North America

Complacency over Coal’s Collapse: Five Factors to Consider

American coal companies’ stock prices have crashed in recent years, in response to the triple-whammy punch that is the US fracking boom, the environmentalist movement, and the slowdown in the Chinese industrial economy. As recently as January of 2016, the Dow Jones US Coal Index had lost around 92 percent of its market value since mid-2014, more than 97 percent of its value since 2011, and more than 98 percent of its value since its all-time peak in 2008.

Coal stock index 10 Year

2008 highs over 700, 2011 highs at 500, 2014 highs around 150, 2016 lows at 12, today at 33.87

Now, it may be that coal really is finished as a major industry in the US, but there is no reason to be certain about this. The market’s plunge is arguably more a sign of investor panic than of rational valuation: coal still accounts for around a third of US electricity generation and close to 40 percent of electricity generation worldwide. The economic outlook for the coal industry does not seem to have collapsed to the extent the Dow Jones US Coal index might suggest.

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Energy mix in the US

world electricity production

1. Climate Change 

Burning coal is generally considered to be around twice as carb0n-intensive as burning natural gas. Carbon dioxide, however, is hardly the only culprit where climate change is concerned. Methane emissions are also a crucial component to climate change, for example, and industries like natural gas and meat production can be more methane-intensive than coal.

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US Methane Emissions By Source

Thus far the natural gas industry, food industry, and many in the US government have neatly sidestepped the methane issue, refocusing American public attention toward carbon dioxide. They have done this by using the “we need to protect the planet for the sake of our grandchildren and future generations” approach. Methane emissions, after all,  only contribute directly to global warming for a few years or decades at a time, whereas carbon dioxide can remain in the atmosphere for many centuries.

The truth, though, is probably that this is deliberately misleading. Future generations may be perfectly capable of handling whatever climate change comes their way, or of removing carbon dioxide from the atmosphere. The really dicey climate change period is more likely to occur within the coming years or decades, when the world is not yet technologically advanced enough to protect vulnerable human (and animal) populations. Within such a time frame, emissions of gasses like methane can be even more impactful than carbon dioxide.

Today US methane emissions, measured in kilotons of CO2 (carbon dioxide) equivalent, are around ten percent as high as carbon dioxide emissions. Since the impact of each kt equivalent of methane upon global warming can be up to 80-90 times higher than carbon over the course of a twenty-year period, however, the overall effect of methane emissions can perhaps be worse for climate change than carbon emissions can.

Indeed, while the direct impact of methane fades over time, the indirect impact of methane emissions could remain for decades if they help to trigger a global warming feedback loop; for example, if it helps to cause sun-reflecting polar ice to melt, which could warm the planet and so cause even more polar ice to melt.

methane emissions

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Carbon dioxide emissions by country, in 2013. Admittedly, given the speed of America’s shale energy boom in recent years, it is possible that these numbers from two and a half years ago are already outdated to some extent

Thus, methane emissions arguably deserve more public attention and regulation. And if they are regulated, it may weaken the natural gas industry relative to the coal industry, as the gas industry in the US accounts for almost triple the methane emissions that coal does. Just this month, the US federal government has launched its first ever package of methane emission regulations for the oil and gas sector.

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Another greenhouse gas to consider in nitrous oxide. Nitrous oxide emissions in the US are roughly 5% of carbon dioxide emissions, measured in kilotons. They only last in the atmosphere for 114 years on average. According to the EPA, though, “The impact of 1 pound of N2O on warming the atmosphere is almost 300 times that of 1 pound of carbon dioxide.” As with methane, it is agriculture, not coal, that is the main culprit of nitrous oxide emissions. Even most of the nitrous oxide emissions that come from the “Energy” sector labelled on this graph come from cars and trucks, rather than from coal-fired power plants.

Methane, which is the main component of natural gas, can also be captured and then stored or used to produce energy. Capturing methane from the natural gas industry, however, is extremely difficult to do, because the gas sector is diffuse, consisting of hundreds of thousands of wells spread across dozens of states as well as in offshore fields in the Gulf of Mexico. Capturing and making use of methane that is released from coal mines could perhaps be easier to do, since coal production is more concentrated than gas or oil. There are only about 1000 or so coal mines in the country, and they are located mostly in Wyoming or the Midwest.

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Another thing to note is that while burning natural gas is only a bit more than half as carbon-intensive as coal, much of the natural gas production in the United States comes  as a byproduct of drillers trying to produce oil. This means that US gas is actually more carbon-intensive than it seems, since it would not be produced as much if the US was not also producing so much oil, and oil (or gasoline) is more than three-quarters as carbon-intensive as coal is.

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Most coal in the US is bituminous or sub-bituminous

This also raises the question: will the price of oil in the US remain low? If it does, it is likely to result not only in a reduction in oil production, but also in natural gas production (again, because natural gas is frequently a byproduct of oil), which in turn could cause coal to become more competitive relative to natural gas.

Oil in the US is used mainly for transportation, so it is possible that the revolutions now taking place in the transportation sector – for example, Uber (and companies like Uber), UberPool, Zipcar, electric vehicles, hybrids,  e-commuting and e-commerce, using smartphone apps to make express busses finally become feasible, being able to watch a movie or do work on your smartphone or tablet while you are taking public transit or being carpooled,  and the development of self-driving vehicles  – could lead to such a reduction in oil use.

In the case of electric or hybrid vehicles, this could also lead to a major increase in electricity usage, potentially helping the coal industry at the expense of the oil and gas industry. And while electric cars may not soon be appearing in every driveway, it may not be too long before a widespread network of electric or hybrid Uber-esque vehicles and Zipcar-esque vehicles come into place.

If, moreover, self-driving vehicles do become a reality as well at some point, it could make vehicle-sharing services like Uber and Zipcar even more competitive, and could allow electric Uber vehicles and Zipcars to drive themselves to (and wait in line at) the nearest battery-charging station. This is an important factor, given that fully charging an electric vehicle often takes several hours.

Of course, many people think that coal is likely to lose out not only to natural gas, but also to alternatives like solar energy, which emit relatively little carbon dioxide, methane, or any other type of greenhouse gas. However, it is still not clear when or if industries like solar will be able to compete on a large scale with coal in developed economies like the United States.

Much has been made about the falling cost of solar panels They are often said to have become more competitive as a result of technological improvements, and are expected to continue doing so going forward. In fact there is an alternative plausible explanation about what has driven the falling cost of solar panels: government support in East Asia (especially China), Europe, and to a lesser extent North America. The solar industry may have benefited from attempts by governments in these regions to stimulate their slowing industrial sectors and reduce pollution at the same time.

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above: China’s solar panel statistics, 2004-2012

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If this explanation is true, then it is possible that the cost of solar panels going forward will not continue to fall as much as people now expect them to. Indeed, if China’s economy has the “hard landing” some fear it will, panel prices could even rise a lot as solar panel manufacturing output collapses.

Ultimately, though, climate change threats will continue to hamper the coal industry, unless at least one of two things happen. The first is large-scale carbon capture and storage. Though carbon capture and storage has been over-hyped in recent years , it cannot be ruled out entirely either. We will discuss this further below.

The second is climate change fatalism. If it becomes accepted that we already well past the point of being able to reverse global warming, then the priority could shift away from reducing carbon emissions and instead become achieving rapid economic advances in order to pay for the huge, global effort that adapting to climate change will entail. Ironically, coal could be employed as the cheap, plentiful resource used to spur such rapid economic growth. If this sounds a bit crazy, bear in mind that it is the approach that India and China are already implicitly (and at times explicitly) embracing at the moment. India in particular is still planning on building many new coal plants in an attempt to achieve economic growth.

Bangladesh, perhaps the most climate endangered among the world’s hugely populous nations, has resisted climate change fatalism. However if it runs out of hope that the world’s major economies will take the necessary measures to mitigate climate change, then it could end up getting on board with this philosophy too, since it desperately needs economic growth to lift its population out of the immediate poverty it faces.

Countries like Bangladesh have, in addition, been publicly toying with the unorthodox idea of purposely releasing gasses like sulphur dioxide into the atmosphere in order to deflect sunlight and thus reduce global temperatures. Indeed, certain industries already produce this effect over a limited timespan, due to the sulphur dioxide they emit. Such industries include coal-fired power plants and container shipping.

According to this article from the Guardian, the container shipping industry alone, over a five-year lifespan, may contribute a cooling effect significant enough to offset the warming caused by every car, bus, and airplane in the world combined. Still, this cooling effect diminishes over longer timespans as sulphur dioxide leaves the atmosphere, and, in any event, sulphur dioxide emissions also cause significant local pollution, such as acid rain.

2. Local Pollution

A lot of the most concerted pushback against coal has seemed like it is driven by fears of climate change, when really it is driven to a substantial extent by frustration with more local forms of pollution that the coal industry creates. In order for local anti-pollution activists to gain public support, they often, quite understandably, use climate change as a cover.

The threat of climate change alone, without local anti-pollution activism, has a more difficult time of creating meaningful pushback, because climate change is far less of an immediate and concentrated danger than localized pollution is. Pushback against local pollution, for example, historically played a significant role in causing American industry to outsource to places like China that were more willing to tolerate it. This is also, by the way, one reason why methane emissions have gotten off the hook compared to some other types of greenhouse gasses, including carbon dioxide: methane causes far less local pollution, even though its contribution to global climate change can be severe.

If coal can overcome its local pollution problem, then, it may be able to revive itself to some extent even in spite of the role it plays in global climate change.

There is a way that the coal industry may reduce its local pollution problem: disassemble and reassemble coal-fired power plants and relocate them to more sparsely populated areas, and largely mechanize the operation of coal-fired power plants and coal mining sites.

CoalRetirementsMap

The West is wide open

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US population density/major city map

The mechanization of the coal industry is already well on its way (see graph below) and will probably continue in the coming years as a result of the “robot revolution”. Moving coal-fired plants to less populated areas would of course be enormously expensive; it would require not just moving the plants themselves, but also the building of new electricity lines.

WV_Employment_vs_Production

Finding cheap routes to build electricity networks through is no easy task, nor is maintaining such electricity networks once they are already built. Plus, the longer the route, the more electricity is lost in transmission – and the routes would have to be quite long in order to locate the power plants in sparsely populated areas. Still, it could happen, if coal can remain cost competitive with other energy sources. More on this in the next section.

Local pollution is also a major reason why urban and suburban areas may start to use a lot of hybrid, electric, or Uberpool-esque vehicles, since conventional gasoline-powered vehicles create a lot of air pollution (and noise pollution) in areas in which lots of people live. Hybrids, if they can become cost-competitive with conventional cars, are ideal in this regard, as they typically cause air pollution only on rural or ex-urban roads where fewer people live.

If electric vehicles become common, it could boost demand for electricity (helping coal, potentially) and decrease demand for oil (helping coal by causing less natural gas production, potentially).

Finally, local pollution is most harmful in places where there are lots of physically vulnerable people; i.e. in densely populated countries where there are many young kids or senior citizens. The United States does not fit this description, as it is sparsely populated and most of its population is in the prime of their lives. The developing world, on the other hand, is often very young and densely populated, while Western Europe, Japan, and increasingly even China are old and densely populated. Pushback against local pollution in China in particular could cause some industrial activity – and its attendant demand for electricity – to relocate to North America.

land per capita

The countries that are by far the most densely populated on this list, namely India and Japan, have by far the youngest and oldest populations, respectively, among the world’s major economies.

3. Robots 

Robots could benefit the coal industry in multiple ways. First and most obviously, they are likely to cause American electricity demand to soar, because robots are often extremely energy-intensive to use and because they could lead manufacturing that in previous decades has been outsourced to countries like China and Mexico to be brought back to the United States.

The same is true in other developed economies, like  Japan, South Korea, Taiwan, and Hong Kong, which are already totally reliant upon coal and other fossil fuel imports to power their economies. In 2014, Japan and especially South Korea were the biggest purchasers of US coal, with the exception of the Netherlands (a European trade hub), Britain, and Brazil. East Asia is also the primary destination for more than three-quarters of Canadian exports of coal, which are split about equally between China, Japan, and South Korea.

