Issue #4: February 2020

Coronavirus and BRI; China in the Arctic Part II

Unfortunately I’m late putting this edition out, mainly because the story I decided to cover turned out to need a deeper and longer look than expected. But hopefully this extended edition is worth the delay. This month, we’re continuing with Part II on China in the Arctic. Last time I covered the growing economic and strategic significance of the Arctic, as the rapidly changing climate reveals new resource deposits and allows easier transport in the region. I looked at China’s interests in the High North and focused on developments in Russia in particular. While there is plenty to say about China and some of the other Arctic states (to which I may return in future editions), for this issue I’ll be concentrating on Greenland.  

But first, a word on the COVID-19 virus, which is understandably dominating the news on China at the moment. 

BRI AND THE CORONAVIRUS

As with the Chinese domestic economy, the coronavirus outbreak is likely to have an impact on the Belt and Road, as travel bans in several countries prevent Chinese workers returning from the Lunar New Year break to resume projects, while supplies of needed materials and machinery are also disrupted. Not every BRI country has reacted the same way, though, with Pakistan (one of China’s closest allies) briefly suspending flights from China before reinstating them a few days later. As of 24 February, Ethiopian Airlines had reduced but not suspended its flights to and from the PRC.  One Foreign Policy headline claimed that the ‘Wuhan virus is the Belt and Road pandemic’, but this is really a stretch. It’s absolutely true that China’s greater integration with the global economy and rising numbers of outbound travellers mean that containing the outbreak has been more difficult than was the case during the 2002 SARS epidemic. But BRI plays only a relatively minor role in this. Based on air travel data, risk of ‘importing’ cases of the virus is highest in neighbouring East Asian states (irrespective of whether these countries are BRI members or host Chinese-built infrastructure projects), as well as Australia and the US. 

There has been some speculation about why Africa (and particularly sub-Saharan Africa) has so far been ‘spared’ (at the time of writing there have been two known African cases, one in Egypt and the other in Algeria), seen as surprising given, as the Foreign Policy article puts it, ‘...China’s expanded interests and infrastructure...’ in the region. The lack of reported Sub-Saharan African cases (as of 26 February) could be to do with a combination of factors- including the climate in some areas and the possibility that cases have simply not been detected yet. It’s quite possible that we could see the virus spreading in Africa, though a Lancet study puts the risk of importing cases to the continent at only a tenth of the level for Europe. It might be that some of the puzzling over why Sub-Saharan Africa has so far apparently avoided the coronavirus is based on an exaggerated sense of just how closely connected to China the region has become. Numbers of Chinese migrants in Africa are significant, but perhaps overestimated, for example. 

That said, the Lancet article argues that the risk is highly variable across Africa- and partly depends upon how the virus spreads within China, given that different Chinese airports serve as the main connection point to different African countries.  If the virus does arrive, there are serious questions about the capacity of some African health systems to cope. Nevertheless, capabilities also vary a great deal by country- and some parts of West Africa may actually be in a better position to respond after the experience of fighting the Ebola outbreak of 2013-14. In any event, many African countries definitely are quite dependent on the Chinese market for their exports- and so the economic impact may be significant even if they manage to avoid an outbreak within their borders. 

CHINA IN THE ARCTIC PART II: GREENLAND

Last August Greenland hit the international news when Donald Trump expressed an interest in the US purchasing the world’s largest island, to widespread bemusement. But it seems as though the idea did not come completely out of the blue- and in fact was probably a reaction to the perceived threat of Chinese encroachment in the Arctic. While the US won’t be buying the country any time soon, multiple American delegations have since visited and this month Trump’s budget request included money for a new US consulate in Nuuk, the island’s capital. 

Trump was derided for failing to grasp the distinction between real estate and sovereign territory- and ignoring the wishes of Greenlanders in the process.  But the idea that the US might gain control of Greenland is not without historical precedent. Various proposals for American annexation or purchase were put forward in 1867, 1910 and 1946- and during the 19th Century the US even claimed Greenlandic territory outright, based on the Polaris expedition which had been the first known party to set foot on the northwest part of the island.  

