China's Global Hunt for Energy

A NEW FOREIGN POLICY

An unprecedented need for resources is now driving China's foreign policy. A booming domestic economy, rapid urbanization, increased export processing, and the Chinese people's voracious appetite for cars are increasing the country's demand for oil and natural gas, industrial and construction materials, foreign capital and technology. Twenty years ago, China was East Asia's largest oil exporter. Now it is the world's second-largest importer; last year, it alone accounted for 31 percent of global growth in oil demand. Now that China is the workshop of the world, its hunger for electricity and industrial resources has soared. China's combined share of the world's consumption of aluminum, copper, nickel, and iron ore more than doubled within only ten years, from 7 percent in 1990 to 15 percent in 2000; it has now reached about 20 percent and is likely to double again by the end of the decade. Despite calls by Prime Minister Wen Jiabao and other politicians to cut consumption of energy and other resources, there is little sign of this appetite abating. Justin Yifu Lin, director of the China Center for Economic Research at Peking University, in Beijing, says the country's economy could grow at 9 percent per year for the next 20 years.

These new needs already have serious implications for China's foreign policy. Beijing's access to foreign resources is necessary both for continued economic growth and, because growth is the cornerstone of China's social stability, for the survival of the Chinese Communist Party (CCP). Since China remains a relatively centralized, government-driven economy, Beijing has been able to adapt its foreign policy to its domestic development strategy. Traditional institutions, such as the Foreign Affairs Leading Small Group of the CCP, are still making the key decisions, but a more pluralistic environment is emerging and allowing business leaders to help shape foreign policy. The China Institute for International Studies, a government think tank, holds numerous conferences bringing together academics and leaders in business, the military, and the government to devise strategies for the top rung of the Communist Party.

Partly on these people's advice, Beijing has been encouraging representatives of state-controlled companies to secure exploration and supply agreements with states that produce oil, gas, and other resources. Meanwhile, it has been courting the governments of these states aggressively, building goodwill by strengthening bilateral trade relations, awarding aid, forgiving national debt, and helping build roads, bridges, stadiums, and harbors. In return, China has won access to key resources, from gold in Bolivia and coal in the Philippines to oil in Ecuador and natural gas in Australia.

China's resources hunt has been a boon to some states, especially developing countries, as it has allowed them to exploit as yet untapped resources or gain leverage to negotiate better deals with older customers. But for other states, particularly the United States and Japan, China's insatiability is causing concern. Some governments worry as Beijing enters their spheres of influence or strikes deals with states they have tried to marginalize. In some quarters in Washington, including the Pentagon, the intelligence services, and Congress, the fear that China could challenge U.S. military dominance in East Asia and destabilize the region is rising. Whatever the prognosis, China's boom can no longer be understood in regional terms alone; as Beijing's economic influence brings it international political influence and the potential for more military power, China's growth will have worldwide repercussions.

Although China's new energy demands need not be a source of serious conflict with the West in the long term, at the moment, Beijing and Washington feel especially uneasy about the situation. While China struggles to manage its growing pains, the United States, as the world's hegemon, must somehow make room for the rising giant; otherwise, war will become a serious possibility. According to the power transition theory, to maintain its dominance, a hegemon will be tempted to declare war on its challengers while it still has a power advantage. Thus, easing the way for the United States and China -- and other states -- to find a new equilibrium will require careful management, especially of their mutual perceptions.

Because China's extraordinary growth also increases its dependence on foreign resources, the Chinese government has developed a new sense of insecurity vis-à-vis the United States. An article published last June in the Beijing-backed Hong Kong newspaper Ta Kung Pao suggested that Washington might resort to economic tactics to contain China. Given the White House's current penchant for unilateral intervention and the loud voices in Congress calling China a military threat, Beijing might reasonably begin to fear that the United States will try to block its purchases of natural resources to destabilize it. Washington must be mindful of these worries and not exacerbate them needlessly.