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World’s largest coal importers. Source: Index Mundi

Indeed it seems like ancient history now, but prior to United States sanctions on Japan in the 1930s, Japan was getting around 60-80 percent of its oil imports from the United States. It is not totally out of the question that a somewhat similar pattern could re-emerge, with the US exporting fossil fuels to East Asia once again, as the US may want each of these countries to remain strong enough to “contain” China.

relative trade northeast asia

These values adjusted for GDP size; they are not given in absolute terms. In absolute terms, China and Japan would be higher than South Korea and Taiwan in every case. Source: Future Economics

South Korea and Taiwan are particularly dependent upon energy imports (see graph above). And the United States is very approving of its alliances with these two countries because they help to “counterbalance” (to use another geopolitical euphemism) both China and Japan, which by most accounts remain by far the world’s second and third largest economies.

fossil fuel importers

For Japan, robots could particularly cause electricity demand to surge, given that Japan may need to use a lot of them to replace its rapidly aging, high income labour force. Japan’s other alternative thus far has been to outsource labour to countries like China and Thailand, however it is not clear how much Japan is willing to continue becoming dependent on these countries, and meanwhile millions of Japan’s domestic workers are approaching retirement age.

population-pyramid-of-japan-in-2015

A second way robots could help the coal industry is by causing electricity demand to rise overnight. One of the drawbacks of coal power has been that coal-fired power plants, unlike hydroelectric dams or, to a lesser extent, compared to natural gas plants, cannot easily ramp up and down their electricity production. This has meant that, like nuclear plants, they tend to over-produce electricity overnight, when the cost of producing the power is often higher than the price it sells for. However, since robots don’t sleep, they may drive up the demand for electricity at night. In addition to coal and nuclear, this may also help wind power, since it is often windier overnight than during the day. But it could hurt solar power.

Robots could perhaps also help allow coal-fired power plants to be moved to or built in sparsely populated areas where their local pollution will not be as bothersome, since robot-run factories may not need to employ many humans. This could also prevent new, long electricity lines from having to be built and maintained in some cases, as the power plant could be located right next to the robot-run industrial areas.

Robot-run factories and coal-fired power plants could also be constructed next to or near the coal mines themselves. This could be a big help to the industry, as coal has very high transportation costs because of how bulky coal is compared to other resources, for example oil, and because coal cannot be moved by pipeline. (Moreover, the transportation of coal often creates significant pollution next to the railways, roads, or barges it is being carried on).

energy density

Note: coal may be a lot less energy-dense than natural gas in gravimetric terms, as shown above, but not in volumetric terms: natural gas takes up a lot of space, since it is a gas

Lignite, in fact, which is used commonly in Europe, has such a low bulk-to-value ratio that in most cases it transported only extremely short distances, and often by conveyer belt. A lot of sub-bituminous coal, which is very common in the US, is not much more dense in its energy content.

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Given this bulkiness, coal could also benefit from robots that aid in the transportation sector: namely from self-driving trucks. Coal is often mined in mountainous areas, where building railways is difficult and expensive (railways cannot handle inclines or sharp bends easily, compared to roads). Building railroads to reach mines, or trucking the coal to the nearest railroad, can be an enormous expense. In the US and Canada coal mining also occurs in wintry and relatively remote locations, for example in northern Alberta or in the mountains of Montana and Wyoming, which can cause transport costs to be higher still.

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With self-driving trucks, however, you do not need to pay a driver wages or insure a driver against the event of injury in a mountain-road accident, which saves money, and self-driving trucks can work all night, which improves efficiency. In fact, even large trucks are often too large to use on mountain roads and tunnels (or if there are mountain roads capable of handling them, they are often very expensive to build and maintain), but with self-driving trucks it is possible to use small trucks instead because you don’t have to worry about paying drivers’ wages or insurance. It would otherwise take a lot more drivers to transport coal via small trucks compared to large trucks, since small trucks can carry much less coal per trip.

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Welch, West Virginia

Self-driving trucks could be a huge boon for the coal industry, then. Indeed, because many mining roads are privately owned by mining companies, they may be able to begin using self-driving trucks before normal roads do, since the biggest barrier to adopting self-driving trucks elsewhere may be public regulations.

Finally, robots and computer systems could help in the maintenance of long power lines, which could benefit the coal industry a great deal (and also benefit other industries, like wind power). Current methods of doing this are expensive, unwieldy, and often dangerous. This video may seem outdated, but many of the methods it shows are frequently still used today.

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Surface Mining, common in Wyoming

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And of course, there may also be plenty of opportunities for robots to increase efficiency in the actual mining of coal itself.

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America dominates in the most important category, “Anthracite and Bituminous” coal. Some of its main competitors, notably Russia and Australia, have their coal reserves located in extremely remote parts of the planet. Germany and Greece, meanwhile, antagonists of one another in the “Eurocrisis”, have something in common: they are rich in lignite but poor in coal. Germany gets around 25 percent of its electricity from lignite production and another 18 percent from coal. 

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US Coal production: much has moved from east of the Mississippi River to west of the Mississippi, from underground mining to surface mining, and from bituminous coal to sub-bituminous coal

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4. Developing Economies 

Many developing nations have embraced coal because it is cheap, but this process could slow or even reverse in the future. If it does, it could allow the US to pick up some of the coal slack that developing countries give up, since there is only so much carbon that the world can handle, and since in some cases it could lead manufacturing to relocate to the US. It could also cause the developing world to import more LNG or renewable energy sources from the US, pushing up the cost of those energies in the US when compared to coal.

First, as climate change fears rise, developing countries could begin to have to scale back on coal, whether because their own populations become worried (the developing world in general is more vulnerable to climate change than the developed world is) or because the developed world decides to slap carbon tariffs on their exports.

Second, local pollution in much of the developing world has become so intense that it may cause – and in some cases, is already causing – increasing pushback against coal.

Third, as was mentioned earlier in the article, robots could allow developed countries to “reverse outsource” their manufacturing industries, which would sharply reduce demand for energy in the developing world.

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Electricity use in China is dominated by the industrial sector

Fourth, if urbanization slows in the developing world – which it could, because of such “reverse outsourcing” taking away urban jobs, because of the spread of cell phone and Internet access into rural areas, because of urban air pollution becoming intense and undesirable, and because urban temperatures in developing countries are frequently extremely high compared to rural areas (particularly rural highlands) – then the developing world will demand energy sources that can be accessed in rural areas where there are little or no electricity grids: solar panels, diesel generators, small wind turbines, etcetera. But not coal, which is generally burned in big power plants to power cities and factories.

coal by country

Instability in the developing world might also benefit the US coal industry, allowing the US to increase its coal exports. If, for example, China falls into regional chaos like it did for decades prior to the Communist takeover of the country in the late 1940s, then it could put at risk some or many of the energy supply routes that link China’s energy-rich interior provinces (like Shanxi, Heilongjiang, and the “autonomous regions” of Xinjiang and Inner Mongolia) to China’s major urban areas on the coast (like Shanghai, Guangzhou, Hong Kong, Beijing-Tianjin, Taipei in Taiwan, and many  others).

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Coal Mining by Province

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Coal-fired power plants map — the region around Shanghai, which does not mine much coal itself (see map above) dominates

Shanxi and Inner Mongolia combined have accounted for more than 15 percent of global coal production in recent years. If China’s coastal cities cannot secure energy supplies from within China, they may turn to importing coal from countries like Australia and even the US instead. This may not be likely to happen, but it is a “black swan” possibility that is worth taking note of, given China’s historical regionalism and the enormous energy and coal consumption of China’s coastal provinces.

This is also true of other energy sources. China’s natural gas, hydro, and most of its oil production, for example, are also located in interior provinces like Heilongjiang, Xinjiang, Sichuan, and Yunnan. They are in fact often located extremely far in the interior, such as in the Autonomous Region of Xinjiang, which produces a substantial portion China’s oil, natural gas, and coal.

Xinjiang has a deep ethno-religious divide between Turkic Muslim Uyghers and its more recent Han Chinese settlers, and has very difficult terrain that has historically made it prone to separatism, irredentism (with the Turkic Muslim populations of neighbouring, now-independent Central Asia) and “warlordism”. In Xinjiang, mountains cover an area larger than England and regularly reach heights higher than the highest Rockies. Much of Xinjiang is also covered by deserts or semi-deserts, and the region is so far inland that its capital city, Uruqmi, “has earned a place in the Guinness Book of Records as the most remote city from any sea in the world. It is about 2,500 kilometres (1,600 mi) from the nearest coastline”.

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china oil by province

China is the world’s fourth largest oil producer, trailing only Saudi Arabia, the United States, and Russia

china pipelines

China’s natural gas network is not extensive like the United States’ is. If a single line were to be endangered as a result of political unrest – for example, the connection to the cities of Guangzhou and Hong Kong, where much of China’s economic activity is located – China might have to look to imports of energy from abroad to make up the difference. This map comes from the US Energy Information Agency 

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Natural gas pipelines in the US

China has, similarly, also pinned hydro hopes on Tibet; a risky proposition given its intensely difficult terrain, remoteness, ethno-religious resistance to Chinese settlement and domination, and position as the source of most of India’s, China’s, and Southeast Asia’s live-giving rivers.

China’s energy imports come mostly, however, from Siberia, Central Asia, or from Oceania, Africa, or most often the Middle East (by way of the Strait of Hormuz, the Indian Ocean, the Strait of Malacca, and South China Sea). Should these supply routes be imperilled, Chinese coastal cities could be forced to import energy across the Pacific from the Americas instead.

indian-ocean-bases

13 percent of China’s oil imports comes from Angola, even, according to the US Energy Information Agency, more than from any country apart from Saudi Arabia (16 percent). Angola, apart from being a formerly war-torn country that remains full of material poverty and ethnic division, is located very far away from China, on the Atlantic rather than Indian Ocean coast of the African continent. For its oil to reach China, it must first round the southern tip of Africa, passing waterways controlled by Angola’s regional rival South Africa.

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A somewhat similar thing could happen, theoretically at least, in India, the world’s third largest coal producer and fourth largest coal importer. Much of the Indias’s oil and gas is produced or processed in states like Gujarat and Rajasthan, while most of its coal is produced in Jharkhand, Chhattisgarh, and Odisha, states which account for two-thirds of India’s coal reserves.

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There is a close overlap between India’s Naxalite-Maoist insurgency and India’s coal producing regions. The exception is Assam-Maghalaya region, but this region, which is connected to the rest of the country by a narrow land bridge between Bangladesh, Nepal, and Bhutan, has its own set of severe problems and insurgencies. Finally, you’ve got the Telangana-Andhra Pradesh complication.

It may also become more economical to have solar power harnessed in the developing world more than or instead of in the developed world. This is because in the developing world, peak energy may increasingly occur at the same time as peak sunlight: in order to power air conditioning for billions of people when its 30-50+ degrees Celsius outside. In the developed world, in contrast, air conditioners are already widespread, and in many places peak energy use occurs when the sun is not bright, for example to power heating units in the winter, or to power perennially overcast places like Britain or Seattle, or to keep the lights on during super-long winter evenings in Scandinavia, or perhaps eventually to power electric cars overnight.

The developing world may also be increasingly likely to use airplanes more often than the developed world does. This is an important point, as airplanes arguably contribute to climate change  more than all the cars on the world’s roads combined (at least, over a five-year timespan), since they emit lots of greenhouse gasses at high altitudes. Developing countries may need to use airplanes more because much of the developing world is located in areas where land-based transport can be difficult: in mountainous or hilly areas, in deserts, in the Tropics, in archipelagos, in rural areas, in conflict-prone areas, and in densely populated cities with terrible traffic jams.

The developed world, on the other hand, may even replace its own airplane usage with land-based transport in some cases, as a result of the technological advances occurring within the land-based transportation sector. Instead of flying from New York City to Florida, Sydney to Melbourne, or even London to Barcelona, people may take the train or bus instead (making use of the wi-fi on the train or the bus along the way, as well as the ability to use services like Uber and Zipcar to get around once they have arrived at their destination) or eventually even take a self-driving vehicle.

5. War

During World War Two, inter-continental weapons did not exist, so US shores were safe from attack (with a few exceptions). During the Cold War inter-continental weapons did exist, but the US was saved from attack by its massive deterrent of nuclear and conventional weapons.

Today, however, precision “smart-bombs” and precision cyber-weapons exist, putting the US at risk (in theory, at least) of a surprise attack on its military and industrial infrastructure. Because a large-scale precision attack would cause very few deaths by WW2 or Cold War standards – a factory could in some cases be destroyed overnight and kill only the night watchman, while cyber-weapons can disable an entire electricity grid without killing anyone – it could mean that an enemy country could be more willing to take the risk of launching such an attack. In other words, the technological advances that are making war less deadly may also end up making war more likely to occur.

The Pentagon is undoubtedly going to spend hundreds of billions or even trillions of dollars to defend against and prepare for such a possibility. It has already done this in recent decades with its ballistic missile defence systems; however these might be inadequate on their own, as North America could simply be too big a place to protect in its entirety.

