In the summer of 2007, a Chinese company bought a mountain in Peru. More specifically, it bought the mineral rights to mine the resources contained in it. At 15,000 feet (4,600 meters) – more than half the height of Mount Everest – Mount Toromocho contains two billion tons of copper, making it one of the largest deposits in the world. For a hefty fee of U.S. $3 billion, Mount Toromocho’s title transferred from Peruvian to Chinese hands.

Over the last decade, China has been buying up mountains and mines, agricultural land and oil fields, thus ensuring that it will have the upper hand in the future struggle for the world’s resources. Scarce, finite, and rapidly depleting global supplies of land, water, energy and minerals – the inputs to foodstuffs, automobiles, mobile phones, computers, and other products of higher living standards – cannot match the demand emanating from a rising world population, rapidly increasing global wealth, and urbanization.

Despite the recent declines in commodity prices, the consequences of long-term fundamental supply and demand imbalances remain; the two most serious are substantially higher commodity prices and the rising risk of violent resource-based conflict. In the aftermath of the 2008 financial crisis, commodity prices increased 150 percent, and already there are around 25 conflicts raging around the world with their origins in commodities, with many more likely to occur over the next decade.

Thus far, national governments have tended to adopt a unilateral approach in order to retain control over scarce commodities, drawing on a mix of military force, higher taxation on commodity suppliers, and export bans on key resources. Across the world, policymakers are imposing similar inefficient policies that hamper global production, exacerbate shortages, and could, over the longer term, force commodity prices higher. For example the Australian mining tax laws introduced in March 2011 imposed a 30 percent tax on iron and coal companies; these are a stark reminder that such tendencies are not just the domain of emerging market politicians, particularly as developed countries continue to face biting fiscal constraints. The motive of many governments is not only to raise cash but also to retain and exercise control over resources, thus securing a steady domestic resource supply. The fact that commodity assets are increasingly falling into the inefficient hands of government compounds the problems posed by resource scarcity.

Despite existing unilateral approaches, commodity shortages are a multilateral problem, in that the people of the world will all face higher commodity prices again as well as the consequences of more political instability and conflict. In this regard, China alone seems to recognize the need for a multilateral strategic approach to securing global resource supplies. China’s multi-pronged commodity campaign relies on a variety of tools, including trade, investment, resource swaps, and financial transfers

The program has three key facets. First, China has systematically befriended the “Axis of the Unloved”; countries and regions of the world that have largely been ignored as destinations for investment by Western economies. Places such as Brazil, Argentina, Mongolia, Kazakhstan, and numerous countries throughout Africa have vast sums of mineral deposits, oil wells, and tracks of arable land. China’s strategy builds on symbiotic relationships with such resource-rich host countries, who gain much needed capital inflows, infrastructure, and a large market for exports, in exchange for mortgaging their resources. Across the emerging world, where in some cases over 60 percent of the population is under the age of 24, investment and job creation are critical to stave off political volatility (such as that seen with the Arab Spring), to ensure sustained economic growth, and to meaningfully reduce poverty. In this regard, China’s resource campaign offers a clear benefit.

Second, also central to China’s global rush for resources is its vast treasure chest of over $4 trillion in foreign exchange reserves, enabling it to pay substantial amounts of money for commodity assets around the world. China’s global commodity campaign began in earnest in 2005. Since then, China’s accumulation across the full commodity complex and all continents has been breathtaking. Between 2005 and 2014, China’s foreign direct investments were valued at more than $870 billion, or almost $2 billion per week over the nine year period.

Some market participants have accused China of “overpaying” for assets – that is, paying greatly in excess of fair market value, distorting the commodity markets and rendering potential competition for commodity assets impotent. But China’s willingness to go on this spending spree reflects the dogged determination of the Chinese political class to pursue economic growth, which relies on commodities as inputs. More generally, in order to prevent a crisis of legitimacy, China’s leaders must continually move the population to better living standards. Ultimately, China’s cash pile and its broad political-economic goals mean China has a virtually zero cost of capital and seeks to secure resources at nearly any price. What looks like overpaying to the western-trained eye actually reflects China’s broad utility function to improve the livelihoods of the Chinese population.

