The geopolitical shift of power from the United States to China stems from the momentous transformation of energy policy. For Europe and Germany, engagement is key to keeping up.
America’s significant engagement around the globe has always been justified by a variety of reasons: making the world “safe for democracy” (Woodrow Wilson); humanitarian interventions to prevent genocide; concerns over the proliferation of weapons of mass destruction, etc. However, Washington’s willingness to intervene was also founded on its own national interest—securing the United States’ energy lifelines. Over recent years, however, the development of huge shale oil and gas deposits has drastically reduced US dependency on energy imports and allowed the country to abdicate its global leadership role.
It has also reduced the willingness of American society to bear the financial burden for stability in other parts of the world. The United States’ foreseeable energy independence is the economic basis for a policy of withdrawal. With his “America First” rhetoric, Donald Trump has become a symbol of this policy. But its origins lie with the Barack Obama presidency. The rebirth of isolationist traditions in the US goes hand-in-hand with the development of its energy resources.
The precise opposite is true for China. The “Middle Kingdom” requires gigantic energy sources to sustain its growth. And this demand has determined Beijing’s foreign policy of late. China is now attempting to identify global import options and secure these with tremendous financial and diplomatic efforts. Liquefied natural gas (LNG) from Qatar, oil from Venezuela, uranium from Central Asia, coal from Australia—the burgeoning world power thirsts for ever new sources in order to sate the growing needs of 1.3 billion Chinese.
The expansion of Chinese military capabilities, not least its power politics in the South China Sea, indicate that the People’s Republic (as the US in the past) is preparing to defend its supply routes if necessary by way of its navy and air force. Beijing’s international energy policy is rapidly filling the void left by the American retreat. While China had been only gradually and hesitantly advancing towards the role of a world power, Trump’s withdrawal has accelerated its pace and bolstered China’s assertiveness on this path. Recent developments reveal how energy policy is shifting the global balance in favor of China.
Petro-Yuan vs. Dollar
Since the conclusion of the Bretton Woods Agreement in July 1944, the US dollar’s status as global reserve currency has imbued it and thereby the US with unparalleled power. Oil, by far the world’s most traded commodity, is priced according to the benchmarks Brent or West Texas Intermediate, both traded in dollars. The US has therefore always been able to rely on an elevated global demand for its currency, which could then could be turned into tangible goods and services. Or it could be weaponized, as was the case with sanctions against Russia and Iran.
Perhaps to preempt such action, China has now introduced its own oil futures benchmark denominated in yuan. It marks the culmination of a ten-year push by the Shanghai Futures Exchange Commission to give the country more pricing power in Asian oil markets. Moreover, the “petro-yuan” will be a first step toward de-dollarization and, considering that China is the largest oil importer, may quickly become the most important Asian oil benchmark. Given that its dependency on oil imports will rise over the next decade from currently 69 to 80 percent, the petro-yuan is China’s attempt to attain sovereignty over its own oil trade.
In recognition of this development, the yuan has been included in the International Monetary Fund’s currency basket. The European Central Bank now also holds yuan in its foreign currency reserves, having bought an equivalent of €500 million in 2017. Other countries have already signaled the desire to follow suit, putting the Chinese government in an increasingly influential position in international monetary matters.
However, these developments have a much wider scope. The emergence of the petro-yuan could fuel further currency wars, accelerate the diversification away from the US currency, and repatriate billions of dollars to the US on account of dwindling global demand. Washington’s ability to keep the expansion of its money supply decoupled from domestic inflation would become severely impaired in the long run and require a great deal more fiscal discipline on the part of the Federal Reserve. Whether the yuan will be a more successful challenger than the euro, which was introduced 16 years ago among similar hopes and fears, but ultimately left the dominance of the dollar untouched, remains to be seen.
Taking the Lead in Climate Policy
The Chinese claim to leadership is also displayed in the area of climate policy. While Donald Trump dubbed climate change a “Chinese hoax” and pulled the US out of the Paris Climate Agreement, President Xi Jinping has positioned himself as a global climate leader. At the 2017 World Economic Forum in Davos, he announced, with an eye to Washington, that his country would respect the Paris Agreement. In October 2017, during his opening remarks at the 19th congress of the Chinese Communist Party, Xi even called for China to take the helm in the fight against climate change. The EU, Canada, California, and numerous American metropolises have agreed to take on the challenge together with Beijing. As a direct result of US withdrawal, China managed within just a few months to perform a fundamental transformation of its image: from coal-intensive scapegoat to visionary champion of global climate policy.
This about-face is not solely the expression of a skillful PR campaign. China is seriously in the process of substantiating its claim to leadership with concrete measures. Take the country’s first street paved with solar panels in the city of Jinan in central China. It covers 6000 square meters of the city’s expressway and produces 820 kilowatt-hours of electricity that are fed into the Shandong Province grid. And 500 kilometers to the south, near Huainan, the Chinese have built the largest floating photovoltaic power station with 165,000 solar panels generating enough electricity to supply 15,000 homes. Another floating solar power plant is scheduled to come online this year, and it is four times as large.
