China's Vulnerability Paradox: How the World’s Largest Consumer Transformed Global Commodity Markets (book excerpt)

Pascale Massot's new book finds China behaves as much in an unplanned as a structured way and provides an alternative lens through which to think about international Chinese economic behavior.

Today I’m sharing an excerpt from China's Vulnerability Paradox: How the World’s Largest Consumer Transformed Global Commodity Markets by Pascale Massot, an associate professor in the School of Political Studies at the University of Ottawa and former advisor to the Canadian government.

I came across the new book by way of her May 29, 2024 report A More Nuanced Lexicon: Heterogeneity, Vulnerability, and Uncertainty in China Studies at the Asia Society Policy Institute’s Center for China Analysis, where she argued

At a time when understanding China has become more critical than ever, it has become more difficult to do so. This is both because of real constraints, such as the increased difficulty of access given hardening outlooks on the Chinese side, as well as because of an atmosphere in the West that has made China less attractive as an object of study, inflicting a perceptible chill on China scholars.

To tackle this from a different angle, I propose a heuristic exercise to challenge three common frames that are often deployed in public discourse — at times implicitly — to describe China: “unity,” “power,” and “predictability.”¹ Instead, I suggest that we look at international Chinese government behavior through the frames of “heterogeneity,” “vulnerability,” and “uncertainty.” I hasten to add that these three frames should not be understood as mutually exclusive alternatives to more dominant frames but rather as additional ones. Indeed, in more ways than one, China is at once a unitary power and a heterogeneous one; it wields great power and exhibits serious vulnerabilities; its path ahead is to some extent predictable and to a large extent uncertain.

This heuristic exercise is deployed to deepen and diversify debates on China and to help challenge received wisdom on China policy. It should be useful no matter whether you think conflict with China is likely and unavoidable, or whether you think conflict with China is unlikely, avoidable, and highly undesirable. Challenging common frames can bolster our analytical acuity by making sure we perceive a challenge from all possible angles and do not neglect potentially promising avenues of reflection. Fostering open deliberation should be one of the West’s distinctive advantages and a foundational element of any debate regarding a future relationship with China.

Now on to her book published by Oxford University Press

Description

China's Vulnerability Paradox explains the uneven transformations in global commodity markets resulting from China's contemporary, dramatic economic growth. At times, China displays vulnerabilities towards global commodity markets because of unequal positions of market power. Why is it that Chinese stakeholders are often unable to shape markets in their preferred direction? Why have some markets undergone fundamental changes while other similar ones did not? And how can we explain the uneven liberalization dynamics across markets? Through a series of case studies, Pascale Massot argues that the balance of market power between Chinese domestic and international market stakeholders explains their behavior as well as the likelihood of global institutional change. At a time of deepening US-China economic tensions, this book provides an alternative, granular understanding of the interacting dynamics between the political economy of Chinese and global markets.

Reviews

"Pascale Massot has written a very carefully researched and conceptually innovative analysis of China's impact on commodity markets. She shows that the Chinese Communist Party's presence in the domestic economy does not lead to uniformly non-market outcomes. Rather competing interests within China have varying effects on external and internal markets" - sometimes these effects are even liberalizing ones. Massot's deep dive into the heterogenous nature and effects of these internal interests challenges the naive view in much discourse these days that the Communist Party imposes uniform preferences on all actors.” - Alistair Iain Johnston, Harvard University

"Why is China unable to effect desired changes in the global commodity market despite being the largest player? In this thorough and informative book on a topic pertinent to all countries, Pascale Massot unpacks the mix of domestic and international factors behind 'China's vulnerability paradox.' The author delivers valuable insights on the reach and limits of China's global influence." - Yuen Yuen Ang, Johns Hopkins University

"A clearly written, comprehensive analysis of one of the key aspects of China's rise in the last two decades" - its enormous impact on the global markets in iron ore, potash, and other commodities. This is an area where the country has risen to number one in a very quick time. Far from this demonstrating hegemonic characteristics, however, Pascale Massot's book illustrates China as a complex, often contradictory power, within a context in which its newly found dominance is also a source of constant stress and questions. This study sheds light on the nature of global markets, the ways in which China behaves as much in an unplanned as a structured way, the emerging structure of the global economy and the complex interaction between different state and non-state actors within the Chinese economy itself. Almost certain to become the standard work on this issue for the years ahead.” - Kerry Brown, Professor of Chinese Studies and Director, Lau China Institute, King's College, London

Pascale Massot is an associate professor in the School of Political Studies at the University of Ottawa. She is also non-resident Honorary Fellow, Political Economy at the Asia Society Policy Institute’s Center for China Analysis, and a Senior Fellow at the Asia Pacific Foundation of Canada.

