WHILE THESE systemic endowments might help offer some predictive insight into a country’s effectiveness in wielding various geoeconomic instruments, they, like any structural features, can only predict so much. Countries are hardly operating in a vacuum. Beyond these endowments, other variables will matter greatly in deciding the effectiveness of geoeconomic tools. Many of these variables will be case-specific: targets matter, for instance, and it is important to keep in mind that the targets may be multiple. As Baldwin aptly points out, identifying primary, secondary, and tertiary goals and targets of geoeconomic tools is advantageous, for while “not all goals or targets are equally important … none is intrinsically unimportant.”241 And certainly there is the question of aims, as some geopolitical goals lend themselves more readily to geoeconomic instruments than do others.242
But the issue here is also broader. Where, for example, a country’s goal is regime change rather than something more targeted, how well do geoeconomic instruments as a whole perform in that regard? How well do certain geoeconomic tools perform compared to others?
These are but a few of the questions and possible variables that could meaningfully influence the success of a country in any particular instance of geoeconomic power projection. Assessing how suited a given country is to using a given economic tool in a given situation will inevitably depend on the circumstances at hand and invariably be a highly fact-bound exercise. It is important to recognize, first, the basic logic and operation of these as specifically geoeconomic tools, as well as their various interactions and tensions, and, second, the structural features likely to count most in determining a state’s overall ability to project geoeconomic power. And perhaps most important, when weighing the relative utility of these tools, it is crucial to do so not only through a cost-benefit calculus or even a stacking up of relative costs (“does it cost country X more than country Y?”). Rather, efforts to size up the relative utility of a geoeconomic approach should be judged by the same measure used to weigh any other form of statecraft: against the next best alternative. With this basic taxonomy in place, the remaining chapters turn to the specific cases of China and the United States.
CHAPTER FOUR
Geoeconomics in Chinese Foreign Policy
China is using economic statecraft more frequently, more assertively, and in more diverse fashion than ever before.
—DR. JAMES REILLY, EAST ASIA SPECIALIST AT THE LOWY INSTITUTE
NEVER IN history has one government controlled so much wealth.1 As China’s economic might has grown, so too has its ability and temptation to use this power to advance geopolitical ends. China is often correctly described as the world’s leading practitioner of geoeconomics. It is also the major reason regional and global power projection has become such an economic (as opposed to military) exercise. “Beijing has been playing the new economic game at a maestro level,” as one observer aptly put it, “staying out of wars and political confrontations and zeroing in on business—its global influence far exceeds its existing economic strength. Nations do not fear China’s military might; they fear its ability to give or withhold trade and investments.”2
Taking China as the best available lens to understand how geoeconomic tools operate in practice—and, crucially, how they can be combined—we now turn to explore China’s use of geoeconomics through six case studies. We begin in Taiwan, which has been a flash point for Chinese Communist Party leaders since their earliest days in power. Beijing well understands how the threat of force is far more useful for defending the status quo than it is for forging any progress toward reunification. For that, Beijing has instead taken to a two-prong economic encirclement strategy, steadily picking off Taiwan’s remaining international allies through a mix of geoeconomic measures while also aiming plenty of geoeconomic pressure directly at Taipei. Next we move to North Korea, where Beijing’s close and complicated alliance with Pyongyang has been as much a constant as its tensions with Taipei. Unlike Taiwan, though, Beijing has no credible threat of force at its disposal, and as Pyongyang has grown more difficult to control, China has moved beyond its long-standing reliance on economic aid and toward a fuller battery of energy, trade and investment, and monetary tools to keep North Korea in line.
We then move eastward to Japan—for Beijing, also a case plenty fraught with historical tension, but one that more directly involves the United States, as Japan’s only defense treaty ally. Looking to assert Chinese territorial claims while undermining the U.S.-Japan alliance, Chinese leaders once again realize that military strength alone will not suffice; hence their decision to vent geopolitical frustrations with Tokyo through a variety of geoeconomic measures, nearly all of them purpose-built to exploit Japanese economic dependence on China’s manufacturing and consumer base. Likewise, many of these same geoeconomic tactics are well represented in China’s foreign policy throughout Southeast Asia. But things in this region are more complicated, the region itself more up for grabs, and so China’s geoeconomic posture is just as often one of positive inducement.
