And there are still other cases that fall somewhere between the two, suggesting that if a state is big enough, a little coercion can cast a long, forward-looking shadow. This is in evidence in Southeast Asia, where energy companies drilling in disputed waters admit to preemptively partnering with Chinese SOEs so as to avoid harassment, such as the Philippine-British company Forum Energy partnering with CNOOC to drill off Reed Bank in the South China Sea.110 It is an extension of the dynamic seen for years now with major private energy companies, which—seeing no alternative to mandatory joint ventures as the only means of entering the Chinese market—have effectively joined their interests to those of onetime Chinese competitors.
Nature or Nurture? China’s Geoeconomic Endowments
Finally, it is worth revisiting the geoeconomic endowments outlined in Chapter 3 in the particular context of China. It reveals a country well suited to geoeconomics, though again, not without vulnerabilities and weaknesses.
Ability to control outbound investment. First is a state’s willingness and ability to put domestic capital to geoeconomic use—be it outbound portfolio investment or outbound FDI, debt or equity. Between the state-owned investment vehicles for its reserve assets, sovereign wealth funds, state-owned banks, and its SOEs, Beijing controls not just vast sums but a number of mechanisms for channeling this investment.
Often these mechanisms are mutually reinforcing: its state banks and foreign exchange reserves are being spun into financing to support the “going out” of its SOEs, frequently in foreign mergers and deals involving strategic industries. In mid-2012, CNOOC swept into Canada with a $15.1 billion deal to buy one of Canada’s largest energy producers, Nexen Inc., a venture intended to enable CNOOC to play a central role in technologies reshaping the North American energy landscape. The bid won approval from Ottawa and the Committee on Foreign Investment in the United States—since Nexen has U.S. interests—giving CNOOC control of Nexen’s Long Lake oil sands project in Alberta as well as billions of barrels of reserves in the world’s third-largest crude storehouse.111 In January 2013, in another example, the management entity overseeing China’s vast foreign exchange holdings (known as SAFE) announced plans to create a new Co-Financing Office charged with providing added liquidity to Chinese banks as they lend to domestic firms investing overseas. “In recent years, the central bank and SAFE have been creating new ways of using foreign exchange reserves to support the real economy and serve for the ‘venturing abroad’ strategy,” as SAFE explained the move in a statement on its website.112
Six months later, in June 2013, Premier Li Keqiang hosted a cabinet meeting at which, according to Chinese state media, he said the government would support domestic enterprises to “go out” and make China’s foreign reserves management more “innovative.”113 Weeks later, China’s central bank followed SAFE’s initial moves with a potentially larger initiative of its own, announcing in August 2013 that it was studying a plan to set up a new agency to invest the bulk of the nation’s $3.5 trillion of foreign exchange reserves overseas for better returns.114 The world got a hint of what this could entail when Chinese media reported in April 2015 that China would invest some $62 billion of its foreign exchange returns into its ambitious New Silk Road project, a project widely hailed as a geostrategic effort to expand Beijing’s influence across Asia while also diversifying China’s transport routes away from current choke points controlled by the U.S. military.115
Domestic market features. China’s geoeconomic performance is in part a story about the strategic advantages of size and speed. According to one estimate, Chinese per-capita GDP rose from 6 percent of the U.S. level in 1980 to 22 percent in 2008,116 and India’s rose from 5 percent to 10 percent.117 Studies by Robert Kuhn have linked domestic market features to Xi Jinping’s much-vaunted “Chinese Dream,” wherein China becomes a “moderately well-off society” by about 2020—specifically, by doubling China’s per-capita GDP by 2020 and incorporating 70 percent of China’s population into cities by 2030—and becoming “a fully developed nation” by the 100th anniversary of the establishment of the People’s Republic of China.118 China will eventually overtake the United States in absolute terms as the world’s largest economy, a title that the United States has now held for approximately a century and a quarter. And so long as China continues its climb up the value ladder, supply chains will continue their relative shift away from the West, potentially dealing a hefty psychological and financially costly blow to the United States.
But from Nigeria to Indonesia to India, many countries are big and growing quickly, and yet they are without anything approaching China’s geoeconomic throw weight. Even if China stands out as superlative in matters of size and speed, these attributes are too widespread to alone account for China’s geoeconomic leverage. In fact, four more factors help explain China’s ability to translate its domestic market into geoeconomic leverage. To review: first, Beijing exercises case-by-case discretion over access to its domestic market; second, China has the ability to redirect its domestic appetite to make a geopolitical point; third, either in fact or in perception, there is a consensus that its domestic market is too large for other nations to ignore; and finally, its growth trajectory is such that other countries see rising future costs to upsetting Beijing today. Taken together, these domestic market endowments are most readily felt in China’s use of trade and investment as instruments of statecraft.
Influence over commodity and energy flows. Chapter 3 outlined the three basic variables that determine how successfully a country can, through its energy and commodity policies, influence its geoeconomic standing: monopoly power (market ownership), monopsony power (influence that comes from being the world’s leading customer), and centrality as a transit point between major buyers and sellers. While China can only claim one of these—its title as the world’s fastest-growing energy consumer—it has nonetheless managed to pull from other strengths in ways that amply compensate.
