Michael Levi on China’s resource extraction boom | Video

World Finance speaks to Michael Levi, co-author of By All Means Necessary and Senior Fellow at the Council of Foreign Relations, about the future for China as it continues its resource extraction boom

May 29, 2014

Chinese resource extraction has been growing at an increasingly intense pace. But has feeding the dragon come at the expense of resource-rich countries? World Finance interviews Michael Levi, co-author of By All Means Necessary, and Senior Fellow at the Council on Foreign Relations to find out about the boom and what it could mean globally, and what course the Chinese economy is likely to take over the next few years.

World Finance: Michael, what is wrong with China’s ambitions overseas?

Michael Levi: There isn’t necessarily anything wrong. Every rising power with a growing economy ultimately needs to turn outward for resources to fuel its economy.

You can generate most of the sources of national power from within, but you’re stuck with the resources that you have. So at some point, every country – the United States, Japan, now China – turns outward to secure resources.

Every rising power with a growing economy ultimately needs to turn outward for resources to fuel its economy

World Finance: Now let’s talk about China in terms of its domestic policy. You know you mentioned in the book that they’re moving towards a more services and technology driven economy. What sort of implications is that going to have for foreign trade with China?

Michael Levi: That’s the central question, because the course that the Chinese economy takes at home is going to have an enormous influence on how it performs abroad.

So China looks at several different forks in the road, in some sense. One is between continuing along its investment heavy, export heavy path, or shifting towards to a more services based economy that’s less energy intensive, less resource intensive. That’s something they’ve been trying to do for many years – largely unsuccessfully – but they hope to turn the corner now.

Then you have this division between no matter what you do, using more efficient technology or less efficient technology. And again, it’s challenging in a less market-based economy, to steer producers and consumers to more efficient technology. But again, depending on the path that China takes there, you’ll see different demand for various resources around the world.

World Finance: This is a country that’s been trying to make this shift for at least five years now, struggling at various periods. So do you think it’s likely that we’re going to see a dramatic change in the next five years?

Michael Levi: Well I don’t think you’ll ever see a dramatic change, but the question is, can they start to turn the corner? And for that you want to focus on the structure of domestic China’s economy, and domestic Chinese politics. Because this is really a political challenge.

This is something that economists generally agree would be good for China, and good for the rest of the world. But just because something is good at the highest levels, doesn’t mean that there aren’t big winners and losers.

And it also doesn’t mean that the structural deficiencies in the Chinese system can naturally be overcome. It turns out that it’s easier for the Chinese government, the Chinese political system, to steer money into big infrastructure projects, big state-owned companies, rather than the more diffuse economy that would be needed to chart this different course.

World Finance: Now in terms of oil reserves, I really like the way that you’re able to debunk the myth that China is at fault for raising oil prices. Can you explain in your own words why you think it’s not necessarily China, but more these market-driven factors?

Michael Levi: Well we should be clear, over the last decade oil prices have gone up enormously. And that would not have happened without very strong Chinese demand. But it also wouldn’t have happened without decisions by a host of countries around the world to not produce more. To actually hold back their output in order to drive prices higher in the face of Chinese demand.

[The rise in oil prices] would not have happened without very strong Chinese demand

There were countries – particularly in the Middle East – that were able to make more money by producing less. And that’s why we’ve seen what we have.

What we argue in the book though is that when you step out of this past 10 years and look out at the next 10, it’s unlikely to see a repeat performance. So we went from $20 to $100 for a barrel of oil. We’re not going to have another five-fold increase from $100 to $500, even as China grows. The world economy has started to respond, it’s producing more, technology has advanced, and we’re not consuming less, but we’re consuming less than we otherwise would have, because we’re becoming more efficient in our use.

And when I say we, I mean most countries around the world: including China.

World Finance: As China has a stake in foreign oil reserves, what sort of implication is that going to have as they continue to build and build their portfolio of control? Are we going to see them in any way be able to monopolise and therefore increase or decrease prices at their discretion?

