Markets Or Mercantilism? Markets Or Jennifer Lind and Mercantilism? Daryl G

Home , Economic ideology, Henry Paulson, Open market

Markets or Mercantilism? Markets or Jennifer Lind and Mercantilism? Daryl G. Press How China Secures Its Energy Supplies

Since oil came to fuel the global economy, governments have sought to ensure access to critical supplies. In the early twentieth century, the British government worried about the United Kingdom’s reliance on Royal Dutch Shell for imports—and especially the Royal Navy’s dependence on overseas oil. The Dutch were susceptible to German pressure and might cut off Britain’s oil during a conºict. First Admiralty Lord Winston Churchill dismissed the notion of relying on markets for critical oil supplies, lamenting that the “open market is becoming an open mockery.” He insisted the British government become “the owners or, at any rate, the controllers [of oil] at the source,” and under his leadership the British acquired a 51 percent stake in the Anglo-Persian Oil Company.1 For decades, other countries followed suit, creating national oil companies (NOCs) to develop and secure energy supplies abroad. Today, China appears to be following in these energy mercantilist footsteps. Some analysts warn that China’s energy policies are hostile; by establishing NOCs and subsidizing their acquisition of overseas oil, the Chinese government is maneuvering to control key energy resources.2 Other observers deride China’s mercantilist policies as anachronistic; in an age of globalization, they say, China can rely on the market to obtain the oil it needs. “Energy insecurity is a myth,” writes Jonathan Kirshner, who argues that China’s government is mistaken in thinking that owning oil enhances its security. Joseph Nye agrees, noting that China “overpays” for its energy and gains no additional security in return.3 One U.S. National Security Strategy criticized Chinese leaders for “act-

Jennifer Lind and Daryl G. Press are associate professors of government at Dartmouth.

The authors thank numerous colleagues and friends whose advice signiªcantly improved this article, including Stephen Brooks, Eugene Gholz, Llewelyn Hughes, Shoichi Itoh, Austin Long, Jona- than Markowitz, Christopher Snyder, and the anonymous reviewers. The authors also appreciate the valuable feedback from seminar participants at Dartmouth College, Cornell University, George Washington University, the University of Chicago, the University of Notre Dame, the University of Texas at Austin, and Yale University.

1. Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 1993), pp. 158, 160, 174. Anglo-Persian would later become British Petroleum. 2. Jack Farchy, “China Seeking to Revive the Silk Road,” Financial Times, May 9, 2016; Colin Shek, “China Plays for Energy in New Great Game,” Al Jazeera, October 10, 2013; Shawn McCarthy, “Po- litical Storm Brews in U.S. over Nexen Deal,” Globe and Mail, September 27, 2012; Robert Collier, “Backlash to Chinese Bid for Unocal,” San Francisco Chronicle, June 24, 2005; and David Zweig, “‘Resource Diplomacy’ under Hegemony: The Sources of Sino-American Competition in the 21st Century?” working paper no. 18 (Hong Kong: Center on China’s Transnational Relations, Hong Kong University of Science and Technology, 2005/06). 3. Jonathan Kirshner, “The Cult of Energy Insecurity and the Crisis of Energy Security,” “America

170

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 171

ing as if they can somehow ‘lock up’ energy supplies around the world or seek to direct markets rather than opening them up, as if they can follow a mercantilism borrowed from a discredited era.”4 Are policies of energy mercantilism outdated and illogical, or do they offer a coherent strategy for enhancing a country’s energy security? This article argues that there is a strategic logic to energy mercantilism (meaning, efforts by the state to enhance national power by securing access to energy supplies). Far from being anachronistic or irrational, policies of energy mercantilism are a logical and potentially effective response to vulnerability. We make three key arguments. First, the logic of energy mercantilism is rooted in the economics and business literatures on ªrm behavior. Companies tend to fear disruptions to their supply chains under four conditions: when their supplies come from industries beset by imperfect contracting, when their suppliers are collusive, when supplies are geographically concentrated, and when supplies are located in regions that suffer frequent conºicts. All four of these conditions plague the oil sector, making states justiªably concerned about access to energy. Second, the approaches that states adopt to mitigate energy insecurity are analogous to the steps that ªrms take to reduce the risk to their supply chains. Firms and states secure supplies by (1) gaining control or inºuence over key suppliers; (2) diversifying products, suppliers, and transportation routes; (3) creating inventories; and (4) providing security to protect vulnerable assets. Third, China’s energy policies are underpinned by energy mercantilist logic. China is highly vulnerable to energy disruptions; its leaders explain their energy policies as a response to this vulnerability; and their policies have enhanced China’s energy security in meaningful ways. Notably, Beijing’s energy mercantilist policies help insulate China from some of the coercive tools that the United States might wield against China (e.g., an embargo or a blockade) during a conºict in the South China Sea or over Taiwan. These arguments have important implications for U.S.-China relations and

& the World: National Security in the New Era” conference, Tobin Project, Cambridge, Massachu- setts, November 14–16, 2008. On Chinese policy speciªcally, see Erica S. Downs, “The Chinese En- ergy Security Debate,” China Quarterly, March 2004, pp. 21–41; Dan Blumenthal and Philip Swagel, “Chinese Oil Drill,” Wall Street Journal, June 8, 2006; Minxin Pei, “China’s Big Energy Dilemma,” Straits Times, April 13, 2006; Joseph S. Nye Jr., “The Wrong Way of Thinking about Oil,” Korea Her- ald, February 27, 2006; Philip Andrews-Speed, “Do Overseas Investments by National Oil Com- panies Enhance Energy Security at Home? A View from Asia,” in Andrews-Speed et al., eds., Oil and Gas for Asia: Geopolitical Implications of Asia’s Rising Demand (Seattle, Wash.: National Bureau of Asia Research, September 2012), pp. 29–41; and Kevin Kane, “Energy Security Dilemma Bubble: Cold War Thinking in a World Supply Oil Market,” Northeast Asia Energy Focus, Vol. 7, No. 1 (Spring 2010), pp. 52–64. 4. The National Security Strategy of the United States of America (Washington, D.C.: President of the United States, March 2006), p. 41.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 172

international politics. First, by connecting a wide range of seemingly unrelated activities under the energy mercantilist rubric—for example, not merely overseas energy acquisitions but also diplomacy with major oil producers, di- versiªcation, inventories, and security policies—this article highlights the prevalence of energy mercantilist behavior today. Analysts sometimes warn that China’s energy mercantilism reveals its leaders’ revisionist intentions, but many countries (including the United States) vigorously pursue energy mercantilism.5 Beijing’s behavior appears less aggressive and more reasonable when one recognizes it as a common practice—and when one notes that China’s principal geopolitical adversary also practices it. Second, China’s energy mercantilism is neutralizing one of the United States’ preferred tools of coercion: the oil weapon. The United States has employed energy coercion repeatedly, and U.S. analysts openly contemplate it as an option against China.6 China’s energy policies, however, have signiªcantly lessened the potential bite of a U.S. embargo or blockade. In the past, the U.S. military could have easily cut off China’s oil imports during a war. Today, China could order its tankers to resist efforts to board its vessels; use its improved military capabilities to attack blockading ships; enlist its petroleum- rich trade partners to protest the U.S. action; increase the ºow through its overland pipelines; and release oil from its large petroleum reserves. The immediate result: an important instrument of U.S. military power—energy coercion—is eroding. The longer-term consequence: China’s successful energy policies will drive the United States to enhance other, but perhaps more escalatory, means of coercion. Finally, and more broadly, this article offers a window into the ongoing struggle between liberalism and mercantilism, whose outcome will help shape the political and economic order in the twenty-ªrst century. If well-functioning global markets negate the logic of mercantilism, then the spread of liberalism has dampened one of the perennial causes of conºict in international politics, as its supporters claim.7 But if states still have incentives to engage in mercan-

5. Stephen D. Krasner, Defending the National Interest: Raw Materials Investments and U.S. Foreign Policy (Princeton, N.J.: Princeton University Press, 1978). 6. On a U.S. blockade of China, see Evan B. Montgomery, “Reinforcing the Front Line: U.S. Defense Strategy and the Rise of China” (Washington, D.C.: Center for Strategic and Budgetary Assessments, February 1, 2017); T.X. Hammes, “Offshore Control Is the Answer,” Proceedings, Vol. 138, No. 12 (December 2012), p. 318; Jeffrey E. Kline and Wayne P. Hughes Jr., “Between Peace and the Air-Sea Battle: A War at Sea Strategy,” Naval War College Review, Vol. 65, No. 4 (Autumn 2012), pp. 35–41; and Sean Mirski, “Stranglehold: The Context, Conduct, and Consequences of an American Naval Blockade of China,” Journal of Strategic Studies, Vol. 36, No. 3 (2013), pp. 385–421, doi:10.1080/01402390.2012.743885. 7. Erik Gartzke, “The Capitalist Peace,” American Journal of Political Science, Vol. 15, No. 1 (January 2007), pp. 172–173. For a literature review on economic interdependence, see Edward D. Mansªeld

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 173

tilist resource struggles even under the prevailing liberal trade order, then the current jousting for resources (particularly oil) may foreshadow economic and political conºict to come. This article suggests that beneath the surface of global economic liberalism, countries continue to compete for resources in a manner that would be familiar to Lord Churchill and his contemporaries. To be clear, we do not argue that energy mercantilism is always the right policy; rather, energy mercantilism has a strategic logic and can improve a country’s energy security (i.e., “the uninterrupted availability of energy sources at an affordable price”).8 Leaders considering energy mercantilist policies—either defensively to reduce their country’s vulnerability or offen- sively to exploit the vulnerability of potential adversaries—must weigh the beneªts of such measures against their economic and strategic costs. This article proceeds in ªve sections. The ªrst section describes the debate between energy mercantilists and their liberal critics, and highlights questions that this debate leaves unanswered. The second section employs insights from microeconomics and business to describe conditions that threaten access to inputs and the strategies that ªrms and states use to mitigate those dangers. The third section illustrates the logic of energy mercantilism in the case of China and considers alternative explanations for Beijing’s energy policies. The fourth section discusses counterarguments, and the conclusion summarizes the article’s ªndings and outlines their policy implications.

Energy Mercantilism versus the Liberal School

For centuries, mercantilism and liberalism have competed as rival ideologies, each offering a different view of the proper relationship between the state and the economy. Mercantilism, the dominant economic ideology in Western Europe from the sixteenth through the eighteenth century, identiªed economic might as the bedrock of national power, and it advocated active government efforts to spur and direct economic growth. At the core of mercantilism is the idea that the state should lead and partner with economic actors to maximize national economic and military power.9 Mercantilism thus differs from the ten- ets of liberalism in both the means and the objective. Liberalism relies on

and Brian M. Pollins, “The Study of Interdependence and Conºict: Recent Advances, Open Ques- tions, and Directions for Future Research,” Journal of Conºict Resolution, Vol. 45, No. 6 (December 2001), pp. 834–859. 8. International Energy Agency, “What Is Energy Security?” (Paris: International Energy Agency, n.d.), https://www.iea.org/topics/energysecurity/whatisenergysecurity/. 9. In its earlier incarnations, mercantilism also encouraged trade protectionism, the hoarding of specie, and the search for colonies to secure natural resources. Those, however, were merely the strategies, popular at the time, to harness the economy and enhance state power. For a survey of