Third, China’s aggressive and systematic approach has made it the “go to buyer” for almost all commodities. This renders it the marginal price setter in the commodity markets, giving China unprecedented influence on prices. Put another way, Chinese demand now crucially determines whether prices rise or fall across the commodity complex. Already many market traders believe China has become the marginal price setter for commodities such as copper and coal.

While China continues its multilateral approach to addressing the coming commodity headwinds, and fundamental supply-demand imbalances, much of the rest of the world appears disengaged. In fact, despite the risks of global commodity shortages, no unified international body exists to address the commodity challenges the world faces. Yet a cohesive, coherent, and explicit global framework that defines and manages competing resource interests and explores strategies for cooperation could help mitigate the risks of conflict and help rebalance the market.

In the absence of such an international body, China’s multilateral approach to the commodity problem is sensible and, by giving host countries what they want, places China in a unique position with the upper hand in the future struggle for global resources. In a world of finite resource supply, and thus a zero-sum equilibrium, a less symbiotic/more unilateral stance raises resource prices, stokes conflicts, and is detrimental to global welfare. The predilection for military incursions in resource-rich regions such as Iraq and Afghanistan almost always disrupts production and forces prices higher. For example, political clashes and military disruptions like those seen in Iraq, Nigeria, and Libya can often add at least $10 to the price of a barrel of oil.

China’s approach to securing resources is not without its critics. However, allegations of exploitation, worker abuses, and systematic labor and environmental transgressions in China’s projects are routinely subject to over-simplification and exaggerations. China’s motives are, in fact, transparent, and the evidence overwhelmingly points to symbiotic partnerships that see the resource-rich host countries greatly benefit. Around the world, China’s efforts are broadly welcomed. According to a Pew survey of 10 sub-Saharan African countries, for example, Africans support Chinese investment by very large margins, with the balance of opinion of those surveyed regarding China and its inroads as decidedly positive and constructive. And despite damning charges that Chinese prisoners are used to staff projects across Africa, Sri Lanka, Bangladesh, and elsewhere, hard evidence is scant; the lack of evidence is surprising given that such transgressions should be easy to document in this age of smart phones.

As there are legitimate questions about the way workers are treated in China, the labor hurdles China seeks to clear abroad could be lower. But the charge that China is abusing workers and degrading the environment in wide-scale fashion, at least in a way that is much more aggressive than other foreign investors, is unfounded. Of course, China should not have a free pass to run unfettered and unchecked around the world, and allegations of labor, human rights, environmental abuses, corruption and financial misconduct deserve serious and objective investigation. But to finger-point and paint China’s approach detrimental and, on balance, as negative bears little truth in reality and is patently unfair.

Nevertheless, given the fact that China’s investment is in depleting resources, host countries are minded to manage the Chinese investment inflows as temporary revenues that will last as long as the resources exist, rather than assume that they are open ended inflows that will last in perpetuity. With this in mind, many governments of petroleum-producing nations, for example, have created sovereign wealth funds, built up with the savings of oil-based revenues.

In reflecting upon what should be done to address the problems of access to resources and escalating commodity prices, a number of options are available. Aggressive government meddling in commodity markets (such as banning commodity speculators from the markets) has, on balance, tended to do more harm than good. Rather than skirting over the fundamental factors that are driving commodity prices higher and raising the risk of global conflicts by offering such band-aid solutions, policymakers need to put in place more fundamental policies that address the structural supply (based on caps of potable water, arable land, minerals and traditional sources of energy) /demand (driven by growth and wealth effects, urbanization and population growth) imbalance.

At the macro-level, for example, policies such as higher taxes on consumption can curb commodity demand. Supply-side policies like subsidies can also alter the supply/demand equilibrium by encouraging greater investment in R&D and exploration into alternatives, such as shale. More specifically, there is also scope to focus on various commodities in a targeted way.

Take food, for example. Policies that address waste, misallocation, and inefficient food subsidies could directly and meaningfully alter food imbalances. U.S. households throw out 14 percent of their food, wasting roughly $75 billion dollars a year, while one billion people across the globe go hungry each day. More efficient allocation of portions and management of the inputs would go a long way to alter food imbalances. Multi-billion dollar food subsidy programs such as the U.S. Farm Bill and the European Union’s Common Agricultural Policy distort the market by encouraging overproduction of food in some countries and underproduction elsewhere. The net effect of these policies is to keep food prices artificially high, to the detriment of consumers. In 2010, the United States paid $6 billion in commodity subsidies, with OECD countries spending over of $220 billion on agricultural subsidies each year. Meanwhile, the EU’s Common Agricultural Policy represents 45 percent of the total EU budget, with some 40 billion euros spent on direct farm subsidies annually.