We conclude in South Asia, on China’s dealings with both India and Pakistan. Even as the familiar story of triangular relations between these countries remains largely intact, the tactics have evolved. After decades of military dynamics largely dictating the mood between Islamabad, Beijing, and New Delhi—nuclear rivalry between Pakistan and India, border skirmishes between India and China, and Chinese military aid to Pakistan—China has come to rely more on geoeconomics in its dealings with both countries. These measures range from the straightforward and transactional (unabashed budget support and pipeline politics directed at Pakistan, for instance, or blocking multilateral aid to India amid tensions over territorial disputes) to the longer-term and more strategic (solidifying Pakistan’s place in China’s New Silk Road, or making India the newly appointed Chinese premier’s first official stop outside of China, with forty-one Chinese companies in tow). Among the most striking features of this case, however, are early signs that under Prime Minister Narendra Modi, Delhi is also migrating toward a similarly geoeconomic posture, appearing to be at least partly in answer to Beijing’s geoeconomic turn.
Divergent and unique as these six cases are, common patterns and similarities emerge between them. That China’s leadership opts for many of the same tactics across such wide-ranging circumstances and objectives raises the possibility that its foreign policy apparatus has forged some basic operational consensus as to the when, how, and why of its geoeconomics. The evident refinement and revision to these tactics suggest that China’s brand of geoeconomics comes with a capacity and eagerness for learning. At the same time, it is a learning curve with plenty of room left, as the several geoeconomic attempts that were either botched or have somehow backfired make clear. This in turn raises larger questions of just how effective and significant these geoeconomic measures are. While the six cases themselves certainly offer some initial clues, we turn to these questions more fully in Chapter 5.
Taiwan: Beijing’s Geoeconomic Endeavors on a Path Aimed at Reunification
From Beijing’s perspective, all historical facts and laws prove that “Taiwan is an inalienable part of China.”3 Taiwan, meanwhile, insists on the rights it has retained as a self-governed entity since 1949, when Chiang Kai-shek’s forces escaped to the small island after suffering defeat by Mao Zedong’s Communist army. Even beyond these highly sensitive sovereignty issues, there are other, broader geopolitical stakes. Beijing understands that in peacetime, Taiwan could constrain China’s ability to develop and project naval power and maritime security; in times of high tension, Taiwan could serve as a base for foreign military operations.4 Chinese leaders hope that strict adherence to the one-China principle will yield peaceful reunification and the emergence of “one country, two systems” across the Taiwan Strait. Beijing will not rule out the use of force, however, and some 1,600 missiles still pointed at Taiwan help punctuate the point.5 This threat of force has been a fixture of cross-strait relations for decades, though, and
cannot alone explain Beijing’s progress in tilting regional and global perceptions of the Taiwan issue in its favor in recent years.
Backstopped by this threat of force, Beijing has supported its desire for reunification by pressuring Taipei with a full range of geoeconomic instruments. China now increasingly relies on a strategy of economic encirclement and penetration to push Taiwan in the direction of eventual reunification. It has two parts: the first is multilateral, reflected in how China uses geoeconomics in its relationships around the world to advance a one-China policy on its terms; the second mirrors this, but on a bilateral level, seen in how Beijing makes use of geoeconomics in its direct dealings with Taiwan.