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 174

the independent decisions of self-interested actors that, through the invisible hand, lead to greater prosperity.10 Today, mercantilism is often portrayed as a discredited concept from a be- nighted era. “The dispatching of mercantilist doctrine,” notes the Economist, “is one of the foundation stones of modern economics.”11 Nevertheless, mercantilist ideas linger. Many leaders and intellectuals see “state capitalism” (for example, the creation of state-owned ªrms in strategically signiªcant sectors and the protection of infant industries) as advantageous at early stages of economic development or even as inherently superior to liberalism.12 Mercan- tilism, as Dani Rodrik notes, “remains alive and well, and its continuing con- ºict with liberalism is likely to be a major force shaping the future of the global economy.”13 A subset of mercantilist behavior, which we call “energy mercantilism,” encompasses governments’ efforts to secure access to energy inputs so as to protect their state’s economy and (implicitly) wield power over others.14 Energy mercantilists emphasize the dangers of relying on markets to provide oil or other essential resources. They see value in exerting control (or at least inºu- ence) over as many links in the energy supply chain as possible, and they regard with alarm a rival’s attempts to establish similar control.15 From the perspective of energy mercantilists, countries should secure their access to resources and undermine the access of rivals, and they are doing so today. Ac-

mercantilist thought, see Lars Magnusson, Mercantilism: The Shaping of an Economic Language (Lon- don: Routledge, 1994). 10. Adam Smith, The Wealth of Nations, 5th ed. (London: Methuen, 1904); and Edmund Fawcett, Liberalism: The Life of an Idea (Princeton, N.J.: Princeton University Press, 2014). 11. “What Was Mercantilism?” Economist, August 23, 2013, https://www.economist.com/blogs/ freeexchange/2013/08/economic-history. 12. See Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrial- izing Economies (Ithaca, N.Y.: Cornell University Press, 1990); Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton, N.J.: Princeton University Press, 2003); Ian Bremmer, The End of the Free Market: Who Wins the War between States and Corporations? (New York: Portfolio, 2010); and Daron Acemoglu and James A. Robinson, “Is State Capitalism Winning?” Project Syndicate, December 31, 2012, http://www.project- syndicate.org/commentary/why-china-s-growth-model-will-fail-by-daron-acemoglu-and-james- a—robinson. 13. Dani Rodrik, “The New Mercantilist Challenge,” Project Syndicate, January 9, 2013, http:// www.project-syndicate.org/commentary/the-return-of-mercantilism-by-dani-rodrik. 14. For an argument that links energy access and military might, see Rose Kelanic, “Black Gold and Blackmail: The Politics of International Oil Coercion,” Ph.D. dissertation, University of Chi- cago, 2012. 15. On U.S. alarm at bids by China National Offshore Oil Corporation to purchase Nexen and Union Oil Company of Californial (Unocal), see McCarthy, “Political Storm Brews in U.S. over Nexen Deal”; “National Security, China, and the Unocal Deal,” Washington Times, July 5, 2005; and David Barboza and Andrew Ross Sorkin, “Chinese Oil Company Offers $18.5 Billion for Unocal,” New York Times, June 22, 2005.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 175

cording to this view, the “Great Game”—the nineteenth-century competition for control of energy resources—has begun anew. The liberal school, by contrast, holds that energy importers can obtain the oil they need through energy markets. Although the global marketplace is neither perfectly free nor perfectly efªcient, resources are generally distributed on the basis of price. As a result, seeking control over sources of vital resources— rather than simply buying them as needed—makes little sense. As Kirshner writes, “The overall supply of oil for the coming decades at least...will almost certainly be assured by the functioning of the price mechanism.” Coun- tries need not directly control oil or worry whether a rival has gifted more gourmet ªgs to the Saudi king: “The oil will be there,” says Kirshner, “at a price.”16 As the Japanese consul-general in New York, Masamichi Hanabusa, famously said before the 1991 Persian Gulf War, Japan was not worried about who controlled Kuwait’s oil: “[E]xperience tells us that whoever controls oil will be disposed to sell it,” and “we are prepared to pay.”17 The liberal view—that resources will go to the highest bidder—is based on two observations. First, oil produced abroad by a country’s NOCs does not necessarily get shipped to the home country’s market. To the contrary, oil companies—even government-controlled NOCs—sell to the highest bidder. Indeed, though Chinese NOCs have purchased oil ªelds around the world, they ship little of that oil back to China.18 Second, even if a country’s ªrms gave preference to their own national markets, that decision would have minimal effect on oil supplies or price. For example, if Chinese oil companies were ordered to supply only Chinese reªn- eries, that would lock up some fraction of the world’s oil supply, but it would free up an equal amount of other supplies that the Chinese would have purchased elsewhere. Such arrangements would “merely change the patterns of global oil trade (i.e., which speciªc barrels of oil China consumes) but not the overall level of consumption.”19 As Trevor Houser notes, “Every barrel China

16. Kirshner, “The Cult of Energy Insecurity and the Crisis of Energy Security,” pp. 6, 8. 17. Hanabusa’s view is surprising given the experience of Japan as the target of a U.S. oil embargo prior to World War II and a blockade during the war. The quote is from Edward N. Krapels, “The Commanding Heights: International Oil in a Changed World,” International Affairs, Vol. 69, No. 1 (January 1993), p. 71. 18. Julie Jiang and Jonathan Sinton, “Overseas Investments by Chinese National Oil Companies: Assessing the Drivers and Impacts” (Paris: International Energy Agency, February 2011), p. 17, https://www.iea.org/publications/freepublications/publication/overseas_china.pdf; Gabriel B. Collins and Andrew S. Erickson, “Chinese Efforts to Create a National Tanker Fleet,” in Collins et al., eds., China’s Energy Strategy: The Impact on Beijing’s Maritime Policies (Annapolis: Naval Institute Press, 2008), p. 93; Erica S. Downs, “The Fact and Fiction of Sino-Africa Energy Relations,” China Security, Summer 2007, p. 46; and Trevor Houser, “The Roots of Chinese Oil Investment Abroad,” Asia Policy, January 2008, p. 154. 19. Eugene Gholz and Daryl G. Press, “Energy Alarmism: The Myths That Make Americans

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 176

buys from Sudan is one barrel the country does not need to buy from Saudi Arabia, meaning one more Saudi barrel is available to the United States, Europe, or Japan.”20 Advocates of the liberal school note that the mercantilist policies of China and other countries might be doing the world’s oil consumers a great favor. Consumers beneªt because Chinese taxpayers are putting up the money to invest in areas that the market had rejected. Hence Nye argues, “China’s mercantilist misunderstanding of markets means that it often overpays for what it mistakenly thinks is energy security.”21 And if these investments put new oil on the market, they lower prices for everyone. As Kevin Kane explains, “An upstream discovery by one company or a country’s NOC is essentially an increase in oil production for everyone.”22 Liberals argue convincingly that when goods are distributed on the basis of price, energy mercantilism makes no sense. Yet even a cursory examination of economic history demonstrates that goods do not always go to the highest bidder. Embargoes and blockades prevent goods from reaching eager customers. And even in normal circumstances, factors ranging from corruption to strategic cooperation among countries make trade deviate from market equi- libria. Even the Economist, a stalwart defender of liberalism, recently noted that “the word ‘market’ has been a misnomer for global trade in oil.”23 Given that trade deviates somewhat from market allocation in normal circumstances, and more so during crises and wars, we return to the question: Is there a logic to energy mercantilism?

Worry about Oil” (Washington, D.C.: Cato Institute, April 2007), p. 8. See also Eugene Gholz and Daryl G. Press, “Protecting the Prize: Oil and the U.S. National Interest,” Security Studies, Vol. 19, No. 3 (Summer 2010), pp. 453–485, doi:10.1080/09636412.2010.505865. More broadly, Gholz and Press argue that when oil is distributed on the basis of price, market adaptations rapidly mitigate the adverse consequences of disruptions. Energy mercantilists might grant that point but ask: How should states protect themselves from circumstances in which energy is not distributed on the basis of price (e.g., during embargoes or blockades, as well as in the prelude to and aftermath of some oil shocks)? 20. Houser, “The Roots of Chinese Oil Investment Abroad,” p. 163; and Kirshner, “The Cult of En- ergy Insecurity and the Crisis of Energy Security.” 21. Nye, “The Wrong Way of Thinking about Oil.” See also Blumenthal and Swagel, “Chinese Oil Drill”; Pei, “China’s Big Energy Dilemma”; and Andrews-Speed, “Do Overseas Investments by National Oil Companies Enhance Energy Security at Home?” 22. Kane, “Energy Security Dilemma Bubble,” p. 60. See also Energy Policy Act of 2005, Public Law 109-58, U.S. Code 42 (2005), § 1837; Gholz and Press, “Energy Alarmism”; and Downs, “The Chi- nese Energy Security Debate.” 23. “America Lifts Its Ban on Oil Exports,” Economist, December 18, 2015, https:// www.economist.com/news/ªnance-economics/21684531-light-sweet-compromise-puts-end-crude- market-distortions-america-lifts.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 177

The Logic of Energy Mercantilism: Mitigating Input Uncertainty

Countries and ªrms depend on access to key inputs, and they worry about disruptions to their supply chains.24 In this section, we explore four conditions—contracting, collusion, geographic concentration, and conºict, or the “four C’s”—that exacerbate fears about supply disruptions, and the strategies that states and ªrms adopt to reduce their vulnerability.

sources of input uncertainty Four conditions heighten ªrms’ fears about access to key inputs. First, input uncertainty is greater in industries beset by imperfect contracting. Firms struggle to write contracts that specify all the ways that either party might underperform and the appropriate compensation under each circumstance.25 To make matters worse, in some industries contracts are difªcult to enforce (for example, because the parties are located in regions with weak rule of law). When contracts cannot be reliably enforced, ªrms worry that suppliers will re- nege when market conditions shift. Second, collusion among suppliers exacerbates ªrms’ worries about access to inputs. If suppliers collude, they can manipulate prices or even shut out ªrms from a market.26 The problems of collusion and contract enforcement are linked. In a market with perfect competition, if a supplier habitually reneged on contracts, it would lose business to its competitors. But in a collusive industry, the suppliers can set the rules—for example, creating a norm in which suppliers typically void contracts when market conditions change. Firms that ªght the cartel and demand their contractual rights do so at their peril.27 Third, companies face greater input uncertainty when they rely on goods that are geographically concentrated. Regional concentration enhances risks from natural disasters (e.g., storms, ºoods, or ªres) and increases ªrms’ expo- sure to violence.28 Fourth, ªrms worry more about access to inputs that come

24. Economic globalization has enhanced ªrms’ use of foreign supplies and spawned increasingly complex supply chains. See Stephen G. Brooks, Producing Security: Multinational Corporations, Glob- alization, and the Changing Calculus of Conºict (Princeton, N.J.: Princeton, 2007). 25. Jean Tirole, “Imperfect Contracts: Where Do We Stand?” Econometrica, Vol. 67, No. 4 (July 1999), pp. 741–781; and Franklin Allen and Douglas Gale, “Measurement Distortion and Missing Contingencies in Optimal Contracts,” Economic Theory, Vol. 2, No. 1 (January 1992), pp. 1–26. 26. Arthur O’Sullivan and Steven M. Sheffrin, Economics: Principles in Action (Upper Saddle River, N.J.: Pearson Prentice Hall, 2003), p. 171. 27. We provide evidence below that companies that are customers of the cartelized state-owned producers perceive themselves to have little legal recourse against them. 28. Two prominent cases include Hurricane Katrina’s damage to U.S. reªning capacity; and a ªre at Japanese Sumitomo Chemical Company in 1993, which greatly disrupted global computer chip manufacturing. See Amy Chozick, “A Key Strategy of Japan’s Car Makers Backªres,” Wall Street Journal, July 20, 2007.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 178

from regions plagued by conºict and lawlessness. Militias or criminal gangs may block roads or demand bribes to permit safe passage; they may seize goods from warehouses or kidnap employees for ransom. The four C’s that exacerbate input uncertainty all exist in the oil industry. First, the industry is beset by problems of contract enforcement. Producer governments can invalidate oil deals at will, unilaterally reducing production or prohibiting an oil sale altogether and asserting sovereign immunity to shield themselves from liability. The NOCs owned by producer governments can invalidate contracts as well. Their assertion of immunity—based on the claim that they are instruments of the state—may be legally dubious, but energy ªrms hesitate to ªght the major producers, which control the supplies they need. “I’ve seen many a Texas oil man pound on a table and say, ‘But I have a contract!’”, explains industry analyst Mikkal Herberg. “The host country says, ‘So sue me.’” Herberg continues, “90 percent of the world sees contracts as a living document, and when conditions change, contracts get renegotiated.”29 Second, the oil industry is collusive, with nonmarket considerations often determining price and supply. The oil industry is led by an oligopoly of producers, which created in the Organization of Petroleum Exporting Countries (OPEC) an institution designed to facilitate collusive agreements. The effectiveness of their collusive efforts has varied over time.30 Initially, OPEC had little success reducing output, but the outbreak of the 1973 Arab-Israeli War uniªed the cartel. OPEC cut output and prices soared.31 It maintained production discipline until the mid-1980s, and regained enough cohesion by the end of the 1990s to cut output and raise prices.32 Today, intra-cartel cooperation has waned. The political situation in the Persian Gulf constantly evolves, but the oil sector—more than most others—remains fraught with the risk of oligop- olistic collusion and nonmarket manipulation of price and supply. The ªnal two conditions that promote input uncertainty are also endemic to the oil sector. Oil production is geographically concentrated in regions beset by conºict.33 Critical oil facilities in the Persian Gulf have been targeted by terror-

