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China Runs Into Natural-Resources Pushback

Authors: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, and Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies
April 3, 2014
Wall Street Journal

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Strategists have long feared that China's quest for natural resources would lead to ever-higher prices, a breakdown in trade and perhaps even wars. But a stunning rebuke to Chinese manipulation last week at the World Trade Organization is a sign that the global system is far more resilient than the worriers have claimed.

The ruling made public on March 26 centered on the Chinese strategy of restricting exports of raw materials—most notably rare earth elements such as cerium and neodymium used in high-tech defense and energy systems—to give Chinese companies a leg up and inflict damage on other resource consumers. The WTO panel declared the restrictions illegal and opened the door to retaliatory tariffs from the United States, Japan and others.

Analysts from elite universities to the Pentagon have worried that China is "locking up" commodities from crude oil to copper, building a mercantilist alternative to the system of global markets that the U.S. has long promoted as the best guarantor of resource security. The data point in a different direction. Chinese oil companies have bought properties from Angola to Canada, but most Chinese oil imports are procured on the open market. Moreover, most Chinese-owned oil produced abroad is sold to the highest bidder, not only shipped home. For some resources—notably iron ore, the second most traded commodity after oil—China's entry has actually pushed global trade in a more market-based, and less political, direction.

Still, analysts argue that China's voracious consumption of natural resources push commodity prices up and cause havoc for economies around the world. Between 2000 and 2008, Chinese demand drove prices for a host of resources strongly higher. But fear of a never-ending price spiral is unfounded. Supplies from slow-moving projects in everything from African copper to Australian gas are finally becoming available to meet Chinese needs.

High prices have also spurred remarkable technological innovation: One of the most notable developments has been the boom in U.S. shale gas and "tight" oil. This boom was induced by historically high prices and is now helping mitigate the risk of spiraling resource costs. Consumers around the world—including in China—are also adopting more-efficient technologies and processes, ranging from lightweight vehicle materials to steel recycling, reducing pressure on global resource markets and prices.

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