The Heritage Foundation
WASHINGTON -- China's quest for Eurasia's natural resources
As China continues its impressive economic growth, access to natural resources and raw materials is becoming increasingly vital, and will feature more prominently on the policy agenda of the decision makers in Beijing. If China seeks to maintain its economic growth rate of 1985 through 2000, it will face a major raw materials shortage and will be forced to focus on Eurasia as a source of major energy resources, water and food. This is likely to lead to growing economic and political involvement in Russia and Central Asia.
The Chinese government has designated oil, grain and water as strategic commodities with maximum influence on economic development. While China is the world's fifth largest oil producer, demand is outgrowing economic production. By 2020, China will not be able to supply itself with oil, iron, steel, aluminum, sulfur, and other minerals.
Official Chinese statistics show China's oil production growing at the rate of 1.7 percent a year, while demand is growing at 5.8 percent. China is a net importer of oil since 1993. The current deficit is about one third of its total consumption of 300 million tons a year. Imports totaled 30 million tons in 1999, growing to 65 million tons by 2001 and likely to continue growing.
A third of imports will come from Russia, some from the Caspian and Central Asia, and the rest from the Middle East, Indonesia, Vietnam, and the South China Sea. Economic cooperation is already a high priority in the Sino-Russian partnership, and is increasingly important in Beijing's relations with Central Asia. Neighboring Siberia boasts the large oil fields in Kovykta in the Irkutsk oblast; natural gas fields in Yakutia (Sakha); and coal basins and millions of acres of pristine forests.
YUKOS, the fastest growing Russian oil company, has championed plans to build a gas pipeline to Daiqin in Northeastern China. Kazakhstan, with 2.2 billion tons of oil and 1.8 trillion cubic meters of natural gas on land (not counting Kazakhstan's Caspian reserves), is planning to produce 49 million tons of oil and 12 billion cubic meters of gas in 2003. By 2010, its production of oil will double and its production of natural gas may triple.
Already in 1997, the China National Petroleum Co., known as CNPC, acquired development rights for two oil fields in Kazakhstan, outbidding European and U.S. competitors, and is conducting a feasibility study for a 3,000 km gas pipeline from Turkmenistan. From the purely economic point of view, these projects looked unviable in the late 1990s when oil was cheap, but calculations may change with oil remaining above $30 a barrel, especially if the full financial muscle of the Chinese government is put behind the projects. Looking even further into the future, these East-West pipelines may be connected with the pipeline grids of Russia and Iran, creating the "Pan Asian Global Energy Bridge."
Trade between China and its Eurasian neighbors is developing at a high pace, primarily involving Eurasian raw materials and Russian weapons in exchange for Chinese low-quality consumer goods and food. Some aspects of this trade are off the books and unregulated, as is the illegal cutting of forests in Siberia. It is energy resources, however, which are going to dominate China's trade with Eurasia in the foreseeable future.
In May of last year, the Kazakhstani energy company Kazmunaigas and CNPC have started to develop a gas pipeline from Keniak to Atyrau, which may become a part of the future Kazakhstan-China main gas export pipeline. China itself is prospecting for oil and natural gas in the Tarim basin in Xinjiang, and constructing a 2,600 mile long East-West oil and gas pipeline which may cost as much as $18 billion. By 2005, these pipelines will supply up to 25 million tons of oil and 25 billion cubic meters of gas to Eastern China.
Both the Tarim pipeline and a possible Central Asian follow-up will contribute to the viability of the gigantic project. CNPC has also acquired a 50 percent stake in the Salyan Oil operating company in Azerbaijan, previously owned by Delta-Hess company, which, in turn, was recently acquired by CNPC.
Salyan, which is 50 percent owned by the State Oil Co. of Azerbaijan, or SOCAR, is planning to invest $80 million into rehabilitation of old oil wells in the Kursangi-Qarabagli field. This is likely to be the first step in the expansion of Chinese oil interests in the Caspian area. CNPC's plan of a major breakthrough into the Russian oil sector was blocked, at least temporarily, on Dec. 28, 2002, when the Russian government declined a higher Chinese bid for the state owned Slavneft company in favor of politically connected Sibneft.
This appetite for natural resources will open doors for major capital projects aimed at supplying China, such as oil, gas and water pipelines. China and other Pacific industrial powers such as Japan and Korea, form the largest oil-consuming region in the world. It is likely to boost domestic prospecting, develop its own (particularly offshore) reserves, but will increasingly have to rely on imports.
Chinese experts predict that Russia will be able to export annually 25 billion to 30 billion cubic meters of natural gas to China annually; 15 to 18 billion kilowatts of electricity from hydroelectric power stations in Siberia, and 25 million to 30 million tons of oil from the Kovykta oil field in Eastern Siberia.
In addition, Russia can pump oil produced in Kazakhstan to Irkutsk and then supply it to China. Furthermore, Russia is willing to build six nuclear reactors in China to generate up to 1.5 trillion kilowatts. In addition, there are numerous projects for developing free economic zones along the Chinese-Russian border, and an international port in the mouth of the Tuman River at Tumangan, where the Russian, Chinese, and Korean borders meet. That port has been on the drawing boards for 15 years, but renewed tensions over the North Korean nuclear weapons program are likely to delay it again.
