Will China Freeze America Out of the Arctic?

August 14, 2019 Topic: Security Region: Americas Tags: ChinaArcticRussiaEconomyXi Jinping

Will China Freeze America Out of the Arctic?

There are implications that China and other states will continue to participate in the Arctic economy. America is falling behind.

Even though the new DOD Policy correctly asserts that the Arctic is a venue for great power competition, in my opinion, most of the levers that the U.S. must play in the Arctic are economic and diplomatic; not military. Freedom of navigation (FON) operations to contest Russia’s establishment of operating rules through the NSR are much too little, too late, and frankly unlikely to garner support in the international maritime law community. Seasoned mariners understand that Russia has a legitimate interest (and some limited support in UNCLOS Article 234) to restrict traffic through the Arctic given the environmental sensitivity of the area, the lack of response capacity, and the extreme hazards of transiting through the remote and icy area except via an established route. Besides, the United States has previously restricted offshore maritime traffic off its Eastern seaboard to protect right whales and Washington State imposed unilateral rules (ultimately struck down by the U.S. Supreme Court) requiring only double-hulled tankers off its coast. These actions are in the same category as Russia’s actions vis-à-vis the NSR in terms of their strict compliance with UNCLOS. 

The United States has every right to expect that the NSR must be open to all seaworthy vessels and that the fees associated with transit reflect the actual costs of vessel services; however, simply stating that Russia (or Canada in the case of the NWP) cannot do anything to try and regulate traffic through these remote passages does not reflect the reality that these maritime passages have far greater than normal risks. Moreover, the United States needs to be cautious in swinging a big legal stick since many of the NSR regulations are designed to ensure the safety of navigation and that ships are adequately insured. These sorts of rules benefit the United States because an offshore accident in the Arctic Ocean can affect the U.S. homeland—the Arctic being essentially a closed sea means that a vessel’s oil spill in the Russian part of the Arctic Sea can easily reach the fish in the U.S. EEZ or wash up on Alaska’s shores. It is far better that the United States and Russia work collaboratively on the NSR since each has an equal interest in vessel safety and protection of the marine environment from pollution from vessels, oil and gas activities, mining, or an industrial accident. 

In my view, the continued expansion of the People’s Republic of China’s Belt and Road Initiative (BRI) throughout the Arctic is the more immediate concern. China can and likely will leverage its BRI investments to build political alliances to align against the United States, to potentially build military support installations, and to lock up future supplies of key natural resources. Even though the United States and Russia have parallel interests in the Arctic to retain political control over activities in the Arctic—since both have long coastlines and large offshore resources—China has been able to successfully exploit the freeze in U.S.-Russia relations and drive a political and economic wedge between the two countries. It certainly doesn’t help that Washington is so politically divided that the executive branch is politically prevented from trying to engage Russia constructively for fear that it will be accused of collusion with a totalitarian regime. Yes, Russia has major political issues, but both countries have large Arctic coastlines and lots of onshore and offshore resources. Working collaboratively is in both countries’ interests. 

The Impact of Chinese Money

The issue of unchecked Chinese foreign direct investment (FDI) is receiving increasing attention in military and policy circles. Senior military commanders have been sounding-off that Chinese FDI is destabilizing and threatening to traditional alliance structures. Former SOUTHCOM Commander Kurt Tidd’s 2018 posture statement before Congress decried the fact that China’s “commercial and diplomatic advances of moving it closer to its strategic goal of reshaping global economic and governances architectures” includes Latin America. Former CENTCOM Commander Gen. Joseph Votel stated that “we must be ready to compete with China…for regional influence” as they “threaten our vital national interests” and—referring to China’s BRI—their “burgeoning economic power could support and mask longer-term military and political objectives.” Finally, the Pacific Commander, Admiral Philip Davidson, strongly criticized China’s “pernicious approach” to its BRI for engaging in “debt trap” diplomacy by providing loans to countries for infrastructure projects (especially in the developing world), knowing they would be defaulted upon. 

The issue of Chinese investment in the Arctic was examined by CNA and the same sort of patterns as mentioned by U.S. military commanders are emerging. The Chinese FDI beachhead in Russia is well known; mainly in the Yamal oil and gas sector but it is expanding into minerals and infrastructure. Greenland is often thought of as the “battleground” for Chinese FDI because Greenlanders are thirsty for FDI, have lots of land and mineral wealth, and China has the cash to spend. Influential Chinese journals associated with the PLA label Greenland as the “strategic fulcrum” of the “Polar Silk Road.” This general concern applies in all Arctic littoral states including the United States, Canada, Finland, and Iceland.

