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ABSTRACT
How can we explain the marketisation of the iron ore market following the emergence of China, whereas the same market had seen change in the opposite direction following the emergence of Japan, 50 years earlier? I argue that relative coordination capacity – or relative market power – between domestic and international stakeholders explains market change at the global level. Via the study of Japan and China's impact on the iron ore pricing and shipping regimes, I show that China's rise led to the marketisation (liberalisation and financialisation) of the iron ore market pricing regime, and the demarketisation of the shipping regime, whereas Japan's rise led to demarketisation in both cases. This article's argument illustrates that China's impact is not equal across markets, contrary to characterisations of China as either a revisionist or status quo power. Second, it argues that China has caused the marketisation of the iron ore pricing regime, which is contrary to expectations on both sides of the debate on China's rise: China was unable to dictate outcomes via a strong state, nor did it seamlessly integrate the global economy. Third, it illustrates the importance of resonance dynamics at the interface of domestic and global market institutions.
Acknowledgements
The author would like to thank Yves Tiberghien, Brian L. Job, Louis W. Pauly, Eric Helleiner, Herman M. Schwartz, Alan M. Jacobs, Robert O. Keohane and two anonymous reviewers for their useful comments on earlier versions of this paper. This work was supported by the Social Sciences, Humanities and Research Council of Canada (Grant numbers 767-2010-2457 and 771-2011-0127), the Chiang Ching-kuo Foundation, and the University of British Columbia.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes on contributor
Pascale Massot is an assistant professor in the School of Political Studies at the University of Ottawa. From December 2015 to July 2017 she was on leave from the university, serving as Senior Policy Advisor to the Minister of International Trade of Canada and Policy Advisor to the Minister of Foreign Affairs of Canada, in both cases managing Asia policy. Her primary areas of scholarship are those of comparative and global political economy, the political economy of the Asia-Pacific region, China in particular, and Canada-China relations. She studies the relationship between states and markets, how China has defined this relationship, what impact this is having on the global economy, and given these realities, how Canada should engage with China. Her research interests include China's emergence as the world's dominant resource consumer and its impact on the governance of global extractive commodity markets, Chinese domestic commodity markets, specifically the iron ore, potash and uranium markets, the role of trust in global markets and Canadian public opinion on China. She has conducted field research in China, including as a visiting scholar at the Chinese Academy of Social Sciences in Beijing. Pascale Massot was the 2014–2015 Cadieux-Léger Fellow at the Department of Foreign Affairs, Trade and Development Canada.
Notes
1 I define marketisation as being composed of two related but distinct notions: liberalisation and financialisation.
2 Hughes and Lipscy (Citation2013) plot the percentage of journal articles in top political science journal that address energy politics since the 1970s. They find that the rate of publications increased from 1 per cent to 4 per cent of total publications during the 1970s, and then gradually declined over the next 20 years, as oil prices also declined.
3 On the rise of China as dominant resource consumer, see Economy and Levi (Citation2014), Kong (Citation2011), Zweig and Jianhai (Citation2005), Garnaut and Song (Citation2006), Song and Li (Citation2009), Rosen and Houser (Citation2007), Moran (Citation2010), and Streifel (Citation2006).
4 Van de Graaf and Colgan (Citation2016) argue in their review of the literature on global energy governance that scholars have only recently rediscovered energy as a research endeavour and call the field ‘nascent’ although it is ‘thriving’ currently.
5 To note that revisionist or status quo positions can each rest on a wide range of assumptions, including realist and liberal ones. I am indebted to A. Iain Johnston for suggesting this to me. As he points out, some realists have argued that China is currently a status quo power and some liberals have argued that China is threatening the global liberal order.
6 It is argued here that liberals conceive of global markets as part and parcel of the global liberal order. For instance, Ikenberry argues that ‘open markets, international institutions, cooperative security, democratic community, progressive change, collective problem solving, shared sovereignty, the rule of law – all are aspects of the liberal vision that have made appearances in various combinations and changing ways over the decades and centuries’ (Citation2012, p. 2).
7 A focus on Chinese SOEs can also be found in business and management studies (Child and Rodrigues Citation2005, Buckley et al. Citation2007, Chen et al. Citation2009, Deng Citation2012, Amighini et al. Citation2013, Bass and Chakrabarty Citation2014).
8 Extractive commodity markets are defined here as markets for primary commodities or materials in their raw or unprocessed state. Their status as commodities is partly defined by the fact that they are, in their refined form, indistinguishable from one another (i.e. copper is copper, and it is measured by concentration). This gets more complicated, however, in many extractive commodity markets, as different moisture content, grades, or the overall quality of the resource play a role in differentiating one commodity's source from another. However, it remains that the boundaries between commodity markets are easily identifiable and distinguishable from one another. Furthermore, it is difficult, if not impossible, to find a substitute for most commodities.
9 Hall and Gingerich define two types of national political economies: liberal and coordinated market economies. In the former, ‘firms coordinate their activities primarily via hierarchies and competitive market arrangements (…) characterised by arms-length exchange of goods and services in a context of competition and formal contracting’. In the other modality, ‘firms depend more heavily on non-market relationships to coordinate their endeavours with other actors and to construct their core competencies’. (Hall and Gingerich Citation2001, p. 8).
10 I define liberalisation as: ‘an outcome in which the market progressively replaces government as the mechanism through which resources are allocated’ (Hughes Citation2014). I define financialisation as the ‘strengthening interaction of commodities markets with the financial system (…), i.e. returns from commodities are increasingly pooled with returns from pure financial assets’ (Valiante Citation2013).
11 In concrete terms, the marketisation of a pricing regime entails a movement towards spot pricing, short-term contracts, high frequency of trades, volatility and less state involvement. A movement towards the demarketisation (strategic end of the spectrum) of a pricing regime is a movement towards benchmark pricing, long-term contracts, low frequency of trades, less volatility and more state involvement and/or more hierarchy and power-based dynamics.