On water, there remains significant scope to encourage investment in programs such as desalination. Although 70 percent of the earth is water, less than one percent is easily accessible fresh water that can be used to sustain human life, including for drinking and sanitation. The fact that a February 2012 report by the U.S. National Intelligence Council cautions that the world will face water shortages, social disruptions, political instability, and the use of water as a weapon to further terrorist objectives over the next 10 years suggests that significant investments in new technologies for fresh water production and distribution is time and money well spent.

Higher taxes on energy consumption could help reduce demand if they increased energy prices enough, but this remains a largely politically unpalatable solution. Energy conservation and efficiency measures may hold more promise. For example, pricing structures that reward consumers for saving energy (and penalize those who don’t) could reduce and manage demand. Incentives for innovation and investments in energy efficient technologies could also help. However, technological innovations such as fracking and shale gas can be subject to aggressive environmental challenges which suggest technological innovations might not be as much a reprieve as one might hope, although worth exploring nonetheless.

Demand-side policies have their limitations, given that it is difficult to dissuade the newcomers to the growing global middle classes to curb their demand for “white goods” such as computers, televisions, refrigerators, washing machines, and mobile phones, each of which act as a draw on the world’s mineral supplies. Here recycling is at least part of the solution. According to a United States Geological Survey analysis, for example, the 810 million cell phones in use, retired, or obsolete and awaiting disposal contain more than 13,000 metric tons of metal– the same amount contained in fifty 747 jumbo jets and enough to fetch a price of more than $500 million. Such analysis suggests there may be a lot of scope for programs that provide an economic incentive for recycling or repurposing outdated metal-intensive consumer products.

More fundamentally, there is the argument that even a small reduction in the levels of U.S. military spending could help reduce the risk of conflict over commodities. Total U.S. military expenditure in 2014 was around $610 billion (or roughly 3.5 per cent of GDP), making the United States the largest military spender by a long shot. If a portion of the money the United States spends on military incursions was directed to R&D for long-term solutions to commodity shortages, it is not at all clear that this would be detrimental to U.S. security; in fact, it might reduce the country’s propensity to engage in resource related conflicts. This would help accomplish the country’s purported military objective of keeping the peace.

Notwithstanding the challenges of China’s commodity campaign its strategy – of giving host countries what they want – gives it the edge in the future struggle for global resources. This remains true even as the global economy (led by a slowdown in China, where economic growth has plummeted from double-digits to 7 percent per annum) has slumped in recent years, and virtually every commodity across the composite – metals, minerals, energy, and foodstuffs – has suffered a notable decline in price over the past year.

In a world of finite resource supply, a unilateral, “every nation for itself” stance leaves all countries as losers, and the world population suffering the costs of higher resource prices, declining living standards, and the proliferation of violent conflicts.

In the summer of 2013, my family and I took a vacation to Nassau, the Bahamas. As we descended on our hotel not far from the enormous Atlantis facility on Paradise Island, we drove past a depressing, dusty shantytown full of shipping containers and trash. With apologies to Thomas Friedman, we asked our taxi driver what it was.

“The Chinese,” he replied. In his telling, the Chinese had brokered a deal to build their own competitor to Atlantis, called Baha Mar, and reneged on their commitments to employ lots of Bahamians and bring economic development to the island. The workers, the food they ate, and the funds they earned all seemed to stay within the fences ringing the compound, as far as he could tell, and there was considerable local resentment toward the Chinese, who had even persuaded the Bahamian prime minister to move his own office to make room for the project.

By the fall of 2014, ominous news reports had begun noting that “delays and labor clashes [were] dulling the buzz” surrounding the $3.5 billion development, and a Baha Mar spokeswoman was left lamely admitting that as to their delayed opening, “we’re focused on late spring 2015.” They were focusing on late spring 2015, but as it turned out 2015 brought developments other than a triumphant opening. The project wound up in Chapter 11 bankruptcy in Delaware, the Chinese conglomerate began threatening that the project would begin cutting Bahamian jobs if the bankruptcy filing was not resolved to its satisfaction, and the Bahamas itself was placed on watch by Standard & Poor’s, which warned of at least a 50% chance of a downgrade of the Bahamas’ credit rating as a consequence of the project.

