China's Growing Appetites

Article excerpt

THERE IS a major new issue looming in global geopolitics which has so far attracted little attention from either policymakers or pundits. It is the emergence of China as the world's largest consumer and importer of many industrial raw materials. After several years of robust growth, China has displaced the United States as the dominant market and price setter for copper, iron ore, aluminum, platinum and other commodities. This development has occurred so quickly that governments have not yet had time to ponder its implications. But just as the need for commodities has driven the foreign policy of Britain and the United States on many occasions since the mid-19th century, so now will China's need for commodities force it to develop a new strategy for foreign policy and security policy. China's appetite for raw materials will also have profound implications for the foreign policies of the United States, China's Asian neighbors, and the countries in the Third World that will soon emerge as China's primary suppliers. (1) Economic factors have long played a role shaping foreign policy and security policy. The transformation now occurring in China's economic status is likely to be as transforming an event in geopolitics as America's arrival as a world power during the early decades of the 20th century.

FEW WOULD argue that China has not emerged as one of the world's economic powerhouses. It has enjoyed several years of output growth in the 7-9 percent range. In late 2003 its year-on-year growth of industrial production was 18 percent, while export growth exceeded 40 percent. China's share of world exports is now approaching 6 percent and will probably overtake Japan's this year. The great growth engine of China during the past two years has been capital spending. China's investment share of GDP is now approaching 45 percent, the highest in the world. During the east Asian economic boom of the early 1990s, some countries had investment-to-GDP ratios as high as 42 percent, but most developing countries today are clustered in the 20-30 percent range. China's investment spending is so robust that it raises disturbing questions about the allocation of capital: the country may create so much excess capacity that profitability declines. But in contrast to east Asia six years ago, China's investment boom is unlikely to produce a financial crisis because it is being financed primarily by domestic savings. The Chinese savings rate is so high that the country is still running a modest current account surplus, despite one of the highest investment rates ever recorded in world economic history.

As a result of this boom, China has developed a voracious appetite for raw materials. Its commodity imports cost $140 billion last year, and its trade deficit on them was $100 billion. China's imports of iron ore have increased from 14 million tons in 1990 to 148 million in 2003. China's imports of aluminum have shot up from 1 million tons to 5.6 million tons. Imports of refined copper have risen from 20,000 tons in 1990 to over 1.2 million tons last year. Imports of platinum have leaped from 20,000 ounces in 1993 to 1.6 million last year. Imports of nickel have risen from zero to 61,500 tons during 2003. The impact of China's raw material demand on global trade has been so dramatic that shipping rates have quadrupled during the past 18 months.

There are now some commodities in which China is a larger consumer than the United States. In late 2003 China accounted for 20.6 percent of global copper demand compared to 16 percent for the United States. In 2005 China will probably account for 21 percent of global aluminum demand compared to 20 percent for the United States. China also accounts for 35 percent of global coal production, 20 percent of zinc output, 20 percent of magnesium output and 16 percent of phosphate output. This is all the more remarkable given that China's real GDP is probably half of America's. (2) And since the real incomes of China's people are only now rising to levels that generate large demands for material goods such as autos, appliances and houses, its consumption of raw materials is poised for explosive growth. …