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 sup- plies. 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 de- velop 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 govern- ment 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 arti- cle, 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 International Security, Vol. 42, No. 4 (Spring 2018), pp. 170–204, doi:10.1162/ISEC_a_00310 © 2018 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. 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 mercan- tilism 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 ar- gues 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 en- hanced 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 over- seas 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 mer- cantilism.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 em- ployed 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 im- proved 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 en- ergy 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.