Interstate competition is natural, of course, but it need not be elevated to the level of conflict. And concerns over China's impressive rise, while understandable, should not detract from the vast room for cooperation that the country's new energy needs allow. After all, the United States and China share an interest in viable oil prices, secure sea-lanes, and a stable international environment, all of which can help sustain their economic prosperity and that of the rest of the world.

OIL-SLICK DIPLOMACY

State-owned Chinese firms are busily seeking resources abroad, often with the support of Beijing, which courts supplier states by cultivating bilateral relations and providing aid and other forms of development assistance. The Commerce Ministry and the National Development and Reform Commission have published a list of countries and resources in which investment is eligible for state subsidies. In addition to reinforcing the nexus between the Chinese government and the business sector, this strategy has solidified China's relations with many developing countries. Previously the champion of the Third World, over the past 20 years China has paid far more attention to its ties with developed economies, from which it has sought investment and technology. Although those links remain crucial for China's modernization, Beijing, with its growing energy needs, is again turning to resource-rich developing countries.

Oil dependence, in particular, has made China an active player in the Middle East. More than 45 percent of China's oil imports were estimated to come from the region in 2004. In January of that year, President Hu Jintao met delegates from the 22 members of the Arab League in Cairo to boost political and economic relations and develop a "new type of partnership" that would further increase oil shipments to China and bilateral trade. Iran alone already accounts for about 11 percent of China's oil imports, and in October 2004, the state-controlled China Petroleum and Chemical Corporation, known as Sinopec, one of China's three major oil companies, signed an oil and natural gas agreement with Tehran that could be worth as much as $70 billion -- China's biggest energy deal yet with any major OPEC producer. Beijing committed to develop the giant Yadavaran oil field and buy 250 million tons of liquefied natural gas over the next 30 years; Tehran agreed to export to China 150,000 barrels of oil per day, at market prices, for 25 years.

In Africa, which already supplied 28.7 percent of China's total crude oil imports in 2004, Beijing has recently expanded its traditional relationships; in some countries, it has even begun to challenge the influence of the United States. In 2000, Beijing established the China-Africa Cooperation Forum (CACF) to promote trade and investment with 44 African countries. In 2003, Prime Minister Wen visited several oil-producing African states accompanied by Chinese oil executives, and President Hu toured Algeria, Egypt, and Gabon. China has been working closely with governments in the Gulf of Guinea, from Angola to Nigeria, as well as with the Central African Republic, Chad, Congo, Libya, Niger, and Sudan.

Beijing has also been active in Latin America. Brazil's development minister visited Beijing nine times in 2003 and 2004. Dozens of business leaders accompanied President Hu on his four-stop trip to the region in November 2004, during which he announced $20 billion in new investments for oil and gas exploration and other projects. During his visit to Latin America and the Caribbean last January, Vice President Zeng Qinghong signed various trade and oil-supply agreements with Venezuela. According to the Financial Times, trade between China and Latin America has quintupled since 1999, reaching almost $40 billion by the end of last year. A recent report by the Spanish bank BBVA indicates that Latin America has continued to benefit greatly from China's economic growth, in terms of both investment and trade. Last year, China invested $1.4 billion in the region; it is now the main impetus for export growth for many Latin American states.

Securing China's energy needs does not simply entail obtaining resources; it also requires getting them home. Transport is no easy feat for a country that still has no cross-border pipeline. The China National Petroleum Corporation struck a deal for a major pipeline with the Russian oil giant Yukos in 2003, but the plan fell apart after the Russian government first dismantled Yukos and then accepted Japan's higher bid on the project. Negotiations for a pipeline that would transport Caspian Sea oil to China through Kazakhstan are slowly moving forward, but China remains heavily dependent on international sea-lanes, especially through the Strait of Malacca and other navigational chokepoints, to bring oil from Africa and the Middle East.

