China

Is China Winning the Race for Resources?: Ronald Bailey at Cato Unbound

"Racing" for resources is economically misconceived.

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ChinaCatoUnbound
Cato Unbound

This month Cato Unbound is hosting a discussion on the question: Is China Winning the Race for Resources? The first essay on the topic is by economist Dambisa Moyo, author of the New York Times bestsellers Dead Aid: Why Aid is Not Working and How There is a Better Way for Africa and How the West Was Lost: Fifty Years of Economic Folly and the Stark Choices Ahead. Her third book is Winner Take All: China's Race for Resources and What it Means for the World.

In Moyo's initial essay, "Winner Take All: China and the Global Race for Resources," she argues:

Over the last decade, China has been buying up mountains and mines, agricultural land and oil fields, thus ensuring that it will have the upper hand in the future struggle for the world's resources. Scarce, finite, and rapidly depleting global supplies of land, water, energy and minerals – the inputs to foodstuffs, automobiles, mobile phones, computers, and other products of higher living standards – cannot match the demand emanating from a rising world population, rapidly increasing global wealth, and urbanization.

Despite the recent declines in commodity prices, the consequences of long-term fundamental supply and demand imbalances remain; the two most serious are substantially higher commodity prices and the rising risk of violent resource-based conflict. In the aftermath of the 2008 financial crisis, commodity prices increased 150 percent, and already there are around 25 conflicts raging around the world with their origins in commodities, with many more likely to occur over the next decade.

Besides me, the other participants in the discussion that will unfold over this month are Justin Logan, Cato's director of foreign policy studies and Ian Bremmer, the president and founder of Eurasia Group. The schedule of responding essays is by Justin Logan, July 8, Ian Bremmer, July 10; and Ronald Bailey, July 13. Discussion to follow through the end of the month.

Just a hint at my take: The current economic supercycle is now on the downward side and China's neo-imperialist version of mercantilism will turn out to be economically futile.

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  1. China overspent. Basic rules of economics still apply.

    1. +1 big ass bubble

  2. We have lots of resources in america except that our government has made the lands their on protected form use. This nation is destroying itself with its own laws.

    1. Well, on the bright side, we still have those resources and can still exploit them by changing the laws. Better to burn up all the Arab oil first and leave them with nothing.

      1. +1 Self Preservation

  3. Those resources are only as good as their ability to transport them back to China and their ability to keep doing so over the objection of the host nations. People like Moyo seem to no understand how global power actually works. Every trade deal and every dollar that flows and every deed of ownership is subject to the veto of the gun. Unless China develops a much bigger Navy and the ability to project power such that even the US or Canada would never confiscate Chinese owned resources, they don’t control anything.

    1. A good point, John.

      1. The other point is that even if they could control it, it wouldn’t mean what Moyo thinks it does. At best it would give them a monopoly over the resource. Three things to consider; the resource is no good unless you sell it or use it, monopolies don’t have unlimited pricing power and trade is mutually beneficial. So at best they end up making some but not an unlimited amount of money. Meanwhile, their customers still get the advantages of buying the resource or manufactured good. Ultimately, the buyers are better off than they would be without the product or they wouldn’t buy it. So what “advantage” is China getting? The ability to get slightly above market returns on a few things. That is it.

    2. He who has the gold makes the rules.

      And he who has the gun, has the gold.

      1. You see in this world there’s two kinds of people, my friend. Those with loaded guns, and those who dig. You dig.

    3. Unless China develops a much bigger Navy and the ability to project power such that even the US or Canada would never confiscate Chinese owned resources, they don’t control anything.

      Not to mention that (more towards an individual/liberty level) unless they suddenly start issuing guns to “good” Chinese citizens and condoms to everyone else and/or reign in the black market and corruption the PRC itself won’t own or control those commodities anyway.

      Given the way foreigners are fleeing as the PRC haphazardly wades into the market…

    4. “Unless China develops a much bigger Navy and the ability to project power such that even the US or Canada would never confiscate Chinese owned resources, they don’t control anything.”

      Both China and Shanghai Cooperation Organization partner Russia have nuclear weapons and they are aimed at American cities. That’s one disincentive to attacking China. Another is that the American military is not as powerful as people imagine. After more than a decade of involvement in Afghanistan, the Taleban, a militia whose members spend half the year herding goats in the mountains, look stronger than ever. Whatever destruction the US military can muster, and it’s not to be misunderestimated, there is a lack of resolve to use it. One more disincentive, Walmart, the nation’s largest business outfit, wouldn’t like war with China, manufacturer of a good portion of American’s most treasured consumer items.

    5. This is a classic obsolescing-bargin model. When companies come in and build major capital projects (such as mines), they typically are able to negotiate great deals because they bring jobs, tax revenue, and infrastructure improvements (and thus have more power in negotiations). As soon as the project is complete, the host government can change the rules of the game. Obviously a host country runs the risk of turning off future investors; however this happens all the time.