29. Jennifer Lind interview with Mikkal Herberg, La Jolla, California, September 2009. 30. See Jeff D. Colgan, “The Emperor Has No Clothes: The Limits of OPEC in the Global Mar- ket,” International Organization, Vol. 68, No. 3 (Summer 2014), pp. 599–632, doi:10.1017/ S0020818313000489; Llewelyn Hughes and Austin Long, “Is There an Oil Weapon? Security Impli- cations of Changes in the Structure of the International Oil Market,” International Security, Vol. 39, No. 3 (Winter 2014/15), pp. 152–189, doi:10.1162/ISEC_a_00188; and Amy Myers Jaffe and Ed Morse, “The End of OPEC,” Foreign Policy, October 16, 2013, http://foreignpolicy.com/2013/10/ 16/the-end-of-opec/. 31. In addition to cutting output, OPEC enacted an oil embargo against the United States and the Netherlands, both of which OPEC members viewed as being sympathetic to Israel. See Yergin, The Prize. 32. Gholz and Press, “Protecting the Prize,” p. 472. 33. On these concerns, see Johsua R. Itzkowitz Shifrinson and Miranda Priebe, “A Crude Threat: The Limits of an Iranian Missile Campaign against Saudi Arabian Oil,” International Security,

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 179

ists, disrupted during political upheavals, and destroyed during conventional wars. Some analysts worry that Arab Spring–style protests might eventually erupt in Saudi Arabia, especially in the oil-rich Eastern Province. Violent conºicts plague other oil-rich areas, such as Kurdistan, Libya, Nigeria, Sudan, and Venezuela. In addition, the oil transport industry endures continuous harassment; pipeline operators often need to pay locals for “protection,” and tankers must steer clear of pirate-infested waters.34 All the conditions de- scribed above are exacerbated by the oil industry’s geographic concentration. The number of oil-producing countries has grown, and non–Middle East production has expanded.35 Nevertheless, the Persian Gulf remains the most signiªcant region in the oil sector, containing the majority of proven reserves and spare capacity.36 Despite the producers that void contracts, an institutional framework for supplier collusion, and the constant threat of violence in key oil-producing regions, no viable alternative to oil currently exists. Oil remains the foundation of economic and military might. Given the four C’s, it is therefore unsurprising that ªrms and states worry about their access to this essential resource.37

responses to input uncertainty In response to the four C’s, ªrms and states employ four broad strategies to protect their access to inputs. inºuence and control. When ªrms worry about access to key inputs, they seek inºuence—or in some cases control—over their suppliers. For example, in industries in which contract complexity and enforcement are problem-

Vol. 36, No. 1 (Summer 2011), pp. 167–201, doi:10.1162/ISEC_a_00048; Eugene Gholz and Daryl G. Press, “Footprints in the Sand,” American Interest, March/April 2010, http://www.dartmouth.edu/ ϳdpress/docs/Gholz_Press_Footprints.pdf; Eugene Gholz, “The Strait Dope: Why Iran Can’t Cut Off Your Oil,” Foreign Policy, August 22, 2009, http://foreignpolicy.com/2009/08/22/the-strait- dope/; and Caitlin Talmadge, “Closing Time: Assessing the Iranian Threat to the Strait of Hormuz,” International Security, Vol. 33, No. 1 (Summer 2008), pp. 82–117, doi:10.1162/ isec.2008.33.1.82. 34. On fears of violence in the energy industry, see Michael T. Klare, “Petroleum Anxiety and the Militarization of Energy Security,” in Daniel Moran and James A. Russell, eds., Energy Security and Global Politics: The Militarization of Resource Management (London: Routledge 2009), p. 45. 35. Hughes and Long, “Is There an Oil Weapon?”; and Andrew Cheon and Johannes Urpelainen, “Escaping Oil’s Stranglehold: When Do States Invest in Energy Security?” Journal of Conºict Reso- lution, Vol. 59, No. 6 (2015), pp. 953–983, doi:10.1177/0022002713520529. On U.S. oil production, see “Sheikhs v Shale,” Economist, December 6, 2014, https://www.economist.com/news/leaders/ 21635472-economics-oil-have-changed-some-businesses-will-go-bust-market-will-be. 36. Nearly all the world’s spare oil production capacity is held by OPEC members, which also account for 43 percent of current production and 71 percent of proven reserves. See “BP Statisti- cal Review of World Energy, June 2017,” pp. 12, 14, https://www.bp.com/content/dam/bp/en/ corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy- 2017-full-report.pdf. 37. The theoretical framework developed here—focusing on the four C’s—could be used to assess the threat to other resources as well—not merely oil

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 180

atic, ªrms often buy their suppliers (i.e., they integrate vertically).38 If direct ownership is impractical, businesses cultivate inºuence with key partners through “supplier relations management,” namely, developing relationships with leaders within those companies to ensure fair (or preferential) treatment.39 As Richard Lamming writes, “If the market worked perfectly...then any good, product, or service, could be bought on price alone....Thefact that there clearly are strong trading relationships between industrial buyers and sellers, that there always have been, and that they are clearly taken into account as important factors in sourcing decisions by intelligent strategists, reveals the limitations of neoclassical economics.”40 Indeed, economists ªnd that when ªrms are selecting suppliers, relational considerations often matter as much as price; therefore, ªrms engage in supplier relations management even in the case of commodities.41 Like ªrms, states seek to control—or at least inºuence—those who supply them with critical resources. In the past, countries engaged in the most literal form of vertical integration, namely, annexing or colonizing resource-rich terri- tory. Today, states seek inºuence in more subtle ways. They offer supplier governments foreign aid, arms sales, diplomatic support, and in some cases military protection in exchange for political cooperation; they forge ties between the two states’ bureaucracies; and they court individuals in key positions. Much of U.S. policy toward the Arab Gulf states can be understood through this lens; the arms sales, military ties, joint training and exercises, and day-to-day interactions between U.S. and Gulf Cooperation Council (GCC)

38. We thank Christopher Snyder for the insight linking the business strategy of vertical integration to the state strategy of acquiring equity oil. On the link between imperfect contracting and vertical integration, see Oliver E. Williamson, “The Vertical Integration of Production: Market Fail- ure Considerations,” American Economic Review, Vol. 61, No. 2 (May 1971), pp. 112–123; Julan Du, Yi Lu, and Zhigang Tao, “Contracting Institutions and Vertical Integration: Evidence from China’s Manufacturing Firms,” Journal of Comparative Economics, Vol. 40, No. 1 (2012), pp. 89–107, doi:10.1016/j.jce.2011.10.002; and the related discussion in Sanford J. Grossman and Oliver D. Hart, “The Costs and Beneªts of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy, Vol. 94, No. 4 (1986), pp. 691–719. 39. Lisa M. Ellram, “Supply-Chain Management: The Industrial Organisation Perspective,” Inter- national Journal of Physical Distribution & Logistics Management, Vol. 2, No. 1 (1991), pp. 13–22; Arawati Agus, “The Signiªcant Effect of Information Sharing and Strategic Supplier Partnership Supplier Performance,” International Journal of Business & Management Science, Vol. 4, No. 1 (July 2011), pp. 75–92; Mark Barratt and Alexander Oliveira, “Exploring the Experiences of Collabora- tive Planning Initiatives,” International Journal of Physical Distribution & Logistics Management, Vol. 31, No. 4 (2001), pp. 266–289; and Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of Marketing, Vol. 58, No. 3 (July 1994), pp. 20–38. 40. Richard Lamming, “Supplier Relationship Management,” in Michael Eßig, ed., Perspektiven des Supply Management: Konzepte und Anwendungen [Perspectives of supply management: Concepts and applications] (Berlin: Springer, 2005), p. 83 (emphasis in original). 41. Thomas Y. Choi and Janet L. Hartley, “An Exploration of Supplier Selection Practices across the Supply Chain,” Journal of Operations Management, Vol. 14, No. 4 (November 1996), pp. 333–343.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 181

ofªcials are designed to give U.S. ofªcials access to key Bahraini, Emirati, Kuwaiti, Qatari, and Saudi ofªcials who make decisions that affect the United States.42 Not only do countries seek inºuence with supplier governments, but they seek leverage over the ªrms that pump, transport, and reªne the oil they need. In some cases, they create NOCs and encourage them to buy equity stakes in foreign oil. Those long-term investments create ties to producer governments. Countries also build national tanker ºeets, to ensure that their own ships could carry oil to the homeland if necessary. Japan, for example—completely dependent on imported oil—transports 90 percent of that oil on Japanese-owned tankers.43 In addition to these deliberate actions to build inºuence, countries with large domestic markets possess inherent inºuence over private ªrms. Even the powerful international oil companies (IOCs) are susceptible to pressure from the governments that ultimately regulate their access to key markets or (in extreme cases) could freeze or even nationalize assets. diversiªcation. A second key strategy for mitigating input vulnerability is diversiªcation. The business literature offers countless cautionary tales of ªrms that depended on single suppliers and suffered stalled production when disruptions occurred. For example, when a 2007 earthquake damaged Riken Corporation’s piston manufacturing line, Toyota endured costly production delays. When a ªre damaged a semiconductor plant in Albuquerque, New Mexico, Ericsson’s cellphone assembly lines came to a halt.44 Firms protect themselves by diversifying their supplier networks and, ideally, sourcing their supplies from multiple regions.45 The logic of diversiªcation applies to states as well. Countries diversify their suppliers, their transportation methods, and, in some cases, the transport routes that carry key supplies to their shores. Chinese NOCs, for example, have been developing ties with a growing number of oil exporters, especially

42. One can debate whether these expenditures for inºuence yield sufªcient beneªt to warrant the costs. For critical views of U.S. policy toward the Gulf, see Gholz and Press, “Protecting the Prize”; and Gholz and Press, “Footprints in the Sand.” 43. “Petrodollars: China Builds Up Its Tanker Fleet,” Platts, August 18, 2014, http://blogs.platts .com/2014/08/18/china-oil-tankers/. 44. Chozick, “A Key Strategy of Japan’s Car Makers Backªres”; and Almar Latour, “Trial by Fire: A Blaze in Albuquerque Sets Off a Major Crisis for Cell Phone Giants,” Wall Street Journal, January 29, 2001. 45. On diversiªcation in supply chain management, see Brian Tomlin, “On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks,” Management Science, Vol. 52, No. 5 (2006), pp. 639–657, doi:10.1287/mnsc.1060.0515; Yimin Wang, Wendell Gilland, and Brian Tomlin, “Mitigating Supply Risk: Dual Sourcing or Process Improvement?” Manufacturing & Service Operations Management, Vol. 12, No. 3 (2010), pp. 489–510, doi:10.1287/msom.1090.0279; and David Simchi-Levi et al., “Identifying Risks and Mitigating Disruptions in the Automotive Supply Chain,” Interfaces, Vol. 45, No. 5 (October 2015), pp. 375–390, doi:10.1287/inte.2015.0804.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 182

those with weak political relationships with the United States. They have been building oil pipelines from Russia and Central Asia, partly to reduce China’s reliance on sea-based trade. In the aftermath of Russian and Ukrainian dis- putes about natural gas in 2005 and 2009, European countries (e.g., France, Germany, and Poland) built liquid natural gas terminals at their ports to reduce reliance on Russian gas pipelines.46 In addition, efforts to diversify energy sources and transport routes have played a major role in negotiations over the Trans-Caspian Gas Pipeline and the Nord Stream pipeline in Europe. inventories. Firms and states also create inventories to reduce the risks of supply disruptions. Maintaining large inventories is expensive because they tie up capital and create storage costs, but having stockpiles allows ªrms to maintain production even if inputs are temporarily interrupted.47 Similarly, countries around the world have amassed stockpiles of oil.48 The U.S. government, for example, controls a strategic petroleum reserve (SPR) containing roughly 700 million barrels of oil. Most U.S. allies have government-controlled stocks as well, which combined roughly match the U.S. stockpile. And in addition to government-controlled oil, many countries host oil stocks owned by locally based oil ªrms, which keep inventories for normal commercial reasons (e.g., to protect against supply delays or hedge against future price increases).49 Privately owned stocks can be enormous (in the U.S. case, they dwarf the SPR); and in many countries, they are mandated and explicitly in- corporated into government emergency stockpile plans.50 security. Finally, ªrms and countries try to enhance the security of overseas assets and transport routes. Firms operating in violent regions often hire private security to protect their personnel, facilities, and supply lines.51 Similarly, states deploy military forces abroad to safeguard critical economic infrastructure, keep pirates from harassing transport routes, and prevent other states from severing supply lines. The United States is the most active country in this