I bring up this anecdote because it stands in such stark contrast to the picture presented in Dambisa Moyo’s essay. Moyo presents China as a menacing and far-sighted antagonist in a zero-sum competition for increasingly scarce natural resources. In Moyo’s telling, China’s strategy of paying top dollar for commitments from other countries to provide access to natural resources “gives it the edge in the future struggle for global resources.” Moyo really is telling two stories: one about a future in which commodity prices skyrocket, and another about how China’s behavior today threatens to do harm to the United States and other major powers in such a world.

I expected to look at this argument from the point of view of someone who studies national security, but even as a non-economist, it is impossible to avoid beginning by saying that Moyo’s admission that “virtually every commodity across the composite—metals, minerals, energy, and foodstuffs—has suffered a decline in price over the past year” has a certain “other than that, Mrs. Lincoln…” quality to it. Moyo proffers no evidence in her essay that strategically valuable minerals or commodities are likely to become scarce to the extent that they produce security competition. More to the point, we have had mini-panics in the recent past about oil and rare-earths minerals that haven’t panned out.

Take rare-earths minerals first. A variety of people, including Chinese policymakers and Western pundits, concluded that rare-earths, which make all sorts of our gizmos and gadgets work, were a new economic weapon that the Chinese could exploit. Because so much of the world’s supply is located in China, the story went, China could use production and supply as a political and/or economic weapon against countries to which it had previously sold agreeably. Even at the time, naysayers pointed out that we bought most of our rare-earths from China because the Chinese rare-earths were cheapest. As soon as Beijing began trying to use them as a political weapon, the markets did what markets do and diversified. As a recent report from the MIT Technology Review put it,

Demand appears to have fallen mainly because companies stockpiled these materials in anticipation of shortages… As it turned out, China’s lower export quotas—which were deemed unfair by the World Trade Organization—didn’t constrain the world’s supply, and China recently stopped imposing those limits on rare earths.

I am not someone inclined to these sorts of just-so, leave-it-to-the-market type of arguments, but as it turns out, sometimes things are just so and can be left to the market. (For a recent victory lap on the argument about rare-earths, this from Tim Worstall should do.)

I am also old enough to remember apprehension about “peak oil”—the worry that the world was running out of petroleum, and an age of sky-high oil prices, with all sorts of attendant consequences for our way of life, were upon us. As anyone who’s gone near a car recently knows, something big didn’t happen, and something big did. Not only did we not hit peak oil, but a one-two punch of a revolution in shale gas production and hydraulic fracturing conspired to put serious downward pressure on oil markets.

For her part, in her 2012 book Winner Takes All, Moyo was down on shale, harrumphing that “as with many new technologies, panaceas, and potential economic saviors, much of the euphoria that surround shale and its prospects for transforming the energy sector is predicated on overly optimistic theoretical scenarios.” (p. 186)

What about the anecdote with which she opens her essay and book, the Chinese purchase of the Peruvian copper mine Toromocho in 2007? How has that worked out?

Toromocho is still a ways off the production targets set by the Chinese firm, and mining investment in Peru has dropped by 14% in the first quarter of 2015, due mostly to low copper prices and a wave of anti-mining opposition, including problems at Toromocho.

I expected my essay to focus on the aspects of how U.S.-Chinese competition for natural resources could produce political and even military tensions, but the underlying economic premise failed to persuade me. In order for Moyo’s story to work, one has to believe a number of things: That severe shortages of commodities will emerge in the coming years; that only the Chinese accurately understand this and have planned accordingly; and that when the price spikes hit, Chinese interests will be protected by contracts signed by governments in some of the world’s most volatile regions.

Why shouldn’t we believe the whole Chinese project will end up more like Baha Mar?

Dambisa Moyo offers important insights on China’s rise, its strategic vision, and the global implications of both. In particular, it has never been more important to recognize that China’s growing international role, particularly in investment, is designed primarily to ensure continued growth and political stability at home. Its economy has slowed, but the need to secure the oil, gas, metals, and minerals necessary to extend its industrial development will continue. The Chinese leadership recognizes that domestic reform – the need to shift from export-based growth to greater domestic consumption, in particular – will continue to slow GDP growth, but avoiding a hard economic landing is as crucial as ever for the Chinese Communist Party’s continued political dominance.