As the precision-weapons era matures throughout the militaries of the world, the Pentagon may decide to take the additional step of shielding US industry by clustering a few “mega-industrial areas”, capable of producing both military and essential non-military goods,  that it can then build more impenetrable defence shields (including “cyber-shields”) around. The idea will be that it is far easier to defend an area the size of a city than it is to defend an area the size of a continent. Other militaries around the world may do a similar thing.

The question is, then, if these military-shielded mega-industrial areas do become a reality, will it be coal that powers them?

It seems quite plausible that it will be. The main alternative, natural gas, is difficult to transport by truck, and natural gas pipeline networks and gas production sites could be vulnerable in the event of war, as could be electricity grids. Coal, however, can be transported by truck, and much of the coal production in the US is already concentrated in just a single state in the heart of the country, Wyoming. Moreover, coal can be stockpiled in enormous quantities, whereas gas is very difficult to store in large quantities.

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Oil could conceivably be used instead of coal, but the US has few oil-fired power plants, and oil would be needed in large quantities to power the many military vehicles and fleet of trucks the US would need to fight a war, so it would not necessarily be available to use for electricity production.

Other countries too might use coal if they decide to build military-defended mega-industrial areas. Many significant countries in the world have coal mines or coal reserves, yet do not produce natural gas or oil in as significant quantities. These include Germany, India, England, Turkey, Poland, and China, for example. Moreover, countries can build up huge stockpiles of imported coal, which they cannot do with natural gas.

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coal production by province

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A mega-industrial region of this kind, backed by the military, could perhaps also allow carbon capture and storage to finally become economically viable. Carbon capture and storage is a key component of mitigating global warming if fossil fuels are not going to be phased out, yet thus far it has been far from economical. But whereas it has not been achievable for a single power plant, if you cluster many power plants together in one area, it could maybe allow for the economy of scale necessary to make carbon capture more affordable.

If, finally, tensions between Russia and “the West” continue to deteriorate, or if the situation in Ukraine continues to destabilize, it might lead to European countries to have to turn to imports of energy from the Americas to make up for the natural gas and coal they would have to stop importing from Russia and Ukraine. This too could help to push up the price of US coal.

Conclusion 

I am just playing devil’s advocate here, of course.  I don’t actually have any idea what the future of the American or global coal industry will be. Still, judging by the fact that the Dow Jones US coal index has nearly tripled since the start of 2016 (though it still remains around 80 percent lower than it was as recently as mid-2014), I may not be the only one to be doing this.

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East Asia

Examining China’s M&A Boom

An article in last week’s issue of The Economist showed that China’s outbound M&A activity[1] has risen sharply of late, up approximately fivefold since the summer of 2015 and eightfold above its average rate between 2010-2015.[2]

The article mentions that this increase could represent a troubling trend of capital fleeing China in response to China’s experiencing slowing economic growth and a gradually depreciating currency in recent years.

It then largely dismisses this theory, however, saying, “rather than sparking a stampede [of money] to the exits, it is more accurate to say that these changes [in China’s economic performance] have alerted Chinese firms to the fact that they are still woefully under-invested abroad. China’s share of cross-border M&A has averaged roughly 6% over the past five years, despite the fact that it accounts for nearly 15% of global GDP[3]”.

Implicit in these words is the expectation that a country’s share of global M&A should not be too different from its share of global GDP. Yet this overlooks several other factors that may determine a country’s propensity for engaging in M&A. These may include a country’s role in international trade, or a country’s proximity to other large economies or foreign financial hubs, or a country’s cultural and linguistic affinity[4] or political relationship with other large economies and foreign financial hubs.

China ticks each of these boxes in a notable way. It is both physically and linguistically isolated from most of the global economy beyond its own borders: East Asia outside of mainland[5] China accounts for only 12% or so of world GDP[6], while the combined GDP of the world’s majority-Chinese economies outside of mainland China is about nine times smaller than that of mainland China itself[7].

China’s political relations are somewhat fraught. 45% of East Asia’s GDP outside of mainland China occurs in China’s regional rival Japan[8], nearly half of the world’s GDP that occurs in majority-Chinese countries outside of mainland China itself occurs in Beijing’s rival Taiwan, and 25% of global GDP is from its potential rival superpower the US[9]. 

China’s propensity toward international trade is, similarly, not pronounced[10]. China accounts for an estimated 11% of international trade, compared to 15% of global GDP.

Finally, apart from Taiwan, the only notable majority-Chinese economies outside of mainland China are business-financial hubs: Singapore and Hong Kong. Such hubs historically tend towards very high M&A activity, and towards being net originators rather than targets of M&A deals[11]. China’s global share of outbound M&A might therefore be higher were these not financial hubs. If, for example, Hong Kong was considered to be part of mainland China[12], China’s outbound M&A would in most years have been meaningfully higher than it has been[13]. 

The value of China’s outbound M&A as a share of global cross-border M&A should perhaps be lower than China’s share of global GDP, then. Yet so far in 2016 it is on pace to be much higher than China’s share of global GDP. The M&A boom could be capital flight after all. 

————

NOTES:

1 — Specifically, the “value of announced outbound mergers and acquisitions including net debt of targets”, according to the article. Notably, however, “announcing deals is not the same as closing them. Between losing out to other bidders and rejection by regulators, China’s investment tally could fall [below what it has announced].” “Nevertheless”, it goes on, “the trend is unmistakable. In recent years China has consistently accounted for less than a tenth of announced cross-border M&A deals; this year its share is nearly a third.”

2According to this article in the Financial Times, Chinese buyers account for an estimated 15% of the value of cross-border M&A that has occured thus far in 2016”. The Chinese offer to buy the Swiss company Syngenta, if accepted, is roughly big enough to eclipse all outbound chinese M&A in any year before 2014.

3- The article goes on to say “…Strategic considerations—acquiring technology and brands that China lacks—are more important [than moving capital out of China] for buyers [of foreign companies], both to bolster their position at home and to speed expansion abroad.”

4 – The following quote is from Clifford Chance and the Economist Intelligence Unit, from 2012: “Despite the growing need for companies to invest in new markets in order to realise their growth ambitions, more than one-half say that they are discouraged from acquiring overseas because of concerns about bridging cultural differences. This rises to 63% for respondents in the US. Many companies admit that they find the softer side of deal-making challenging, with just 44% of companies saying that they are effective at handling cultural integration as part of the transaction process.”

5 — “Mainland China” in this case does not include Hong Kong, Macao, or Taiwan, but does include other Chinese islands like Hainan and Xiamen.

6 – If you also include India, Australia, and New Zealand this figure rises to 18%

7 -By comparison, even the nominal GDP of the United States is only 2.75 times larger than the combined GDP of Britain, Canada, and Australia. France’s GDP is only 3.15 times larger than that of Belgium plus Quebec. Even if you try to count the wealth of the entire Chinese global diaspora rather than just majority-Chinese economies like Taiwan, Hong Kong, and Singapore, it is still very small compared to the size of mainland China’s GDP.  If you assume, for simplicity’s sake, that there are 50 million “overseas Chinese” (the figure given, roughly, by Wikipedia), and that each has an average income of $25,000 (similar to the per capita GDP of Taiwan), then the overall income of the Chinese diaspora is $1.25 trillion — still little more than 10% of mainland China’s GDP.

8 – According to this source, “Chinese FDI in Japan and trade relations between the countries have a long history because of the relative cultural and geographic proximity between the countries (Alvstam et al., 2009). Also, China is one of the two most important trade partners for the Japanese economy. All this should, following the mainstream trade theories (e.g., Helpman, 1984; Helpman & Krugman, 1985; Petri, 1994), give favorable conditions for large inflows of FDI. In relative terms, this picture has to some extent been correct. Before the recent territorial row over the Senkaku, or Diaoyutai, Islands located between Okinawa and Taiwan, the Chinese and Japanese mutual cross-border M&As was steadily increasing with 2010 and 2011 as peak years recording 16 M&A deals, respectively (Recof, 2012). However, this trend seems to have been broken, by recording only 6 M&As in 2012, and 5 M&As in 2013.”

Japan was not even one of China’s top 10 targets of outbound M&A between 2005-2015— the biggest target for outbound Chinese and Hong Kong M&A was Britain (14.6% of the total). By comparison, 43.7% of Japan’s outbound M&A over the past 10 years went to the US. (Source: graphs from http://qz.com/465638/charts-and-maps-how-japans-companies-are-beating-chinas-in-overseas-ma/)

9- This is not to say the China’s relationships with Japan, Taiwan, or the US are nearly as troubled as many people think they are or would like them to be. Still, these relationships mean that China may have a very different outlook in foreign affairs than do many other countries.

10 – Indeed, one might expect China to account for a disproportionately large share of international trade, given its role as the ‘workshop of the world’ and its voracious appetite for imports of energy and minerals. But in fact China only accounts for about 11-12% of global trade as far as I can tell (using statistics from MIT’s Observatory of Economic Complexity), regardless of whether or not Hong Kong is included.

11-   In 2014, the largest M&A deal involving an Asian country, whether cross-border or domestic, was the acquisition of China’s CITIC Ltd. by Hong Kong’s CITIC Pacific Ltd., a deal that was worth about three times more than any other involving an Asian country that year. In 2015, in contrast, one of the biggest deals was, according to this article from Bloomberg, “China Cinda Asset Management’s (pending) $8.8 billion purchase of Hong Kong lender Nanyang Commercial Bank.” Singapore’s outbound M&A has been increasing by a huge amount in recent years too and is much higher than its inbound M&A.

12 —M&A statistics, moreso than many other economic or financial categories, tend to consider Hong Kong as being separate from the rest of the territories of the People’s Republic of China. This may be (at least partially) justified, but it can also confuse matters at times.

13 – In 2011, 2012, and 2013, Hong Kong’s outbound M&A was about 25-40% as large as mainland China’s, even though Hong Kong’s GDP is only around 2% as large as mainland China’s. Singapore’s outbound M&A, meanwhile, was 1.5-22% as large as mainland China’s during 2011, 2012, and 2013, while Singapore’s GDP was also only about 2% as large as mainland China’s.  (Source: Global Financehttps://www.gfmag.com/global-data/economic-data/value-of-cross-border-maa-by-region-country?page=2)

M&A Table

I made this chart in order to find correlations between outbound M&A activity (as given in column I, at the right end of the chart) and the factors in the four leftmost columns of the chart. Column I’s closest linear relationships are with columns E and F — though Japan is an outlier in both cases. Admittedly, though, this chart does not include enough countries or enough years of M&A to say much.

Column B is based on the regions Europe, North America, and East Asia. For example, the USA’s figure in column B is equal to the GDP of Canada plus the GDP of Mexico divided by the GDP of the world. Column C is based on two “super-regions”: the North Atlantic (including Europe and North America) and the Indo-Pacific. The US scores much lower than China in Column B – because North America minus the US has a much smaller GDP than East Asia minus China – but scores much higher than China in Column C, because the US is not far from Europe.

Column D is based on countries in which the majority language(s) is the same: China’s figure in column D, for example, is equal to the combined GDP of Taiwan, Hong Kong, and Singapore – the only other majority-Chinese economies – divided by the GDP of the world.

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East Asia, Images

Labour Strikes in China

The China Labour Bulletin website provides maps displaying incidents of labour strikes that have occurred in recent years. While of course these should be viewed with a hefty grain of salt, they may be worth scrutinizing all the same.

This image below shows the number of strikes in general that have occurred since 2011: as you can see, they have been becoming a lot more common since the beginning of 2014.

since 2011 map

Yet this may be somewhat misleading: nearly half of the strikes indicated in the map above are thought to have had fewer than 100 people participate in them. It may be better to look just at the number of larger strikes that have occured, as the following two maps do:

1000-10,000, 2011.png

more than 10,000 persons since 2011

4 out of the 7 labour strikes involving 10,000+ people since 2011 occured in Guangdong province, according to the China Labour Bulletin

These maps above show that the larger strikes, with 1000-10,000 people and 10,000+ people, respectively, occured most often in 2014, unlike the smaller but more numerous strikes that occured most frequently in 2015 and so far in 2016. Since 2015 there have not been any strikes involving more than 10,000 people, according to the China Labour Bulletin.

chinese_provinces-map

Now let’s have a closer look at the differences between China’s many provinces. Below I have tried to graph the number of strikes that have occurred in each province, first since 2011 and then since 2015:

2011

2015Guangdong, China’s most populous province, finished at the top of both graphs, while Tibet, Qinghai, Hainan, Tianjin, Ningxia, Gansu, and Xinjiang finished at the bottom of both graphs. All of the provinces of China are more or less in the same position in both graphs, in fact. And there are no major regional patterns that can be gleaned clearly from either list.