Although Chinese investment in the Arctic is quite large, hard data is difficult to obtain. People can speculate over the actual extent of China’s inroads; however, Chinese firms have “attempted to purchase and invest in infrastructure of military significance, including an abandoned naval base in Gronnedal and three airports” in Greenland. The Central Danish government has blocked two of those transactions and there are very recent reports that China’s state-owned Communications Construction Company withdrew from consideration of a public offering to upgrade airports in Nuuk and Ilulissat; but, this level of Chinese activity—especially that which can be conducted “under the radar”—is likely to continue. 

The Diplomat reports that China is stepping up its mining interests in Greenland; especially rare earth minerals (REEs) in the Kvanefjeld Project in which China already controls upwards of 90 percent of the world’s extractive capacity. Beijing has twice threatened the United States and Japan to cut off of REEs as a politically retaliatory move. This particular example is illustrative of the types of problems the United States could confront in terms of being able to participate in regional economic development and in the development of ports and waterways that are free and open to the United States and other international shipping on a non-discriminatory basis. The same can also be said about recent transactions which are being tracked at CNA in the area of Chinese financed fiber optic cable projects in Finland and submarine cable service to Greenland—the Data Silk Road. 

Massive Infrastructure Demand

Estimates vary but as development in the Arctic brings more people, ships, and economic activity there will be increased needs for all forms of infrastructure including ports, railroads, navigational aids and dredging, pipelines and cargo terminals, and roads. The Polar Connection based out of London writes

The recent growth in infrastructure is no small or minor trend, with $300 billion in projects either completed, in motion or proposed in Russia alone . . . An inventory of planned, in-progress, completed and cancelled Arctic infrastructure projects compiled in 2016 by global financial firm Guggenheim tallies 900 projects, amounting to an estimated one trillion dollars of infrastructure investment over the next 15 years.

There is a continuing international demand for natural resources including hydrocarbons, metals and fish and with that comes an associated need for transportation nodes (ports, harbors, railroads), energy supply (power plants, transmission lines, pipelines, offshore terminals), waste management, water and other infrastructure. The Arctic is one of the planet’s last big sources of mineral and hydrocarbon wealth. Yet, the macroeconomic data indicates that there is only modest population growth in the Arctic region to support and service this increased growth in extractive activities. This necessarily means that infrastructure capacity will likely have to come from beyond the Arctic. The question remains, will that capacity come from China or somewhere else? Will the U.S. play a role in all of this and, in doing so, help to drive the proper standards that will protect the U.S. coastline and its share of fisheries? 

The Biggest U.S. Challenge: Permissive Chinese Lending

In the short term, it is difficult to project the U.S. playing a major role in Arctic infrastructure development or extractive activities and that China will remain the leader here. There are two major U.S. challenges which seem to prevent it from leading in this emerging market: (a) lack of competitive financing and (b) a vastly smaller industrial sector that hasn’t competed in these emerging markets as in the past.

U.S. firms are likely not competitive in Arctic infrastructure projects so long as Chinese SOEs—or similar firms from other countries—have state financing. First, U.S. firms must collateralize the loans that they obtain from either U.S. trade finance lenders (such as EXIMBANK) or from international development banks. A Chinese SOE has no need to collateralize or secure its lines of credit from Chinese financers. Second, if a SOE (or even a Chinese commercial contractor with public financing) is unsuccessful and the loan becomes non-performing there is much less risk to the investors since the Chinese government has historically propped-up so-called “zombie companies” to maintain full employment and retain an emerging market presence. Private Chinese lenders are not disciplined to the same extent as western lenders. Bad loans are extended until “good times” when repayment is possible. Third, there is continued evidence (according to the Heritage Foundation that Chinese firms “frequently fail to meet the safety, quality control, and environmental standards set by Western and other international infrastructure firms.”) Even if the country where the infrastructure is being developed lacks the regulatory capacity to inspect and monitor, western firms have national regulators, an open press, and shareholders that will demand high labor and environmental standards. There are no such checks and balances with most Chinese firms. Fourth, Chinese firms still (according to Heritage Foundation) engage in bribery and blacklisting activities to secure contracts. U.S. and western firms have strict legal prohibitions (Foreign Corrupt Practices Act/EU Anti-Bribery Convention) against payments to officials to obtain public contracts. It is possible that things might change in China since the press is reporting a record number of defaults; however, that hasn’t happened yet.