Moyo is also wise to note that recipients of Chinese investment continue to benefit from it. It wasn’t so long ago that the developing world’s cash-starved governments had little choice but to turn to Western governments and institutions for investment. The entry of Chinese players into this game creates competition that helps these governments secure more favorable terms of trade and investment and avoid the hard political choices that Western creditors often demand. Particularly in Africa and Latin America, that’s a plus for development, particularly in infrastructure. China’s need, heightened by its economic slowdown, to make state-owned enterprises more efficient will chasten their spending, and the fear that senior leaders will use Xi Jinping’s anti-corruption program to ensure compliance will enhance this effect. But we will see more Chinese companies going abroad in coming years as part of the state’s plans to achieve all kinds of political and economic goals. 

It’s also true that there is no single international institution with a mandate to regulate this investment competition in order to make most effective use of scarce global resources, and major developed and developing states aren’t likely to find the common ground needed to create and empower one. This is the same problem that blocks agreement on a global approach to climate change. Emerging nations suspect that established powers want to stunt their growth to protect their own privileges. It’s unfair, they argue, that the West, having completed its industrial revolution, inflicting massive environmental damage in the process, wants to restrict the ability of new players to grow. Western powers counter that future damage will be inflicted mainly by large emerging nations like China and India – and that developed and developing countries will pay the price together if carbon emissions are not capped. Moyo is right that this problem extends to access to vital resources like arable land and clean water. 

Moyo’s most important insight is that “China alone seems to recognize the need for a multilateral strategic approach to securing global resource supplies.” What’s true for commodity supplies is true for all other aspects of China’s foreign policy. Today, only China has a coherent global strategy. The core of this approach lies in Beijing’s conviction that China cannot meet its long-term goals in an international system dominated by institutions like the World Bank and International Monetary Fund which allow developed states to decide on the terms by which developing states will grow. 

Yet to understand how its foreign policy is changing, we must also recognize that China is now investing not only to secure needed commodities but to open markets for China’s own excess production, particularly in heavy industry. This is a crucial element of both China’s “One Belt One Road” project, which is meant to open new routes for commercial exchange between China and Europe, and the Beijing-led Asian Infrastructure Investment Bank, which will create opportunities for Chinese industrial policy and help China become an internationally recognized lender of first resort. That, in turn, will help China redefine the rules of international direct investment.   

This is shrewd strategic thinking, but China’s leadership is well aware that China’s greater international role will generate unprecedented challenges. It will force Beijing to manage relations with countries that want to hedge their bets to avoid over-dependence on China’s continued growth and Beijing’s good will. That’s particularly true among its wary East Asian neighbors. Beijing will also find itself implicated as never before in the internal problems of other countries and regions. We have seen this already with China’s attempt to broker peace in Sudan, a country in which China has spent heavily to secure energy supplies. Beijing has mainly been able to avoid vulnerability to turmoil in other regions. But with Washington less willing and able to assume responsibility for managing so many of the world’s hotspots and potential conflicts, China may soon carry burdens it doesn’t really want. How China responds will matter for the entire global economy. 

Finally, the greatest global vulnerability produced by China’s rise centers on the risk that Beijing can’t sustain the expansion. There is little to reason to believe that China will become significantly less stable over the next five years. Its development will likely continue at a healthy, though slower, pace. But over the longer term, China faces new and complex questions. How can China manage the growing gap between rich and poor? How can it continue to grow without doing so much more damage to the country’s air and water that public anger reaches critical mass? How can the country’s leadership manage public demand for better governance at a time when ideas, information, and people surge across internal and external borders on an unprecedented scale and at unprecedented speed? If China gets old before it gets rich, the country’s enormous middle class will likely hold its leadership directly responsible. 

 

This is a country well on its way to building the world’s largest economy. For this reason, China’s vulnerability is our vulnerability. Dambisa Moyo is surely correct that China’s rise will create all sorts of problems in a world of scarce resources and heightened competition to control them. But China’s potential fall should worry us even more. 