In 2022, she was a member and adviser to the Co-Chairs of the Canadian Minister of Foreign Affairs’ Indo-Pacific Advisory Committee, which was tasked with providing recommendations to the Minister on the development of Canada’s Indo-Pacific strategy. She also served as the Senior Advisor for China and Asia in the offices of various Canadian Cabinet ministers, including the Minister of Foreign Affairs and the Minister of International Trade, between 2015 and 2017 and again between 2020 and 2021.

The following excerpt was chosen from the book by Pascale Massot.

Excerpted from CHINA’S VULNERABILITY PARADOX: How the World’s Largest Consumer Transformed Global Commodity Markets, by Pascale Massot, published by Oxford University Press. Copyright 2024

Introduction

(…) 

Solving the following three puzzles is thus the core motivation behind this book: Why, despite China’s rising salience in global commodity markets, are Chinese actors often in a position of vulnerability and unable to shape market institutions in their preferred direction? What explains the variation in China’s impact on global markets? In other words, why have some global commodity markets undergone fundamental changes in the way they operate as a result of China’s emergence while other similar markets have been more resilient? Finally, how can we explain the (uneven) liberalization dynamics across commodity markets, following China’s rise? My goal in this book is to explain the diverging global market outcomes resulting from the dramatic contemporary expansion of China’s economy. (p.6)

(…) 

China emerged as the number one importer of iron ore in the world in 2003, overtaking Japan. At the time, for fifty years until 2010, the global iron ore market had operated under a negotiated benchmark pricing regime. Prices were determined in annual benchmarking negotiations between the three main iron ore producers, BHP Billiton, Rio Tinto, and Vale, on one hand, and the Japanese importers, on the other. The pricing regime had enjoyed decades of stability. In 2006, Baosteel, the lead Chinese importer, took over the Japanese importers to negotiate the benchmark price with global suppliers for the first time. Over the next four years, prices saw a dramatic rise. By 2010, the negotiations had collapsed and the big three iron ore producers ushered in a quarterly and then a spot-pricing regime. Within five years from China taking over negotiations, the decades-old global iron ore benchmark pricing regime met a dramatic end. The position of market vulnerability on behalf of the Chinese iron ore market stakeholders in the face of powerful iron ore exporters led to chaotic behavior and the unintended liberalization of the global pricing regime.  (p.31)

(…)

At the time of China’s emergence as dominant consumer and importer of potash, the global potash market presented many similarities with the global iron ore market. It was heavily concentrated, had been stable for decades, and was home to a negotiated benchmark pricing regime. In the potash case, the emergence of China was followed by the fall of one of the two largest global marketing cartels, the Belarusian Potash Company, in 2013, and by some changes in the frequency of annual benchmark pricing negotiations. Overall, however, the benchmark pricing system survives until today (2023), with China as the lead benchmark price negotiator. The global pricing regime saw some liberalization movement but has shown more resilience than in the iron ore case. This chapter argues that the explanation lies in the balance of market power between Chinese domestic and global market stakeholders, especially the high level of market coordination by Chinese importers, at the interface with the global market. Indeed, China is home to a powerful group of importers, three (but really two) key state-owned entities control close to half of all imports, and it has carefully coordinated its procurement strategy, including its negotiation strategy with the world’s main potash exporters. (p.32)

(…)

The empirical focus in this book is global commodity markets and their systemically relevant consumers, but the conclusions point to broader patterns we can expect as China attempts to carve out a position of market power that is commensurate with its size in the global economy. (p.33)

(…)

The Argument: Market Power, Market Vulnerability, and Market Change

In this book, I trace key variation in China’s behavior and its impacts on global market institutions to the market power differentials between Chinese domestic and international market stakeholders. In so doing, the full picture is unveiled, from domestic variables to international-level outcomes. I argue that there is a causal relationship between relative market power—or the relative capacity of consumers and producers to coordinate behavior—and market institutional change at the global level. China’s impact on global market institutions and Chinese stakeholders’ capacity to influence global market outcomes are the result of the particular configurations of market power at Chinese domestic and international levels in each given market. 

At the time of China’s emergence, its domestic commodity markets varied: some were coordinated, others were fragmented. Likewise, global commodity markets significantly varied.

(…)

The book develops a two-level framework that identifies the circumstances under which global market institutional change is more likely to occur following the emergence of a new player (Table 1.1). Indeed, global market outcomes cannot be explained exclusively as the result of domestic or international dynamics but by their interaction. (p.7)

(…) 

Broader Debates

Here are a few implications of the framework presented in this book for our understanding of China’s impact on the global economy. The debate on the political economy of China’s rise and impact on the global economy has evolved from one where liberals argued that China should integrate into the global economy and realists argued that it would disrupt it, to one where both liberals and realists argue that China threatens open markets but they disagree on what to do about it. The evolution of this debate has hidden from view the very real ways in which power manifests in global markets, with and without China’s involvement. Positions of market power are the variegated terrain on which any emerging market stakeholders must operate. 