      The only difference in this scenario is the investing “companies” are state-owned enterprises. Unless China has the military power and will to enforce the original deal, the host country can still change the rules of the game. They may be more hesitant, but it still can (and will) happen.

      1. And sometimes people are not deterred by scaring off other investors. If for example the government goes socialist, they won’t care what other investors think. Or if the government is motivated by racism, they won’t care. The problem China has is that they are a hated minority in most of east Asia. Nothing short of a Chinese fleet showing up off the coast and maybe not even that, is going to deter the Malaysians or Indonesians from confiscating Chinese assets and giving them to their own people if they get angry enough or desperate enough and want to use China as a scapegoat.

  4. In the aftermath of the 2008 financial crisis, commodity prices increased 150 percent

    Which obviously — OBVIOUSLY — had not whatsoever to do with the massive inflationary pressures on basic commodities due to the Obama administration tripling the money supply around then.

    1. And they didn’t stay that high did they? The buyer has power too. Even a monopolist has limited pricing power.

      1. If you rapidly increase the supply of money, the demand for it falls relative to other things. Thus, this spike might have made physical commodities worth more relative to U.S. dollars:

        http://www.fgmr.com/us-dollar-…..orted.html

  5. Same false issue as which justified defending Saudi Arabia and Kuwait from Saddam. Aside from wondering how Saddam was a worse despot than the Saudi regime, I never understood why anyone believed Saddam in control of Saudi oil would be worse for the world. They sold it; he wanted to sell it. He wasn’t going to hoard it, or destroy it. I figured it was just Bush payback for the Saudis bankrolling his son.

    Like John says, resources are only good when used or sold.

    Same with those South China Sea islands surrounded by oil fields. Who cares who sells the oil to everyone else, or whether they use it and free up oil they have been buying to be sold to somebody else.

    Or selling Alaska oil to Asians and using the profit to buy cheaper oil from elsewhere and closer to the refineries.

    Gads people are stupid.

    1. Exactly. You can rightfully worry about what Saddam or China will do with the money that they make from selling those resources. Worrying about them holding the world hostage by controlling them is absurd. What was Saddam going to do with all of that oil? Drink it?

      And yeah, in retrospect saving the Kuwaiti’s sorry asses was likely a mistake. Who gives a shit if Saddam owned the oil? As long as he understood he couldn’t use that money to build nukes or fund terrorism, his ownership would have been an improvement over the Saudis and Kuwaitis owning it.

      1. As long as he understood he couldn’t use that money to build nukes or fund terrorism

        From an economic point of view, there is little risk to the world from China doing what they are doing; in fact, they are probably just wasting their money and hurting themselves.

        But once aggression, warfare, and totalitarian governments are involved, control over more resources can be an advantage. China can build nukes and fund terrorism and get away with it.

        1. To some degree they can. But to what end? Those resources are only good if people are willing to trade with them. If they get too aggressive or blunder into a big war, people will stop trading with them and they are screwed.

          The danger from China or Iran or Saddam’s Iraq is that the people in charge fear the people under them more than they do other countries. So sometimes the leadership can’t be deterred. If they think showing weakness is going to embolden their domestic enemies and get them killed, they will rationally take their chances in a war over certain death at the hands of their own people.

        2. Hitchens on China, 2007:

          http://www.slate.com/articles/…..china.html

  6. Shortages in many of those areas are Malthusian delusions, not reality; that is, it already appears unlikely that there will be shortages.

    In some of those areas where shortages may be real (e.g. rare earths), any attempt by China to jack up prices significantly and extract monopoly rents will lead to the development of substitutes and alternative sources. For example, mercury, once essential, has been eliminated from almost all uses in electric and electronic devices.

    In terms of alternative sources, the asteroid belt is easy to mine with current technologies and has orders of magnitude more resources than available on earth.

    1. Monopolists do not have unlimited pricing power. If they raise the prices too high people will find alternatives to the product. If China wants to hoard the rare earths all that will accomplish is to spur people to develop alternatives to rare earth and render the Chinese owned assets worthless.

    2. There really isn’t a shortage of rare earths. And if there were it would only be temporary. Marx, Malthus, and Keynes, when can we stake these economic vampires through the heart?

  7. It seems to me that China is using paper money that can be printed up at no cost to purchase real assets that will be needed in the future. This debate is ultimately about the purchasing power of fiat money over the long term and history seems to be on the side of China on this front.

    Those who have bet on the currency that is issued by the privately controlled monopoly in the world’s biggest debtor economy clearly believe that monetary theory and history do not matter. Those who have taken the other side tend to see bubbles in sovereign debt that will destroy most sovereign currencies. Complicating the issue are those who do not care for any fundamentals and play the momentum game in the futures market. Time will tell us who is right.

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