Nuuk, capital of Greenland Source: Visit Greenland

Trump’s comments also reflect contemporary US strategic thinking on Greenland and the wider Arctic, albeit crudely. Bigger in land area than Mexico but with a (mostly Inuit) population of just 57000, Greenland is still part of the Kingdom of Denmark. Since 2009 the island has had a status of ‘self-rule’, meaning that the Greenlandic government exercises authority in all areas except foreign policy and defence. Part of the agreement stipulates that Greenland can move towards full independence if supported by a majority of the population. But in order to do so it would have to forgo an annual transfer from the central Danish budget, which currently accounts for more than half of Greenlandic government revenues. 

The US, meanwhile, has maintained a military presence in Greenland since World War II. The island is situated in a strategically important location in naval terms and, because of the short distance over the pole to Russia, served as a vital cog in US Cold War operations (including a planned secret nuclear base and sometimes coming at the expense of local people). Thule Airbase (and the 254 square mile security area around it) still houses missile early warning and space surveillance systems- and seems likely to become more important as strategic and economic competition in the Arctic escalates.  

Greenlandic governments in recent years have tended to see the country’s potential for mining and tourism as the most plausible route towards economic and therefore overall independence from Denmark. It is here that China has entered the picture, with successive administrations making efforts to court Chinese investment. Both Danish and US authorities seem to be worried about this prospect- and it’s easy to see why. If Greenland were to achieve independence on the back of Chinese economic support, so goes the logic, it could potentially become a conduit for Chinese influence on the Arctic Council, Chinese control of strategic natural resources and even Chinese military bases in the North Atlantic. 

Map of Greenland showing main towns, bases and Chinese-invested mining projects. 

Source: Andersson, Zeuthen & Kalvig (2018)

As so often when discussing China’s expanding global presence, there is plenty of hyperbole around familiar themes here, underneath which sits a grain of truth. Chinese firms are involved in a handful of Greenlandic mining ventures, though in the two most important projects they only control a minority stake and neither are currently operational.  In Greenland’s far north, Australian firm Ironbark holds the rights over a major zinc and lead deposit at Citronen Fjord. State-owned China Nonferrous has an agreement with Ironbark to build the mine and find most of the financing for it from Chinese banks (as well as an option for China Nonferrous to acquire a stake in the venture). Partly because of the logistical challenges involved (ships can only reach the site for short periods during the Summer), the project has not yet been developed, though production might start sometime after 2022

At the other end of the island the Kvanefjeld rare earth elements (REE) venture is closer to being realised. This project is owned by another Australian firm (Greenland Minerals), with a Chinese REE producer Shenghe Resources (which itself has a complicated mixture of private and state ownership) holding a 12.5% stake and an option to buy 60%. This mine has both strategic and economic importance. First, because along with REEs it will also produce uranium, an issue on which it  took two years of negotiations for the Greenlandic and Danish governments to reach agreement. But REEs themselves are also widely seen as strategic commodities. These are a family of elements which have a range of applications (principally as magnets and catalysts) across many sectors, including consumer electronics (smartphones), green technology (fuel cells and motors for electric cars and wind turbines), optics and fuel refining (including jet fuel). 

Perhaps surprisingly, while REE deposits are found on every continent, the vast majority of the industry, from extraction to most processing and manufacturing, has been monopolised within China. I wrote about REEs (with a particular focus on South Africa) back in 2012. At that time, concern was growing internationally about the degree of Chinese control over a sector with such strategic significance. Lower costs and less stringent environmental standards (which have had devastating consequences) meant the Chinese REE industry had outcompeted international alternatives, leading to the closure of formerly important mines such as Mountain Pass on the California-Nevada border. As of 2012 there were various efforts to reopen old mines and develop new deposits around the world- both as a way to counter perceived dangers of Chinese dominance, but also in recognition of likely future demand as the world increasingly takes up renewable energy.  