1000 - 10,000 since 2015.png

Labour strikes since January 1, 2015 involving at least one thousand people. Guangdong had 27, followed by Jiangsu with 9 and Shandong with 8.

What if we adjust the figures to take into account the population size and GDP of each province?  Then we get the following graphs:

2011 pop

2011 gdp

Here Guangdong and Tibet again finished at the top and bottom of both graphs, respectively. Ningxia, however, which had finished fifth from the bottom before adjusting for population and GDP, has now moved up to second from the top. Ningxia is China’s third least populous province (the two Tibetan provinces, Tibet and Qinghai, are the least populous), is one of China’s five “autonomous regions” (the others are Tibet, Xinjiang, Inner Mongolia, and Guangxi), and, along with Xinjiang, has by far the highest concentration of Muslim inhabitants of any province in the country.

In the adjusted-for-population graph, China’s relatively small and wealthy “direct-controlled municipalities”, namely Shanghai, Beijing, Tianjin, and Chongqing, were much higher up than they were on the adjusted-for-GDP graph, with the exception of  Chongqing. (Chongqing is quite a bit less urbanized than the three others are). Shanghai and Beijing were third and fifth, respectively, while Tianjin, which was the least strike-prone of any province when adjusted-for-GDP, was close to the middle of the pack when adjusted-for-population.

Another big change was Hainan, China’s southernmost province and only island province (not counting Hong Kong, Macau, or Taiwan), which was third from the bottom before adjusting for population size or GDP, but fourth from the top when adjusting for GDP and eighth when adjusting for population size. Shanxi and Shaanxi, meanwhile, two neighbouring provinces located in and around the mountains of north-central China, moved from around the middle of the pack to near the top once adjusted for GDP and population.

map_1360

Shanxi in particular is China’s major coal producing region, and the coal industry has come under a lot of pressure in recent years, which may help explain Shanxi’s high position on both of these graphs. (Shaanxi too is a top coal producer. Inner Mongolia, though, China’s second biggest coal producer, is admittedly near the bottom of the GDP-adjusted labour strikes graph). Shanxi has also been arguably the main provincial target by far of Xi Jinping’s intense “anti-corruption” campaign.

Still, these graphs again do not prioritize large strikes over smaller ones. Below, then, are the strikes with between 1000 – 10,000 participants that have occured since 2011. Since there have been very few strikes with more than 10,000 participants, the 1000-10,000 category accounts for an overwhelming share of the large labour strikes that have taken place:

1000 since 2011

1000 since 2011:pop

1000 since 2011:gdp

The graph showing labour strikes with more than 1000 people since 2011, adjusted for GDP size, is I suspect the most important one. The population-adjusted graphs tend to somewhat misleadingly overemphasize the wealthiest provinces, like Shanghai or Tianjin, since they have lots of per capita economic activity and therefore also lots of per capita labour strikes. The graphs that are not adjusted at all skew in favour of populous provinces, meanwhile. The GDP-adjusted graphs, though, are perhaps the most indicative of provinces in which there may be growing social challenges to China’s political or economic establishment.

Notably, this GDP-adjusted graph is also the only one in which clear regional divisions can be seen. Apart from Guizhou, nine of the ten westernmost provinces in China- Tibet, Qinghai, Xinjiang, Yunnan,  Ningxia, Inner Mongolia, Sichuan, Chongqing, and Gansu – are in the bottom thirteen provinces of the list, and six are also in the bottom seven of the list. Seven of the top nine provinces on the list, meanwhile, are seven of China’s eleven eastern coastal states. These also happen to be the seven most southern coastal states on the Chinese mainland.

Beijing and the provinces around Beijing, like Liaoning, Hebei, Henan, Tianjin, Shanxi, Inner Mongolia, and Shandong, are near the bottom or the middle of the list. Shanghai on the other hand, as well as two of the three provinces that surround Shanghai, namely Jiangsu and Anhui, are quite close to the top of the list. Guangdong, which is the most populous province in China, remains far ahead at the top of the list. Three of Guangdong’s four neighbouring provinces, namely Jiangxi, Guangxi, and Fujian, are at the top of the list as well.

chinese_provinces-map

Remarkably, Guangdong’s GDP-adjusted figure for large labour strikes is roughly twice as high as any other province and five times the nationwide average. Guangdong has also been home to four of the seven labour strikes in China involving more than 10,000 people since 2011, according to the China Labour Bulletin. Given Guangdong’s enormous size and revolutionary history, this may be worth noting.

China-provincial-share-of-GDP

The other biggest outlier is the northeastern province of Heilongjiang, which apart from Guangdong had by far the most large strikes adjusted for GDP size. Heilongjiang has been a major oil and coal producing province, which may partially help to explain this. Strikes in the province have been putting its governor Lu Hao, the youngest provincial governor in the country, under a lot of political pressure of late.

Heilongjiang’s position also highlights an interesting trend: China’s most peripheral provinces, like Tibet, Guangdong, Heilongjiang, Xinjiang, Guangxi, Yunnan, Qinghai, Inner Mongolia, Hainan, and Jiangxi, are either at the very top of the list or at the very bottom of the list. Heilongjiang itself has the longest international border in China outside of the three “autonomous regions” of Tibet, Xinjiang, and Inner Mongolia. Heilongjiang’s border with Russia is only slightly shorter than the entire US-Mexican border. Hopefully Donald Trump will move there once he loses the election this year,  and trouble America no more.

The China Labour Bulletin maps also zoom in to show which cities the strikes occured in, and gives basic information about them. For example:

CLB

It also breaks down the strikes by the response they are thought to have received, in five categories: “police”, “arrest(s)”, “government mediation”, “negotiation”, or “other”. According to the site, “Guangdong also led the country in the number of police interventions in labour disputes, accounting for about 19 percent of the total 831 incidents in which police were deployed and 24 percent of the incidents in which arrests were made”.

“Worker protests accounted for 38 percent of all mass protests by Chinese citizens last year, according to statistics published on the well-respected Wickedonna blog.”

To close, here are the numbers of strikes of all sizes since the beginning of 2015, adjusted for provincial population size and provincial GDP size. Guangdong is finally not at the top of either:

2015 pop

2015 gdp

But if you look only at large strikes since 2015, then Guangdong is back on top:

1000 - 10,000 since 2015.png

Labour strikes since January 1, 2015 involving at least one thousand people. Guangdong had 27, followed by Jiangsu with 9, Shandong with 8, and Sichuan with 5. There have been no strikes with 10,000+ people since the beginning of 2015, according to the China Labour Bulletin

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East Asia

Expect the Unexpected: 10 Reasons North Korea Could Soon Change Course

1. Russia’s economy is currently in disarray as a result of falling natural resource prices, slow economic growth in Europe, and its rivalry with the United States. Russia has been an ally of North Korea because it sees North Korea as a counterweight to the Chinese, Japanese, and US-backed South Koreans, the other powers in Northeast Asia. If Russia’s economy does not bounce back, North Korea will need to adapt to the weakening of one of its only friends in the world.

2. Russia has been looking to export commodities to South Korea, as Russia worries that Europe and Japan will reduce their imports of Russian oil and gas as a result of the Ukraine conflict, the American fracking boom, the end of Western sanctions on Iran, and the possibility of Japan turning its nuclear power plants back on. Though Russia is obviously not thrilled about South Korea’s close relationship with the United States, it might nevertheless be happy to see a more united Korea serve as a counterweight to China and Japan in the Pacific.

In addition, the most direct way for Russia and South Korea to trade with one another is via the 800 km of North Korean territory that separates Seoul from Vladivostok. This is particularly true of gas exports, which travel cheapest through overland pipelines rather than by undersea pipelines or LNG ships. It is also true of many other types of goods, however. Politics aside, it would often make more sense to cross North Korea rather than to load and unload ships in order to sail the 600 km of sea between Russia and eastern South Korean ports (which are themselves 150 km or so from Seoul).

map_vostok_eng.jpg

 

3. The youngest generation of the North Korean leadership, embodied by 33-year old Kim Jong Un, was raised during the 1990s, after the Soviet Union had fallen, after China’s economic miracle had begun, and after the Internet and satellite television had become common. Kim Jong Un himself went to school in Switzerland, a stark contrast to his father Kim Jong Il who may have been educated in China during the Maoist era.

Today Kim must be looking at Bashar al-Assad with fear. Like Kim, Assad took over at a fairly young age from a father who had been a larger than life figure. Assad lasted for one decade before the Syrian Civil War got underway; Lil’ Kim is now in the middle of his fifth year in office. Meanwhile, the number of North Koreans living today who were alive during the reign of the first Kim, Il Sung, is quickly falling.

4. Unlike most other poor countries, North Korea’s population is not young. Its population pyramid has two main bulges: one between 40-50 years old, the other between 15-25 years old. A decade from now, then, much of the older bulge will have become too old for manual labour, while the number of young people entering the workforce for the first time will have begun to drop off. At this point, North Korea may be more inclined to move away from a labour-based economy, which in turn will require it to import capital from abroad, perhaps from the South Koreans.

north-korea-population-pyramid-2014.gif

This aging also raises Korea’s family reunification issue: North Korea’s 40-50 year old cohort are in many cases the children of families who were divided by the peninsula’s split in the Korean War. The coming decade will be the last chance for many of these sundered families to get back in touch before their elderly parents pass away — and before this generation becomes old itself.

5. Back when China was run by committee, consensus, compromise, etc.,
it liked being compared to North Korea because it could say, in effect, “we may not have a liberal democratic political system, but at least we’re nothing like the government in North Korea”. Today, though, as China has been moving back in the direction of a more traditional persona-led dicatorship embodied by Xi Jinping, the last thing that the Chinese leadership wants is for Xi to be compared with Kim Jong Un.

Xi has yet to visit North Korea, even though Xi has been perhaps the most well-travelled leader in Chinese history, and the first ever to visit South Korea before North Korea. Kim Jong Un, in turn, has not yet travelled the 800 km from Pyongyang to Beijing. (In fact, Kim Jong Un has never officially left North Korea since taking over as its leader in 2012). This may soon change, however: Kim Jong Un may finally visit Beijing in the next few months.

6.  Japan could be coming back in a big way: Shinzo Abe’s revivalism – including the end of formal military pacifism and the symbolic 2020 Tokyo Olympics may just be the start. The Japanese economy is far less exposed to the Chinese economic slowdown than are those of South Korea and Taiwan. Japan might benefit more from Russia’s troubles than China will, given that China has often allied itself with Russia. Japan is also more dependent on energy imports than China, and so may be more likely to benefit from the fall in energy prices than China will.

Japan may benefit more than any other country from the coming era of robots, given its uniquely aged workforce and technological expertise — and given that robots might make China’s enormous human workforce less of an economic advantage over other countries than it is today. Whether Japan addresses its aging workforce dilemma by importing more energy to power robots or by continuing to outsource more of its industrial activity to countries like Thailand and Taiwan, however, it will have to become more active in the region, and thus potentially more aggressive in the region, in order to ensure its access to foreign markets.

If Japan’s reemergence causes the Chinese to want to create a rift in the US-Japan alliance, Korea is the best place for China to try to do so. The US loves its alliance with Korea, while Japan does not. The Japanese and Koreans have quite a tortured relationship, a legacy of Japan’s historical domination of the peninsula. The US would be thrilled by a more unified Korea, whereas the Japanese might be wary of one even in spite of their current rivalry with the North.

Consider the context for the Korean War (1950-1953): Japanese power had just been decimated in World War Two, so China helped to divide the Korean peninsula because it feared the American-allied unified Korea that had emerged at Beijing’s doorstep following the invasion of the North by America and the South. China did not have to consider using Korea to create a rift between the US and Japan, since Japan was not a player at the time. A somewhat similar situation occurred in 1990, when American power surged again as the Soviet Union fell and as Japan’s economy suddenly began its “lost decades” of slowing growth.

If Japanese power grows, however, China may want a more unified Korea as a buffer against the Japanese and as a prime way of splitting the American-Japanese alliance. Alternatively, if China and Japan can finally mend fences with one another politically, it may cause the United States (and/or Russia) to want a more unified Korea to serve as a counterweight to both China and Japan.

7. More so than during the 1990s,
when Russia and China were weaker than they are now and 9-11 had not yet occurred, the US has a lot to worry about today other than North Korea’s military programs. North Korea’s first nuclear tests were in 2005, possibly in order to win back American attention that had shifted to the Greater Middle East. Now, though, with the US still worried about the Muslim world and also concerned with Russia and China, there may be diminishing returns to this strategy of gaining aid and prestige by nuclear saber-rattling.