Internationally, China has long-conditioned aspects of its diplomacy on disavowal of Taiwan. For example, in 1992, France sold Mirage fighter jets to Taiwan, and the Chinese government responded by shutting down the French consulate in Guangzhou, thereby denying French companies the chance to construct a subway there.6 The one-China policy, which proclaims that Taiwan is an inalienable part of China and countries cannot have relations with both China and Taiwan simultaneously, also served as the first step in “normalizing” South Africa’s economic relationship with China.7 China has worked to extend these same diplomatic conditions to the Western Hemisphere and Africa as well.8
The strategy has worked. Because support for China’s position on Taiwan is a prerequisite, in some cases an explicit one, for Chinese investment or economic ties of any consequence, Gambia in late 2013 became the most recent nation to accede to Beijing’s one-China policy, leaving Taiwan with just twenty-two allies, mostly small nations in Latin America, Africa, and the Pacific such as Nicaragua and Tuvalu.9
And in what marks a major ideological shift for China, Beijing has also begun hinting at a willingness to use sanctions against countries it views as engaging in measures that reinforce Taiwan’s de facto independent status. In 2010, following the U.S. announcement of a $6.4 billion arms sale to Taiwan, Chinese vice foreign minister He Yafei threatened Ambassador Jon Huntsman that China would “impose sanctions against [U.S.] companies that … engage in arms deliveries to Taiwan.”10
The open declaration that it would employ economic sanctions has since allowed the Chinese to clear what James Reilly, a China expert at the University of Sydney, calls a huge “ideological hurdle—they [have] opened the path for more explicit use of sanctions in the future.”11 Possible future scenarios could include export, import, financial, or investment sanctions, and—if past precedents hold—the deliberate slowing or withholding of business.12 China could dramatically reduce its interaction with Taiwan’s economy, creating an asymmetric vulnerability that leaves Taiwan far more exposed than China.13
Taipei has long been aware of the geoeconomic pressure Beijing can exert upon the island—in fact, some of the most powerful reminders have come even without Beijing needing to exercise that pressure in explicit fashion. In 1995, after President Lee Teng-hui delivered a speech asserting the de facto status of the Republic of China on Taiwan, Beijing responded with threats and conducted military exercises and missile tests off the coast of Taiwan.14 The episode, which has since been termed the Third Taiwan Strait Crisis, caused the Taiwanese stock exchange (TAIEX) to lose approximately 30 percent of its total value. The magnitude of the decline set off speculation that China had perhaps had a more direct hand; Beijing denied any concerted manipulation, while acknowledging that political relations at the time were strained.15 Taiwan was again reminded of the economic costs of political rupture with Beijing when, later in Lee’s years as president, comments on a “special kind of state-to-state relationship” with China caused TAIEX to drop 13.25 percent in one week.16 It is impossible to know whether the drop was anything more than purely market-driven. Regardless, Taiwan learned an important lesson with Lee’s suggestion of Taiwanese independence: political ruptures have economic consequences.
But the story of China’s growing use of geoeconomics in its direct dealings with Taiwan really begins in 2000, when the president of Taiwan at the time, Chen Shui-bian, lifted a fifty-year ban on direct trade and investment with mainland China. Taipei was not blind to the geopolitical risks that economic opening could entail—government reports openly cited worries that Beijing would “use economic interaction to force political concessions.”17 But Taiwan’s domestic challenges—record unemployment, a worn-out economy, and the specter of municipal and presidential elections—left President Chen little choice.18
And so it was that Taiwan embarked on a historic shift away from its well-established “no haste, be patient” stance to one of “aggressive opening, effective management,” scrapping a long-standing $50 million ceiling on individual investments in China and allowing offshore units of Taiwanese banks to remit money to and from China.19 Under President Ma Ying-jeou, who succeeded President Chen in 2008, the two sides followed these initial steps with a series of specialized agreements that furthered economic ties. Formal restoration of the “three direct links”—direct postal services, trade, and transportation across the strait—in 2008 eliminated the need for transit cities and dramatically reduced travel time in both trade and tourism.20 In June 2010, the Economic Cooperation Framework Agreement (ECFA) was signed with the aim of establishing a “systematic mechanism for enhancing cross-strait economic cooperation.” In a departure from the hard-bargaining negotiating posture China is known to take in many trade deals, the ECFA strongly favors agricultural interests in Taiwan’s “green South”—a traditional stronghold of anti-mainland sentiment.21 Beginning with preferential duty cuts and protection for bilateral investments, the ECFA aspires to the full elimination of nearly all cross-strait trade restrictions, opening each side’s markets to the other in “unprecedented ways.”22 To date, Taiwan has made available more than 400 sectors to Chinese investment, including manufacturing, services, public construction, and finance.23
These economic policies were aimed at more than economic outcomes. They arose as part of a largely unspoken mutual consensus on both sides of the strait to address more pressing economic issues first rather than tackling more difficult political questions.24 That is, Taiwan may have had little alternative given its dire economic situation, but improving economic ties stood as a geoeconomic project for both sides. Defending his record in a late 2013 interview with the Washington Post, Ma explained that these economic gestures both marked a necessary point of departure in a broader strategy aimed at improving the whole of cross-strait relations and increased what Ma called Taiwan’s “international room for maneuver.”25 Ma described how these economic gestures have changed cross-strait relations from a “vicious cycle” into a “virtuous cycle,” citing a long list of economic benefits, as well as elevated international standing for Taiwan—all made possible by this economic détente.