TRADING PARTNERS

The United States has recently been on the losing side of trade patterns, allowing China to leverage its economic heft to strike deals in America's backyard. Thanks to bilateral trade agreements, aid, and debt relief, China has won the goodwill of various resource-rich states. In 2004, about 40 percent of China's outgoing foreign direct investment went to Latin America, for example, and on a trip that year, Hu persuaded Brazil and Argentina to grant China "market economy" status, which benefits China in antidumping cases brought against it under the World Trade Organization's dispute-settlement system. Likewise, Beijing has signed dozens of trade and investment treaties with African states and forgiven more than $1 billion in debt since the CACF was created in 2000.

Thanks to this strategy, Beijing has made some remarkable inroads, venturing into the United States' traditional sphere of influence. Through trade, Beijing has turned around its relations with Australia, one of Washington's staunchest allies in the Asia-Pacific region. Last year, Australian exports to China jumped by more than 20 percent, with a 41 percent increase in iron ore and a 72 percent increase in coal, and China is poised to displace the United States as Australia's number two trading partner. (By some accounts, it already has.) Australia has also agreed to export to China, starting in 2006, approximately $1 billion dollars worth of liquefied natural gas every year for 25 years. Such deals are enhancing China's soft power in Australia, perhaps to Washington's detriment. According to a poll taken last spring, 51 percent of Australians surveyed believe that a free-trade agreement with China would be good for Australia (only 34 percent think well of the existing U.S.-Australian free-trade pact). And 72 percent agreed with Australian Foreign Minister Alexander Downer when he said last year that Washington should not automatically assume that Australia would help it defend Taiwan against a Chinese military attack.

Energy diplomacy has also prompted China to seek access to Canada's resources, especially the massive tar sands of Alberta. Since late 2004, Beijing and Ottawa have concluded a series of energy and resource agreements, providing for greater Chinese involvement in developing Canada's natural gas sector, its vast oil sands deposits, and its uranium sector. Last April, PetroChina and the Canadian giant Enbridge signed a memorandum of understanding to build a $2 billion pipeline that would carry oil to the western coast of Canada for shipment to Asia. Although no money is yet on the table, western Canadians see China's investment in the tar sands as a major opportunity; according to an Enbridge analyst, without such foreign investment, the fields would remain undeveloped.

Yet the deal could create tensions between the United States and China, as well as between the United States and Canada, particularly since Vice President Dick Cheney's 2001 national energy policy report emphasized the importance of Canada's tar sands to U.S. energy security. According to one Canadian Foreign Ministry official who declined to be identified, the U.S. State Department is carefully watching negotiations between Beijing and Ottawa. David Hale and other American resource analysts believe that the U.S. Congress is getting nervous about Chinese fishing in American waters. This testiness highlights one of the risks of China's energy strategy: by treading on what Americans perceive as their turf and vying for resources they also covet, Beijing is stepping on some very sensitive toes.

Although such friction is most obvious with the United States, resource competition could also pit China against Japan. Tension between Beijing and Tokyo is increasing over gas reserves they both claim in the East China Sea. In late 2004, Japanese media reported that the Japanese Defense Agency had revised its security strategy partly on the assumption that conflicts over resources could escalate into war. And last April, after the Japanese government awarded two Japanese companies the right to drill for oil and gas in a disputed area of the East China Sea, the Chinese People's Daily argued that competition over the East China Sea was "only a prelude of the game between China and Japan in the arena of international energy."

BEYOND GOOD AND EVIL

Another important feature of Beijing's resource-based foreign policy is that it has little room for morality. Because coveted natural resources are often found in pariah states, Beijing has struck energy deals with governments that do not respect international regimes. This strategy has created a set of complicated problems. It does not exactly pit China against the United States in a competition over the same resources; by shunning these states, Washington had already given up on their goods. But it does undermine other U.S. goals, such as isolating rogue governments or punishing them for failing to promote democracy, comply with international law, limit nuclear proliferation, or respect human rights. As Beijing's search for resources prompts it to reinforce relations with Iran, Myanmar, and Sudan, China is challenging the United States' moral hegemony and its ability to check states whose records it abhors. Last June, Chris Hill, the assistant secretary of state for East Asian and Pacific affairs, told a subcommittee of the U.S. House of Representatives that a major task for the United States and its Asian allies was "to ensure that in its search for resources and commodities to gird its economic machinery, China does not underwrite the continuation of regimes that pursue policies seeking to undermine rather than sustain the security and stability of the international community."