The move by North Korea in 2010 to kill 46 South Korean navy soldiers in the Cheonan ship attack, which was by far the most casualties the South’s military has experienced in decades, suggests that the North Korean leadership may be aware of these diminishing returns. More recently, so does the announcement by North Korea this past winter that it has successfully developed a hydrogen bomb.

8. South Korea’s economy is slowing because of China’s economic slowdown and because South Korea has now basically become a “developed” economy (its per capita income is estimated to be $28,000, in nominal terms). While South Korea does not want to pay the financial burden of resuscitating theNorth Korean economy, it could nevertheless see some opportunities for itself in engaging the North in trade.

North Korea, for example, has one of the world’s largest reserves of high-quality anthracite coal, while South Korea is one of the world’s leading importers of coal and of fossil fuels in general. And of course, North Korea has a cheap, Korean labour pool (and potential consumer base), at a time when South Korea’s workforce is no longer cheap or youthful by global standards.

relative trade northeast asia.png

Trade figures, adjusted for overall GDP size

9. Coal prices have plunged of late in China and in most of the rest of the world. This could put a lot of pressure on the North Korean economy, which has become the third largest supplier of coal to China in recent years. China accounts for more than 90 percent of all North Korean international trade. According to Reuters, “last year, North Korean coal deliveries to China surged 26.9 percent, making North Korea China’s biggest supplier behind Australia and Indonesia. Coal deliveries from Australia plunged 25 percent, indicating the increase in [Korean] imports may have been to help support this”.

10. With China and the wider Northeast Asian economy struggling after years of rapid expansion, ending North Korea’s isolation could be a good last-ditch attempt to stimulate regional growth. China, for instance, could try to use its position as the North Korea whisperer in order to gain economic favours from the United States. China also has an incentive to engage North Korea — and to have South Korea engage North Korea — because the last thing the Chinese want to deal with right now is a refugee crisis emerging on their border with North Korea in the unlikely but not impossible event of a state collapse occuring there. A few million Koreans already live in China near the North Korean border.

korea north.png

Finally, North Korea could benefit the regional economy by serving as a land route between China and South Korea. Seoul is just 500-600 km from significant Chinese cities like Shenyang and Dalian by way of the North, and 1150 km from Beijing. In the longer-term, the North Korean trade route could become even more commercially important if fixed links are built across the Yellow Sea between North Korea and China, across the Gulf of Bohai between the Chinese provinces of Liaoning and Shandong, or across the Korea Strait from Japan to the Korean peninsula.

———

So, could the era of extreme North Korean isolation from the world be reaching its final days? Certainly, from the US point of view, North Korea is something of a last man standing these days: of the six countries that the Bush government named as the “axis of evil” – Iraq, Iran, Syria, Libya, Cuba, and North Korea – Kim is now the only leader not to have been either toppled (Iraq and Libya), besieged (Syria), or moving towards warmer relations with the US (Cuba and Iran). Given the changes occurring all around it in Asia and the world, North Korea’s position no longer seems like an easily sustainable one. Reunification with the South or not, it still makes sense to guess that North Korea under Kim Jong Un will end up being very different from that of his father.

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East Asia, Images, North America, South Asia

The Provincials — Image of the Day

the provincials

The graph above shows the size of countries’ largest provinces or states in relation to their  overall populations. So California, for example, is home to approximately 12 percent of the total population of the United States, whereas Ontario is home to 39 percent of Canada’s population and Punjab to 47 percent of Pakistan’s.

250px-Map_of_Argentina_with_provinces_names_en

The biggest standout here, though, is Argentina’s largest province Buenos Aires, which is by far the most populous of Argentina’s 24 provinces. In fact, the population of the province of Buenos Aires does not even include that of the “Autonomous City” of Buenos Aires – see map above – which is itself the fourth most populous province in the country. In Argentina’s presidential elections this past October, the two candidates were the leaders of the province of Buenos Aires and the Autonomous City of Buenos Aires, respectively.

Below is a graph, made using data taken from Wikipedia, which shows the GDP sizes of the biggest provincial/state economies around the world, in nominal terms. It is led by California, which is thought to have an economic output of nearly $2.3 trillion these days, larger than all but seven of the world’s countries. Given the nature of this information, though, this graph should probably be taken with a decent-sized grain of salt.

nominal gdp

13 of the 34 provinces/states in the graph above are in the USA, 9 are in China, and 13 are in other countries. Germany and Japan both have 2, but they are the only countries apart from the US or China to have more than 1 province on this graph.

No Indian states made it on to the graph above. On the graph below, however, which shows the 34 most populous provinces/states in the world, 11 are from India, whereas California, the most populous US state, is ranked 33rd. 17 out of 34 on the graph below are Chinese, and 6 are neither Chinese nor Indian. This graph also shows the territory size of each province.

prov

Note the dominance of India’s province Uttar Pradesh. In fact, India’s five most populous states – Uttar Pradesh, Maharashtra, Bihar, West Bengal, and Madhya Pradesh (combined population: approximately 580 million) – border one another in a direct line, and Uttar Pradesh also directly borders India’s seventh most populous state, Rajasthan, as well as India’s most densely populated state, Delhi (India’s capital). In China and the US, in contrast, some of the largest states, notably California, Texas, Florida and Illinois in the US and Guangdong and Sichuan in China, do not border any of the other most populous states within their own country.

inde49

In Germany, meanwhile, the fifth most populous state in the country, Hesse, directly borders all four of the most populous German states: North Rhine-Westphalia, Bavaria, Baden-Wurttemburg, and Lower Saxony. Hesse’s chief city is Frankfurt, a European finance and transport hub.

germany-regions-map-printable

Finally, in Brazil, the three most populous states, namely Sao Paulo (which is by far the largest), Minas Gerais, and Rio de Janeiro, directly border one another. Sao Paolo also borders the sixth largest state, Parana, while Minas Gerais also borders the fourth largest state, Bahia. The four largest Brazilian states are home to 48 percent of Brazil’s overall population.

Brazil_states_named

 

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Images, North America

US Legal Immigration — Image of the Day

most-common-country-immigrants

most-common-country-immigrants-no-mexico

With all the disgusting Trump talk on the issue of illegal immigration that has been going on, the other main source of American newcomers – legal immigrants – is sometimes overlooked. The maps above were made by Giorgio Cavaggion, using data from the Department of Homeland Security of immigrants who “became legal permanent residents during the fiscal year of 2012.” That year over one million people in the US became Legal Permanent Residents. Here are 10 thoughts on the maps above:

1. Mexico Still Dominates

Even in spite of the big drop-off in immigration from Mexico to the United States (see graphs below), Mexico still ranks first in half of the states in the country. Only in the northeastern and north-central regions of the US, from Montana to Maine, is Mexico not #1.

2012-phc-mexican-migration-08aFT_14.12.26_BorderApprehensions

2. India a Strong Second 

India finished first in six states (Ohio, Pennsylvania, New Jersey, Connecticut, Delaware, and Virginia) and second to Mexico in twelve states (Washington state, Arizona, Texas, Wisconsin, Illinois, Missouri, Arkansas, Mississippi, Alabama, Georgia, South Carolina, and North Carolina). This is a big increase from previous generations (see graph below).

Still, nearly a third of all Indian immigrants in the US live either in California or New Jersey. More than 25% live in San Jose, Chicago, or Greater New York City. Also notable is that India’s many regions are not represented proportionally in America. Rather, Indian states like Gujarat and Punjab are highly over-represented. Gujaratis, for example, account for more than 20% of Indians in the US, though they are only 6% or so of the population within India itself.

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Population pyramid of Indian Immigrants in the US

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Foreign-born Americans By Country of Origin. India still ranks far behind Mexico, and just barely ahead of various Pacific and Caribbean countries

3. Burmese in Fly-Over Country 

Burma (aka Myanmar) was first in Indiana and second to Mexico in Kansas, Oklahoma, Nebraska, and Iowa. This could be significant going forward, given that Myanmar may have finally begun to liberalize its political system and renew ties with the United States in recent years. Indeed, Myanmar has often been seen as one of Hillary Clinton’s primary achievements during her time as Secretary of State, so if she becomes president it could perhaps further impact the US-Burmese relationship. Since the mid-2000’s, though, most Burmese immigrants in the US have been from non-Burmese ethnic minority groups, like the Karen people.

4. Bhutan Surprises

I would never have guessed that Bhutan, a far-away Himalayan country of just 750,000 people, would finish first on this list in three separate states (Vermont, New Hampshire, and North Dakota). No other country, apart from Mexico, India, and the Philippines, was first in three or more states. And even the Philippines was first in just one of the Lower 48 states.

5. The French Connection 

Vietnam finished first in just one state, Louisiana, and the fact that it did reflects two different ways in which history continues to inform the present-day United States. First is the French connection: Louisiana and Vietnam were both part of the globe-spanning French Empire, a fact that seems to resonate today even though neither Louisiana nor Vietnam even speak much French anymore. Or maybe Vietnamese just enjoy New Orleans jazz.

Second is the American military: wherever it goes, people from that country tend to end up in the United States. The Vietnamese have now become one of the biggest non-Hispanic groups in the US apart from Chinese and Indians, as have immigrants from Korea and the Philippines where the US also fought significant wars during the 20th century.  Iraq too has seen its share of immigrants to the US grow over the past decade: on the maps above, Iraqis finished first in Michigan and second to Mexico in Tennessee and Idaho.

6. Cubans in Kentucky, Dominicans in Massachusetts 

One might have expected Cuba to finish first in Florida, but in fact Mexico took that honour, leaving Cuba in second. But while Florida was the only state where Cuba finished second to Mexico, Kentucky, surprisingly, was the only state where Cuba finished first overall. Massachusetts and Rhode Island, meanwhile, were taken by the Dominican Republic, which did not finish second to Mexico in any states.

Though Cuba and the Dominican were the only two Spanish-speaking countries apart from Mexico on either of the maps above, the United States of course also has a very large population from other Latin American countries. These did not finish first – or second to Mexico – in any states, however, because many live in Washington D.C. (Salvadorans in particular) or in major immigrant-rich states like California, New York, and Florida, or come from Puerto Rico which is not considered to be a foreign country, or have not yet become Legal Permanent Residents.

7. East Asia in the West 

This is an obvious one: immigrants from East Asian countries often continue to cling to the Pacific Ocean even once they reach the United States. Though Mexico still finished first throughout the entire US West Coast, the Philippines finished first in Hawaii and Alaska and second to Mexico in California, Nevada, New Mexico, and Wyoming. Oregon and Utah, meanwhile, were the only two states in which China was second to Mexico. India, though not a Pacific country, was second to Mexico in Arizona and in Washington state.

8. East Africa in the North

Of the ten states in the Lower 48 which directly border Canada, Mexico finished first in just two (Washington state and Idaho), Canada finished first in just one (Montana), Bhutan finished first in three, Somalia in two (Maine and Minnesota), and Iraq in one (Michigan). Another East African state, Ethiopia, finished first in nearby South Dakota. Ethiopia also finished second to Mexico in Colorado.

9. Filipinos in Coal Country

Outside of the offshore states of Hawaii and Alaska, the only state the Philippines finished first in was West Virginia. Outside of California, Nevada, and New Mexico, the only state the Philippines finished second to Mexico in was Wyoming. Today Wyoming accounts for approximately 40% of US coal production and West Virginia accounts for about 10% of US coal production. Both states produce considerably more coal than any other state; only Kentucky even comes close to  their level of coal production. Wyoming, West Virginia, and Alaska also have the highest per capita energy production of any states in the country.

10. China “Seemingly” Underrepresented

China, in spite of its huge population, only finished first in one state, and only finished second to Mexico in two states. This could be a bit misleading, though, since the state that China finished first in was New York. New York was the only one of the “Big 4” states (California, Texas, Florida, and New York) not to be finished by first in by Mexico, and, with the exception of Michigan, it was the only one of the fourteen most populous states in America not to be finished first in by either Mexico or India.

 

 

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Images

Capital Idea — Image of the Day

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Countries have different way of ordering their own provinces and capital cities, and how they choose to do so may sometimes say a lot about what sort of politics they have. Where countries’ capital cities are concerned, there is usually something akin to one of the following four set-ups:

  1. The Argentine model: the country’s capital city serves as its own unique administrative district and is surrounded on all sides by a single province that it influences to a large degree.
  2. The American model: the capital city serves as its own unique administrative district but is not surrounded by a single province (or state, etc.), but rather by two or more provinces.
  3. The Saudi model: the capital city is not its own unique administrative district, but is part of an important province that is named after itself.
  4. The Canadian model: the capital city is sometimes annoyingly full of bureaucrats, but is otherwise more or less a normal place. It is not its own administrative district.

