Belt and Road, Trade and industry, International relations, National security | East Asia, The World

24 January 2020

The United States cannot rely upon products that originate in, or supply chains that run through, a potential adversary, Bashar Malkawi writes.

China’s Belt and Road Initiative (BRI), publicly released in 2013 and formerly named ‘One Belt, One Road’, would, at first look, seem to be a force for good. China views the BRI as a way to enhance its trade connectivity, reduce surplus domestic industrial capacity, develop poorer interior provinces, promote energy security, and internationalise Chinese industrial and financial standards.

The BRI builds China’s commercial ties abroad by financing, constructing, and developing major transport, energy, technology, and other infrastructure projects in the Indo-Pacific, Africa, the Middle East, Europe, and the Americas.

Nevertheless, some perceive the BRI as a form of colonialism, whereby China will exploit smaller economies for its own benefit. By providing loans for energy and infrastructure projects, ownership of such developments will pass to China if the loanee countries, overextended with debt, cannot service the loans.

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Sri Lanka can serve as an example. China provided the loans and a Chinese company, China Harbor Engineering Company, one of China’s largest state-owned enterprises, constructed the Hambantota port development project in the country through the BRI. Unfortunately, the project did not succeed economically, and Sri Lanka defaulted on the loan. Eventually, under pressure from the Chinese government, Sri Lanka handed over the port and 15,000 acres of land to China for 99 years.

China now has a major port on the Indian Ocean and, if history repeats itself, the same will hold true in Tanzania where China is funding another port development. This could give China a second major port on the Indian Ocean, a crucial commercial waterway.

Arguably, the bigger concern from BRI for the United States is not what China gains, but what it may lose. One of China’s less publicised activities, for instance, is its attempt in Africa to lock up the supply of critical minerals, such as cobalt and rare earth metals.

A 2010 study commissioned by the Peterson Institute of International Economics concluded China’s attempt to ‘lock up’ minerals in Africa was not anti-competitive, with the notable exception being its attempts to exercise control over rare earth elements. China’s demand for minerals has put huge strain on the international supply system of these minerals.

US Geological Survey data also confirms that, for the past decade, China has accounted for more than 90 per cent of global production of rare earths and that China’s restrictions on the supply of rare earth metals, beginning in 2010, have spurred efforts to explore for these metals outside of China.

In contrast, Molycorp’s Mountain Pass Mine, the only rare earth producer in North America, shut down in 2016 and filed for bankruptcy. In 2010, Molycorp went public at $14 per share and reached a high of almost $80 per share in 2011. When rare earth prices became depressed as a result of Chinese dumping of rare earths, Molycorp’s stocks crashed, causing its bankruptcy.

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In 2017, it was sold to an American consortium with a Chinese minority partner for $20.5 million, $500,000 over a bid made by an American, Australian, and Swiss consortium. Some have begun recognising this growing monopoly. The CEO of an advanced materials manufacturer even met with President Trump’s staff to persuade him that the United States should nationalise the country’s only rare earth mine because of its military implications.

Availability of rare earth minerals is critical for the development of electric cars, manned and unmanned aircraft, batteries that power guided missiles, and lightweight materials used to make jet engines and rocket noses.

Without a domestic supply, the United States must rely on Chinese sources of rare earths to build ‘Made in America’ military equipment. It makes little sense to rely upon a security competitor for access to essential military materials.

Rare earths are not the only strategic metal. Lithium, chromium, cobalt, graphite, copper, and manganese are also essential for industrial purposes. For example, manganese is the most essential mineral in the production of steel aside from iron ore. But, again, most American electrolytic manganese comes from China. This is clearly a supply chain vulnerability.

China is the world’s largest producer of minerals, but its high ‘burn rate’ – its reserves-to-production ratio – has caused concern for Chinese authorities and sparked fears of future shortages in supplies in all minerals. Consequently, China has adopted a so-called ‘Two Resources, Two Markets’ policy to encourage private enterprises to actively pursue mining deals throughout the world.

The United States, among other countries, illustrated international concern with China’s policy when they filed a WTO complaint in 2012 arguing that China violated WTO rules by improperly manipulating the rare earths market to distort global market prices.

More specifically, the complainants alleged that China was hoarding rare earths deliberately to increase global prices, while lowering prices domestically, that the measures distorted and hindered competitive free trade, that China exercised an unfair trade advantage, and that the measures served to exert pressure on international firms to move their operations to China through export curbs. China argued in response that their measures were necessary for goods that are in critical shortage.

The WTO panel suggested that whether the shortage was in fact critical would depend on the essential nature of the product. The characteristics of the product would also inform how long the measure would need to be in place to relieve such a shortage.

After adopting the policy in 2006, China increased the number of mining and mineral processing assets in Africa in which it has an interest from just a handful to more than 120 in 2015. Those assets did not include early exploration and greenfield projects. The interests range from direct and indirect investment to joint ventures and other structures.

From a national security perspective, this should be a concern for the United States. It cannot rely upon products that originate in a potential adversary. The Americans must adopt an industrial policy that focuses on the development of critical industries domestically, which will also provide a job base that will support its middle class, or face a growing vulnerability into the future.

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