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.
Steel is a sector in which China has emerged as the world's dominant player. China's steel production is now running at 220 million tons per annum, more than the United States and Japan combined. Since it is also importing 40 million tons, China's steel companies are planning to add another 200 million tons of capacity during the next few years. The stock market capitalization of China's steel industry is now $41 billion compared to $11 billion for the United States, $50 billion for Japan, and $12 billion for Korea.
The growth of China's steel industry is highly correlated with the country's pace of urbanization. As the experiences of the United States and Japan have demonstrated, urbanization creates tremendous demand for raw materials. Between 1900 and 1970, America's urban population grew from 30 million to 154 million. At the same time, America's per capita steel consumption increased six-fold. Between 1950 and 1970, Japan's urban population increased by 70 percent and per capita steel consumption increased eightfold, reaching a peak 20 percent higher than America's. As China is currently only 40 percent urban and 60 percent rural, there will be huge pent-up demand for steel to build new cities and expand existing ones.
The urbanization factor is producing explosive growth in China's demand for cement as well. China has been the world's largest consumer and producer of cement since 1985. It represents 40 percent of world cement production and already has an intensity of per capita use higher than America's. In fact, China's cement consumption is over 640 million tons per annum, a level six times higher than U.S. consumption.
China's steel boom has also changed its role in the world coal market. As a result of the robust domestic demand, China's exports of thermal coal have fallen from 80 million tons in 1991 to 74 million tons in 2003 and numbers potentially as low as 55 million tons this year. China is also now importing coking coal rather than exporting it. Given that China was an important coal exporter, the result of these declining sales has been large price increases. World thermal coal prices rose by 20 percent last year and are likely to increase another 40 percent this year.
China has large reserves of some raw materials but is very dependent upon imports for others. It has 54 percent of the world's manganese reserves, 23 percent of lead reserves, 22 percent of silver reserves, 12 percent of coal reserves, 11 percent of vanadium reserves, and 6 percent of copper reserves. China is also a growing factor in the market for agricultural commodities, having recently displaced Japan as the number-two market for rubber imports. Despite U.S. trade sanctions on imports of its textile products, China increased imports of cotton from the United States by 700 percent during 2003.
China's appetite for food imports is likely to expand because of increasing urbanization and water shortages. China is trying to feed 20 percent of the world's population on 7 percent of its arable land. It currently employs 370 million people to produce as much food as 2 million American farmers. The amount of land being harvested has declined from 90 million hectares in 1998 to 76 million last year. There is also a serious water shortage in the north, where grain production is largest. China has four-fifths of its water in the south, while two-thirds of its cropland is in the north. Water per acre of cropland is therefore only one-eighth of that in the south. The supply of water is also being depleted because of diversion of water from rivers to cities, the depletion of underground supplies in aquifers, and the increasing pollution caused by industrialization.
After a remarkable expansion of grain production from 90 million tons in 1950 to 392 million tons in 1998, China's grain harvest has fallen in four of the last five years--dropping to 322 million tons in 2003 (a decline in output exceeding the entire grain...