Michael Levi: Well for the most part, China wants to see lower prices. So for most countries around the world – unless they’re oil exporters – that’s a good outcome. And this Chinese money that’s going into overseas oil production, it’s often a bad deal for China! They’re often losing money, they’re making bad bets. But by adding oil to the market, they’re benefiting economies around the world.

And so I think that is generally a positive outcome, one that we should welcome.

As far as monopoly goes, China’s still a relatively small player compared to the big producing countries and the big international investors. And so it’s diversifying the global pool. You see China buying oil overseas, investing in it? But typically selling that oil on to the global market.

World Finance: Now having a resource-hungry country such as China propping up regimes in Africa that are fighting terrorism could potentially exacerbate the situation locally, don’t you think?

So when China invests in Africa, you have a host of different impacts. Certainly when China invests, or when it buys resources that others produce, it can boost the overall economy in these countries. It can help the broader population.

But we know that if resource extraction is handled poorly; if it’s not transparent, if it’s not done in a way that properly shares wealth – and often China’s companies can abet that sort of trend – it can undermine governance. And that can help any of many kinds of bad things to happen in a country, whether it’s on the security side, or on the labour side, or on the environmental side.

World Finance: Ensuring southeast Asian sea lane security is a real issue for China, isn’t it?

Michael Levi: So you’re hitting on an important piece. We assume that international trade and resources, and other things, is a frictionless thing. That it happens without any kind of military, security, involvement. That it’s a pure economic process. But the reality is, there’s a security regime that underpins all that. These resources move around the world at pretty low cost, because security is provided for those sea lanes that they travel over.

But if you’re sitting in China, and you look out at the world and you see the US is guaranteeing the security of these sea lanes. The US is an adversary, or at least a potential adversary, and you start to ask, ‘What can I do at a reasonable cost to provide more of my own security for that trade? So I don’t need to rely on others?’

And I think you see manifestations of that in the South China Sea in particular. You see conflict in recent weeks between China and Vietnam, ostensibly over small bits of land, and maybe oil and gas resources nearby. But I think really, in substantial part, about the sea lanes that run near those small pieces of rock. Because if you control the land, you have a stronger claim to the sea.

China often tacks back and forth. But right now they seem to be feeling confident

World Finance: So do you think this current regime is more or less willing to diffuse tensions in those regions where they have trade deals?

Michael Levi: I don’t think we’re seeing a move toward a more conciliatory Chinese approach. I think if you look at the pattern in recent months you’re seeing a more aggressive approach. Particularly when it comes to the common areas that move global commerce, including commerce and resources.

You saw the unilateral declaration of an air defence identification zone late last year. You’ve seen the situation with Vietnam. You’ve seen conflicts with Philippines. You’ve seen more tension with Japan. And so it seems that the trend is towards greater assertiveness, towards greater deference to the military, rather than a more conciliatory approach.

We’ll see! China often tacks back and forth. But right now they seem to be feeling confident.

World Finance: Do you think fears of China’s resource extraction, the pace that it’s happening at – do you think it’s unwarranted?

Michael Levi: I think a lot of it is unwarranted. In the sense that… not in the sense that it isn’t a challenge, but in the sense that we have appropriate responses. I think we need to make sure that we become more efficient in our use of resources. That we make it possible to produce resources. That we develop alternatives so that supply isn’t overly strained, and prices don’t become too challengingly high.

We also need to make sure that we invest in that global regime of open trade and secure trade that we’ve benefitted from so much over the last decades.

I think we’ve actually been pretty successful in bringing China along. Not always, but a lot of the time. But as we see what’s happening in the South China Sea, as we see Chinese diplomacy with Russia, I think we should be reminded that this isn’t necessarily a natural state of affairs. It requires our attention.

World Finance: Michael Levi, thank you so much for joining us today.

Michael Levi: Thank you.