46. International Energy Agency, “Energy Policies of IEA Countries, Poland 2011 Review” (Paris: International Energy Agency, 2011). 47. See Donald Waters, “Inventory Management,” in Ann Brewer, Kenneth John Button, and Da- vid A. Hensher, eds., Handbook of Logistics and Supply-Chain Management (New York: Pergamon, 2001), pp. 195–212; and John J. Coyle et al., Supply Chain Management: A Logistics Perspective (Ma- son, Ohio: Cengage Learning 2009). 48. Amy Myers Jaffe and Ronald Soligo, “The Role of Inventories in Oil Market Stability,” Quar- terly Review of Economics and Finance, Vol. 42, No. 2 (2002), pp. 401–415. 49. For a discussion of the logic of commercial inventories, and its strengths and weaknesses as a tool for mitigating shocks, see Gholz and Press, “Protecting the Prize.” 50. Eugene Gholz and Daryl G. Press, “All the Oil We Need,” New York Times, August 20, 2008. 51. See Stuart Reid, Armies of the East India Company, 1750–1850 (London: Osprey, 2009); and on contemporary Chinese ªrms in Africa and the Middle East, see Andrew Erickson and Gabe Col- lins, “Enter China’s Security Firms,” Diplomat, February 21, 2012, https://thediplomat.com/2012/ 02/enter-chinas-security-ªrms/.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 183

regard. For example, it relies on forward-based military forces to protect Saudi and Kuwaiti oil facilities from possible Iranian strikes; air and naval forces to thwart attacks on tanker trafªc near the Strait of Hormuz; and naval forces operating continuously near the world’s other key sea-lanes to deter and, if necessary, thwart attacks on shipping.52

the beneªts of energy mercantilism The four C’s make countries vulnerable to three types of energy disruptions: oil shocks, embargoes, and blockades. The risk of oil shocks (i.e., sudden drops in the global availability of oil) is high because contracts are difªcult to enforce and because the oil industry is geographically concentrated, organized in a cartel, and located in a region prone to conºict. The collusive nature of the oil industry elevates the risk of embargoes, and the weakness of contract enforcement prevents suppliers from protecting themselves via antitrust lawsuits, long-term purchase agreements, or futures contracts. Finally, states worry about the possibility of blockade. Countries understand that their vital resources are vulnerable as they cross the seas, where pirates and hostile navies could interdict their ships.53 The four energy mercantilist strategies (inºuence/control, diversiªcation, inventories, and security) reduce the likelihood and consequences of shocks, embargoes, and blockades. For two of those strategies, the beneªts are straightforward. Inventories insulate their owners (indeed all consumers around the world) from oil shocks, and they protect their owners from embargoes and blockades. Military forces (“security”) patrol sea-lanes, escort tankers through dangerous waters, and could confront naval forces conducting a blockade. Countries also improve their energy security through diversiªcation. They diversify their overall energy portfolio (e.g., among oil, gas, coal, nuclear, and renewables) to reduce their vulnerability to speciªc disruptions. They diversify their means of bringing home foreign-sourced energy; a diversiªed portfolio of sea-based imports and pipelines reduces vulnerability. Pipelines also create relationships of mutual dependence, which complicate efforts to carry out embargoes. Because pipelines are inherently inºexible (they can carry sup-

52. On U.S. capabilities to protect oil facilities in the Persian Gulf, see Shifrinson and Priebe, “A Crude Threat.” For an assessment of the risks to tanker trafªc through the Persian Gulf, see Talmadge, “Closing Time”; and Gholz, “The Strait Dope.” 53. Hughes and Long, “Is There an Oil Weapon?”; Jeff D. Colgan, “Fueling the Fire: Pathways from Oil to War,” International Security, Vol. 38, No. 2 (Fall 2013), pp. 147–180, doi:10.1162/ ISEC_a_00135; Charles L. Glaser, “How Oil Inºuences U.S. National Security,” International Secu- rity, Vol. 38, No. 2 (Fall 2013), pp. 112–146, doi:10.1162/ISEC_a_00137; and Mirski, “Stranglehold.”

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 184

plies only along a determined route), they make it costly for any energy ex- porter to participate in an embargo against a customer at the other end of a pipeline. Building inºuence with those that supply oil—the governments of oil- producing states, the ªrms that pump and process oil, and the transport companies that move it—can mitigate the danger of supply shocks. First, it may persuade oil-producing states not to create an oil disruption in the ªrst place. The United States cultivated close ties with major oil producers in the Persian Gulf in part to avoid a replay of the 1973 oil shock.54 Second, if a shock occurs (e.g., a conºict or natural disaster reduces some producers’ output), countries that have inºuence may persuade unaffected producers to increase their output, offsetting the elevated prices rather than enjoying the windfall. Note that Saudi Arabia increased production to reduce the price spike caused by the outbreak of the 1980–88 Iran-Iraq War, and after Iraq’s invasion of Kuwait, rather than reap the beneªts of higher prices.55 Third, in- ºuence over an oil-producing government or ªrm may secure preferential protection from a shock, encouraging it to comply with existing contracts rather than renegotiating at the new, higher price (or putting the oil on the spot market for the highest bidder). Inºuence also protects countries against oil embargoes. Successful embargoes depend on near-universal compliance, because even a few noncompliant producers can keep most importers ºush with oil. Maintaining close ties with several oil-producing states may be enough to protect a country from an oil cutoff. Similarly, control over the NOCs that produce oil, and the tankers that transport it, may be essential to break an embargo. Without such control, if an adversary wields inºuence over the world’s major tanker companies, then even if producer countries are willing to break the embargo, the target country may have no way to bring the oil home. Even in the case of blockade, a country’s inºuence over major oil producers can be critical. For example, if the United States considered enacting an oil blockade against China, the views of Saudi Arabia and the other major oil exporters would carry great weight. If Saudi Arabia and other OPEC producers did not support the measure, they could force the U.S. Navy to board and seize their tankers—a costly step for the United States (and one that could expose it to a major, retaliatory oil shock.) One might doubt the extent to which inºuence can affect producer decisions, particularly in circumstances like supply shocks. If a ªre disrupts North

54. Yergin, The Prize. 55. Gholz and Press, “Protecting the Prize,” pp. 466–470.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 185

Sea production and global oil prices rise, will the Saudi government not do what is in its own best interest—namely, set Saudi oil production to maximize revenue? In fact, ªrms’ practice of supplier relations management, and the entire ªeld of diplomacy, is predicated on the idea that relationships, and the inºuence they create, matter. Fifty years of U.S. policy toward the GCC states rest on the view that relationships with their counterparts in Bahrain, Qatar, and so forth pay off in a wide range of policy decisions. To assume that none of this matters is to conclude that none of those practitioners understand how their counterparts make decisions. Thus, energy mercantilism encompasses a broad set of policies that governments adopt to secure access to energy supplies. Although establishing NOCs and purchasing foreign oil stakes attract the greatest attention, a wide range of policies fall under the energy mercantilist rubric, including establishing close relationships with producers, diversifying sources and transport routes, maintaining stockpiles, and projecting military power to provide security. The logic of energy mercantilism is sound, but are countries actually em- ploying these policies—as a coordinated effort—for the purposes we have identiªed? After all, the same policies that make sense for energy mercantilist reasons could be driven by domestic political dynamics, such as rent-seeking or interest group politics.56 In the following section, we explore the actions of one country whose energy policies have triggered great controversy—China— and look for evidence for the motivations behind those policies.

Energy Mercantilism in Practice: The Case of China

China’s energy policies have attracted attention and debate.57 As Chinese NOCs expanded abroad in search of equity oil, liberal critics declared these policies irrational in a free-market, globalized world.58 Scholars have

56. Krasner, Defending the National Interest. 57. For discussion of Chinese activities, see Tom Hancock, “China Encircles the World with One Belt, One Road Strategy,” Financial Times, May 4, 2017; Shivshankar Menon, “The Unprecedented Promises—and Threats—of the Belt and Road Initiative” (Washington, D.C.: Brookings Institution, April 28, 2017); John Moody, “China’s Silky Threat to American Leadership,” Fox News, May 13, 2017; William J. Norris, Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Con- trol (Ithaca, N.Y.: Cornell University Press, 2016), chap. 4; Elizabeth C. Economy and Michael Levi, By All Means Necessary: How China’s Resource Quest Is Changing the World (Oxford: Oxford Univer- sity Press, 2014); Øystein Tunsjø, Security and Proªt in China’s Energy Policy: Hedging against Risk (New York: Columbia University Press, 2013); Downs, “The Chinese Energy Security Debate”; Houser, “The Roots of Chinese Oil Investment Abroad”; and Kenneth Lieberthal and Mikkal E. Herberg, “China’s Search for Energy Security: Implications for U.S. Policy” (Seattle, Wash.: National Bureau of Asian Research, April 2006). 58. Kirshner, “The Cult of Energy Insecurity and the Crisis of Energy Security”; Nye, “The Wrong Way of Thinking about Oil”; and Chen Shaofeng, “Has China’s Foreign Energy Quest En-

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 186

therefore searched for domestic explanations for China’s puzzling behavior. One view holds that Chinese interest groups use energy security rhetoric to lobby their government for cash and diplomatic support. In this view, China’s navy employs “pseudo-national interest-arguments” to lobby for budgetary share;59 NOCs urge the government to subsidize oil deals they favor for commercial reasons; shipbuilders and steelmakers lobby for a Chinese tanker ºeet; and construction ªrms and local governments push for pipelines.60 Other scholars explain China’s energy policies by pointing to Chinese Communist Party rent-seeking.61 Indeed, authoritarian governments in general, and the Party in particular, engage in rent-seeking, despite multiple stages of reform toward greater privatization and efªciency in the state sector.62 Although interest-group politics and rent-seeking undoubtedly affect China’s energy policy, we ask three sets of questions: Does China face high de- grees of input uncertainty, and do Chinese analysts and policymakers recognize these risks? Is China undertaking the policies that the energy mercantilist explanation would expect, and do Chinese ofªcials explain their policies as a response to energy security risks? Finally, have these policies reduced China’s vulnerability to foreign energy disruptions?

hanced Its Energy Security?” China Quarterly, September 2011, pp. 600–625, doi:10.1017/ S0305741011000671. 59. Tunsjø, Security and Proªt in China’s Energy Policy, chap. 5. 60. The proªtability of upstream activities was discussed in Jennifer Lind interview with Herberg, September 2009. See also Xin Ma and Philip Andrews-Speed, “The Overseas Activities of China’s National Oil Companies: Rationale and Outlook,” Minerals & Energy, Vol. 21, No. 1 (2006), pp. 17– 30, doi:10.1080/14041040500504343. For arguments that NOCs rather than the government are driving Chinese policies, see Jiang and Sinton, “Overseas Investments by Chinese National Oil Companies”; Zha Daojiong, “China’s Energy Security: Domestic and International Issues,” Sur- vival, Vol. 48, No. 1 (Spring 2006), p. 182, doi:10.1080/00396330600594322; Jacqueline Newmeyer, “Chinese Energy Security and the Chinese Regime,” in Moran and Russell, Energy Security and Global Politics, pp. 188–210; Ma and Andrews-Speed, “The Overseas Activities of China’s National Oil Companies”; and Erica S. Downs, “Who’s Afraid of China’s Oil Companies?” in Carlos Pascual and Jonathan Elkind, eds., Energy Security: Economics, Politics, Strategies, and Implications (Washington, D.C.: Brookings Institution Press, 2010), pp. 73–102. On the politics of pipelines, see Andrew S. Erickson and Gabriel B. Collins, “China’s Oil Security Pipe Dream: The Reality, and Strategic Consequences, of Seaborne Imports,” Naval War College Review, Vol. 63, No. 25 (Spring 2010), p. 93. 61. On rent-seeking, see James M. Buchanan, Robert D. Tollison, and Gordon Tullock, eds., Toward a Theory of the Rent-Seeking Society (College Station: Texas A&M Press, 1980); and David A. Lake, “Powerful Paciªsts: Democratic States and War,” American Political Science Review, Vol. 86, No. 1 (March 1992), pp. 24–37. 62. Susan L. Shirk, The Political Logic of Economic Reform in China (Berkeley: University of Califor- nia Press, 1993); and Steven Cheung, The Economic System of China (Beijing: CTIC, 2009). On Chi- nese economic reform and state-owned enterprises, see Minxin Pei, China’s Trapped Transition: The Limits of Developmental Autocracy (Cambridge, Mass.: Harvard University Press, 2008); and An- drews-Speed, “Do Overseas Investments by National Oil Companies Enhance Energy Security at Home?” p. 20.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 187

china’s energy uncertainty All major oil importers have reason to worry about potential energy disruptions caused by the industry’s imperfect contracting, collusion, geographic concentration, and the Gulf region’s propensity for conºict. China, however, faces greater threats to its energy supplies than do other major importers. In one important respect, China’s energy portfolio is quite favorable; its vast coal resources satisfy most of its industrial and residential energy demands. China’s oil consumption, however, is growing, as is the share of oil that it imports.63 Three additional factors heighten China’s vulnerability: the country’s weak inºuence in major oil-producing regions, the propensity of its potential adversaries to use oil as a weapon, and its weak military capability to defend its oil supply chain—from the well, through its pipelines, or at sea. Viewed from Beijing’s perspective, the Persian Gulf region is a hub of U.S. inºuence. The United States has cultivated close commercial and diplomatic ties with the major Gulf oil producers since the ªrst days of oil exploration in the region. And over the past two decades, Washington transformed what were once largely political and economic ties into major military partnerships, characterized by arms sales, exercises, and continuous U.S. military deploy- ments throughout the region. In addition to those key relationships, the United States and most other major oil importers (but not China) are members of the International Energy Agency, which helps members coordinate responses to supply shocks. Several major European oil importers have their own long- cultivated ties to Gulf producers. Equally important, the Europeans—along with U.S. Asian allies—can rely on the United States to manage affairs in the Gulf in a fashion intended to protect shared energy interests. By comparison, China is alone. It has weaker diplomatic relations with the major Gulf states, no signiªcant military presence in the region, and no powerful ally to promote Beijing’s interests. China’s concerns about energy access are compounded by the frequency with which the United States uses oil as a weapon. Just since the end of the Cold War, the United States has helped orchestrate a crippling United Nations–sanctioned embargo on Iraq (1990); enacted sanctions (with the European Union) against Sudan targeting the country’s oil industry; imposed sanctions (with the EU) on Libya that targeted its oil companies and banks (2011); and led the global effort to sanction Iran—speciªcally targeting its oil and banking sectors (2012). Furthermore, China need not look at foreign countries’ experiences to appreciate the U.S. government’s propensity to employ

63. Downs, “The Chinese Energy Security Debate”; and Mikkal Herberg and David Zweig, “China’s ‘Energy Rise’” (Los Angeles, Calif.: Paciªc Council on International Policy, April 2010).