Russia and China are planning to cooperate in developing a network of railroads and pipelines in Central Asia, building a pan-Asian transportation corridor (the old Silk Road) from the Far East to Europe and the Middle East. Ambitious Chinese plans, however, to build the longest pipeline in the world -- from Western Kazakhstan to China at a cost of $10 billion -- are running into financing difficulties.
Thus far, the target of $20 billion in trade established by Presidents Jiang Zemin and Yeltsin in 1997 has not been reached. For the foreseeable future, the West will remain China's leading investment and manufactured goods trading partner -- while Eurasia will become an important source of raw materials.
The race for resources -- and for capital investment to develop them -- is also likely to put Chinese energy corporations and their Western allies into competition with their Japanese and Korean counterparts. The ability of Eurasian governments and transnational corporations to work cooperatively to develop resources and operate energy markets will greatly influence the pace of economic development in Asia in this century.
(Ariel Cohen, Ph.D., is a research fellow in Russian and Eurasian studies at the Heritage Foundation. His expertise includes international energy issues.)
The National Center for Policy Analysis
(The NCPA is a public policy research institute that seeks innovative private sector solutions to public policy problems.)
DALLAS, Texas-- The IRS vs. foreign investment
By Andrew F. Quinlan
Foreigners have invested more than $1 trillion in capital in the United States since 1984, when Congress and the Reagan administration established a policy of not taxing interest they earn on U.S. bank deposits. This influx of capital will be jeopardized if a proposed Internal Revenue Service rule is implemented.
The regulation (133254-02) would require banks to report interest paid to nonresident aliens, although their deposits are not subject to U.S. taxes. This would harm America's economy and undermine the competitiveness of U.S. financial institutions. The price is high, especially given that the IRS does not have the authority to issue this rule.
Executive branch agencies and departments are supposed to issue regulations that implement laws enacted by Congress. More specifically, the IRS is supposed to promulgate regulations that help enforce U.S. tax law. Since the United States government does not tax bank deposit interest paid to nonresident aliens, the IRS does not need to collect this information. Indeed, the IRS admits that the purpose of this regulation is to help foreign governments tax the income their citizens earn in the United States.
Congress has examined the tax treatment of indirect foreign investment on several occasions. The desire to attract capital has always led lawmakers to decide not to tax or require reporting of bank deposit interest paid to nonresident aliens. The proposed IRS regulation, however, seeks to overturn the outcome of this democratic process. This would undermine the rule of law and President Bush's efforts to rein in regulatory abuses.
The current tax and privacy rules for foreign investors have been a huge success, attracting about $1 trillion to U.S. financial institutions. These funds finance car loans, home mortgages and small business expansion in America. If the regulation is approved, however, foreigners will shift a substantial share of their funds to London, Hong Kong and other jurisdictions that protect investors' interests.
Financial institutions around the world compete for liquid capital. American banks have successfully competed, but this profitable source of deposits will become very unstable if banks are forced to put foreign tax law above U.S. tax law. Money will flow out of America, making it more difficult for U.S. banks to meet the challenge of foreign competition.
The economic loss would be substantial; Stephen Entin of the Institute for Research on Economics of Taxation estimates the regulation would annually cost $80 billion in lost output, or 0.8 percent of U.S. gross domestic product.
The IRS asserts that the total regulatory burden on financial institutions will increase by only 500 hours. This estimate is absurdly low. To read and interpret the rule, seek appropriate legal and accounting advice and report on thousands of accounts will surely impose a far greater burden.
The IRS regulation is a slap in the face of tax reformers. All proposals to fix the tax code, such as the flat tax, are based on common-sense principles such as taxing income only once and taxing only income inside our borders. But the new regulation would sabotage tax reform by helping foreign governments double-tax income earned in America.
For example, the European Union would like the United States to join a cartel for the purpose of double-taxing cross-border savings. The Bush administration has rejected the EU request, but the IRS rule undermines that position. In fact, the EU considers the proposed regulation supportive of its cartel.
The IRS is ignoring laws requiring cost-benefit analysis of proposed regulations. It has effectively exempted itself from regulatory oversight by incorrectly declaring most of its regulations either "interpretative" within the meaning of the Administrative Procedure Act or not "major" within the meaning of Executive Order 12866. Yet many IRS regulations impose significant economic costs and should be subject to regulatory review.
Collecting private financial information on nonresident investors and sharing that data with foreign governments hinders jurisdictional competition. It enables high-tax governments to impose levies on income earned outside their borders, particularly discriminatory taxes on capital. Thus the regulation would encourage governments to increase marginal tax rates on mobile capital.
The current version of the regulation is a slight modification of a rule proposed in the waning days of the Clinton administration. The original proposal required reporting deposit interest paid to all nonresident aliens, but intense opposition led to its withdrawal in the summer of 2002. The IRS immediately issued the new version, which limits information collection to residents of 15 developed countries, including some EU members. However, it is clear that the IRS intends to eventually extend the regulation to citizens of all nations.
