War by Other Means

by Robert D Blackwill

  What, then, is it about China’s brand of geoeconomics that makes it so seemingly effective? In looking back across the cases detailed in Chapter 4 for patterns and clues, what emerges is clearer insight into the how, why, and when of China’s geoeconomic prowess. Certainly it is in large part a structural story—China undoubtedly has more than its share of the geoeconomic endowments outlined earlier—but this oversimplifies. First, there are plenty of tensions and complications even within these structural endowments; it is not as if these endowments are unalloyed positives, nor, taken together, do they all row in the same direction for Chinese foreign policy makers. Second is the obvious and easily forgotten fact that any full account of China’s geoeconomic clout must look beyond structural factors to the role of deliberate policy calculations by Chinese leaders. And, as with any policy calculations, geoeconomic calculations are malleable—subject to change as new factors (including actions by other states) serve to alter how China’s geoeconomic options compare to various alternatives.

  Trade and investment. Compelled by its export-led growth model, China has been assiduous in pressing to liberalize tariff barriers. For many countries, according such a vital role to exports might translate into a weak negotiating posture in bilateral or multilateral dealings, and potentially limit the extent to which trade questions might be decided on geopolitical over economic aims where the two differ. Not so with China. Because of the sheer size and perceived growth potential of its domestic market, China has proven effective at using access to its domestic market as a means of shaping other states’ geopolitical behavior. As Singapore statesman Lee Kuan Yew once put it, “China is sucking the Southeast Asian countries into its economic system because of its vast market and growing purchasing power. Japan and South Korea will inevitably be sucked in as well. It just absorbs countries without having to use force.”19

  What distinguishes Chinese geoeconomics on trade and investment is not only a willingness to put its market-opening initiatives to geopolitical use (seen, for example, in the more concessionary terms China has offered up in its most strategically valuable trade deals).20 It is also an ability to foster asymmetrical economic dependence on China among certain countries—and, once that is achieved, to shape their foreign policies in ways congenial to China’s national interests.21 Certainly, the threat of force can loom over the whole equation, as with Taiwan. But recognizing that a military campaign to prevent Taiwanese independence would undermine much of Taiwan’s value to China (which, apart from principled arguments of territorial integrity, is largely economic), China has sought to answer this problem through this same giant sucking sound that Lee Kuan Yew describes. Taiwan’s economic dependency upon China has effectively forestalled the prospect of Taiwanese independence.22

  This is mostly a story of deterrence. And as with all such examples, for that deterrence to continue working, Beijing must succeed in maintaining sufficiently credible threats of economic reprisal. An unusual feature is that Beijing has the ability to shape its domestic economic appetite in ways most other countries do not. And Beijing has shown itself capable and willing to redirect the consuming habits of its domestic market to punctuate a political disagreement. This is seen, for example, in the way that Japanese exports to China plunged some 14 percent in a single month (October 2012) amid tensions over maritime claims, and, more than three years on, still have not fully recovered.23 Reflecting on the slump in Sino-Japanese trade during the height of the East China Sea conflict in 2012, China’s Ministry of Commerce spokesperson Shen Danyang hinted that at least some of the drop was due to factors beyond economics. While he explained “the drop in trade volume between China and Japan [as] mainly caused by economic factors,” he did not stop there. “Bilateral relations have cast shadows on trade relations,” he added. “Japan needs to properly handle issues between the two countries, and provide a proper environment for the development of China-Japan economic ties.”24