The Argentine Model 

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Examples of the Argentine model include, of course, Buenos Aires, which is surrounded by the province of Buenos Aires (Argentina’s recent presidential election, in fact, was between the mayor of Buenos Aires and the governor of Buenos Aires province); Berlin, which is surrounded by Brandenburg (see map below); Moscow, which is surrounded by the Moscow oblast; the Australian Capital Area, which is surrounded by New South Wales (see map below), Vienna, which is surrounded by Lower Austria; Brussels, which is surrounded by Brabant (though Brussels does not directly border Walloon Brabant, which is several km to the south of Brussels); Prague, which is surrounded by the Central Bohemian Region; and Addis Ababba, which is surrounded by Oromia.

Australian-States

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Beijing probably also belongs in this category: it is surrounded mostly by the province of Hebei but in two spots also by the city of Tianjin, which like Beijing is one of China’s four “direct-controlled municipalities” (the other two are Shanghai and Chongqing). Tianjin was temporarily made part of  Hebei province in the 1960s, and in recent years there has been much talk of increasing integration and cooperation between Beijing, Hebei, and Tianjin in order to form a sort of capital city macro-region, which is often referred to by the acronym Jingjinji.

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Seoul in South Korea has a similar set-up to Beijing. It is surrounded almost entirely by the province of Gyeonggi, but also touches the coastal city-province of Incheon, in the same way that Beijing does the city-province of Tianjin:

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Note by the way that South Korea has a number of city-provinces. Of these, only Gwangju, in the southwest, conforms fully to the “Argentine model”.

Paris too may be included in this list; Paris is not itself a province, but it is surrounded on all sides by Ile de France, one of France’s 13 regions. (Prior to the beginning of this year Ile de France was one of France’s 22 regions, but these have since been reordered and reduced).

 

The American Model 

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Capitals which are their own unique administrative districts but lack their own single encircling province include Washington D.C. (which is surrounded by both Virginia and Maryland), Tokyo, London, Delhi; Mexico City, Bangkok, Tehran; Hanoi, Abuja (though Nigeria’s largest city by far, Lagos, which was the capital until 1991, is an example of  the Argentine model), Baghdad (which is surrounded by four other provinces), Manila, Jakarta, Madrid, Islamabad, Brasilia (though just barely …and the capital of Brazil prior to 1960 was Rio de Janeiro), Kinshasa, and Bogota (though in a relatively weird way; see map below, Bogota is the sliver between the departments of Cundinamarca – which Bogota is also the capital of – and Meta).

 

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One feature that a number of these have in common is that, while the capital city’s administrative district often borders two other provinces, it is usually surrounded much more by the less populous of the two other provinces. Notable examples of this include Washington D.C., which is surrounded much more by Maryland (population 5.9 million) than by Virginia (population 8.3 million); Delhi, which is surrounded much more by Haryana (25 million) than by Uttar Pradesh (205 million); and Brasilia, which is surrounded much more by Goias (6.5 million) than by Minas Gerais 21 million.

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Capitals which do not fit this pattern, however, are Mexico City, where the federal capital district is surrounded much more by  the state of Mexico (population 16 million) than by the state of Morelos (population 1.9 million); and Islamabad, which is surrounded much more by Punjab (population 91 million) than by Khyber Pakhtunkhwa (population 27 million).

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A number of non-capital cities, meanwhile, such as Hamburg, which is the most populous city in Germany apart from Berlin, fit into this category as well.

 

The Saudi Model 

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A capital city which is not its own unique province, but rather is part of an important province named after itself. Examples may include Riyadh, Stockholm, Dhaka, Santiago, and Ankara. Bern also could probably be on this list, but Bern is only the de facto capital of Switzerland; Switzerland has no de jure capital city.

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The Canadian Model 

Examples of countries in which the capital city is not its own unique independent unit may include Ottawa, Amsterdam, Rome, and Warsaw.

According to Wikipedia “two national capitals in federal countries are neither federal units [like provinces, states, etc.], special capital districts, nor capitals of federal units: Ottawa, the capital of Canada [because Toronto is the capital of Ontario, the province in which Ottawa is located], and Palikir, the capital of the Federated States of Micronesia“. Ottawa is situated entirely within the province of Ontario, but also directly borders French-speaking Quebec.

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Ottawa

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Please let me know if I’ve made a mistake on any of these; administrative divisions can be a bit complicated – and I can be a bit lazy.

 

 

 

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East Asia, Images, North America

East Asian Trade – Image of the Day

From Finally Passing Gas: 10 Winners and Losers of the Panama Canal Expansion:

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A typical assumption has been that China and Japan will be the primary beneficiaries of the canal. China, after all, leads the world in importing commodities and exporting bulk goods, and Japan has accounted for 40% of the world’s LNG imports – far more than any other country – in recent years.

Yet while China and Japan lead the pack in terms of the value of their absolute trade, they lag far behind both South Korea and Taiwan in the more relevant category of relative trade; that is, the value of their trade relative to the overall size of their economies. As can be seen in the chart above, the economies of China and Japan are generally not as trade-oriented as those of South Korea and Taiwan. As such, they might not benefit as much from the canal, which is intended to ease trade — in particular LNG trade, which the pre-expansion canal could not facilitate.

Of course, none of this means that South Korea and Taiwan are risk-free investments. They are not. Both, for example, have significantly more exposure to China’s economy, which has been struggling of late, than Japan does. All else being held equal, though, South Korea and Taiwan appear likely to be two of the greatest beneficiaries of the new canal.

 

 

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East Asia, Europe, India, North America, South Asia

The Geopolitics of Cheap Energy

Oil prices have fallen again: they are now at $29 a barrel for West Texas Intermediate crude and a similar price for Brent, their lowest since 2003. Natural gas, coal, and other commodity prices have also been dropping of late, in most cases. So: what will be the geopolitical consequences of cheap energy in general and of cheap oil in particular, all other things being theoretically held equal?

One consequence of cheap energy is the weakening, possibly, of four potential great powers: Russia, Brazil, China, and Mexico. While the media has understood the Russian and Brazilian half of this list – their economies are both estimated to have shrunk by 1-3 percent druring 2015, after all, which is difficult to miss – it has largely failed to register the Chinese and Mexican half. This is because it views China as being a leading oil, energy, and natural resource importer rather than as a resource exporter like Russia or Brazil, and because it views Mexico as merely a source of drugs, migrants, resorts, and cheap goods rather than as a potential great power.

China

China may be the world’s largest energy importer, but it is has also become its second largest energy producer, and as such only relies on energy imports for an estimated 15% of its total energy consumption, in contrast to 94% in Japan, 83% in South Korea, 33% in India, 40% in Thailand, and 43% in the Philippines. In 2014 imports of oil were equal in value to just around 2.4 % of China’s GDP, according to the Wall Street Journal, compared to 3.6% in Japan, 6.9% in Korea, 5.3% in India, 5.4% in Thailand, 4% in the Philippines, and 3.3% in Indonesia.

South Korea and Japan also imported more than two and four times more liquified natural gas, respectively – the prices of which tend to track oil prices more closely than conventional natural gas prices do – than China did. China’s LNG imports barely even surpassed India’s or Taiwan’s. China’s imports of natural gas in general, meanwhile, were less than half as large as Japan’s and only around 20% percent greater than South Korea’s.

China, furthermore, tends to import energy from the most commercially uncompetitive, politically fragile, or American-hated oil-exporting states, such as Venezuela, Iran, Russia, Iraq, Angola, and other African states like Congo and South Sudan. In contrast, Japan and South Korea get their crude from places that will, perhaps, be better at weathering today’s low prices, namely from Kuwait, Qatar, the UAE, and Saudi Arabia. Similarly, China gets much of its natural gas from Turkmenistan, Uzbekistan, and Myanmar, whereas Japan imports gas from Australia and Qatar and South Korea imports gas from Qatar and Indonesia.

China’s top source for imports of high-grade anthracite coal, and its third largest source for imports of coal in general, is North Korea. China has, in addition, invested capital all over the world in areas hurt by falling energy and other commodity prices, including in South America, Africa, Central Asia, Canada, and the South Pacific.

Another mistake the media makes is looking at China as if it were a country, rather than what it really is: both a country and a continent. Continents have internal, deeply-rooted regional divisions, and China is no exception. Its main divide is between areas south of the Yangtze River, which tend to be mountainous, sub-tropical, and dependent upon importing fossil fuels, and areas north of the Yangtze, which tend to be flat, more temperate, and rich in fossil fuels.

Northern China, stretching over 1000 km from Beijing southward to Shanghai on the Yangtze, is the country’s political heartland. It is densely populated and home to most of China’s natively Mandarin-speaking, ethnically-Han citizens. When compared to southern China, the north has historically been somewhat insulated from foreigners like the Europeans, Americans, and even Japanese. Beijing’s nearest port is roughly 5000 km away from Singapore and the Strait of Malacca; Hong Kong, in contrast, is only around 2500 km from Singapore and Malacca. Beijing is rougly 2600 km from Tokyo by ship, whereas Shanghai is just 1900 km from Tokyo and Taipei is just 2100 km from Tokyo.

Japan’s Ryukyu island chain and the Kuroshio ocean currents historically allowed for easy transport from Japan to Taiwan and the rest of China’s southeastern coast; the Japanese controlled Taiwan for more than three and a half decades before they first ventured into other areas of China in a serious way during the 1930s. Even today, Japan accounts for a larger share of Taiwan’s imports of goods than do either China or the United States.

Southern China has often depended on foreign trade, since much of its population lives in areas that are sandwiched narrowly between Pacific harbours on one side and coastal subtropical mountain ranges on the other. In northern and central China, in contrast, most people live in interior areas rather than directly the along the Pacific coast. These people in the interior generally did not engage in as much foreign trade, as in the past moving goods between the interior and coast was often limited by the fact that northern China’s chief river, the Huang-he, was generally unnavigable and prone to flooding northern China’s flat river plains, destroying or damaging roads and bridges in the process.

In southern and central China, by comparison, even people living far inland could engage with the coast by way of the commercially navigable Yangtze and Pearl Rivers, which meet the Pacific at the points where Shanghai and Hong Kong are located.

Northern China, however, was most directly exposed to the land-based Mongol and Manchu invaders who ruled over the Chinese for most of the past half-millenium or so prior to the overthrow of the Manchu Qing Emperor in 1912. Today the north continues to retain the political capital, Beijing, and a disproportionally large majority of Chinese leaders were born in north China — including Beijing-born Xi Jinping and Shandong-born Wang Qishan (a former mayor of Beijing) — in spite of the fact that most Chinese political revolutionaries, including Mao Zedong, Deng Xiaoping, Chang Kai-Shek, Sun Yat Sen, Zhu De, Ye Jianying, Hong Xiuquan, and famed writer Lu Xun, hailed from southern or south-central China.

Today, out of China’s seven Standing Comittee top leaders, only seventh-ranked Zhang Gaoli was born in southern China, whereas five of the seven were born in northern China and one, Premier Li Keqiang, was born in central China. Zhang Gaoli may in fact be the first person born outside of northern or central China in thirty years to have made it to the Standing Committee. He is also the only person currently in the 25-member Politburo born outside of northern or central China. Among the 11-man Central Military Commission, meanwhile, seven were born in northern China, while two were born in north-central China and two in south-central China. Out of the 205 active members of the Party Central Committee, fewer than 15 were born south of central China.

Indeed, the southern half of China, stetching from islands in Taiwan, Hainan, Hong Kong,  Xiamen, and Macau in the east to the plateaus of Yunnan, Sichuan, and Tibet in the west, is politically peripheral. It is home to a majority of China’s 120 million or so non-Han citizens (most of whom are not Tibetan or Uyghur, though those two groups recieve almost all of the West’s attention), China’s 200-400 million speakers of languages other than Mandarin, China’s tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, most of China’s 50-100 million recent adopters of Christianity, and most of China’s millions of family members of the enormous worldwide Chinese diaspora.

Southern China is physically closer to Southeast Asia (a region with a huge Chinese minority population) and most of the populous areas of Japan, and further away from sparsely populated Mongolia or Siberia, than northern China is. The south’s Fujian province, in particular, is linguistically and economically close to Taiwan, while the south’s Guangdong province is close to Hong Kong. A large share of China’s GDP comes from the coastal areas of China from around Shanghai south to Guangdong, particularly if you include Taiwan as part of the country. Guangdong alone accounts for an estimated 10% of mainland China’s GDP and over 25% of its exports. This creates a somewhat unbalanced dynamic: China’s political periphery is also its economic centre.