The regulation is also contrary to the administration's position on the treatment of confidential taxpayer information. On several occasions, former Secretary Paul O'Neill and other Treasury officials stated that the U. S. government does not support automatic information sharing. Rather, O'Neill said information should only be provided on a case-by-case basis in response to specific requests -- and with full respect for due process and individual privacy. The proposed rule clearly violates this commitment, since any information collected would be automatically forwarded to foreign governments.
The proposed IRS regulation is bad tax policy and bad regulatory policy. It is inconsistent with President Bush's tax reform agenda. And it will hurt the U.S. economy by reducing the capital available for workers, consumers, homeowners and entrepreneurs. The rule would become effective following its final publication in the Federal Register. Instead, it should be withdrawn by the Treasury Department.
(Andrew F. Quinlan is president of the Center for Freedom and Prosperity, a nonprofit organization that seeks to promote economic prosperity by advocating competitive markets and limited government.)
DALLAS, Texas -- Bush appointee is strong defender of free market policies
By Bruce Bartlett
One might expect President Bush to be attacked by Democrats for appointing a staunchly free market-oriented economist as his chief economic adviser. But it is a bit odd for him to be attacked by Republicans for doing so. Yet that is what happened last week when Steve Moore of the pro-Republican Club for Growth attacked N. Gregory Mankiw's appointment as chairman of the Council of Economic Advisers.
Moore's concerns mainly involve some comments Mankiw made in the first edition of his best-selling textbook, "Principles of Economics" (not the 3rd edition of his "Macroeconomics," as Moore writes). He condemns Mankiw for referring to supply-side economists as "charlatans and cranks" and "snake-oil salesmen" for allegedly convincing Ronald Reagan that taxes could be cut with no loss of revenue.
Of course, no one ever said such a thing. I have thoroughly researched this matter and found no evidence that any economist working for the Reagan Administration ever said that. This fact is documented in books by Martin Anderson, chief domestic policy adviser to President Reagan, and William Niskanen, a member of his Council of Economic Advisers. Nevertheless, the canard has been repeated so many times that Mankiw can be excused for thinking it was true.
Mankiw was simply trying to illustrate the point that sometimes a fad can sweep the economics profession that later turns out to be false. This is indisputably true. Unfortunately, he chose a poor example to make his point. Mankiw acknowledged this fact by purging this section from later editions of his book, the 3rd edition of which is due out shortly.
Yet even in the first edition of his textbook, Mankiw acknowledged that the Laffer Curve is correct in theory -- it simply shows that at a 100 percent tax rate or a zero percent tax rate no revenue is collected. Every economist knows that this is true. But of course, we are nowhere near a 100 percent tax rate -- nor were we in 1981 -- such that one could expect an across-the-board reduction in tax rates actually to raise revenue. Ronald Reagan never said so, nor did any other responsible economist.
To his credit, Mankiw quickly recognized that he had made a mistake. Yet Moore seems intent on hanging it around his neck forever. This is just stupid, especially in light of the fact that Mankiw has written extensively in favor of policies Moore certainly approves of.
One of the things Moore completely ignores is that Mankiw had a column in Fortune Magazine from 1997 to 2001, in which he regularly promoted strongly free market policies. For example:
-- In a 1998 column he praised Milton Friedman as among the top 3 economists of the 20th century.
-- In a 1999 column and again in 2000, Mankiw criticized the estate tax as one that "restrains the economy, doesn't fall on the rich ...and doesn't even raise much revenue."
In another 1999 column, Mankiw strongly praised school vouchers, saying, "An economy based on free and competitive markets serves consumers better than one based on central planning."
-- In one of his last columns, Mankiw endorsed the election of George W. Bush because, unlike Al Gore, he would cut taxes, reform Social Security and antitrust policy, and try to implement school choice.
It is hard to see what more Moore could ask for in any economist -- let alone one trained at MIT and a full professor at Harvard. Let's face it, advocating the free market at such institutions takes a great deal of effort. It would be much easier for Mankiw simply to parrot the interventionist line at those schools that the market is inherently imperfect and in constant need of government policies to correct its errors.
Yet early in his career, Mankiw rejected the simplistic Keynesianism that has long dominated both Harvard and MIT For example, economist Mark Skousen, former president of the Foundation for Economic Education, praised Mankiw in his book, "The Making of Modern Economics." Mankiw, Skousen said, put classical economics at the front of his text and relegated Keynesian economics to a secondary position. Said Skousen, "In essence, under Mankiw, the classical model becomes the 'general' theory and the Keynesian model becomes the 'special' case -- the very opposite of Keynes's thesis."
It is also worth noting that Mankiw's textbook was strenuously attacked by leftists precisely for being too free market-oriented. Socialist Robert Heilbroner criticized it on such grounds in a review in the far left Nation magazine in 1997.
I think President Bush has found an excellent replacement for Glenn Hubbard, who resigned from the CEA to return to his family in New York. Anyone who thinks Mankiw is a liberal in sheep's clothing simply doesn't know what he is talking about.
(Bruce Bartlett is a senior fellow with the National Center for Policy Analysis.)
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