A handful of mines outside China since began producing, but this has done little to reduce China’s near-monopoly position. In fact, Chinese REE firms have themselves got involved in the sector’s internationalisation. In some cases this has been through taking direct stakes in new mining ventures. But perhaps more importantly, because China remains the main site for REE processing, most of the new mines have agreements to export the ore that they mine to Chinese separation plants.  There are arguments about how severe the impact on global supply chains really would be should China ever start restricting REE exports, but it is notable that REEs were exempted from US tariffs (and often seen as a potential ace up China’s sleeve)  in the American-Chinese trade war. From this perspective, Chinese interest in the Kvanefjeld project (which includes agreements for the mine’s output to be processed in China) looks to be centred on China’s REE industry itself- developing access to supplies from outside China, partnering with firms from the global north in order to access technology and in general moving towards a global industry in which Chinese firms play a leading role. 

Debate about Chinese global investments often revolves around how far they are motivated by strategic or economic concerns- is this just about firms seeking profit, or is each example of overseas expansion part of a larger political plan being orchestrated from Beijing? Greenland presents a good example of why that may not be quite the right way to frame the issue. Anderson,  Zeuthen & Kalvig, in a paper comparing the Kvanefjeld and Citronen Fjord ventures, ask instead whether the motivations are primarily about ‘Arctic access’ or else ‘access to minerals’ (both of which have strategic and economic elements).  What they conclude, plausibly, is that the Chinese central state’s expressed interest in the Arctic (and in Greenland in particular) provides an incentive for companies to look for viable projects in the region, because it brings a decent chance of being able to secure state support in the form of loans from the two main state-owned policy banks. However, the authors argue, because REEs are seen by Beijing as a more strategically important industry/commodity, investment decisions in this sector ‘...are more likely to be driven by China’s interest in the strategic resource itself, whereas decisions of where to engage in zinc projects are more likely to be determined by China’s foreign policy priorities.’ 

Importantly, they also don’t fall into the trap of treating all Chinese actors as necessarily all having the same goals or incentives (including the various arms of the state). It’s not possible to dig into the complexities of decision-making on the part of Chinese state or Chinese firms in a short newsletter like this.  But suffice it to say that research on these kinds of questions is vital if we want to understand how BRI works- and do better than simplistic understandings which assume every aspect of China’s global presence is part of some centrally-coordinated Machiavellian plan (or, for that matter, that Chinese firms are simply apolitical profit-maximisers).  

Fears that growing Chinese economic presence in Greenland will mean greater Chinese political influence- and thus the prospect of either the US being ejected from Thule or China setting up its own military bases- certainly seems to be shaping US responses, with knock on effects for both Denmark and Greeland itself. This has played out most obviously in the Nuuk government’s scheme to construct two new airports and upgrade a third. The plan was always  controversial domestically, given a price tag equivalent to around a fifth of Greenland’s GDP. But with no roads connecting the country’s towns and only two airports capable of handling international flights (both far away from the larger settlements and visitor attractions), the new airports’ backers saw the scheme as key to improving connectivity and fostering an emerging tourist industry. Then in 2018, China Communications Construction Company’s (CCCC) bid for airport contracts was shortlisted. This prompted the Danish government to step in and provide its own part financing for the projects (along with the Nordic Development Bank), in exchange for a stake and thus, apparently, influence over choice of contractors. CCCC then pulled out in 2019, citing difficulties in securing visas for its engineers. 

According to the Wall Street Journal, after learning about a Greenlandic delegation’s visit to China in search of loan financing for the airports, the Pentagon leaned on the Danish government to provide the funds instead. This is not the first controversy around how far Danish authority over defence matters allows Denmark to intervene in Greenland’s domestic affairs. But the airports scheme had been framed as an important step towards economic development and self-sufficiency for Greenland, so accepting Danish backing was seen by some as a backwards step, deepening Greenlandic dependence on Denmark. This was enough to cause a political crisis, with the pro-independence Naleraq party withdrawing from the ruling coalition. 