  China has subtler ways of depressing imports as a means of registering political grievances—ad hoc customs measures affecting imports, retaliatory tariffs on a politically sensitive good or set of goods, new and arbitrary regulations on foreign firms and importers. In one case, Chinese authorities announced a new licensing requirement for online payments systems. Two years after the licensing requirement was authorized, the approval process for foreign firms still had not been released. Curiously, however, one foreign firm was somehow able to procure a license, notwithstanding the fact that no foreign licensing measures yet existed.25 Chinese leaders draw geopolitical leverage from this sort of ad hoc regulatory system and the arbitrariness it affords, venting displeasure with the foreign policy decisions of another country through punishing its companies (not unlike how Russia does it, as seen in Moscow’s campaign to expel McDonald’s, Apple, and other iconic U.S. brands from the country in the wake of U.S. sanctions over Ukraine).26 Following the U.S. Justice Department’s indictment of five Chinese military officers on charges of cyber espionage, China banned the use of Microsoft’s Windows 8 on all government computers. Chinese state media at the time went as far as to brand Google, Facebook, Apple, and Yahoo as “pawns” for the U.S. government.27

  In sum, China no doubt has an attractive domestic market, but it manages to translate this into geopolitical influence above and beyond what any reasonable appraisal of its market value suggests it should command. This is traceable in large part to the relatively tight control Beijing still exercises over access to its market. First, Beijing exercises relatively tight control over access to its domestic market. Whereas most Western countries screen would-be investment only on narrow national security grounds, China exerts a far higher degree of control, deciding each investment on a case-by-case basis, closing off entire sectors to foreign investment, and for other sectors attaching a price of entry—from forced joint ventures with state-owned enterprises to mandatory technology transfer. (For this reason, China’s pledged commitments to depart from this sort of case-by-case adjudication in the course of U.S.-China negotiations on a bilateral investment treaty would mark a crucial breakthrough. But those negotiations, frequently stalled since their 2008 start, have once again begun to lose steam, leaving many observers expecting that it could be years before any agreement is reached).28

  Meanwhile many see signs that conditions are growing more challenging for companies entering China. A new business in China, for instance, must navigate twice as many start-up and construction procedures as it would in another East Asian or OECD country.29 According to Kerry Brown, a professor of Chinese politics at the University of Sydney, “Increasingly multinational companies will in all sorts of subtle and not subtle ways be made to adapt their behavior to meet the political and economic needs of the party.”30

  When it comes to outbound global investment, no government has more working capital at its disposal, or more tools to channel it, than the PRC. Many of these tools are novel—either in kind, by order of magnitude, or both—and found exclusively or almost exclusively in China. To take a few leading examples, China has around $3.5 trillion in foreign exchange reserves, the majority of which is managed by the State Asset Foreign Exchange (SAFE) and the China Investment Corporation (CIC), its leading sovereign wealth fund.31 China’s largest SOEs—many of them global competitors and Fortune 500 companies—make their largest purchases and overseas investments at the direction of the Chinese government, often with geopolitical objectives and conditions. SAFE has openly predicated investment decisions on nations’ disavowal of Taiwan.32 Chinese FDI in Africa likewise comes only on recognition of Beijing’s one-China policy. China has diplomatic ties.33 (As the striking correlations between voting patterns in the African Union on Qaddafi’s ouster and Libya’s SWF investments on the continent suggest, such geoeconomic techniques are not confined to China.)

  Returning to a point raised in Chapter 2, this influence is not just unidirectional. China’s substantial strategic investments, often directed towards weak and authoritarian states, c
an in turn shape Beijing’s foreign policy instincts, policies, and perceived national interests.34 Some of these effects may be salutary, some not. Recall how years of Chinese involvement in Sudan enabled China to help facilitate a North-South peace deal (once China finally came to terms with the political reality of two Sudans35), but for years leading to the eventual peace talks, had also helped to undermine U.S. sanctions there.36

  At times this can create a mutually reinforcing dynamic, compelling Beijing toward greater shows of geopolitical muscle to protect these investments. In the case of Zimbabwe, China has demonstrated resilience in protecting its investments through the use of its veto power on the UN Security Council. In 2008, a resolution calling for arms embargo and financial and travel restrictions on Zimbabwean president Mugabe and other leadership was backed by nine UN member states but vetoed by both Russia and China.37 Leading up to Zimbabwe’s presidential elections, in 2011 China paid just $3 billion for exclusive access to the African country’s extensive platinum rights, a contract estimated to be worth $40 billion. One headline in the Zimbabwe Mail went so far as to say that China’s geoeconomic influence over Harare rendered Zimbabwe a “full-fledged Chinese colony.”38 More recently, in the spring of 2014, the People’s Liberation Army donated $4.2 million to fund various projects for the Zimbabwe Defence Forces, Mugabe’s military, including development, training, and equipment acquisition.39 With the Mugabe government’s continued isolation from the West and a national debt of over $7 billion, the Chinese investment is a significant factor in keeping Mugabe in power.40