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 188

embargoes and blockades. Following the 1989 Tiananmen uprising, the United States cut off arms and munitions trade, military exchanges, and other commercial ties with China. Leaders in Beijing would thus not be paranoid to worry that if conºict were to erupt, the United States might target China’s energy supply lines—indeed, U.S. defense and foreign policy elites frequently discuss that approach.64 Finally, China is highly vulnerable to blockade. It imports 60 percent of its oil, 90 percent of which is transported by sea.65 Its navy has little ability to protect itself from sophisticated air or submarine attacks away from China’s coast, so China has limited ability to protect tankers or break a blockade on the high seas. Furthermore, China’s energy supply chain crosses oceans controlled by the U.S. Navy. In sum, China faces the same risks as every country that relies on supplies from an industry that is concentrated, collusive, contractually challenged, and prone to violence. But unlike other major importers, such as Japan, South Korea, and the United Kingdom, China has weak inºuence, no powerful allies, limited military capabilities, and adversaries that target oil when con- ºicts occur. Chinese analysts and policymakers recognize these dangers. Some Chinese experts argue that the chance of coercive tools being applied against China is low given China’s central role in the global economy and its deep interdependence with the United States.66 Nevertheless, China’s growing dependence on imported energy supplies, and the existence of ºash points with U.S. allies and partners, have created profound concerns among many Chinese elites. Those elites, note Andrew Erickson and Lyle Goldstein, “generally perceive a substantial naval threat to China’s oil SLOCs [sea lines of communication].” One

64. Stephen Biddle and Ivan Oelrich, “Future Warfare in the Western Paciªc: Chinese Antiaccess/ Area Denial, U.S. AirSea Battle, and Command of the Commons in East Asia,” International Secu- rity, Vol. 41, No. 1 (Summer 2016), pp. 7–48, doi:10.1162/ISEC_a_00249; Hughes and Long, “Is There an Oil Weapon?”; Mirski, “Stranglehold”; Collins et al., China’s Energy Strategy; and Aaron L. Friedberg, A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia (New York: W.W. Norton, 2012). The Chinese government’s concerns are enhanced because the Chinese Com- munist Party, facing growing levels of discontent among Chinese citizens, relies on economic growth as a pillar of its legitimacy. See Robert S. Ross, “The Problem with the Pivot,” Foreign Af- fairs, Vol. 91, No. 6 (November/December 2012), https://www.foreignaffairs.com/articles/asia/ 2012-11-01/problem-pivot; and Norris, Chinese Economic Statecraft,p.70. 65. Du Juan, “Nation Weighs Shipping System for Oil Imports,” China Daily, March 22, 2012. 66. See Zha, “China’s Energy Security”; Zha Daojiong, “Oiling the Wheels of Foreign Policy? En- ergy Security and China’s International Relations” (Singapore: S. Rajaratnam School of Interna- tional Studies, Nanyang Technological University, March 2010); and Jia Qingguo and Richard Rosecrance, “Delicately Poised: Are China and the U.S. Headed for Conºict?” Global Asia, Vol. 4, No. 4 (Winter 2010), pp. 72–81.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 189

Chinese analyst, Zhang Wengmu, argues, “It is not difªcult for the West to ªnd a pretext to impose sanctions on China.”67 Liu Jiangping and Feng Xianhui warn, “China’s sea-lanes can be cut off at any time.”68 Chinese analysts worry about an oil shock stemming from an OPEC-orchestrated supply cut, or terrorism, or a U.S.-Iran conºict near the Strait of Hormuz.69 More pointedly, they highlight the history of the United States and Russia using sanctions against China, going back to the founding of the People’s Republic. In 1949, the United States enacted sanctions against the new Chinese state, leading China to rely on the Soviet Union for vital imports.70 When Sino-Soviet relations soured in the early 1960s, the Soviets severed trade ties, causing energy shortages and economic disruption across China.71 Chinese writers suggest that these two experiences created an appreciation of China’s vulnerability that has lingered for generations—akin to Western memories of the 1970s’ oil shocks. In interviews, Chinese analysts also mentioned the U.S. refusal to sell China grain during that country’s famine in the 1970s, and allege that the United States pressured Australia and Canada to follow suit. Chinese leaders, notes Kent Calder, have been “sobered by [Russia’s] use of both oil and natural gas as a geo-political lever...[against] the Ukraine, Moldova, and even Belarus.”72 It is certain

67. Andrew Erickson and Lyle Goldstein, “Gunboats for China’s New ‘Grand Canals’? Probing the Intersection of Beijing’s Naval and Oil Security Policies,” Naval War College Review, Vol. 62, No. 2 (Spring 2009), pp. 43–76, at p. 55; Zhang Wenmu, “Sea Power and China’s Strategic Choices,” China Security, Summer 2006, p. 22; and the discussion in Tunsjø, Security and Proªt in China’s Energy Policy, chap. 5. 68. Quoted in Robert S. Ross, “China’s Naval Nationalism: Sources, Prospects, and the U.S. Re- sponse,” International Security, Vol. 34, No. 2 (Fall 2009), pp. 46–81, at p. 70, doi:10.1162/ isec.2009.34.2.46. Chinese fears are not conªned to a U.S. threat. See John Lee and Charles Cull, “China and India’s Growing Energy Rivalry,” Businessweek, December 16, 2010, https://www .hudson.org/research/7573-china-and-india-rsquo-s-growing-energy-rivalry; and “U.S.-Indian Alliance against China,” editorial, Ming Pao, August 17, 2005. 69. Sheng Kang, “Chinese Oil Security in an Instable Africa,” China Academic Journal, November 2005, pp. 37–41; F.Q. Zhou, “Rethinking the Security of China’s Oil Supply,” John Shi, trans., China Oil Economy, Vol. 13, No. 1 (January 2005), p. 34, http://www.cnki.net; Gholz, “The Strait Dope”; and Talmadge, “Closing Time.” These are not China-speciªc concerns; such concerns were raised by government ofªcials, policy analysts, and scholars whom we interviewed in Seoul and Tokyo in November 2009 and March 2010. 70. The United States sanctioned China after the 1949 Mutual Defense Assistance Act (i.e., the “Battle Act”) and during the Korean War (when it also pressured its allies not to trade with China). On memories of such sanctions, see Guy C.K. Leung, “China’s Energy Security: Perception and Reality,” Energy Policy, Vol. 39, No. 3 (March 2011), p. 1332, doi:10.1016/j.enpol.2010.12.005. 71. Arthur Jay Klinghoffer, “Sino-Soviet Relations and the Politics of Oil,” Asian Survey, Vol. 16, No. 6 (June 1976), pp. 540–552; and Kim Woodard, The International Energy Relations of China (Stan- ford, Calif.: Stanford University Press, 1980), p. 52. 72. Kent E. Calder, “Sino-Japanese Energy Relations: Prospects for Deepening Strategic Competi- tion,” report of “Japan’s Contemporary Challenges” conference, Yale University, New Haven, Connecticut, March 9–10, 2007, p. 14.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 190

that they have noted the economic effects of the U.S. and EU sanctions against Iran.73 Finally, Chinese ofªcials and policy analysts are aware of their country’s vulnerability to a blockade. Expressing a common view, analysts Liu and Feng write: “China’s economic cooperation with developing countries . . . has also rapidly increased in recent years, mainly due to our strong internal demand for energy sources and raw materials from there. All these economic comings and goings depend on ocean transportation.”74 Zhang Wenmu is explicit about the resulting dangers: “China is almost helpless to protect its overseas import oil routes. This is an Achilles heel to contemporary China, as it has forced China to entrust its fate (stable markets and access to resources) to others.”75 Many Chinese analysts discuss the “Malacca Dilemma,” the fact that most trade headed to China (particularly oil from the Persian Gulf) passes through the Strait of Malacca, a waterway frequently patrolled by the U.S. Navy.76 “Most of China’s oil imports come from the Middle East and Africa,” observes Li Chengyang, who concludes that “[g]iven the current situation in the Malacca Strait, we feel that we should come up with a suitable alternative.”77 The fears of many Chinese analysts about Malacca are summarized by Shi Hongtao: U.S. naval capabilities in and near the Strait “will enable the United States to seize geopolitical superiority, restrict the rise of major powers, and

73. Mark Landler and Clifford Krauss, “Gulf Nations Aid U.S. Push to Choke Off Iran Oil Sales,” New York Times, January 12, 2012. 74. Quoted in Ross, “China’s Naval Nationalism,” p. 70. 75. Zhang, “Sea Power and China’s Strategic Choices.” On perceptions of China’s vulnerability in the sea-lanes, see ZhongXiang Zhang, “China’s Energy Security, the Malacca Dilemma, and Re- sponses,” Energy Policy, Vol. 39, No. 12 (December 2011), pp. 7612–7615, doi:10.1016/j.enpol .2011.09.033; Shaofeng Chen, “China’s Self-extrication from the ‘Malacca Dilemma’ and Implica- tions,” International Journal of Chinese Studies, Vol. 1, No. 1 (2011), pp. 1–24; Wu Lei and Shen Qinyu, “Will China Go to War over Oil?” Far Eastern Economic Review, Vol. 169, No. 3 (April 2006), p. 40; Bruce Blair, Chen Yali, and Eric Hagt, “The Oil Weapon: Myth of China’s Vulnerability,” China Se- curity, Summer 2006, pp. 32–63; Pak K. Lee, “China’s Quest for Oil Security: Oil (Wars) in the Pipe- line?” Paciªc Review, Vol. 18, No. 2 (June 2005), pp. 286–288, doi:10.1080/09512740500162949; “U.S.- Indian Alliance against China”; and Ni Lexiong, “Sea Power and China’s Development,” Libera- tion Daily, April 17, 2005, http://www.sciso.org/Article/Scholar/stratagem/NiLexiong/200609/ 217.html. 76. Zhang Yuncheng, “The Malacca Strait and World Oil Security,” Huanqiu Shibao (newspaper), December 5, 2003; Shi Hongtao, “China’s ‘Malacca Straits,’” Qingnian Bao (newspaper), June 15, 2004; Lee, “China’s Quest for Oil Security”; and (in Chinese) Lin Yun, “The Dragon’s Arteries,” Modern Ships, October 2006, pp. 8–19. 77. Quoted in Phar Kim Beng, “China Mulls Oil Pipelines in Myanmar, Thailand,” Asia Times (online), September 23, 2004. Many analysts echo those fears: China faces “grave risks in transportation,” according to Shaofeng Chen, “Motivations behind China’s Foreign Oil Quest: A Perspective from the Chinese Government and the Oil Companies,” Journal of Chinese Political Science, Vol. 13, No. 1 (2008), p. 85.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 191

control the ºow of the world’s energy.” He declares, “[W]hoever controls the Strait of Malacca will also have a stranglehold on the energy route of China.”78

chinese energy mercantilism China’s leaders have adopted the full range of energy mercantilist policies. China has expanded its “going out” policy (of encouraging Chinese ªrms to invest in foreign ventures, particularly in the energy sector) into the sweeping “Belt and Road Initiative”—a plan to increase connectivity, trade, and Chinese inºuence throughout Asia.79 Equity oil shares and service contracts deepen Chinese ties with oil producers and increase Beijing’s inºuence with foreign suppliers. China is diversifying the sources of its inputs, the means of oil transport, and even the grades of oil that its NOCs can reªne. It is expanding its inventories to help the country ride out disruptions, and it is increasing its ability to secure foreign energy supplies by enhancing its military capabilities. control and inºuence. China is seeking greater control and inºuence over suppliers—both the countries that export oil and the ªrms that pump, transport, and reªne it. Chinese leaders have held state visits with leaders from key oil-producing countries to facilitate energy deals, offering loans to ªnance infrastructure construction and other projects.80 As a result of this di-