 

The Aluminum Corp. of China (Chinalco) bought a copper mountain in Peru in 2007, notes Dambisa Moyo. So what? In 2007, according to the International Monetary Fund, copper was selling for over $8,000 per ton and Chinalco’s stock price was $80 per share. Copper is now going for $5,440 per ton, and Chinalco’s stock is below $10 per share. Moyo then reprises the standard neo-Malthusian mantra that world is fast running out of non-renewable and renewable resources, and only China has figured out the need to stash them away for the coming rainy day. While Moyo does note that commodity prices have been trending down lately, she evidently dismisses this as a mere blip on the way to the desperate war-torn resource-constrained future.

To further illustrate the Chinese Dragon’s economic wisdom and growing reach, Moyo warns that “between 2005 and 2014, China’s foreign direct investments were valued at more than $870 billion, or almost $2 billion per week over the nine year period.” We should compare, however: According to the latest comparable figures reported by the Bureau of Economic Analysis, U.S. foreign direct investments between 2005 and 2013 amounted to $2.7 trillion, or almost $6 billion per week.[1]

Moyo is certainly right that countries should eliminate the massive economic distortions introduced by subsidies, especially those aimed at agriculture and energy. She is also right that the United States should downsize it vast military-industrial complex. (Advice she may also want to share with the Chinese government, which has been boosting its military expenditures at double digit rates for nearly 20 years, reaching $145 billion in 2015.[2])

But let’s turn back to Moyo’s main point that by practicing Malthusian zero-sum economics, China’s leaders are exercising uncommon wisdom. This is hogwash.

In the 1950s, economists Raul Prebisch and Hans Singer made the seminal observation that commodity prices had been falling for many decades relative to the prices of manufactured goods. As Singer put it, “It is a matter of historical fact that ever since the [eighteen] seventies the trend of prices has been heavily against sellers of food and raw materials and in favor of the sellers of manufactured articles.” The upsurges in commodity prices during the first decade of this century would appear to contradict this trend. But do they?

“Once—maybe twice—in every generation, the global economy witnesses a protracted and widespread commodity boom. And in each boom, the common perception is that the world is quickly running out of key materials,” observes David Jacks, an economist at Simon Fraser University.[3] We have in just passed through such a situation. Jacks studies the phenomenon of economic “super-cycles,” in which commodity prices rise and fall over periods lasting between thirty and forty years. In 2013, Jacks analyzed the price trends for 30 different commodities during the past 160 years. He finds that fifteen of the thirty commodities he tracked over the past 160 years are in the midst of super-cycles that started in the mid-1990s. In other words, the expansionary phase of the current super-cycle has run nearly twenty years so far.

Jacks also frames a useful distinction between “commodities to be grown” and “commodities in the ground.” The astonishing fact is that as world population since 1850 grew sixfold and the world’s economy expanded more than hundredfold, Jacks found that the prices of commodities that are grown—grains, cotton, wool, and so forth—have generally been falling.  On the other hand, commodities that come out of ground—oil, tin, iron, chromium, and so forth—have remained flat or have been slowly rising.

Price is determined by supply and demand. Between 2002 and 2007, global economic growth was the strongest and longest lasting since the 1970s.The huge boom in the prices for all sorts of resources in the current super-cycle has been chiefly generated by rising demand in fast-growing emerging economies in countries like China and India.

In their 2012 study “Super-Cycles of Commodity Prices Since the Mid-Nineteenth Century,” economists Bilge Erten and José Antonio Ocampo, from Northeastern University and Columbia University, respectively, confirm that the recent price increases in commodities are the result of a super-cycle upswing.[4] Parsing real price data for nonfuel commodities such as food and metals from 1865 to 2009, they find evidence of four past super-cycles ranging in length between thirty and forty years. The cycles they identify ran from 1894 to 1932, peaking in 1917; from 1932 to 1971, peaking in 1951; from 1971 to 1999, peaking in 1973; and the post-2000 episode. The increases in commodity prices during these cycles are driven largely by increases in demand arising from strong periods of industrialization and urbanization such as those experienced by Great Britain, Germany, and the United States in the nineteenth century, Japan in the twentieth century, and China and other emerging economies at the beginning of the twenty-first century.