As it happens, northern China produces almost all of China’s fossil fuels (particulary in and around Shanxi province, 300 km or so inland from Beijing, where a large share of China’s coal is mined and which has seen the biggest political shakeup of any province from Xi Jinping’s anti-corruption campaign thus far), whereas southern and central China, especially if you include the neighbouring economy of Taiwan as being part of China, account for most of China’s imports of energy. Taiwan, in fact, may be more dependent on oil imports than any other significant economy in the world. Falling energy prices may weaken the Chinese political heartland relative to its periphery, in that case. Whether or not this will generate any political instability going forward remains to be seen.

If (a big if) energy prices remain low for a sustained period, then the question of China’s future dependence on imported energy also becomes relevant, as does the question of the future dependence on imported energy of China’s most important neighbours. In that case, how dependent on energy imports will countries like China, Japan, and India be in a decade or two from now?

While it is impossible to know what the future will be like, it is not difficult to imagine that China will remain less dependent on energy imports than India and/or Japan during the years or decades ahead, as a result of India’s still-emerging economy and Japan’s still-roboticizing economy.

China is not likely to be a major adopter of energy-intensive robots, in per capita terms, because China has a far larger cheap labour force than any country in the world apart from India. Japan, in contrast, will likely help lead the robot revolution, as its labour force is expensive and aging rapidly. This could make Japan even more dependent on importing energy, as machines that are both highly mobile and capable of sophisticated computation require an enormous amount of energy to run — and indeed, one of their main advantages over human labour is that they can and frequently will be tasked to run 24-7,  without even taking any time off for holidays or sick days.

China is not certain to increase its energy imports nearly as much as less-developed economies like India, meanwhile, as the Chinese inudstrial sector is facing challenges as a result of its past generation of energy-intensive growth. China faces rising labour costs in its cities, a pollution problem, crowded transportation infrastructure, a US that is concerned with Chinese industrial power, and countries throughout the world afraid of China’s world-leading carbon emissions. In addition, China is located much further away from the Persian Gulf and Caspian Sea oil and gas fields than the Indians and other South Asians are, and so might have difficulty accessing them in a pinch.

China may also have to face industrial competition from resource-rich or capital-rich economies such as Australia, Norway, Canada, Qatar, Texas, and maybe even Hong Kong, which will perhaps be able to use energy-intensive robots of various kinds to build up their manufacturing sectors in spite of their small labour forces. This could make China’s industrial growth rate slip, which in turn might reduce China’s resource imports and thus prevent China from becoming the leading beneficiary of low energy and commodity prices.

Such a shift will be especially likely if the United States or European economies decide to enact tariffs on goods coming from places that generate power by using coal in inefficient ways, a prospect that has become increasingly likely as a result of America’s triple-alliance between environmentalists opposed to coal consumption, shale gas producers competing with coal, and energy companies trying to pioneer more expensive but cleaner ways of consuming coal. China may then have to focus on growing its service sectors instead of its energy-intensive industrial sectors.

Japan, lastly, might benefit from Russia’s energy-related woes more than China will. This is not only because the Chinese have to a certain extent often looked to Russia as an ally against the West, but also because the areas of Russia that China is close to are mostly irrelevant to China: they are landlocked, Siberian, and for the most part located far from China’s population centres. Pacific Russia, in contrast, located next to the Sea of Japan on the East Asian side of Russia’s Pacific mountain ranges, has a far more liveable climate than the continental Siberian interior, is home to a number of useful medium-sized port cities, and accounts for much of the oil and nearly all of the Russian natural gas exports to Asia — led by energy-rich Sakhalin Island, which is just 40 km away from Japan and was partly owned and inhabited by the Japanese prior to the Second World War.

Russia may, in fact, be somewhat better prepared to fight another border war with China like it did in 1969, which might not be too different than the many other wars Russia has fought around its own borders both prior to and since then, than it would be to face off against Japan again within its far-eastern, mountainous, archipelagic and peninsular Pacific region, as it did in 1905 and then during World War Two. Of course this does not mean Japan will attack Russia — though it has certainly toyed with the idea of making more forceful moves in the Southern Kuril Islands, which both countries claim as their own. Even the unspoken possibility of conflict, however, may help grant the Japanese leverage over Russia in negotiations relating to commercial or political issues.

Mexico 

Mexico is much more than just America’s messy basement. It has the world’s 11th largest population,14th largest GDP, and, because it is in the New World, its population is in many ways much more internally unified than those of most other large countries are. It also has important ties to the rest of the Spanish-speaking world, to the Latin-based world in general, and to the 35 million or so Mexicans in the United States in particular, most of whom live in states adjacent to the Mexican border. Mexico is the clear potential leader in the Spanish-speaking world: its population is bigger than those of Colombia, Argentina, and Venezuela combined, and its economy is about to surpass Spain’s. If you include illegal transactions, Mexico already has the largest economy in the Spanish world by far. Along with (or perhaps instead of) Portuguese-speaking Brazil, Mexico could potentially help Latin America to become one of the most prominent regions in the world during the decades ahead.

Mexico may not be a major beneficiary of low energy prices, for three general reasons. First, it is a net oil-exporting economy: oil exports accounted for an estimated 2.7% of Mexico’s GDP in 2014, and Mexico had been hoping to increase its oil and gas production since its president enacted widely-touted reforms in the country’s energy sector that year. Mexico is also often a relatively high-cost oil producer, and so may be forced to cede market share to more price-competitive producers in other countries.

Second, Mexico has ties – both existing ties and potential future ties – to other countries in Latin America, a region that is highly economically dependent on exports of energy and other natural resources. Most of the South American economy is already in or flirting closely with recession as a result of the commodity crash, which on the whole is probably not a good thing for Mexico.

Third, Mexico has ties to the southwestern United States, in the areas of America that were part of Mexico prior to the 1830s-1850s, most notably California and Texas where around 25 million Hispanic-Americans live today. Like Mexico itself, this part of the US is dependent on energy exports, led by Texas (a major producer of oil, gas, coal, wind power, solar power, and refined petroleum products: Texas produces approximately one-fifth of US energy and one-third of US crude oil) but also including the surrounding energy-producing states of Oklahoma, Colorado, New Mexico, Utah, Louisiana, Arkansas and the federally-administered oil-and-gas producing waters in the Gulf of Mexico.

Nearly all of the states with a high share of Mexican-Americans are either energy-exporting states or else, in the case of California, New York, Florida, and Arizona, have the lowest per capita energy consumption of any states apart from tiny  Rhode Island, Hawaii, and Connecticut.

Even California’s energy imports do not balance out Texas’s energy exports, because California is itself the US’s third largest oil-producing state, tenth largest energy-producing state, and has the fourth lowest per capita energy consumption; its energy imports are not as large as one might expect given the enormous size of the Californian economy. They might even shrink in the future, if the Monterrey basin shale resources are developed. California is also the largest agricultural producer in the United States (Texas is fourth), a big sector that can be hit by falling commodity prices as well.

Mexico has admittedly been benefiting from cheap gas prices brought on by Texas’s shale boom.  Mexican imports of US gas have nearly tripled since 2009, which has benefited the industrial sector in northern and north-central Mexico. This gas import growth might slow going forward, however, as America’s LNG export facilities may soon be coming online, LNG import facilities in both Europe and China are expected to be opened soon, and the Panama Canal expansion which will be finised this year may allow LNG ships to traverse the canal from Texas to Asia for the first time. As LNG allows US gas to be sold worldwide, Mexico’s import growth of US gas might slow down. In any event, Mexico is the 19th largest natural gas producer in the world, so even with increasing imports from the US it will not soon become a significant net importer of natural gas.

In the future, meanwhile, somewhat similar to China, Mexico’s industrial growth may not be as strong as most people expect, which could cause it to become less dependent on energy and other commodity imports relative to other countries. Mexico is currently a major industrial economy, the result of its large and cheap labour force and proximity to US consumers. As labour and other prices in northern and to a lesser extent central Mexico are becoming more expensive due to economic growth in these areas, however, Mexico’s industrial growth rate may slow. This is because central and especially southern Mexico are separated from the US by vast areas of mountainous deserts or jungles, making the north-south roads and pipelines through Mexico expensive to build, use, and maintain, as well as potentially vulnerable to groups like the drug cartels, indigenous peoples, or local governments. Southern Mexico resembles Central America more than it resembles northern Mexico.

Mexico may increasingly also have to face industrial competition from Cuba, which is the only other sizeable Hispanic country close to the United States; from Venezuela, if it too can finally mend fences with America and leverage its energy resources to industrialize; or from Canada and the US, if they try to use robots and other technologies to re-industrialize. If, finally, domestic politics lead the US to try to make the Mexican border more of a barrier, Mexico might have to industrialize less and stick more to the many other sectors of the diverse Mexican economy, which are less resource-intensive.

Europe 

There is a fourfold division in Europe, where energy and commodity imports are concerned. First is between mainland Europe, which is a major importer of energy and oil, and the regions surrounding mainland Europe (namely Scandinavia, the North Sea, the former Soviet Union, the Middle East, North Africa, western Africa, and the Americas), which are energy and commodity producers. Even the United States has now become such a big energy producer that its energy imports account for only around 15% of its overall energy consumption, a very low share in comparison to an estimated 62% in Germany, 71% in Spain, 77% in Italy, 46% in France, and 43% in Britain.

Second is between countries which use the Euro as their currency – Germany, Spain, France, Italy, Greece, Slovakia, etc. – which tend to be significant importers of oil or other commodites, and countries that do not use the Euro – Norway, Sweden, Switzerland, Britain, Denmark, Poland, Romania, Czech Republic, Ukraine, Belarus, Russia, etc. – which tend to produce a decent amount of oil, energy, or other commodities — or else, like Switzerland, have economies that are not energy-intensive and so may not benefit as much from cheap energy. (Switzerland, the 20th largest economy in the world, also relies on imports for just 52% of its energy, according to the World Bank, which is a lower share than in all but four of the 19 countries within the Eurozone). Admitedly there are a few exceptions to this rule: most notably Turkey, which imports a lot of energy but does not use the Euro, and Estonia and to a lesser extent the Netherlands, which produce a decent amount of energy domestically yet do use the Euro. Still, even the Netherlands is a major net importer of crude oil.

The third division is between countries that are in the European Union and European countries that are not in the European Union. This division is similar to the Eurozone one, except that states like Britain, Denmark, Poland, Romania, and Sweden — all of which are mid-sized energy or commodity producers – are in the European Union but do not use the Euro, which leave the continent’s major commodity and enegy producers of Norway, Russia, and Ukraine as more prominent outsiders. Turkey, meanwhile, is, unlike Russia, Switzerland, Norway, or Ukraine, a member of the quite important European Customs Union, though like them it is not part of the EU.

Finally, and in some ways most pertinently, there is a division between northern Europe and southern Europe. The further north you go, the less dependent the Europeans are on energy imports. Scandinavia and Russia are the furthest north: they are major energy and commodity producers. (Even the three Baltic states, which are generally assumed to be among the smaller countries in Europe, actually own far more land per capita – and especially forested land, which is crucial for feeding Europe’s sizeable wood-fuel industry – than any European countries to the south of them do).

These are followed by countries like Britain, the Netherlands, Romania, Ireland, the German economies, Poland, the Czech Republic, Slovakia, Hungary, Belgium, and northern France, which have economies that are also not too dependent on energy imports. (Like Switzerland, both Ireland and northern France have economies that are not at all energy-intensive, when compared to others).

In southern Europe, finally, there are the economies of Spain, Portugal, Greece, Italy, France-sans-Paris, Turkey, Cyprus, and Malta, which are highly dependent on imports of oil, natural gas, and energy in general. (While nearby Algeria remains a large energy-exporting state and Libya has energy-export potential, Morocco, Israel, Lebanon, and Jordan are highly dependent on energy imports and Egypt and Tunisia are both more or less energy neutral). Perhaps not incidentally, most of southern Europe has experienced an economic depression during the past eight years.

The biggest exception within southern Europe, meanwhile, is Italy, which produces more oil than France, Greece, Turkey, and Spain combined, slightly more oil than even Germany produces. This may in fact partly help to explain why Italy has been suffering a great deal of late, whereas the Spanish, Portuguese, and possibly even Greek economies might finally be on the mend. Even Italy is the world’s third largest gas importer, however, so as with Spain, Portugal, Turkey, and Greece, the Italians depend on imports from abroad to supply more than 70% of the energy they consume.