  Sanctions. The Chinese government typically regards sanctions as an abuse of power by developed countries, notably the United States. Sanctions, from the Chinese perspective, are seen to compound crises rather than help defuse them.41 China has tended to oppose sanctions particularly out of fear of losing out on imports of vital commodities that support economic growth at home.42 (By comparison, the United States has been the principal country imposing sanctions in more than 120 instances over the past century.)43 In the case of Iran’s nuclear program, while China unsurprisingly opposed unilateral U.S. sanctions on Iran, Beijing did vote in favor of all UN Security Council sanctions against Iran. Beijing has hardly proven itself an enthusiastic participant, maintaining economic ties with Iran in circumvention of Security Council commitments.44 In July 2013, the U.S. government moved to impose penalties on foreign entities that maintain commercial ties with Iran. Undeterred, China has continued to seek out ways around these sanctions to further bolster the Iranian government, be it through importing Iranian crude oil (rather than fuel oil) or, as at least one Iranian lawmaker has claimed, the promise of $20 billion in development projects in Iran using oil money.45

  Aid. While China has looked much less to official assistance as a source of diplomatic leverage than one might expect—the official Chinese bilateral aid budget is a meager $5 billion per annum—there are important exceptions.46 Image projects—presidential palaces in Zimbabwe, Togo, and Sudan and more than fifty-two sports stadiums in Africa—are obviously part of China’s campaign for closer political ties.47 According to estimates compiled by AidData, a development watchdog group, China paid out $80 billion in “pledged, initiated, and completed projects” in Africa from 2000 to 2012. But “most of that aid went to areas where national leaders were born, indicating a strong political bias,” AidData found.48 “As soon as [a region] becomes the birthplace of an African president, this region gets 270% more development assistance (from China) than it would get if it were not the birth region of the president,” says Roland Hodler, professor of economics at the University of St. Gallen in Switzerland and one of AidData’s leading researchers.49

  These projects can backfire. China has come in for criticism over some of its development choices, such as its 2007 decision to finance a new presidential palace in Sudan. While the international community focused on providing aid and supplies to African peacekeeping forces working to suppress the Darfur genocide, China’s leader Hu Jintao provided Sudan an interest-free loan to build a presidential palace and called for other nations to “respect the sovereignty of Sudan.”50 The move—coming as it did in the run-up to the 2008 Olympic Games in Beijing, when China was already under intense public scrutiny—attracted widespread criticism, not just for the fact of China’s aiding a brutal regime but also for the way that development took a backseat to blatantly political motives.51 “China is not financing a presidential palace by mistake,” Sebastian Mallaby, then a columnist for the Washington Post, wrote of the deal’s announcement, “it is doing so deliberately. It is not financing just any presidential palace; it has chosen a president so odious that his fellow African leaders hold their noses at him.”52

  But, such clumsier missteps aside, have these sorts of image projects paid off for China? Generally speaking, popular perceptions of China in Africa or Latin America remain roughly unmoved from 2007 levels (if anything, the two most recent Pew surveys on the question show more cases of declining opinions toward China than of warming views).53 But then, it is hardly clear that improving public opinion in these regions was the goal that Chinese leaders had in mind. Among elites and leaders in these regions, China has fared much better. A 2014 study by the RAND Corporation put it this way: “Africans’ reactions to Chinese involvement have been mixed: Government officials have been overwhelmingly positive, while other elements of African societies criticize China for what they see as an exploitative, neo-colonial approach.”54 In an article in the Financial Times, former Senegalese president Abdoulaye Wade wrote, “China’s approach to our needs is simply better adapted than the slow and sometimes patronizing post-colonial approach of European investors, donor organizations and non-governmental organizations.”55 To the extent that China’s moves are as much influence attempts as aid projects, evidence suggests that they are succeeding on at least the first of these scores—and indeed often both.