One way to look at these developments is that Greenland requires outside investment if it is to ever obtain full independence- and that Nuuk government has so far been successful in leveraging its growing strategic significance in order to play off external partners against one another. But the country remains in a weak position in relation to the other players. Trump’s desire to buy the island (from Denmark) infuriated a lot of Greenlanders, given their long history of being sidelined by US-Danish deals. Influential voices in Denmark are aware of these feelings- and perhaps wary, given the opening of a new US Consulate in Nuuk, that the Greenlanders might increasingly seek to deal with the US directly. But this comes alongside a view of Greenland as a ‘card’ to be leveraged in Denmark’s relationship with the US- for example in deflecting US criticism of Denmark’s failure to meet the 2%  GDP target for defence spending among NATO members. The recent decision by Copenhagen to name Greenland as its top security priority should be seen in these terms. 

As for China, it is not yet clear how far increased interest in the Arctic generally will translate into a greater involvement in Greenland specifically. As I discussed in the last issue, Beijing’s ability to participate in Arctic affairs is limited by its distance from and lack of claims over the region. An independent but weak Greenland reliant on Chinese investment might therefore represent an appealing outcome. But so far there’s not really much evidence that Beijing is actively pushing for it. Greenlandic governments have been proactively seeking infrastructure investments and loan financing from China for some years without apparently raising much interest, outside the CCCC airport bid (though bidding for oil licences might change that next year). Of course, China’s fierce assertions of sovereignty over Tibet, Xinjiang, Hong Kong and Taiwan mean that Beijing can’t be seen to officially back Greenlandic independence. 

In any case, it seems much more likely that a Greenland separated from Denmark would fall under greater American rather than Chinese influence. Everything points to the US military presence being scaled up in future- perhaps also as counter to Russia as well as China- while Greenland’s Prime Minister Kim Kielsen has said it is ‘beyond doubt’ that Greenland will remain part of NATO. Plans to help Greenland survey mineral deposits and develop a regulatory structure for their exploitation are reminiscent of the mooted Arctic Development Bank discussed in the last issue of this newsletter- and similarly, are probably aimed at keeping Chinese investments out. 

https://the-drive.imgix.net/https%3A%2F%2Fs3-us-west-2.amazonaws.com%2Fthe-drive-cms-content-staging%2Fmessage-editor%252F1566588370648-aerial_picture_of_thule_air_base.jpg?auto=compress%2Cformat&ixlib=js-1.4.1&s=12830476fe38247c13d2df3f640a0468

Thule Airbase Source: Public Domain

None of this is to suggest that Trump’s idea of buying Greenland is going to happen. Even if Denmark were to agree, any transfer would have to be subject to a Greenlandic referendum. Given the situation in other US overseas territories- including the US Virgin Islands, a former Danish colony sold to the US in 1917- it is improbable that Greenlanders (a large majority of whom support eventual independence) would ever vote to swap Danish for American rule. 

For ordinary Greenlanders the growing spotlight on their country presents a dilemma. Without more external investment it is hard to see how independence could be financially feasible (though some think otherwise). Mining and tourism could potentially provide much needed jobs, diversify the economy away from over-reliance on fishing and stem the tide of emigration, along with providing the money to address social problems. But some worry that a mining boom would bring immigration on a scale which could outstrip Greenland’s small existing population. Even the hypothetical prospect of Chinese workers arriving in the country has been hugely controversial in the past (though labour shortages are now seeing some East Asian workers arrive). More broadly, and as in the Arctic in general, many of the new economic opportunities are arising because climate change is leading to easier access for tourists and mining companies. For Greenland, that means boom times, but also the end of traditional hunting lifestyles and the isolation and even abandonment of remote settlements, as transport by dog sled becomes more difficult on the thinning ice. That melt is a major contributor to global sea level rise- and seems to be now progressing at a pace in line with what only a few years ago would have been considered a worst case scenario