78. Shi, “China’s ‘Malacca Straits.’” Malacca is not the vital choke point it is sometimes made out to be; several alternative shipping routes—deep enough for even the biggest oil tankers—add only modestly to the distance of Persian Gulf–China shipping routes. These analysts’ broader conclusion is, however, correct: the U.S. military can control all the plausible maritime approaches to East Asia. See Hughes and Long, “Is There an Oil Weapon?”; Mirski, “Stranglehold”; and Eugene Gholz and Daryl G. Press, “Enduring Resilience: How Oil Markets Handle Disruptions,” Security Studies, Vol. 22, No. 1 (February 2013), pp. 139–147, doi:10.1080/09636412.2013.757167. 79. The Belt and Road Initiative includes ªnancial, diplomatic, and cultural undertakings, but em- phasizes energy and infrastructure projects. See Richard Ghiasy and Jiayi Zhou, “The Silk Road Economic Belt” (Stockholm: Stockholm International Peace Research Institute, 2017); William T. Wilson, “China’s Huge ‘One Belt, One Road’ Initiative Is Sweeping Central Asia,” National Interest, July 27 2016, http://nationalinterest.org/feature/chinas-huge-one-belt-one-road-initiative-sweeping-central-17150; Peter Cai, “Understanding China’s Belt and Road Initiative” (Sydney, Australia: Lowy Institute for International Policy, March 22, 2017); and Xuming Qian, “The ‘One Belt, One Road’ Strategy and China’s Energy Policy in the Middle East” (Washington, D.C.: Middle East In- stitute, May 20, 2015). 80. Norris, Chinese Economic Statecraft, chap. 4; Economy and Levi, By All Means Necessary, chap. 4; Ting Shi, “How China Is Building Ties in the Middle East,” Bloomberg News, January 25, 2016, https://www.bloomberg.com/news/articles/2016-01-25/what-xi-s-iran-trip-tells-us-about-china- s-middle-east-plans; “China’s President Xi Visits Saudi Arabia to Improve Ties,” BBC News, Janu- ary 19, 2016, http://www.bbc.com/news/world-middle-east-35351391; Juan Forero, “China’s Oil Diplomacy in Latin America,” New York Times, March 1, 2005; Chris Alden, China in Africa (Lon- don: Zed, 2007); and David Zweig and Bi Jianhai, “China’s Global Hunt for Energy,” Foreign Affairs, Vol. 84, No. 5 (September/October 2005), https://www.foreignaffairs.com/articles/asia/ 2005-09-01/chinas-global-hunt-energy.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 192

plomacy, by 2013 Chinese NOCs had signed an estimated $150 billion in oil- for-loan deals with several countries (Angola, Bolivia, Brazil, Ecuador, Ghana, Kazakhstan, Russia, and Venezuela). Chinese loans, aid, and arms deals “sweeten bids for oil concessions.”81 In fact, China frequently structures loans to oil producers so that they are repaid in oil at whatever the prevailing price is at the time of repayment. Those deals, as William Norris notes, therefore hedge against supply disruptions rather than price ºuctuations.82 As China strengthens its ties with producer countries, it increases its in- ºuence over the companies that pump, transport, and reªne the oil. Chinese NOCs, supported by Beijing, have made major overseas acquisitions, including majority stakes in Enchana Oil (Ecuador), Petro-Canada, PetroKazakhstan, Udmurtneft (Russia), and a controlling interest in the Yadavaran oil ªeld in Iran, as well as minority (yet substantial) stakes in the energy sectors of Indonesia, Nigeria, Sudan, and Uganda.83 In addition to those purchases, Chinese NOCs have signed joint ventures that link their fortunes to IOCs and foreign NOCs. PetroChina is partnering with Saudi Aramco to build a jointly owned reªnery complex in Yunnan Province, and with Qatar Petroleum to build a $12 billion reªnery in Zhejiang. Meanwhile the other major Chinese NOC, Sinopec, signed a deal with Aramco for a jointly owned reªnery in Saudi Arabia. Sinopec has also partnered with Exxon and Aramco to build a reªnery in Fujian Province, and it is negotiating at least two other similar deals (with Kuwait and Venezuela).84 Finally, China’s government is encouraging the construction of a ºeet of Chinese-owned and Chinese-ºagged oil tankers, as part of a policy referred to as goiu, goin (Chinese oil, Chinese tankers). Whereas about a decade ago only 10 percent of China’s oil imports arrived via Chinese-owned vessels, that ªgure has risen to 40 to 50 percent; Chinese leaders hope that by 2020,

81. Zweig, “‘Resource Diplomacy’ under Hegemony,” p. 8; and Downs, “The Chinese Energy Security Debate,” p. 30. For data on Chinese aid and loans linked to overseas energy deals, see U.S. Energy Information Administration, “China,” analysis brief (Washington, D.C.: U.S. Energy Infor- mation Administration, May 14, 2015); and Jiang and Sinton, “Overseas Investments by China’s National Oil Companies,” p. 41, table 2. 82. Norris, Chinese Economic Statecraft,p.82. 83. For a list of Chinese energy deals since 2002, see Jiang and Sinton, “Overseas Investments by China’s National Oil Companies,” annex 1. Such efforts have not been conªned to oil: Chinese ªrms have engaged in a broader effort to secure rights to natural resources and minerals overseas. See Howard W. French, “The Next Empire,” Atlantic, May 2010, https://www.theatlantic.com/ magazine/archive/2010/05/the-next-empire/308018/; and Alden, China in Africa. 84. See “King Salman and China President Launch YASREF Reªnery in KSA,” Oil Review Middle East, January 24, 2016; Chen Aizhu, “CNPC, Shell, Qaar to Push for $12.6 bln China Reªnery,” Reuters, January 19, 2012; Anthony DiPaola, “Aramco, PetroChina to Build 200,000 Barrel China Reªnery,” Bloomberg, March 21, 2011; and “PetroChina, Shell, Qatar Agree to Build Reªnery in Zhejiang,” Bloomberg, October 13, 2011.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 193

the ªgure will rise to 60 to 70 percent.85 According to Gabriel Collins, “In peacetime, [the tanker ºeet] will operate for proªt. Yet, in an oil crisis, state- owned vessels would stand ready to be pressed into service.”86 diversiªcation. China is diversifying its energy suppliers, reªning capability, and transportation routes. A major goal of this effort is to reduce its reliance on the Persian Gulf. According to Shaofeng Chen, “China feels it is a greatrisk...toplace overreliance on [the Middle East] in view of the long- term instability there.”87 In particular, Chinese NOCs have focused their investments in energy-producing countries that have relatively weak political and commercial ties to the United States—places such as Kazakhstan, Russia, Sudan, and Venezuela. At the same time, China is broadening its reªning capacity, allowing its oil companies to efªciently reªne a broader range of crude—from “light, sweet” to “heavy, sour” oil. Although there may be multiple motivations driving China’s choice of energy partners and its need for diversiªed reªning capabilities,88 Chinese analysts and ofªcials talk openly about the danger of overreliance on the Gulf; according to Shaofeng Chen, China’s diversiªcation efforts accelerated after the U.S. invasion of Iraq.89 One industry analyst comments, “They don’t want to put all their eggs in one bas- ket, like in the Middle East or in any particular region. So they are trying to secure diversiªed supplies from different parts of the world, and Central Asia is pretty crucial to that.”90 Finally, China is diversifying its oil transportation routes. It has developed overland pipelines that avoid the Strait of Malacca and reduce China’s de-

85. “Petrodollars”; Gabriel Collins, “China Seeks Oil Security with New Tanker Fleet,” Oil & Gas Journal, October 9, 2006, http://www.ogj.com/articles/print/volume-104/issue-38/general- interest/china-seeks-oil-security-with-new-tanker-ºeet.html; Juan, “Nation Weighs Shipping Sys- tem for Oil Imports”; Meng-di Gu and Shou-de Li, “China Seeks Security through Fleet Expan- sion,” Oil & Gas Journal, December 8, 2008, http://www.ogj.com/articles/print/volume-106/ issue-46/transportation/china-seeks-oil-security-through-ºeet-expansion.html; Gabriel B. Collins and Andrew S. Erickson. “Tanking Up: The Commercial and Strategic Signiªcance of China’s Growing Tanker Fleet,” Geopolitics of Energy, Vol. 29, No. 8 (2007), pp. 2–11; and Collins and Erickson, “Chinese Efforts to Create a National Tanker Fleet,” p. 84. 86. Collins, “China Seeks Oil Security,” p. 20; and Tunsjø, Security and Proªt in China’s Energy Policy, chap. 5. 87. Chen, “Motivations behind China’s Foreign Oil Quest,” p. 81. 88. China’s energy investment choices may also be shaped by China’s status as a latecomer to the industry; by IOCs’ efforts to block Chinese attempts to enter well-established markets; and by restrictions that other countries impose on business ties with oil producers that are accused of sup- porting terrorism or violating human rights. See Houser, “The Roots of Chinese Oil Investment Abroad”; Zha Daojiong and Hu Weixing, “Promoting Energy Partnership in Beijing and Washing- ton,” Washington Quarterly, Vol. 30, No. 4 (Autumn 2007), pp. 109–110, doi:10.1162/wash.2007 .30.4.105; and Amy Myers Jaffe and Steven W. Lewis, “Beijing’s Oil Diplomacy,” Survival, Vol. 44, No. 1 (Spring 2002), p. 127. 89. Chen, “Motivations behind China’s Foreign Oil Quest,” p. 81. 90. Peter Kiernan, quoted in Shek, “China Plays for Energy in New Great Game.”

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 194

pendence on sea-based transport more generally. Relative to shipping oil, pip- ing oil costs more and provides less ºexibility. Still, Chinese energy companies have built several major international pipelines, including the Eastern Siberia– Paciªc Ocean route for Russian oil, and the Chinese-Kazakh and the Chinese- Turkmen pipelines that carry oil from Central Asia to China. Other routes are being developed, such as an oil pipeline from Myanmar to Yunnan Province, in southwestern China; and another from Gwadar, Pakistan, to Urumqi, China.91 As part of its effort to bypass Malacca, the Chinese government is also pursuing closer ties with the countries that have ports along the Southeast Asian sea-lanes; the so-called string of pearls strategy would allow Beijing to build more pipelines—from one side of Thailand to the other—to avoid the narrow naval choke points.92 “An energy imports cutoff enforced during hostile conditions may trigger a rapid collapse of China’s economy and paralyze its military forces,” notes China Daily, “hence One Belt One Road and spe- ciªcally the Gulf pearl chain which includes all the six GCC countries as well as Iraq and Iran would be a major breakthrough to reduce its dependence on SLOCs.”93 inventories. China is developing a government-controlled strategic petroleum reserve to insulate itself from short-term disruptions in oil markets.94 It is constructing its SPR in three phases, with the goal being the capacity to store 500 million barrels by 2020.95 Low oil prices during phase 2 of the process led to a buying spree that resulted in the SPR doubling in size from 2014 to 2015, at which time it reached 191 million barrels.96 China’s government has not re- vealed the rate at which it can draw oil from storage, but an examination of reªnery capacity near its dozen SPR sites puts that ªgure at approximately 3 million barrels per day, and perhaps higher.97 In addition to its government-

