to the long run, a bilateral investment treaty—currently under negotiation with China—would provide a strong legal framework for ensuring best practices by Chinese firms. Participation in the Trans-Pacific Partnership, which Beijing is currently exploring, could be another important means of raising the performance standards of those firms. In the nearer term, the United States is in the process of becoming EITI-compliant—joining other EITI-compliant countries such as Mongolia and Peru—which will help ensure that any Chinese firms investing in extractive industries in the United States will operate transparently.
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Canada, which has explored the possibility but not yet actively pursued it, should follow.

Resource-rich countries are also confronting public debates over the benefits and costs of exporting nonrenewable resources to China. In Africa and Latin America, this has manifested itself in popular concerns about land purchases tied to food exports. In Kazakhstan, the public has voiced worries over land purchases and oil exports. In the United States, there is little concern about exports in areas such as minerals or agricultural commodities—indeed, these will usually be celebrated—but natural gas exports have already become controversial, and this controversy may eventually spread to the prospect of oil exports.
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Proponents of allowing exports cite the opportunity to capture economic gains from trade and to shake up politicized world gas markets; they also warn that constraining U.S. natural gas exports would undermine leverage over China and others in trade negotiations and arbitration, since U.S. export constraints would likely violate U.S. WTO obligations. Skeptics of allowing exports argue that barring natural gas exports could help U.S. consumers and manufacturers; they contend that blocking exports would help the United States wean itself off oil and reduce its carbon pollution.

The weight of evidence and particularly the risks to the world trading system suggest that the United States would be better off if it
allowed exports of natural gas without restricting potential customers. In particular, if the United States were to give strong preference to friends and allies (such as Japan and India) over China, it would undermine growing Chinese confidence in markets as a provider of resource security, potentially undermining U.S. interests in the longer run.

China is now the largest driver of resource demand, but it is certainly not the only player. How should the United States and other countries, whose firms often compete with the Chinese for the right to develop natural resources overseas, respond to this resource quest? It is easiest to identify dangerous ideas that countries should avoid. In particular, they should not get into a race to the bottom with China by providing low-cost financing to resource firms as a way of competing with Chinese banks. Doing so would take money from average citizens and hand it to firms whose profits are far more narrowly shared. More useful are efforts such as those by U.S. government agencies (among them the U.S. Export-Import Bank) and similar agencies from other OECD countries to bring China in line with OECD financing standards.

More difficult is the question of whether countries should lower any transparency and environmental standards they impose on their resource companies that operate overseas, in order to allow them to compete with Chinese firms on a level playing field. Such a step could make some sense; forcing companies to adhere to overly high standards might lead them to lose bids, with the net result being development by Chinese companies and low environmental and social performance to boot. But this view is shortsighted. The presence of multinationals with high standards can prompt host governments to improve their own laws, and strong host country governance can in turn improve Chinese performance. Moreover, China pays a reputational cost when its firms don't adhere to host country laws. Its companies are increasingly learning from the “outside in”; over time, the presence of other multinational firms alongside Chinese ones is likely to lift performance by all.

One area in which the United States, in particular, might do better is in ensuring that U.S. diplomats are more active in helping U.S. companies win opportunities to develop resources. Government support for overseas resource developers has ebbed and flowed, reaching a high point in the second term of the Clinton administration, before declining through the Bush and early Obama administrations. Basic steps such as supporting U.S. commercial delegations on state visits should be adopted. And although the United States should not emulate China's practice of providing below-market financing for large-scale infrastructure and resource development projects, the administration could help U.S. companies compete by arranging resource-based trade and investment missions that include not only extractive industries but also U.S. construction and other infrastructure-related firms.

We saw earlier that many Chinese firms and the government itself have already begun to recognize the importance of adopting international standards for corporate social responsibility. Some are producing CSR reports, opting for third-party certification, and joining multiple international CSR framework organizations such as the Global Compact and the Global Reporting Initiative. The United States and other resource-rich countries with strong state capacity, such as Canada, Australia, and Norway, can help by assisting those countries with weaker capacity to develop their own enforcement capacity through training and encouraging compliance with international reporting standards such as EITI. The United States could also consider requiring that Chinese state-owned firms, as well as other countries' state-owned enterprises, adhere to the same financial and other disclosure standards as are followed by publicly traded U.S. firms when they invest in the United States. Similar requirements could also be enforced in other countries with strong and transparent financial regulatory systems.

The United States must also respond to China's resource quest as a great power. (Japan, India, and perhaps Russia will need to respond to China as regional powers, and other countries will feel
compelled to respond to China as geopolitical players too. As with the case of the United States, determining the right contours for each will require looking carefully at the particular predicaments, needs, responsibilities, and abilities.) The United States feels the repercussions of events in almost every part of the world, thanks to its global security, economic, and diplomatic presence. It also remains responsible, by its own choice, for providing stability and security for friends, allies, and others in many resource-producing areas and sea lanes around the world. It is thus inevitably affected by many of the broader consequences of Chinese efforts to secure natural resources.