Probably the best recent example is China’s thirty-year gas supply deal with Russia. Announced May 2014 after ten years of negotiations, the deal reflects a clear upper hand by Beijing.119 The deal also demonstrates China’s desire for energy supplies that do not need to travel via sea-lanes controlled by the U.S. Navy. The deal should mean greater gas supplies in the region (and, in turn, lower prices). While the Russia-China deal was greeted by robust press attention, just a year earlier China had concluded an agreement with Turkmenistan that was twice the size of its Moscow accord.120 With anxieties over Russian neoimperialism rising across Central Asia, Turkmen officials were quick to hail the arrangement with China as the consummation of a “new strategic partnership” between the two.121 But these supplies will still be transiting pipelines, and so they will potentially be subject to the same sort of pipeline politics that always make downstream customers vulnerable.
Centrality to the global financial system. Of all China’s geoeconomic endowments, it is the country’s centrality to the global financial system that remains the least utilized compared to potential. China has yet to liberalize its capital account, and its domestic financial sector remains underdeveloped in many respects, especially its equity and debt markets. Despite the considerable progress and maturation that still await, China’s centrality to the global financial system is already a driving force behind its success in translating economic power into geopolitical clout. As an ever-larger share of China’s trade is settled in RMB, and as new offshore financing hubs are added to those already in Hong Kong, Singapore, and the United Kingdom, China will assume new stature as an intermediary of capital, not just a supplier. As the country’s financial maturation progresses, Beijing may also deepen its recent experimentation with sanctions, especially financial ones.
IN SUM, China’s use of geoeconomic instruments has produced a robust diplomatic tool to shape other nation’s policies. Heriberto Araújo and Juan Pablo Cardenal argue: “By buying companies, exploiting natural resources, building infrastructure and giving loans al
l over the world, China is pursuing a soft but unstoppable form of economic domination.”122 But, underscoring how collateral consequences can prove just as geopolitically potent as intended aims, these policies have also locked up significant quantities of global energy resources, grown the coffers of dictators unfriendly to the United States; lent new momentum to domestic proponents of China’s own military buildup, and arguably have increased the odds of resource-based conflict.123
CHAPTER SIX
U.S. Foreign Policy and Geoeconomics in Historical Context
For its first 150 years, the American foreign-policy tradition was deeply infused with economic logic. Unfortunately, thinking about international political economy has become a lost art in the United States.
—ROBERT ZOELLICK, FORMER WORLD BANK PRESIDENT AND U.S. TRADE REPRESENTATIVE
THE PRESENT hesitancy in the United States toward geoeconomics stems from several factors—a lack of presidential leadership that has spanned both parties; the dominance of economic sanctions as the near-reflexive geoeconomic instrument of choice; and difficult bureaucratic politics, reflected in the steady migration of geoeconomic decision making away from the State Department and those responsible for placing U.S. foreign policy interests above all others.1 These factors are all important contributing causes, and the United States is unlikely to improve its present understanding and use of geoeconomics without meaningfully addressing them.
But, taken alone, they do not adequately explain the ambivalence. After all, various U.S. presidents have waned in their enthusiasm for geoeconomic techniques of statecraft over the years—Woodrow Wilson’s rejection of “dollar diplomacy,” for instance—even as they and their coterie of advisors still recognized, debated, and utilized these techniques with far greater sophistication than seen today. Likewise, the United States has relied heavily on sanctions at several points in its history, but during these periods U.S. policy still evinced a level of comfort with geoeconomic instruments beyond sanctions that is not seen today. Finally, while bureaucratic politics have long plagued U.S. geoeconomic efforts—congressional reports on the issue trace as far back as the 1950s—recent bureaucratic impediments are indeed new in some ways, as Chapter 9 discusses.
There is yet another culprit contributing to the present ambivalence toward geoeconomics in the United States today: a faulty historical memory. In recent decades U.S. policy makers have plainly forgotten the traditional role that geoeconomics has played in this country’s foreign policy.
Even to the casual witness of U.S. foreign policy debates in recent years, these historical blind spots are not hard to find. As one analyst stressed, “While … all governments step into economic matters in one way or another,” China and Russia today “do so in ways unthinkable in the U.S.”2 Economics and politics, according to many mainstream accounts, are “relatively separable and autonomous spheres of activity,” and to the extent one has bearing on the other, it is “economic rationality [that] ought to determine political relations,” not the reverse.3 U.S. officials and experts concede, for example, that a potential U.S.-EU trade deal, the Transatlantic Trade and Investment Partnership (TTIP), “could be seen as a ‘second glue’ to shore up the transatlantic relationship.”4 But “calling TTIP an ‘economic NATO’ would … be wrong.”5 These assertions reflect a widely held worldview that markets are somehow apolitical, to be kept free from geopolitical encroachments, and in any case not a proper arena for state power politics.6
It has not always been so. The United States declared war on Britain in 1812 only after years of embargoes failed to change the latter’s behavior. William Howard Taft’s “dollar diplomacy” proved to be a long-term failure, especially in Asia: it “encouraged Japan and Russia to increase cooperation in dividing Manchuria, alienated their British and French allies from the United States, weakened Chinese integrity, and show[ed] American diplomacy to be both naive and heavy-handed.”7 But whether such geoeconomic adventures have been successful or not, the United States has a long and extensive record of attempting them. For most of its history, the United States has regularly understood—and exercised—geoeconomic tools as part of its strategic battery.