12 This argument could be formulated in bargaining terms, where the goal is to formalise interaction patterns and assess which party is dominant and gets to set the rules of the game for a market at a given time. It is clear from the case studies under review here that a bargaining model should take into account that key sub-national actors have diverging preferences at the same time, and that price trends are not the only motivator behind preferences (contrary to the petro-political cycle (PPC model) elaborated by Wilson in 1986 (see Vivoda Citation2011, for a discussion). For a review of bargaining models in the political economy of resources, see Wilson (Citation1986), Ramamurti (Citation2001), Eden et al. (Citation2005), Grosse (Citation2005), and Vivoda (Citation2009b, Citation2011).
13 In this article, the focus is on coordination capacity on either the producer or consumer side, among market or non-market entities that have a stake in the market. The producer side includes multinational firms and governments in relevant countries (in this case Australia or Brazil). The consumer side includes large and small firms, government departments (in this case in Japan or China), industry associations and the like.
14 Market power is defined here as relational, at both the domestic and international levels. I adopt Susan Strange's definition of power: ‘Power is simply the ability of a person or group of persons so to affect outcomes that their preferences take precedence over the preferences of others’ (Strange Citation1996, p. 17.).
15 See Vivoda (Citation2009b) for a review of the literature on the relationship between (low) industry concentration and (low) bargaining power of multinational corporations. Among other authors who have identified concentration as a variable of interest, we find Rodrik (Citation1982), Krasner (Citation1974), Hughes and Long (Citation2015) and Radetzki (Citation2013). Rodrik defined global commodity markets along 4 variables: degree of concentration, vertical integration, state ownership and trade and price formation mode (Citation1982). Hughes and Long (Citation2015) investigate the link between (higher) market concentration and the potential for coercion. I investigate the link between market concentration and coordination, another form of market power.
16 Mordecai Kurz (Citation2017) measured ‘monopoly wealth’ (levels above which profits or stock values are not purely chance events, but rather reflective of monopoly power) at 82 per cent of total stock-market value. The percentage of exports by the four largest firms in the world is near or above 60 per cent in the iron ore, uranium, potash and soy markets, just to name a few commodities.
17 A primarily price determined logic would predict that consumers (producers) have an interest in marketisation (demarketisation) when prices are dropping, and an interest in demarketisation (marketisation) when prices are rising (see the Petro-Political Cycle model (PPC), Wilson Citation1986). ‘The PPC model posits that … in rising markets, sellers … gain leverage; in falling markets, buyers … , gain leverage’. (Vivoda Citation2009b, p. 518). In a more recent application, Colgan et al. (Citation2012) argue that the timing of innovation in the global oil market depends on dissatisfaction, which in turn depends on price. The authors argue that when prices are up consumers are dissatisfied and when prices are down, producers are dissatisfied.
18 The data drawn upon for this article was part of a larger project that included 119 interviews with Chinese and foreign officials, industry practitioners, managers, analysts, specialised journalists and other experts. Interviews were conducted by the author in either Mandarin Chinese, English or French. Interviews are numbered, and information about the interviewee is added in brackets in this format: (number, profession, date and location).
19 The Chinese government has continued to promote the consolidation of the domestic steel industry, with the recent merger of Shanghai Baosteel with Wuhan Iron & Steel in 2016 (Wildau Citation2017), but half of the country's output is still accounted for by small private firms (Shepherd Citation2016).
20 The goal of these efforts was framed at the time as reducing China's dependence on the foreign iron ore export ‘monopoly’ (‘垄断’) (Zhao Citation2013). The Chinese Ministry of Commerce reduced the numbers of import licenses from over 500 to 105 in 2010 (Zhao Citation2013). Given the widespread illegal use of licenses at the time, a larger number of Chinese companies were purchasing iron ore on the global market.
21 Free on Board (FOB) means that the seller pays for the transportation of the goods only to the port of shipment, which includes the cost of loading the goods on the cargo ship. Beyond this point all costs are borne by the buyer of the goods. Cost and Freight (CFR) means that on top of delivery to the port of shipment, the seller also pays for the freight between the port of shipment and the destination port. Cost, Insurance Freight (CIF) means that on top of delivery to the destination port, the seller also pays for insurance. (Iron ore: A history of iron ore pricing Citation2012)
22 The Valemax carrier is the largest bulk carrier ever built: over twice as big as Cape-size carriers (400,000 dwt).
23 COSCO has continued to consolidate its position domestically and in the global shipping market by merging with China Shipping in 2016 (Goh and Miller Citation2017).
24 As one interviewee put it: ‘Vale sold the Valemax idea to China when the pricing system was FOB. In the FOB system, they could say there were then sharing costs … but by the time the ships got built, the market had shifted to CFR. Savings all belong to seller! Vale makes more profits! Not fair’ (Interview 112, iron ore industry consultant, Shanghai 2012).
25 After failing to offer a strong response to the Japanese negotiating position in the 1960s, the Australian government did evolve a stronger position by the early 1970s. As a result, Australian producers were able to extract price increases from the Japanese in the mid-1970s. This shows the emergence of bargaining patterns as coordination improved on the producers’ side. However, Japan followed suit with government supported proactive foreign investment policies in global iron ore projects, especially in Brazil, and was able to maintain its dominant position vis-à-vis the Australian producers (Hurst Citation2015b).
26 CRVD (Companhia Vale do Rio Doce) at the time.
27 The Japanese initiative, led by Nippon Steel, included the establishment of a freight-sharing system with Brazilian producer Vale to account for freight cost differentials between Brazil and Japan and Europe and Japan (Sukagawa Citation2010).