Such concerns have already proved justified, as in the case of Sudan. In 1997, while the Muslim-led Sudanese government was waging a gruesome war against Christian rebels in the south, Washington barred U.S. oil companies from doing business with Khartoum, leaving the door open for their Chinese counterparts to expand their operations there. Now China gets about five percent of its oil from Sudan and has reportedly stationed 4,000 nonuniformed forces there to protect its oil interests.

Beijing has brushed off accusations that it is helping to prop up Khartoum. "Business is business. We try to separate politics from business," said then Deputy Foreign Minister Zhou Wenzhong in the summer of 2004. "I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them." Meanwhile, Beijing has deftly protected its oil interests there. In September 2004, it successfully watered down a UN resolution condemning Khartoum, undermining U.S. efforts to threaten sanctions against Sudan's oil industry. As if oblivious to the tensions created by Beijing's maneuvering, two highly respected Chinese professors argued this past April that China's assistance in turning Sudan into an oil-exporting state shows how China is raising standards of living in the developing world.

Washington remains wary, especially as Beijing seeks cooperation from other governments on the United States' shortlist of rogue states. China is undermining U.S. efforts to contain Iran's nuclear ambitions by resisting the imposition of sanctions against the Islamic Republic in the event it resumes its efforts to enrich uranium. And Beijing is strengthening ties with the temperamental Venezuelan president, Hugo Chávez, who likes to poke the Americans in the eye. "We have been producing and exporting oil for more than 100 years," Chávez told a group of Chinese business executives last December. "But these have been 100 years of domination by the United States. Now we are free, and place this oil at the disposal of the great Chinese fatherland." Souring relations between Caracas and Washington have already prompted the Senate Foreign Relations Committee to mandate contingency plans in case Venezuelan oil stops flowing to the United States. Chinese officials, meanwhile, deny that China's oil hunger is increasing friction with the United States. According to Han Wenke, deputy director general of the energy institute affiliated with China's National Development and Reform Commission, "Although oil trade plays an important role in every field, it has a limited influence in Sino-American relations."

GOING "GUN"-HO?

A big test of the U.S.-Chinese relationship may come if China's current economic growth and need for resources push it to expand its military influence -- a prospect that makes many people nervous. Survey results released by the BBC in 2005 show that although 49 percent of respondents in 22 countries welcome China's economic growth, most people feel negatively about the prospect of China significantly increasing its military power. Few analysts expect China to become belligerent. But its growing dependence on oil, especially from the Middle East, will make it more actively concerned with sea-lanes, in particular the Strait of Malacca and the Taiwan Strait, both of which its oil tankers use. Zhang Yuncheng, an expert at the Chinese Institute of Contemporary International Relations, in Beijing, believes that China would face an energy crisis if its oil supply lines were disrupted and that whoever controls the Strait of Malacca and the Indian Ocean could block China's oil transport route.

Concerns about safety in the Strait of Malacca are not new, but the potential for terrorism to target oil tankers in the region has understandably been taken more seriously since the attacks of September 11, 2001. Although the coastal states of Indonesia, Malaysia, and Singapore have long patrolled the strait to ensure free passage, now that four-fifths of China's imported oil comes through it, Beijing increasingly shares that interest. The Taiwan Strait has also long been a source of concern, since it is seen as a possible battleground between China and Taiwan were Taipei ever to declare full sovereignty. With China increasingly reliant on foreign resources, Beijing is now also worried that Taiwan could threaten China's supplies.