Still, these newfound ties have also left Taiwan in a position of asymmetric dependence on China. In part, these vulnerabilities were inevitable—merely the ordinary market physics one could expect from liberalization, and no one ever promised that market physics would be neutral in its geoeconomic consequences. But the magnitude and pace of these consequences do help explain Beijing’s reasoning in leading with an economic détente. By 2003, only three years after lifting the ban, China replaced the United States as Taiwan’s largest trading partner, and by 2020, Taiwan expects to send some 62 percent of its exports to the mainland, bolstering its substantial trade surplus with China.26 Already, Taiwan is moving in that direction, with China consuming 40 percent of the island’s exports in 2015.27
This cross-strait economic liberalization has also proven to be a source of indirect leverage for Beijing over Taiwan. Describing this newfound “international room for maneuver,” for example, Ma was fairly explicit that Taiwan’s ability to sign economic deals with other countries hinges on improvements in cross-strait relations. “After we signed with mainland China the ECFA in June 2010, two months later, in August, Singapore expressed willingness to begin talks about signing a
n economic cooperation agreement,” Ma explained. “Since we have signed the ECFA agreement with mainland China, many countries have shown interest in holding talks with us.”28 Ironically, Ma’s statements came as an attempt to fend off criticisms over precisely the issue of Taiwan’s vulnerability to Chinese geoeconomic pressure. But in citing these recent economic deals (Ma signed twenty-one trade agreements with China during his first six years in office), as well as other recent achievements in joining several international institutions, Ma made it clear that all paths to economic and political progress run through Beijing.29
And as Taiwan’s economic dependence on China has grown, Beijing has gradually toughened its stance on political and military negotiations. In October 2013, at a meeting with envoys from Taiwan, Chinese president Xi said a final resolution on Taiwan’s status must be reached and that the island’s political estrangement from the mainland “cannot be passed on from generation to generation.”
During the Chen Shui-bian years (2000–2008), Beijing voiced staunch opposition to what was perceived as Taipei’s gradual steps toward independence. In reality, Chen, sensing that progress toward both political and economic independence was not an option, chose political independence. He pushed to rewrite the Taiwanese constitution with an emphasis on the island’s independence while allowing greater economic interdependence. He continued large weapons purchases from the United States, even as he christened offices and industries bearing the name “China,” steps aimed at solidifying Taiwan’s identity as the one independent China.30 In retrospect, it is doubtful that political and economic dependence could be separated for purposes of strategy, and in any case, Chen’s steps toward political independence wreaked economic consequences. Beginning with President Chen’s inauguration, Taiwanese investments took a hit. Upon his election, TAIEX fell by 2.7 percent on concerns that Chen would inflame relations between China and Taiwan, causing the Taiwanese government to intervene.31 And on his first day in office, the stock market fell by nearly 3.5 percent.32
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