The South and East China Seas are the most likely places where serious armed conflict involving China might occur in a resource-rich region. But competition for resources is unlikely to be the sole (or even central) driving force in any such confrontation. To be certain, to the extent that resource competition can be tamped down—including through deference to international law—the potential for conflict will be reduced. The United States can increase its credibility in calling for such efforts by ratifying the UN Convention on the Law of the Sea. That said, as we argued earlier, UNCLOS is unlikely to resolve resource conflicts in the South and East China Seas. The U.S. approach to the region will need to be informed by this, and by considerations that extend well beyond natural resources (and hence beyond the scope of this book).

Additionally, the United States can play an important role in providing technical assistance to help ameliorate resource-based conflict in the region. Its efforts through the Lower Mekong Initiative, which includes all the downstream countries that share the Mekong River—Burma, Cambodia, Laos, Thailand, and Vietnam—are a good example. By furnishing technical assistance to these countries—modeling the potential impacts of climate change, forecasting other potential impacts, and promoting a sister-river agreement between the Mekong River Commission and the Mississippi River Commission—the United States is enhancing the leverage of these countries in their efforts to push Beijing to be more transparent. It
is an important mechanism as well for strengthening the substance of the U.S. rebalance to Asia.

The United States will be drawn in far more decisively when it comes to the question of sea-lane control. As we argued earlier, as China comes to depend far more than the United States on certain sea lanes (particularly the Straits of Hormuz and Malacca), it may be tempting for the United States to invest less in protecting them and attempt to shift responsibility to China. This would be unwise. In the short run, China does not even have the ability to replace the United States as the protector of commerce on the high seas—and for oil in particular, the United States would still be hurt by disruptions in the Middle East and Asia.

In the longer run, as Chinese naval capabilities grow, the United States should still seek to maintain a dominant role in sea-lane security. Entrusting critical sea lanes to China would essentially mean abandoning U.S. allies and, so long as many resource markets remain global, also expose the United States. That said, the United States should use every opportunity to develop its relationship with the People's Liberation Army. The 2012 joint anti-piracy exercise between the U.S. Navy and the PLAN is one such example, and an invitation to the PLAN to attend Rim of the Pacific 2014, a multilateral exercise off the coast of Hawaii, is another. These joint exercises are the foundation for ensuring sea-lane security in the future. Meanwhile, the United States should seek Chinese cooperation—diplomatic and economic rather than military—in efforts to promote economic stability in important resource-producing regions, notably the Middle East, even as the two countries differ over the appropriateness of political change.

Further, the United States needs to adapt to the way Chinese investment is affecting global efforts to confront challenges such as the Iranian nuclear program. U.S. technological superiority in extractive industries gives it some leverage, both because countries value U.S. companies as critical investors (despite having China as a theoretical alternative) and because even Chinese companies often rely on U.S. equipment (which can be withheld through sanctions). Sustaining this strength is important. We also saw that opportunities
for Chinese companies to invest here give U.S. diplomats leverage by providing something the United States could threaten to take away if Chinese companies don't cooperate with international pressure against other states. Opportunities for these companies to invest in the United States may also reduce pressure for them to seek out problematic investments abroad.

China's demand for resources will not abate anytime soon. Beijing plans to bring hundreds of millions of people still in poverty into the middle class, further develop its infrastructure and industry, and build its diplomatic and military presence abroad. No matter how efficiently the country uses its own resources as well as those of the rest of the world, its economic development will continue to exert a profound impact on the availability and price of commodities, and have broader consequences for governance, international relations, and global security.

Not every consequence of China's resource quest will be relevant to every country, and wise leaders will take care not to be drawn into conflicts in which they have little or no stake. Yet many countries—and particularly the United States—will find themselves challenged by China's resource quest along multiple dimensions as a result of the many ways in which they themselves interact with the world. Leaders need to understand all of these dimensions and take steps to respond as the world is transformed by China's growing presence and pursuit of natural resources.

The rest of the world cannot determine the outcome of China's resource quest. It can, however, help ensure that China's impact is as broadly benign—or even beneficial—as possible. Understanding the reality of China's resource quest, good and bad, in all its facets, is essential to achieving that goal.

1
. All dollar figures are in U.S. dollars unless otherwise noted. Edward Wyatt, “Ex-ConAgra Unit Settles with U.S. Over Artificial Oil Trade, ”
New York Times
, August 16, 2010.

2
. One might point out that it was U.S. corporations, not the U.S. government, that produced and traded overseas resources. But this does not change the fact that U.S. power helped companies gain access to resource-production opportunities and, more important, helped ensure that resources produced overseas by anyone could be reliably shipped to consumers in the United States.