  In addition, China, along with several other emerging powers, has looked to state-owned development banks, which are extending financing to the developing world at below-market rates—as in Venezuela, which again has approximately $40 billion in Chinese loans and counting—and record volumes. By some estimates, the China Development Bank, holding nearly $1 trillion in assets, outstrips the World Bank’s lending capacity by a factor of thirty-two.56 One can be reasonably confident that at least some of this $1 trillion will be deployed toward geopolitical purposes, or at minimum with geopolitical co-benefits. And of course, when dealing in sums in the trillions, even small percentages can make for impressive investment numbers. When China launched the China Africa Development Fund (CADF) in 2007, a $5 billion fund backed entirely by the CDB, it marked the first private equity venture by a Chinese state bank. Eight years on, the CADF has invested in more than 80 projects across 35 African countries.57 It assumes only minority stakes in projects alongside other Chinese investors, and allows Chinese firms to supply local partners with Chinese capital, technology, and know-how. Still, the CADF appears subject to the same ultimate political direction that defines every other Chinese state bank. Martyn Davies, CEO of Frontier Securities in South Africa, was telling in his lukewarm endorsement of the CADF’s independence, calling it “largely commercially driven.”58 A look at the CADF’s steering committee, consisting of Chinese officials, suggests this may be a charitable assessment. As one newspaper explained, “If the projects interfere with sensitive or material or economic or diplomatic policy, then they have to listen to the steering committee.”59

  In the case of Chinese aid to Venezuela, Chinese financial support assists the Venezuelan government in acting counter to U.S. national interests. Venezuela continues to allow Iran to illegally launder billions of dollars and stash “hundreds of millions” of dollars in “virtually every Venezuelan bank today.” It also permits Hezbollah to establish terrorist training facilities on Venezuela’s Margarita Island, a move that has further strengthened the “marriage of convenience” between narcotics traffickers a
nd drug gangs.60

  One additional geopolitical benefit of Chinese overseas aid is the continued diplomatic isolation of Taiwan. Sixteen years after China broke off relations with the African island nation of São Tomé and Principe over its diplomatic recognition of Taiwan, China has planned to open a trade mission to promote aid and investment projects in the tiny country, located in the Gulf of Guinea. In a few years’ time, this may well lead to a unilateral move by São Tomé and Principe to cut its formal diplomatic ties with Taiwan, as was likely the case in Gambia’s unexpected decision to withdraw diplomatic recognition of Taiwan.61 In the years since Malawi broke off diplomatic relations with Taiwan in exchange for recognizing the Beijing government in 2008, China has aided the southern African nation in the “construction of a new parliament building, the Lilongwe International Convention Center, the Karonga-Chitipa Road, and the Malawi University of Science and Technology.”62 It is no surprise that countries see China, with its much deeper wallet, as having a much better payoff—literally—than Taiwan. Aid thus serves as a tool for China to protect its own definition of “one China”: namely, that Beijing is the legitimate representative of China, to which Taiwan belongs.63

  Monetary policy. Underpinning China’s economic ascendancy is its monetary policy. By keeping its currency cheap, China has managed to make its exports more competitive than those from other developing countries, from Bangladesh and Vietnam, to India and Mexico. While the real exchange rate of the RMB against the U.S. dollar has appreciated significantly in recent years, China has intervened steadily since roughly 2001, doing so at record levels in 2014 (orchestrating some of the largest single day devaluations in decades in 2015).64 While in most countries domestic politics would balk at the economic disadvantages that such currency restraint inevitably generates, China has more or less managed to buy off the opposition.65 Many states resent how the undervalued yuan undermines their competitiveness, but offers of Chinese financial assistances, trade opportunities, and simple fear of Chinese political influence are enough to mute criticism.66