91. Erickson and Collins, “China’s Oil Security Pipe Dream”; Emmanuel Karagiannis, “China’s Energy Security and Pipeline Diplomacy: Assessing the Threat of Low-intensity Conºicts,” Har- vard Asia Quarterly, Vol. 12, Nos. 3–4 (2010), pp. 54–60; and “Russia-China Oil Pipeline Opens,” BBC News, January 1, 2011, http://www.bbc.co.uk/news/world-asia-paciªc-12103865. 92. Glain, “Yet Another Great Game”; James R. Holmes and Toshi Yoshimura, “China’s Naval Ambitions in the Indian Ocean,” in Collins et al., China’s Energy Strategy, p. 125; and Bill Gertz, “China Builds Up Strategic Sea Lanes,” Washington Times, January 17, 2005. 93. Sumedh Anil Lokhande, “China’s One Belt One Road Initiative and the Gulf Pearl Chain,” China Daily, June 5, 2017. 94. David Pietz, “The Past, Present, and Future of China’s Oil Strategy,” in Collins et al., China’s Energy Strategy, p. 56; and Carolyn Cui, “China Seen Bolstering Oil Reserves,” Wall Street Journal, April 11, 2012. 95. U.S. Energy Information Administration, “China,” p. 18. 96. Oceana Zhou, “China May Apply Brakes to Strategic Oil Reserve Growth,” Platts,De- cember 15, 2015, https://www.platts.com/latest-news/oil/singapore/china-may-apply-brakes- to-strategic-oil-reserve-27051432. 97. A blockade that interrupted all 8 million barrels of sea-based imports to China would free up an equivalent amount of Chinese reªning capacity. China likely located its SPR facilities such that

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 195

controlled stocks, China’s NOCs maintain their own inventories, which as of 2015 totaled approximately 350 million barrels.98 Between the SPR sites and the NOC inventories, China has roughly 500 million barrels of oil in stockpiles, which it can likely pump and reªne at a rate of 4 to 5 million barrels per day. security. China is gradually increasing its ability to secure its imports. Its military modernization efforts have been well documented.99 In particular, China is improving its air and naval forces, extending its military reach throughout East Asia, and taking steps toward a future in which it can stop others from harassing shipping—or controlling the sea-lanes—throughout the region. China’s newest surface ships have improved air defenses, enhancing their ability to operate away from the Chinese coast. Its military is also developing systems for striking targets at sea and throughout East Asia (e.g., long- range radars, satellites, and unmanned aerial vehicles to ªnd and track targets; and ballistic missiles, cruise-missiles, submarines, and aircraft to strike them).100 China’s other principal means of importing oil—overland pipeline—is also becoming more secure, as China deploys advanced air defense systems not only along the coast but throughout the country. The motivations for China’s military modernizations are surely broader than its concerns about energy security. But within China, the need for military muscle in the sea-lanes is frequently offered as an important rationale for naval modernization efforts. As one Chinese scholar noted, “The fact that China’s future energy supply is overly dependent on the sea lanes and the fear that the U.S. might cut them off...drives much of Beijing’s modernization of its navy.”101 A survey of China’s ofªcial navy journal reveals intense concerns about energy vulnerabilities caused by Chinese naval inferiority.102 Robert Ross analyzes the fears and political forces that have driven the Chinese government to invest heavily in enhancing China’s naval power, and concludes that energy insecurity is a frequent and critical argument made by China’s “naval nationalists.”103 He quotes numerous Chinese analyses that connect

the oil could be transported to the reªneries whose operations would be halted by overseas oil disruptions. 98. U.S. Energy Information Agency, “China,” p. 18. 99. See, for example, Evan B. Montgomery, “Contested Primacy in the Western Paciªc: China’s Rise and the Future of U.S. Power Projection,” International Security, Vol. 38, No. 4 (Spring 2014), pp. 115–149, doi:10.1162/ISEC_a_00160; Eric Heginbotham et al., The U.S.-China Military Scorecard: Forces, Geography, and the Evolving Balance of Power, 1996–2017 (Santa Monica, Calif.: RAND, 2015); Friedberg, A Contest for Supremacy; and Ross, “China’s Naval Nationalism.” 100. On China’s military buildup and the U.S. response, see Heginbotham et al., The U.S.-China Military Scorecard; and Montgomery, “Contested Primacy in the Western Paciªc.” 101. Wu Lei, quoted in Gabriel Collins, Andrew S. Erickson, and Lyle J. Goldstein, “Chinese Naval Analysts Consider the Energy Question,” in Collins et al., China’s Energy Strategy, p. 300. 102. Ibid., p. 301. 103. Ross, “China’s Naval Nationalism,” p. 69.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 196

China’s energy insecurity with its need for enhanced naval power “to guarantee reliable and secure energy supplies”; to be able to “break an American blockade”; and to counter U.S. dominance in the Malacca Strait.104 In sum, China is pursuing a wide range of policies that are consistent with the logic of energy mercantilism, and Chinese ofªcials and analysts often explain these policies by pointing to threats to the country’s energy security. As one industry journal noted, “China seems determined to consolidate its grip on as much of the oil and gas chain as possible, including buying up overseas production assets, strengthening transport links with bigger tanker ºeets and networks of pipelines and building liqueªed natural gas terminals and storage tanks.”105 In addition to those efforts is China’s military modernization program. China is not merely dabbling in energy mercantilism; it is using a wide range of policy tools to secure the ºow of resources upon which its economy and military depend.

the results of china’s energy mercantilism Mercantilist policies have signiªcantly reduced China’s vulnerability to energy disruptions, particularly in the event of an embargo or blockade of China’s oil imports.106 First, China’s joint ventures with foreign NOCs and IOCs, such as the partnership between PetroChina and Saudi Aramco to build a major reªnery complex in China, make it costly for countries to join an anti-China embargo. It would be hard for Saudi Arabia, for example, to support an embargo against China if doing so would deny oil to the Saudis’ own reªneries and potentially expose Aramco to the nationalization of a multibillion-dollar illiquid investment.107 Second, Beijing’s overseas investments, particularly its development of mar- ginally proªtable oil ªelds in several countries, would complicate efforts to embargo China. Table 1 lists seven oil producers with which China has nur- tured political and commercial relations and that frequently take independent (if not adversarial) positions vis-à-vis the United States. As the table indicates, those seven states export more than 13 million barrels of oil per day. China’s daily oil imports are only approximately 9 million barrels. As a result, China could secure every barrel of oil it needs unless most of the countries

104. Quoted in ibid., p. 70. 105. “China Taking a Firmer Grip on Energy Transport,” Alexander’s Gas and Oil Connections, March 6, 2006, http://www.gasandoil.com/news/2006/03/cns61268. 106. Energy mercantilist policies could also help China by preventing oil shocks and mitigating their consequences. In China’s case, however, these efforts are probably unnecessary, because the United States exercises inºuence with major oil producers to prevent and mitigate shocks. 107. On the frequent nationalization of private oil assets, see examples in Yergin, The Prize, pp. 455, 583–584.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 197

Table 1. China’s Axis of Oil

Exports (millions of barrels per day) Angola 1.7 Iran 1.3 Kazakhstan 1.3 Nigeria 2.3 Russia 5.1 Sudan 0.15 Venezuela 1.5 Total 13.35

SOURCE: World Factbook 2014 (Washington, D.C.: Central Intelligence Agency 2014).

listed in table 1 joined an embargo—an unlikely occurrence.108 (Moreover, the amount of global exports from countries that are politically independent of the United States may grow in coming years, as Iran’s exports increase.) China’s energy mercantilism has also reduced Chinese vulnerability to blockades.109 China cannot eliminate the risk of blockade until it builds global military capabilities on par with the United States, but energy mercantilist policies mitigate the danger. First, China’s “going out” efforts have raised the political costs of implementing a blockade. Its aid, diplomacy, and commercial ties to oil-producing countries complicate efforts to build international support for a blockade. In particular, China has tied its fortunes to Kuwait, Qatar, and Saudi Arabia by promoting joint ventures among Chinese and Persian Gulf– based NOCs. Those projects include major new reªneries jointly owned by the Chinese and Gulf ªrms, with long-term commitments to buy their oil from their Gulf parent state. A U.S. blockade would therefore not merely squeeze Beijing; it would prevent Kuwaiti, Qatari, and Saudi NOCs from shipping oil to their own reªneries. Before the United States chose to impose a blockade, it would need to soothe its Persian Gulf partners’ frustration over the lost in- come, over the risk that their investments in China might be nationalized (if they appeared to be cooperating with the blockade), and over the indignity of

108. Data from Energy Information Administration 2014 averages, http://www.eia.gov/beta/ international/analysis.cfm?isoϭCHN. 109. Critics have argued that China securing energy resources overseas makes no sense because of the risk of blockade; in a conºict, the U.S. Seventh Fleet stands in the way of getting those oil supplies home. See Biddle and Oelrich, “Future Warfare in the Western Paciªc”; Hughes and Long, “Is There an Oil Weapon?”; and Glaser, “How Oil Inºuences U.S. National Security.” As Xin Ma and Philip Andrews-Speed argue, “Equity oil can increase a country’s oil security only if it is a major military power. The country must have sufªcient maritime power to control the sea-lanes over which the oil is shipped.” See Gabriel Collins, “Over a Barrel: China’s Foreign Policy and Energy Security,” Geopolitics of Energy, Vol. 27, No. 7 (July 2005), p. 14.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 198

having their exports blockaded by the ally that has for decades railed at them for using oil as a weapon. Second, a national tanker ºeet reduces China’s vulnerability to a blockade.110 The Chinese government could order those ships to resist efforts to interdict them, forcing the U.S. Navy to board or disable each vessel at sea. For the United States, an ideal blockade is bloodless: one in which the tankers simply turn around because their owners fear their ships will be seized or their insur- ers demand prohibitive premiums. A ºeet of Chinese tankers, however, could deny the United States an easy victory and turn every encounter in international waters into a ªreªght, perhaps leaving tankers damaged and leaking oil. As Israel discovered in 2010, when it interdicted a ºotilla of ships that sought to break its blockade of Gaza, boarding ships at sea and ªghting people onboard who appear to be civilians can cause substantial political fallout.111 The alternative to boarding ships—torpedoing tankers at sea—might send oil spewing into the ecologically rich, and economically valuable, ecosystems of the South China Sea. The simple step of creating a national tanker ºeet thus raises the costs to those who might blockade Chinese oil. Third, and perhaps most important, China’s diversiªcation and inventory policies would substantially reduce its vulnerability should a blockade occur. China’s investment in pipelines has slightly reduced its dependence on sea- based trade; out of China’s 9 million barrels per day of imports, approximately 10 percent comes by pipeline.112 China’s stocks of oil, however—counting its SPR and the oil controlled by Chinese NOCs—can fully replace sea-based imports for approximately three months. And because most of China’s oil consumption is for transportation, simple adaptations during a crisis—for example, restrictions on personal car travel, and calls for patriotic Chinese to walk or bicycle—could reduce China’s oil consumption, enabling its inventories to last even longer. As long as China has a weak navy and relies on the seas for critical imports, it remains vulnerable to a blockade. Energy mercantilism, however, has raised the costs and reduces the effectiveness of a counter-China blockade. Seen as part of a long-term strategy, these policies provide a buffer in case China faces

110. On the Chinese tanker ºeet, see Tunsjø, Security and Proªt in China’s Energy Policy, chap. 5. 111. Isabel Kershner, “Deadly Israeli Raid Draws Condemnation,” New York Times, May 31, 2010; and Isabel Kershner, “Israel and Turkey in Talks over Deadly Flotilla Raid,” New York Times, May 6, 2013. More broadly, blocking oil bound for China would not be simple. See Gabriel B. Collins and William S. Murray, “No Oil for the Lamps of China?” in Collins et al., China’s Energy Strategy, pp. 387–407. 112. China consumes approximately 12 million barrels of oil a day from all sources—domestic production and imports—which constitutes 20 percent of all energy consumed in China. Sea- based imports, therefore, account for roughly 14 percent of China’s energy.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 199

coercive attacks in the near term, while Beijing strengthens its ties to major energy exporters and enhances its naval power in coming decades. In sum, scholars have viewed Chinese energy mercantilism as a puzzling anachronism in this age of free-market globalization, and they have explained the supposedly misguided policies with domestic-level arguments. They at- tribute energy policies to different domestic rationales. For example, many analysts explain China’s acquisition of foreign oil assets as rent-seeking by the Beijing elite. Local governments and heavy industry, favoring infrastructure spending, advocate pipeline construction. NOCs build oil stockpiles for price hedging. And the politically inºuential PLA, joined by heavy industry, pushes for expanded naval capabilities. Even China’s strategic petroleum reserve can be explained without reference to energy mercantilism: as a hedge against future price increases in response to market ºuctuations. Each of these explanations undoubtedly contains some truth—no major policy has a single rationale—but the energy mercantilism lens provides a parsimonious explanation for all of these disparate policies. As the case study reveals, the energy mercantilism explanation diagnoses the dangers that China faces in the same terms as do China’s analysts and leaders, and it recommends the very policies they are adopting.