Turkey

Turkey is in the most interesting position of all when it comes to energy and geopolitics. It, along with its nearest European neighbour Greece, is a significant net energy importer; Turkey has a relatively energy-intensive economy and energy imports account for three-quarters of its energy consumption, while in Greece energy imports account for 60% of energy consumption. Oil imports in Turkey and Greece were estimated to be equal in value to 3.2% and 4.5% percent of GDP in 2014, respectively, both figures quite a bit higher than in most other countries within Europe.

Surrounding Turkey and Greece, however, is a ring of leading energy-producing regions: the Middle East, Russia, Ukraine, the Caspian Sea-Central Asia region, and North Africa. Even Turkey’s closest Western neighbours of note, namely Italy, Romania, and Austria, are not necessarily going to benefit much from cheap oil or cheap energy. Italy produces nearly three times as much oil as Turkey does, Romania produces nearly twice as much oil as Turkey and depends on energy imports for just 22% of its energy consumption, and Austria has the lowest oil-imports-as-a-percent-of-GDP of any country in the Eurozone. Even Israel, Cyprus, and Egypt have made major new energy discoveries of late, of natural gas within the Eastern Mediterranean.

In past years, Turkey has already seen many of its neighbours fall to shambles to one extent or another — first the Soviet Union, Yugoslavia, Lebanon, Algeria, and the Caucuses in the 1990s, now Iraq, Syria, Ukraine, Greece, Georgia, and Libya, among others. Further troubles in the regions surrounding Turkey, then, perhaps brought on by the falling price of energy, could create a serious power vaccum for the Turks to consider filling.

Turkey’s close-to-home rivals the Kurds, meanwhile, are also potential losers in a cheap energy environment. They produce a lot of oil in Iraqi Kurdistan, abut a number of hydropower facilities located within Turkey’s mountainous Kurdish regions where the headwaters of the Tigris and Euphrates rivers form, and possess ties in some cases to energy-rich Iran (as a result of the Kurdish population in Iran as well as the fact that Persians tend to be ethno-linguistically closer to most Kurdish groups than most Kurds are to either Turks or Arabs) or to energy-rich Iraq (as a result of the sizeable Kurdish population that lives in Iraq).

India 

India, like China, is both a major energy producer, the seventh largest in the world, and a major energy consumer, the third largest in the world. In India, however, oil imports were equal to 5.3% of GDP in 2014, compared to just 2.4% in China, while energy imports accounted for 33% of Indian energy consumption, compared to just 15% for China. And whereas in China the areas that benefit the most from cheap energy are located outside of the Chinese political heartland, in India the country’s political core territories — which are centred around India’s largest state by far, namely Uttar Pradesh (population 200 million), as well as parts of its neighbouring states like Bihar (India’s third largest state), Madhya Pradesh (5th largest), Rajasthan (7th largest), and Delhi (India’s capital city, population 17 million) — may benefit among the most in India from falling oil and energy prices.

Some of the other areas within India, on the other hand, such as parts of both Western India (which produces 75% of the oil from onshore fields in India, and which has close economic ties to the nearby energy-rich Persian Gulf) and Eastern India (which is where most of India’s coal and other commodities are produced or exported), might not benefit in the same way*.

[*when I say “benefit”, I mean it in the geopolitical sense of the term, not in the ethical sense. From an ethical point view, for example, the fall in energy and commodity prices is arguably great news for many of the people in Eastern India who were being exploited because of their coal and mineral wealth. Obviously, things like this are usually far more complicated in reality than can be captured in any single essay].

India’s geopolitical dream is of a prosperous, peaceful Indian Ocean basin in which it, by virtue of its size, diversity, and central location, would be far and away the most prominent and powerful country. In order to accomplish this India must have better relations with Pakistan, a country that has been backed by the United States as well as by fellow Muslim states like Saudi Arabia. With the Saudis and other Sunni Muslim countries hurt by cheap oil and energy prices, and with India’s traditional allies against Pakistan, namely the Russians and Iranians, hurt by cheap energy too, both India and Pakistan might perhaps be forced to rely more heavily on the Americans. If, then, the Americans decide to prioritize India-Pakistan peace-making as a way to maintain stability in South Asia and help to contain forces like China, Russia, and pan-Islamism, there may be some cause to be hopeful. Don’t be too sure though: there are plenty of reasons why India, Pakistan, and the United States might each find it difficult to pursue Indian-Pakistani or Hindu-Muslim reconciliation.

Within the wider Indian Ocean region, stretching 6000 km from Madagascar to Indonesia and 6000 km from Sri Lanka to Kerguelen, there is also some scope for careful optimism. In East Africa, from around Ethiopia south through the Great Lakes, most economies are not dependent on energy exports in the way that western African countries like Angola, Nigeria, Algeria, Congo, Gabon, and Equatorial Guinea are. Even South Africa, the world’s sixth largest coal exporter, is not nearly as dependent on energy exports as Nigeria, Angola, or Algeria are, and is a net importer of crude oil. Oman and Yemen, similarly, the two Arab countries with coastlines directly along the Indian Ocean, are not nearly as dependent on energy exports as other Arab countries like Saudi Arabia, the UAE, Qatar, and Kuwait are. They, especially Yemen, may also be leading importers of food.

In the eastern Indian Ocean, the Indonesian islands of Sumatra and especially Java (combined population: 195 million) tend to be energy-importing areas, in contrast to Indonesia’s Pacific islands like Kalimantan and, 3500 km to the east of the Indian Ocean, West Papua, which account for most of Indonesia’s energy production as Sumatra’s aging oil fields are declining. In Indonesia’s neighbour Malaysia, similarly, most oil production comes from around the Pacific island of Borneo, an island Malaysia shares with Indonesia and Brunei, rather than from the Malay Peninsula on the edge of the Indian Ocean where most of Malaysia’s population lives. Singapore, moreover, which is located roughly in between western Malaysia and western Indonesia, is the world’s 13th or 14th largest oil importer (it is roughly tied with Thailand, which is also located along the outer edge of the Indian Ocean); in spite of its small size Singapore now imports nearly twice as much crude oil as Indonesia and Malaysia combined export to the world.

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East Asia

China’s Hidden Regionacracy, part 1: China’s Borderlands

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How can one measure China’s economic stability? In the West, it is common to look to Hong Kong and Tibet as litmus tests of the strength of the central Chinese government. While it is true that both Hong Kong and Tibet are very important places, their combined populations do not account for even one percent of China’s overall inhabitants.

To get a better sense of China’s stability, then, one must also examine the other areas of China where the dictates of the central government are most likely to be resisted. Arguably, these include the following six regions: Southwestern China (namely, the provinces of Yunnan and Guizhou, plus the “Autonomous Region” of Guangxi), Southeastern China (the provinces of Guangdong, Fujian, and Hainan), Northeastern China (the provinces of Heilongxiang and Jilin), the Sichuan plateau (the province of Sichuan and “Direct-controlled Municipality” of Chongqing), and the “Autonomous Regions” of Xinjiang and Inner Mongolia.

These regions have a total population of over half a billion. They are home to a majority of China’s 120 million or so ethnic minorities, 300-400 million speakers of languages other than Mandarin, tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, 20-30 million Muslims, 50-100 million recent adopters of Christianity, and tens of millions of family members of the vast worldwide Chinese diaspora.

Together, these regions form a cordon around the flat, triangle-shaped Chinese heartland that extends for more than a thousand kilometres from Beijing to Shanghai, where most of the rest of China’s population lives. Several other provinces, meanwhile, such as Shanxi, Gansu, Hunan, and the Hui Muslim “Autonomous Region” of Ningxia, arguably fall somewhere in between China’s central and peripheral territories, from both a geographical and political perspective.

Along with the high-altitude Tibetan(-Qinghai) Plateau and the Chinese Himalayas, these six peripheral regions possess by far the most rugged, expansive, and insular terrain within China. Their territories consist either of:

  • subtropical hills and mountains (throughout most of Southeastern and Southwestern China)
  • vast semi-desert plateaus (in Xinjiang and Inner Mongolia)
  • enormous mountains (in Xinjiang, where mountains cover an area larger than England and regularly reach heights higher than the highest Rockies)
  • mountainous or hilly islands (within the archipelagic coastal waters of Southeastern China, in places like Hong Kong, Macau, Hainan province, Xiamen, Zhoushan, Pingtan County, and nearby Taiwan)
  • mountain-enclosed riverlands (in Sichuan and Northeastern China)

Not surprisingly, Chinese central governments, whether they are controlled by ethnic Han Chinese as is the case today, or else by outside invaders like the Manchu or Japanese as was the case for most of the past half-millenium, have almost always had trouble subduing most or all of these areas.

Indeed, China’s peripheral regions contain all of China’s land borders, which are the longest in the world, more than two thousand kilometres longer than all of Russia’s land borders and well over double the length of the continental United States’. These borders remain almost impossible for the Chinese government to fully control, not only because of their incredible length and difficult terrain, but also because they are located an average of between one and a half thousand and three thousand kilometers away from the Chinese heartland. Only two significant railway lines cross the western half of this enormous distance as of yet.

Complicating matters further, China’s borders are shared with fourteen different countries, nearly all of which possess either ethnolinguistic or religious ties with the areas of China they are adjacent to. These include:

  • the long Himalayan border that separates Tibet from India, Nepal, and Bhutan, across which the exiled Tibetan Buddhist leadership resides
  • the even longer border that seperates Inner Mongolia (where more than one-fifth of the population are ethnic Mongols) and Xinjiang from the country of Mongolia (which in turn shares a three and a half thousand kilometer-long border with Russia)
  • the Manchurian-Korean border, where China is terrified of millions of refugees flowing in from North Korea in the event of a disaster there, and where nearly two million people living in the Manchurian provinces of Heilongxiang and Jilin are already Korean
  • the twin Siberian borders with Xinjiang, Inner Mongolia and Manchuria; Xinjiang’s borders with Khazakstan, Kyrgystan, Afghanistan, Pakistan, and Kashmir, where, as in Xinjiang, a plurality of the population is Muslim and/or ethnolinguistically Turkic
  • the southeastern and southwestern Chinese borders with Southeast Asia, throughout which there is a diaspora of tens of millions of southern Chinese, and where ethnic minority populations span both sides of China’s borders with countries like Myanmar and Vietnam.

As the economies of these peripheral Chinese regions as well as China’s neighbouring countries emerge, as in recent years many have begun to do at a faster pace than the Chinese economy has as a whole, they may deepen this array of cross-border relationships, and in turn could undermine efforts by China’s central government to enforce national unity within the huge Chinese economic and political system. The Chinese have certainly been worried about their neighbours within the relatively recent past: China sacrificed hundreds of thousands of its citizens during the Korean War in the 1950’s and then thousands during the Sino-Vietnam War in 1979, which, as a point of comparison, may be more casualties than the United States has suffered in all of the wars it has ever fought put together.

Since the 1980’s, however, as the China-US alliance took root and the Chinese economy began rapidly expanding, and as the economic growth of most of China’s neighbours collapsed in the early 1990’s (Japan and the Soviet Union), late 1990’s (South Korea, Taiwan, Southeast Asia, and British-era Hong Kong), or during the the 2008 global recession (Russia, Japan, Taiwan, Europe, and North America), while around the same time the power of China’s English-speaking rivals became preoccupied with Afghanistan and Iraq throughout the 2000’s, China has not had to worry about its borderlands nearly so much.

This is not to say that these regions were problem-free during this period. The Chinese government has in fact been concerned with many of them, including, for example:

Yet all such risks proved to be manageable ones, eased as they were by the amazing Chinese economic boom that was then still in full swing, and by the fact that China, which until 2010 still had an economy thought to be smaller than Japan’s, had not yet attracted the full attention of other powers intent on containing it.

Lately, in contrast, just as the United States has been disengaging from Afghanistan and Iraq and the economies of the US and Britain have begun speeding up again following their multi-year post-recession slog, and just as Japan, which continues to have the third largest economy in the world by a large margin, has finally begun to rebuild its will to implement an aggressive economic stimulus program and outwardly post-pacifistic foreign policy, many of China’s peripheral provinces and most of the countries surrounding China either grew or accelerated their economies at a faster pace than did the overall Chinese economy, which has slowed significantly in recent years.

In some of these areas, for instance on both sides of the border between south-western China and northern and eastern India, growth in 2014 accelerated at a much faster pace than in China as a whole. While China’s overall economic growth nevertheless remains quite strong compared to most of the rest of Asia and the world – at least, according to Beijing’s own official estimates, which admittedly are dubious – this constellation of recent trends does not bode well for its central government going forward.

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