But China's oceangoing navy is small, and with a U.S. naval base at Diego Garcia, in the Indian Ocean, and India's navy dominating the mouth of the Strait of Malacca, Beijing seems to feel vulnerable about its limited capacity to patrol on its own. President Hu has reportedly commented on the problem, which he calls "the Malacca dilemma," and considers it key to China's energy security. He is concerned that "certain powers [read 'the United States'] have all along encroached on and tried to control the navigation through the strait."

There is talk of China boosting its navy to protect its commercial ships, although so far it is unclear how far that project has come along. In a January 2004 article in the Beijing-controlled Hong Kong newspaper Wen Wei Po, a Chinese military expert recommended both defensive and offensive options for a new naval strategy: "One [option] is making quick reactions, including military reaction, when a crisis occurs ... to display the strength for safeguarding the country's interests. The other is the capability of reciprocal deterrence. This means if you can threaten my international shipping route, I can also threaten your security in various fields, including your international shipping route security."

Some members of China's naval officer corps want to readjust the country's entire naval strategy. In their view, China faces threats not only along its coast but also on the high seas and so it should shift its focus from coastal to oceanic defense. According to a report written for the Pentagon by the consulting firm Booz Allen Hamilton, "China is building strategic relationships along the sea lanes from the Middle East to the South China Sea in ways that suggest defensive and offensive positioning to protect China's energy interests, but also to serve broad security objectives." Beijing is reported to be helping Pakistan build a port at Gwadar, upgrading a military airstrip in the South China Sea and monitoring stations in Myanmar, and negotiating for naval facilities in Bangladesh.

For now, Washington's views about China's possible militarization remain divided and in flux. In February, Defense Secretary Donald Rumsfeld said that although the Pentagon was watching China's growing naval power, he could not confirm reports that in a decade the size of the Chinese fleet would surpass that of the U.S. Navy. But in May, Rumsfeld challenged Beijing to explain why it is increasing its military investments when China faces no major threat. Assistant Secretary of State Hill, for his part, does not perceive China as a serious threat to the United States; he has said that China's rise is not a zero-sum game for Washington. Others claim that China will need to expand more than its military capacity to remain secure. Bernard Cole of the National War College, for example, has argued that "Beijing will not be able to rely on its navy alone to protect its vital [sea-lanes], but will have to engage [in] a range of diplomatic and economic measures to ensure a steady supply of energy resources."

Cui Tiankai, the director general of the Chinese Foreign Ministry's Asian Affairs Department, has confirmed the view that whatever Beijing's efforts to boost its navy, China will continue to rely heavily on diplomacy and cooperation. Speaking at a conference at Hong Kong University last February, he argued that countries along the Strait of Malacca have the main responsibility to protect the strait and that China is willing to cooperate with them. He also expressed the hope that China, Japan, and South Korea could work together to ensure the flow of energy to Northeast Asia. And although he said that he believes U.S. influence is expanding in the Strait of Malacca, he expressed no concern about it. Thus, although Beijing is trying to build its own capacity to secure sea-lanes, it clearly wishes to continue to cooperate with -- and sometimes free-ride on -- the United States, as well as Indonesia, Malaysia, and Singapore, to keep the straits open.

CONSUMER PROTECTION

In the past, most of China's disputes, with both its neighbors and other states, centered on trade issues. But its rising need for resources affects its foreign relations in new ways. Like other resource analysts, Mikkal Herberg, director of the Asian Energy Security Program at the National Bureau of Asian Research, said at a seminar at the University of California, Berkeley, in April that he could not foresee any scenario that would not lead to confrontations between the United States and China over energy.