Critique and Discussion

The energy mercantilism framework expects governments to engage in a vari- ety of policies to secure their access to key energy inputs. Critics might argue, however, that energy mercantilist policies do not make sense because, in a time of crisis, IOCs and NOCs will protect their own corporate interests (and in the case of IOCs, their shareholders) rather than some abstract concept of national interest. In fact, during the 1973 OPEC crisis, U.S.-based IOCs imple- mented the embargo against the United States,113 and British Petroleum Chairman Eric Drake is said to have rebuffed the personal request of Prime Minister Edward Heath for preferential treatment for British customers. Ac- cording to these critics, the policies of energy mercantilism make no sense given the long-standing “battle between minister and manager” in the oil industry, and the fact that managers will pursue their ªrm’s interest, not the state’s.

113. Saudi Arabia warned U.S. oil companies that if they violated the embargo they “would be harshly dealt with.” Yergin sympathizes with the ªrms that were caught in the middle: “[W]hat choice did [they] have? . . . [They] could lose their entire position in the Middle East.” Yergin, The Prize, p. 621.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 200

Although IOCs and even some NOCs have substantial independence during normal conditions, when crises occur, ministers generally trump managers. For example, in the lead-up to World War II, the U.S. government persuaded executives from Standard-Vacuum (Stanvac), a major U.S.-based oil company operating in the Dutch East Indies, to cooperate with the U.S. embargo of Japan—even though doing so put Stanvac in the middle of the brewing U.S.-Japan conºict. In fact, if the Japanese invaded the East Indies, Stanvac executives agreed to destroy their company’s own oil wells and reªnery to prevent them from falling into Japanese hands.114 Even in the 1973 OPEC crisis, the power of managers has been exaggerated. The story of British Petroleum’s Drake rebufªng Prime Minister Heath is a fabrication: Drake actually agreed to give the United Kingdom preference, on the condition that his cooperation be kept secret. For decades, scholars treated this as a case of manager triumph- ing over minister, when in fact it was the reverse.115 Winston Churchill would have been proud: having a British company as an industry leader in the Persian Gulf achieved exactly what he had wanted: oil supplies for the United Kingdom at a time of crisis. More recently, governments have applied substantial pressure on locally based companies—even in countries with strong traditions of private property and rule of law. After the terror attacks of September 11, 2001, the U.S. government exerted substantial inºuence over telecommunications and internet security ªrms to gain access to their data—in some cases, in contravention of the law. One ªrm that refused to comply found its lucrative government contract canceled.116 Ministers are not only masters in the realm of national security; during the 2008 ªnancial crisis, Treasury Secretary Henry Paulson informed the chief ex- ecutive ofªcers of the nine largest U.S. banks that he wanted to meet with them the very next day at the U.S. Treasury—an act that in itself demonstrates the balance of power between the U.S. government and the country’s most powerful ªrms. At the meeting Paulson dictated the terms of a deal to them, in which the banks would each sell the government hundreds of billions of dol- lars of preferred stock, and the government would guarantee some of the

114. Yergin, The Prize,p.311. 115. Drake said that the deception was necessary because British Petroleum would be “in awful trouble” if “our successful under-the-counter measures” to give preferential access to U.K. buyers “become known.” See James Bamberg, British Petroleum and Global Oil, 1950–1975: The Challenge of Nationalism (Cambridge: Cambridge University Press, 2000), p. 483 116. Nicole Perlroth, Jeff Larson, and Scott Shane, “N.S.A. Able to Foil Basic Safeguards of Privacy on Web,” New York Times, September 6, 2013; Ellen Nakashima and Dan Eggen, “Former CEO Says U.S. Punished Phone Firm,” Washington Post, October 13, 2007; and Ellen Nakashima, “Verizon Says It Turned Over Data without Court Orders,” Washington Post, October 16, 2007.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 201

banks’ debt and expand deposit insurance on some accounts. When some of the executives objected, Paulson bluntly told them, “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”117 During the crisis, the Treasury Department also bullied Bank of America into acquiring Merrill Lynch, despite the latter’s catastrophic liabili- ties. According to his testimony, Paulson warned Bank of America that it would make the acquisition or “the government either could or would remove the Board or management.”118 To be clear, major corporations are not political weaklings. During serious crises, however, when powerful governments need cooperation from locally based companies, the ministers trump the managers. If the United States found itself in a shooting war with China, it is not hard to imagine either Washington demanding that U.S. corporations help isolate China or Beijing taking the reins of its quasi-independent NOCs to help China secure access to vital energy supplies.

Conclusion

Energy mercantilism, though criticized as irrational in a globalized world, is based on sound logic. Just as ªrms manage their supply chains, states actively protect their access to key inputs from foreign disruptions. Firms are particularly concerned when they depend on inputs from industries beset by imperfect contracting, collusion, geographic concentration, and conºict. Those same conditions magnify states’ concerns about access to oil supplies. Furthermore, the policies that states adopt to mitigate threats to their critical imports mir- ror the actions that ªrms take to ensure access to key inputs: cultivating relationships with major suppliers; vertically integrating; diversifying suppliers; building large inventories; and protecting their foreign assets. In short, energy mercantilism, often derided as reºecting a naïve understanding of global markets, is based on how the globalized economy actually works. Energy mercantilism is savvy supply chain management. China has employed energy mercantilist policies to great effect. It has cultivated relationships with countries that are important energy exporters; established nationally controlled companies in key positions in its supply chain; diversiªed its suppliers and transportation routes; and boosted inventories to

117. “Paulson Forced Banks to Take TARP Money: Documents,” CNBC.com, May 14, 2009; and Mark Landler and Eric Dash, “Drama behind a $250 Billion Banking Deal,” New York Times, Octo- ber 14, 2008, www.nytimes.com/2008/10/15/business/economy/15bailout.html. 118. Paulson testiªed that he issued the threat on behalf of Federal Reserve Chairman Ben Bernanke. See William D. Cohan, “An Offer He Couldn’t Refuse,” Atlantic, September 2009, p. 70.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 202

hedge against disruptions. It also is building military capabilities to defend its foreign supply lines. These steps have puzzled many analysts, partly because they have viewed elements of these efforts in isolation (rather than as part of a broader effort), and because in normal circumstances these policies yield few beneªts. Beijing’s mercantilist policies, however, reduce China’s vulnerability to energy shocks or coercion by an adversary targeting China’s energy sector. These arguments have three implications. First, China’s energy policies, which are sometimes cast as unusual and hostile, are neither. By drawing attention to the wide range of energy mercantilist activities (for example, not only overseas acquisitions, but also diversiªcation, diplomacy, inventories, and security), we highlight that many countries, including the United States, engage in energy mercantilism.119 China’s behavior appears more reasonable when recognized as a common practice. Washington’s energy mercantilism is less obvious than Beijing’s, but that is because the United States already has what China desires—close ties to major oil producers; great inºuence over many of the world’s IOCs; and a large strategic petroleum reserve. By developing the logic of energy mercantilism, we shed light on Beijing’s motivations as it struggles to develop energy security and on the role of energy in the developing U.S.-China competition. Second, this article highlights an overlooked dimension in the changing strategic balance between the United States and China: a decline in U.S. coercive leverage, notably, with respect to the oil weapon.120 Against an adversary whose geographic size, large population, and nuclear arsenal make decisive war impossible except in the gravest circumstances, coercive capabilities are key. But in the event of a war, U.S. instruments for coercing China are all prob- lematic: air attacks against strategic targets in China are highly escalatory; cyberattacks run the risk of counterattacks against the United States’ own vulnerabilities; and ªnancial sanctions are implausible given China’s central role in the global economy.121 And now, China’s energy mercantilism is neutralizing the U.S. oil weapon.

119. Flynt Leverett, “Resource Mercantilism and the Militarization of Resource Management: Ris- ing Asia and the Future of American Primacy in the Persian Gulf,” in Moran and Russell, Energy Security and Global Politics, pp. 211–242. On Indian equity oil, see Uttam Kumar Sinha and Shebonti Ray Dadwal, “Equity Oil and India’s Energy Security,” Strategic Analysis, Vol. 29, No. 3 (July 2005), pp. 521–529. On Japan’s efforts to increase its equity oil, see Hisane Misake, “Japan’s Quest for Bigger Oil,” Asia Times (online), April 3, 2007; and Tsutomu Toichi, “Japan’s Response to Its New Energy Security Challenges,” in Mikkal E. Herberg et al., eds., Adapting to a New Energy Era: Maxi- mizing Potential Beneªts for the Asia-Paciªc (Seattle, Wash.: National Bureau of Asia Research, 2014), pp. 29–38. 120. On the changing military balance, see Biddle and Oelrich, “Future Warfare in the Western Paciªc”; Montgomery, “Contested Primacy in the Western Paciªc”; and Heginbotham et al., The U.S.-China Military Scorecard. 121. On the risk of escalation from conventional strikes, see Joshua Rovner, “AirSea Battle and Es-

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 Markets or Mercantilism? 203

The erosion of the oil weapon is not merely the loss of one arrow in the U.S. quiver; Washington is losing an important military option.122 Two decades ago, China was vulnerable to U.S.-led sanctions or to a crippling blockade by the Seventh Fleet. But today, Beijing could order its Chinese-ºagged tankers to run the blockade, requiring the U.S. Navy to resort to force against the civilian vessels and their crews. Beijing might launch air and missile attacks against blockading surface ships; it could rally its partners among exporting nations to protest the U.S. action; it could appeal to Russia to boost ºow rates through its overland pipeline; and it could release oil from its reserves to replace lost barrels. China’s energy policies have made a naval blockade more difªcult, and they reduce a blockade’s bite. What can the United States do to respond to China’s energy mercantilism? At this point, Washington can do little to directly counter Beijing’s policies for insulating its energy imports from foreign pressure. Attempting to deny China’s energy ªrms key exploration or extraction technologies is a non- starter; China’s oil companies already have the technology they need. Nor can the United States prevent China from expanding its tanker ºeet, or increasing its petroleum reserves. Washington could try to use diplomacy to block Beijing’s efforts to negotiate pipeline deals or purchase agreements, but as discussed earlier, China has sought partnerships with countries that have poor relations with Washington. The only area in which the United States can directly thwart Beijing’s energy mercantilism is in the military domain: Beijing’s efforts to build the military capability to protect its far-ºung energy assets and transportation routes. In that domain, the United States still has the upper hand and is working hard to retain it. Rather than directly counter China’s energy mercantilism, the United States will likely respond in two other ways. It will invest heavily in offensive cyber capabilities, to provide Washington with an alternative option for wartime coercion. In addition, the U.S. military will hone its capabilities to conduct other kinds of wartime energy interdiction, such as air strikes in western China against pipelines or attacks against China’s rail network (that transports coal). China’s success at neutralizing a key U.S. coercive tool will thus force U.S. military planners to explore alternatives that are more costly for Washington and possibly more dangerous for both countries.

calation Risks” (San Diego: Institute on Global Conºict and Cooperation, University of California, San Diego, 2012); and Caitlin Talmadge, “Would China Go Nuclear? Assessing the Risk of Chinese Nuclear Escalation in a Conventional War with the United States,” International Security, Vol. 41, No. 4 (Spring 2017), pp. 50–92, doi:10.1162/ISEC_a_00274. 122. On a U.S. blockade of China, see Montgomery, “Reinforcing the Front Line”; Hammes, “Off- shore Control Is the Answer”; Kline and Hughes, “Between Peace and the Air-Sea Battle,” pp. 35– 41; and Mirski, “Stranglehold.”

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021 International Security 42:4 204

Finally, this article has broader implications for the global economy. Since 2016, political analysts and scholars have expressed shock at the sudden rise of nationalism in the United States and Europe, and the assault on the liberal international order by populist and far-right leaders. Only a few years ago, liberalism seemed ascendant. How did the political landscape change so quickly? This article suggests that mercantilism and nationalism have been alive and well throughout the post–World War II era. It is telling that the United States, arguably the world’s leading proponent of free-market liberalism, is also the world’s champion at energy mercantilism—not merely preparing for possible disruptions to its supplies, but preparing to sever adversaries’ access to energy, as Washington has done repeatedly. Viewed through this lens, there appears to be an instrumental underpinning to U.S. support for open markets—namely, that such support depends on old-fashioned calculations about power and narrow national interest. The point is not that there is hypocrisy in the world—that states espouse liberalism while following la raison d’état—though that is also true. The point is that economic liberalism, a force that many hope will pacify international politics, may not be the dominant political ideology of the twenty-ªrst century, as it appears on the surface. Today, as in the past, the notion that states can rely on markets to provide the critical supplies they need is, in Churchill’s words, “an open mockery.” The ongoing geopolitical maneuverings for access to oil would look entirely familiar to the architects of British policy nearly a century ago.

Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/isec_a_00310 by guest on 30 September 2021