In recent decades, however, America began to tell itself a different story about geoeconomics, both about its role in statecraft generally and about its historical role in American foreign policy specifically. U.S. policy makers began to see economics as its own distinctive realm, to be protected from the whims of statecraft. Writing to President Nixon in 1969, Richard Cooper—then a young staffer at the National Security Council who would go on to become a prominent Harvard economist and senior U.S. government official—acknowledged this growing separation between foreign policy and foreign economic policy, viewing it as something between necessary and desirable in promoting the U.S. aim of a liberal trading environment.8 “Given general guidance for the achievement of a liberal trading environment,” Cooper explained, “it was felt that foreign economic policy should be left alone, free from interference by shorter-term political considerations.”9
As this bifurcation grew more ingrained over successive U.S. administrations, economics largely became the exclusive province of economists, all but unavailable to foreign policy makers, and except for sanctions, America’s comfort level with geoeconomics began to wane. So began a structural separation that remains today. Bridging this divide begins with correcting the historical record on America’s use of geoeconomics, and with isolating when things changed and why. A surer sense of history—and with it, perhaps a clearer national self-understanding—on these points will be crucial to deciding where and how geoeconomics ought to figure into American strategic calculus and the promotion of U.S. national interests today.
The American Revolution to 1914: The Geoeconomics of Survival
In the years following the American Revolutionary War, the Founding Fathers argued that the United States could not achieve true independence unless it was economically robust and self-sufficient. Thomas Jefferson put the point in a May 1797 letter to statesman and eventual vice president Elbridge Gerry. The British and French, Jefferson wrote,
have wished a monopoly of commerce and influence with us; and they have in fact obtained it. When we take notice that theirs is the workshop to which we go for all we want … that to them belongs either openly or secretly the great mass of our navigation … that they are advancing fast to a monopoly of our banks and public funds, and thereby placing our public finances under their control … when they have shown that by all these bearings on the different branches of the government, they can force it to proceed in whatever direction they dictate, and bend the interests of this country entirely to the will of another; when all this, I say, is attended to, it is impossible for us to say we stand on independent ground.
It is difficult to find a clearer example of geoeconomic concern and intent.
Jefferson voiced the common understanding that America’s greatest early threats were geoeconomic in nature. Others never lost enthusiasm for shows of geoeconomic opportunism. Keenly aware that Europe would be the most likely source for possible threats to American security, Benjamin Franklin suggested that America should consider offering its commerce in exchange for the friendship of European states.10 Thomas Paine, in Common Sense, explained how “our plan is commerce, and that, well attended to, will secure us the peace and friendship of all Europe; because it is in the interest of all Europe to have America as a free port. Her trade will always be a protection.” Paine was under no illusions that America’s economic interests might somehow be separated from Europe’s. Rather, geoeconomics was Paine’s solution. It was through trade that the United States might play off European states against each other in international politics. “By providing European states with equal access to American ports,” one source explained, “each will have an interest in preventing others from threatening America’s independence.”11 And Alexander Hamilton, the father of American capitalism, saw commerce as a weapon in power politics, a prop
osition not likely to win a referendum among today’s trade policy makers.12
In a rare point of agreement between them, Hamilton and Thomas Jefferson shared a basic enthusiasm for geoeconomic tools of foreign policy. Jefferson is rightly remembered for having scored one of America’s greatest geoeconomic successes in its history: in April 1803, he oversaw the purchase of 828,000 square miles of land between the Mississippi River and the Rocky Mountains, doubling America’s size for a mere four cents an acre ($15 million in total). The economic rationale was self-evident; Jefferson wanted to ensure that American farmers in the Ohio River Valley had access to the Gulf of Mexico via the Mississippi River—the river offered these farmers a crucial vent for their surplus grain and meat. The more fundamental motivation, however, was geopolitical. In May 1802, Jefferson confided to James Monroe that “we have great reason to fear that Spain is to cede Louisiana and the Floridas to France.” He knew that the United States could not undertake a military confrontation with Napoleon Bonaparte’s France; he also assessed, however, that if France secured the aforementioned territories, it would be emboldened to expand into and plant roots in the very areas on which Jefferson had trained his strategic sights. As Jefferson warned America’s ambassador to France, Robert Livingston, “The day that France takes possession of [New] Orleans, fixes the sentence which is to restrain her forever within her low-water mark. It seals the union of two nations, who, in conjunction, can maintain exclusive possession of the ocean.”13
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