By no means are such conflicts a certainty, however. In assessing the dangers of China's growing energy needs, certain important mitigating factors tend to be overlooked. For example, Beijing has set out to replace some of the oil it consumes with alternative forms of energy, such as coal, of which it holds the world's third-largest reserves. China is projected to become the world's largest producer of nuclear energy by 2050. It is also promoting conservation and the efficient use of petroleum. Following President Hu's December 2004 exhortation to balance "economizing and resource exploitation" with "actively developing oil substitutes," last spring Beijing established a new powerful energy agency, the State Energy Office, which reports directly to the prime minister. The SEO's job is to lower China's energy dependence -- the ratio of the energy China imports to the total it consumes -- to 5 percent, as Prime Minister Wen has advocated. This is an ambitious goal, but China is far ahead of the world's other top consumers: according to the political scientist Robert Ross, it imports only 12 percent of the energy it consumes, compared with 40 percent for the United States and 80 percent for Japan.

Nor should the dangers posed by China's rising energy needs be overstated. For one thing, China's hunt for resources is helping some developing states. The rising cost of resources may be hurting poor countries that import oil, but it is helping those that supply it. Other states will also benefit. According to Homi Kharas, a chief economist at the World Bank, 45 percent of China's total annual imports come from developing countries, and these sales help developing states offset the increased cost of crude oil and gas.

China's hunt for resources may have less dire consequences for developed nations such as the United States than is often assumed by a strict zero-sum vision of the world's natural-resources markets. China typically picks up secondary deals or moves into markets from which the United States is absent; thus in many places the two countries are not really in direct competition.

A much bigger issue is how the magnitude of China's energy needs affects the international oil market: China's demand is so great -- and likely to get much greater -- that it could affect global supplies and prices. Yet it is precisely because China and the United States are both great oil guzzlers that there are grounds for cooperation. Some energy experts, such as Amy Myers Jaffe at Rice University, argue that big consumers can best protect their interest in keeping oil supplies steady and prices predictable by joining forces to counterweigh the influence of producers rather than by trying to forge privileged relations with them. One strategy is to create joint reserves of oil. Members of the International Energy Agency, an organization of 26 industrialized states, including the United States, created to manage energy emergencies, have already contributed to such a common pool. And some analysts, such as Herberg, have urged Congress to invite China to participate.

Similarly, Washington and Beijing share a common interest in securing open sea-lanes to ensure the unhindered passage of cargo ships. That both governments want stability in the Malacca and Taiwan straits does not pit them against each other -- just the opposite. Moreover, developing an oceangoing navy to defend far-off sea-lanes is an arduous and expensive project, which will take Beijing decades to complete. In the meantime, China must cooperate with the United States to maintain its sea-passage security, in particular the security of its energy shipping lanes. This should not be a problem, so long as China and the United States avoid war over Taiwan.

It is true that difficult times may be ahead. U.S. officials, particularly in the Department of Defense, the Pentagon, and Congress, see China's resource hunger as a new strategic challenge. Consider, for example, Congress' response to the China National Offshore Oil Corporation's recent bid to buy the American energy company Unocal. Few impartial analysts see any serious threat to U.S. national security in the deal, yet in a statement approved by 398 votes to 15, members of the House of Representatives said the sale would "threaten to impair the national security of the United States." Under its resource-based foreign policy, China has become quite assertive in seeking the raw materials it needs to keep its economic juggernaut rolling. Just how benign China's rise remains is partly in the hands of China's leaders. Supporting pariah states that scoff at global norms, all in the name of economic growth, will not endear China to the world, especially not to the United States. Washington and Beijing must reach some accommodation on how to view China's ties to such rogue states.

Yet China has a right to pursue energy sources through market strategies, and unlike the Soviet Union, it is not orchestrating regime changes to advance its interests. Washington must recognize that it would be irresponsible for China's leaders not to increase the country's energy supply. Washington must learn to cooperate with this rising China and continue to work to integrate it into the global economy. Beijing, for its part, must develop ties that do not flout international standards of good governance and human dignity or threaten U.S. security interests. The world needs farsighted leaders on both sides of the Pacific to adapt to rapid changes in the global distribution of economic and political power, not leaders who let such shifts push them into an increasingly acrimonious confrontation.