It is true that coal still dominates China’s energy mix and will continue to do so for the foreseeable future. China’s power plants burn as much coal as the rest of the world combined. Yet emissions from coal have been declining over the last three years, and the current five-year plan stipulates a two-year moratorium for issuing permits for new coal power plants. The rapid development of smart networks, a revamped electricity market design, and the advancement of renewables are clear signs for a real energy transition, perhaps even an energy revolution, taking place in China.
China Spends, the US Cuts
The country is planning on investing €317 billion in renewables over the next three years, furthering their unprecedented expansion. And China already has close to 200 gigawatts of installed wind capacity, more than twice as much as the US. Two-thirds of photovoltaic cells sold worldwide and half of newly installed wind turbines come from the People’s Republic.
For the Chinese leadership, it’s less about reducing greenhouse gas emissions and more about three key points: fighting unbearable smog in China’s largest cities, garnering international recognition, and gaining an edge over the competition in global markets in terms of technological innovation and political power.
Here, too, the US is on the verge of surrendering first place to the Chinese. The Trump administration is planning to ask Congress to cut the funding for energy efficiency and renewable programs by 72 percent in the fiscal year 2019. Many institutions will suffer, but the hardest hit will be the National Renewable Energy Laboratory (NREL), with research and development funding dropping 78 per cent for solar alone.
China’s leadership is especially pronounced in the automotive sector. Chinese regulators have just halted the production of 500 car models that do not fulfill the country’s environmental standards. Beijing is confident that, as the world’s largest vehicle market, they can rely on producers adjusting to efficiency standards set by China. It is betting on e-mobility, and everyone is following suit.
The Electric Silk Road
While the US believes it will be able to isolate and sanction major countries like Russia and Iran, China is looking for means and ways to forge economic and technological ties with as many states as possible. China’s Belt and Road Initiative (BRI), a modern version of the Silk Road, intends to connect the world’s second largest economy with Southeast Asia, Eurasia, the Middle East, Europe, and Africa via a network of oil and gas pipelines, electricity and fiberglass networks, highways, rail connections, as well as air and seaports.
The Chinese plan to establish an electricity super-network is barely being noticed in Europe and the US. In May 2016, the Chairman of the State Grid Corporation of China (SGCC), Liu Zhenya, submitted a proposal for a $50 billion electricity network spanning the globe to combat pollution and climate change. He enjoys the support of President Xi. The plan envisages more solar parks and wind farms, geothermic energy, and hydropower stations across a globe increasingly interconnected by a super-grid.
In the mid-term, the plan foresees the expansion of trade and investment along the new Silk Road. SGCC has already honed in on ten transnational transmission networks meant to connect China with, for example, Russia or Mongolia. The SGCC is also trying to purchase 20 percent of the German transmission system operator 50Hertz. That would be the first time a Chinese company holds a stake in critical telecommunication and electricity infrastructure.
The Belt and Road Initiative is a significant Chinese projection of power. Not least because it is presented as a soft power project focused on renewable energy, communication, transportation, and fight against climate change. In reality, China is exhibiting strength and gaining political and economic influence on the global stage.
How should Germany and Europe as a whole respond to this new Silk Road? First, the Belt and Road Initiative is not a short-term plan, but will presumably remain at the core of Chinese foreign, economic, and energy policy for years to come—and Germany and Europe need to develop a long-term strategic response. Given the vast resources backing the project, it would make little sense to attempt to fight or contain it. Rather, engagement, support, and cooperation are key. Just as the old Silk Road was not a one-way street, the current project holds new and unexpected opportunities for European researchers, engineers, managers, bankers, and traders.
The State Grid Corporation of China, one of the world’s largest companies, organized a conference in Frankfurt last year where it presented a vision of extending its reach all the way to Europe. It made an offer for comprehensive political, economic, and technological cooperation. So far, academia has heeded the call to a greater extent than politics.
Germany’s government could also appoint a Silk Road representative, who together with German industry, the country’s financial and trade institutions, its research bodies, and politics, could organize conferences and workshops along the Silk Road, identify areas of cooperation and coordinate the implementation of projects. The Foreign Office already has a working group on connectivity that is examining the Silk Road concept and could serve as a base for such a representative. But a German reaction will not suffice. It is essential to bring in the EU. A similar coordination office could be established with the Commission.
Bring in Russia, India, and even the US
Russia should also be an integral part of the concept. The gas pipeline “Power of Siberia” between Russia and China is set to transport 38 billion cubic meters of natural gas to China as agreements on a “Power of Siberia 2” pipeline are finalized. This all further illustrates the close collaboration between the two countries in energy matters.
What’s more, we should make the (not easy) attempt to recruit India for this project to avoid the impression that the BRI initiative is directed against Delhi. India has reached an agreement for an Indo-Pacific security cooperation with Australia, Japan, and the US as a way to contain the perceived aggression of Chinese expansion in the region. Because of these real fears and manifest tensions, it is crucial that India is welcomed and becomes part of the technological and economic cooperation framework.
Lastly, it would also be desirable for the US to participate in such initiatives. It could recognize the Silk Road concept as an opportunity for America and its industry. However, the project is only conceivable as a cooperation on equal footing, relying on a sensitive understanding of the traditions and mindsets of all involved partners. An “America First” approach based on elbowing, friend-or-foe thinking, marginalization, sanctions, and meddling in the internal affairs of other states will not be compatible. That is why we cannot wait for the US, but rather have to formulate our own response in Germany and Europe, and act accordingly.