Being attuned to considerations of market power is also important when market power is lacking. Too often it is assumed that China’s largest impacts globally will result from a position of strength, whereas being in a position of vulnerability would lead China to have little impact or to integrate into existing global economic institutions. The cases studied in this book unveil a more complex array of possibilities. In the iron ore case, China’s position of market vulnerability led to the disruption of a long-lasting global market institution. Some of the largest impacts of China’s rise may be the unintended global consequences of domestic market power dynamics. In the potash case, China’s rise led to the unsettling of existing positions of market power. The argument here is not that China’s rise is replacing established positions of market power with something more benign. In the potash case, levels of concentration in the Chinese domestic potash market are high, and smaller potash stakeholders in China complain about the domestic oligopoly controlling the market. The point is that market power configurations are a fundamental feature of all global markets, that they vary from market to market, and that the emergence of a large new player will unsettle these power configurations in different ways, leading to unique patterns of global institutional change.

(…)

The sheer size of China’s push and pull on the global economy and the rapidity of its growth have had tremendous impacts on global commodity markets. For many commodity producers, this has been great news. But China’s rise has also created new uncertainties, including for policymakers concerned about its dominance over global markets, from supply crunches (rare earths) to over-production (steel). At a time of crucial debates about the future of the global economy, this book provides an alternative lens through which to think about international Chinese economic behavior. (p.17)

(…)

Unintended Consequences

A related insight yielded by this book’s findings is that some of the impacts of China’s rise we observe at the global level were not intended by the largest Chinese stakeholders. The outcomes of China’s rise globally vary only in part according to the preferences of leading Chinese SOEs, ministries, industry associations, central planning agencies, or private firms. The difficulty we face in parsing out the intended and unintended impacts of Chinese behaviour with regard to foreign markets stems in part from the fragmentation of its domestic political economy.

It is possible to arrive at better granular understanding of the process through which domestic Chinese dynamics translate into global outcomes, via careful tracing of a variety of stakeholder behaviors, both in China and internationally. To do so, it takes broader consideration of relevant stakeholders (than just the “main ones”), attentiveness to the presence of diverging preferences and awareness of interaction effects that can lead to unintended global outcomes. If there ever was a rationale for investing in a deeper knowledge of and familiarity with China and its various subnational private, semi-private, state-led, or party entities, this is it.

This insight not only has profound implications for our understanding of Chinese impacts on the world but also of policy prescriptions in response to Chinese patterns of behavior in various global issue areas. The importance of unintended outcomes should help us reframe arguments that take for granted the tendency not only for Chinese actors to articulate coherent long-term objectives in all areas of global economic import (what “China” wants) but also for Chinese stakeholders to then deliver the behaviors that would produce the intended outcomes and, even in this case, for the intended outcomes to happen at all, given the attendant interaction effects and resulting unpredictability. The unexpected nature of global outcomes actually presents the opportunity to bring more humility to discussions of resource security, supply chain vulnerabilities, and global market institutional design. (p.241)

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Problematizing the Concept of “Open Markets”

(…)

The current debate has evolved into one that is dominated by those who see China as threatening open markets, faced increasingly by some who argue that the United States is also undermining global market openness. 

As this book suggests, however, this is not a terribly satisfactory way to frame the debate. First, the argument that China’s rise has led to the undermining of openness is not the best way to describe the changes that have taken place, at least not in the cases studied here. To be sure, the argument that China has integrated into existing open market institutions is also unsatisfying. In both cases, the framing falls short because the markets China has been engaging with for the past decades were not best characterized as “open” to start with. The global iron ore market of the 2000s, when China rose to face it, was not best characterized as open, or “accessible, legitimate, and durable”, to borrow a phrase from Ikenberry (2008). Many global markets function under very high levels of industry concentration and coordination. When China emerged as the number one consumer in most of the commodity markets reviewed here, the top four companies controlled more than 50 percent of exports.

(…)

There is another aspect to the framing of global markets as open that China’s rise is leading us to ponder. There are normative assumptions embedded in the notion of market openness, whether openness is seen to be “good” as a means toward better outcomes, or as an end in itself. But the inescapable persistence of unequal power relations in global markets that were long touted as open poses a moral problem. The important insight is that global markets are never fully open, neutral grounds—whether prior to or following China’s emergence—and that power relations matter in our thinking about China and global markets. To think of global markets as open arenas that must be protected from China’s behavior frames the issue in an unproductive way, and this can have deleterious effects as we try to imagine global market institutions that have to adjust to a range of rising economies, and not just to China. Thinking about global markets and global market change in their myriad institutional manifestations helps us see global market design as a legitimate political and normative terrain, as opposed to the technical issue it is sometimes portrayed to be. In other words, bringing back market power relationships to the fore raises questions of institutional and distributive fairness, which have to be considered if (more) open global markets are to be considered an attractive proposition. (p.248)

Excerpted from CHINA’S VULNERABILITY PARADOX: How the World’s Largest Consumer Transformed Global Commodity Markets, by Pascale Massot, published by Oxford University Press. Copyright 2024