The super-cycles are driven by periods of accelerating economic growth that boosts demand for commodities, thus pushing up their prices. Rising commodity prices in turn encourage the development of more supplies and the invention of resource-conserving technologies. As economic growth slows down during the second part of a super-cycle, the real prices of the now copiously supplied commodities fall. In fact, the researchers find that the prices for nonoil commodities do not generally recover to their preboom averages. The IMF’s commodity price index has fallen by 43 percent since peaking in 2008.

The Economist magazine has developed a widely cited commodities index that tracks the real prices of an extensive variety of mineral and agricultural goods. “Since 1871, the Economist industrial commodity-price index has sunk to roughly half its value in real terms, seeing annual average compound growth of –0.5 percent per year over the ensuing 140 years,” pointed out Council on Foreign Relations energy adjunct fellow Blake Clayton in 2013.[5] He added, “Even after the boom years of the 2000s—in 2008, for instance, as commodity indexes soared, the Economist index never climbed more than halfway above where it stood 163 years earlier, in real terms.”

 

Figuring out when a super-cycle has topped or bottomed out is a fraught exercise. Nevertheless, many researchers believe that the current super-cycle in commodity prices has peaked and is moving into its downward phase. A recent analysis Colorado School of Mines researcher John Cuddington and his colleagues reports that super-cycle for crude oil reached its trough in 1994 and likely peaked in 2010; the natural gas super-cycle low was in 1994 and topped out in 2006.[6] They also look at the various economically important metals and find that the super-cycle troughs for copper, aluminum, zinc and tin occurred in 1998, 1995, 1999, and 1998 respectively. They suggest that copper peaked this year; aluminum in 2011, and zinc and tin were still heading toward their peaks.

Cuddington and his colleagues argue, “As of 2014, most of the LME (London Metal Exchange) six are past their super-cycle peaks and headed downward toward their troughs.” As it happens, according to IMF figures, the price of price of copper peaked in 2011 and has since fallen by 45 percent; aluminum topped out in 2008 and has dropped by 47 percent; tin peaked in 2011 and is now 56 percent cheaper; and zinc topped out in 2006 and is now 54 percent lower. If the past is any guide, commodity prices could well fall to levels even lower than the price nadir of the 1990s as the expansionary phase of the current super-cycle begins to fade.

Proponents of peak depletion get it wrong because they treat natural resources as fixed stocks, failing to take into account the inherent dynamics of market forces and technological innovation. Amazingly, some still claim that the era of cheap resources is over, when in point of fact nearly all resources in the past were much more expensive than they are today, even taking into account the continuing after-effects of the current super-cycle.

Resources are defined by advancing human knowledge and technology. A deposit of copper is just a bunch of rocks without the know-how to mine, mill, refine, shape, ship, and market it. “Innovation has arguably been the dominant force in determining the path of real prices for primary commodities over the past three and a half centuries,” assert economists Harry Bloch and David Sapsford.[7] They add, “The influence of innovation has been sufficient to result in negative trends in real prices for numerous individual commodities and for aggregate indexes of commodities. The negative trends occurred in spite of massive increases in output with growth in the world economy.” China’s leaders have mistaken the commodity prices increases of the current super-cycle sparked by their own development as a permanent condition.
Moyo oddly asserts that “a cohesive, coherent, and explicit global framework that defines and manages competing resource interests and explores strategies for cooperation could help mitigate the risks of conflict and help rebalance the market.” Well, yes. In fact, the World Trade Organization and the current Doha Round of trade negotiations aim at bolstering just such a global framework to manage competing interests. That framework is called free trade, or at least, the freer trade that the WTO process seeks to foster. Moyo would do well to advise China’s leaders to stop their economically ignorant pursuit of resource nationalism. Such neo-imperialist mercantilism undermines the very system that would ensure China (and all other countries) secure access to copious supplies of goods and services from around the globe.[8]

Moyo makes the same mistake as China’s leaders in taking the current super-cycle’s recent run up in commodity prices sparked by China’s own economic development as signaling permanent scarcities in natural resources. She is, however, surely right that in order to maintain power China’s Communist Party leaders “must continually move the population to better living standards,” or at least claim credit for doing so. But wasting money by overpaying for natural resources abroad instead of investing in productivity enhancing innovation and education at home will not achieve that goal. The Party leaders evidently are still in thrall to the failed ideology of economic central planning and the ultimate results of those policies will not be pretty.