China: Case Studies on Geoeconomics

By Aaron Sick and Mark Nexon

Over-the-Horizon’s first article, an interview with Jennifer Harris, focused on geoeconomics as a national instrument of power. During the interview, Harris stated that while the US increasingly looks to its military to resolve crises, it behooves the US to consider alternative instruments of power – for instance, foreign policy-oriented economics – in pursuit and support of national interests. China’s employment of geoeconomics has highlighted its effectiveness, winning and furthering its geopolitical strategy across the western Pacific. Chinese leaders have leveraged Japan’s need for China-sourced rare earth metals, undermined the Association of Southeast Asian Nations (ASEAN), and have begun to supplant US influence in the Philippines. Perhaps most alarming to US interests is the Chinese use of state-owned enterprises (SOE) as instruments of foreign policy, as well as China’s enormous lending facilities supplanting those of the West across the developing world. If the US seeks to maintain its economic and military influence, its defense establishment must come to grips with China’s globally expanding economic power and how it is rapidly altering long-standing American strategic assumptions.

Background

China’s ability to build and exploit soft power is edging out the West’s longstanding system of military and trade partnerships. For three consecutive decades China’s economy has grown annually at an impressive rate of 10 percent per year. Even a recently slowed Chinese economy has reportedly achieved growth rates in excess of 6 percent, whereas the post-recession US economy grew at a paltry 1.6%. Operating from Deng’s principle of “Hide your strength, bide your time” over these past decades of sustained growth, China invested vast sums around the world. 130 nations now count China as their largest trading partner. As China invests in developing states’ energy and transportation infrastructure, funds and builds the new Silk Road, and enhances its position in the South China Sea (SCS), it is building leverage over nations who rely on Chinese loans and trade for economic and political viability. This leverage makes it possible for China to achieve national objectives without having to confront the US with its improving, but less capable, military.

In addition, Chinese foreign investment is politically and human rights’ agnostic, allowing Chinese loans to flow to states where US and European institutions do not. Its economic policy is dual purpose: loans through the China Development Bank (CDB) and the Chinese Africa Development Fund (CADF) act as mechanisms to realize Mao’s desired Chinese leadership of the developing world. This growing economic influence also provides China with leverage over nations with human and natural resources vital to its national interests. The World Bank and International Monetary Fund (IMF) lending requirements are far more restrictive and are not vertically integrated like the Chinese. For instance, China not only provides the necessary funding for infrastructure projects, but Chinese SOE’s provide project management expertise, heavy equipment, skilled laborers, and large project construction capabilities.

Regional Influence

US allies in the Pacific are alternatively pressured and enticed by Chinese economic strength. A 2010 incident, in which a Chinese civilian collided his boat with Japanese Coast Guard vessels near the disputed Senkaku Islands, ended with his expedient return to China following a likely-related Chinese ban on the export of rare earth elements (REE) to Japan. 97 percent of the world’s REE were controlled by China at the time, the import of which remains vital to the technology-based Japanese economy. In fact, REE are essential to numerous commercial and military technological applications. China’s temporary ban on the export of REE to Japan could be viewed as a warning to other states reliant on the same commodities. Here, China did not need to threaten military force to gain the release of its citizen. Instead, China leveraged geoeconomic influence over Japan, including the restriction of REE exports, to achieve its foreign policy objective. By not crossing the threshold of military action, China postures itself for greater benefit while avoiding military confrontation with militarily-superior geopolitical adversaries.

asean-flagsOther nations, dependent on China for trade, investment, and aid, must consider China’s views when making national policy. Cambodia’s development is largely reliant on Chinese aid. Cambodia is one of the ten member states of ASEAN, an economic and diplomatic association that makes policy via consensus and is viewed “as the only legitimate regional counter-balance against China.” Indeed, increased US engagement in southeast Asia has been accomplished through economic and military partnerships with ASEAN members and East Asian Summit (EAS). China’s importance to the Cambodian economy deters the smaller nation from supporting any policy disadvantageous to China.

The most recent example of China frustrating ASEAN’s mission followed a UN ruling against Chinese claims in Philippines waters in the South China Sea (SCS). Protesting Chinese reclamation projects in its exclusive economic zone (EEZ), the Philippines sought arbitration at the UN. The UN ruled that China did not have a “legal basis to claim historic rights to the bulk of the South China Sea.” Despite the ruling, Cambodia declined to support an ASEAN statement supporting the Hague’s ruling, revealing a divided ASEAN and validating China’s use of geoeconomic power to maintain its illegal presence in waters where $5 trillion of trade passes each year. China appears to have deftly exploited the US reliance on ASEAN and the now-defunct (at least from the US point of view) Trans-Pacific Partnership (TPP) for regional influence.

Further, even the Philippines has not capitalized on its favorable UN ruling. Instead, President Duterte has attempted to play the US and China off one another to maximize possible benefits for the Philippines from both powers. While maintaining military ties with the US, Duterte welcomes China’s pledge of billions of dollars in loans to improve its infrastructure including $3.7 billion in poverty-reduction projects. Unable to deliver the same state-backed loans and lacking the state-owned enterprises (SOE) capable of large scale infrastructure construction, the US is rapidly finding itself with less and less influence with one of its oldest treaty allies. Simultaneously, Filipino objections to Chinese efforts to enforce its territorial claims in the SCS are increasingly muted; Duterte has openly stated that if China increases economic support, he will keep quiet on the SCS disputes. Ultimately, the short term political and economic desires of the Philippines leader may outweigh the longer-term implications of ceding its substantial fishing and energy rights in the SCS. Moreover, the presence of Chinese armed forces in the SCS presents increasingly complex barriers to American military power projection in the region, reducing confidence in the US’ ability to fulfill mutual defense treaty obligations in the western Pacific. A country from which the US projected power in the Pacific for over a century is perhaps drifting towards a regional military competitor more able to efficiently project its economic power.

Global Influence

China’s influence expands well beyond the Pacific. As a rising global power China seeks economic ties with developing nations to decrease its dependence on the West. China’s global pursuit of oil resources, even in the American sphere of influence, demonstrates how reluctant China is to rely on western-dominated energy markets for its energy needs. Since 2008, the China Development Bank (CDB) has provided loans to Venezuela totaling $40 billion. Adjusted for inflation, these loans exceed the post-WWII aid to West Germany by over $10 billion (adjusted for inflation). In exchange, Venezuela is committed to “ship” 419,000 barrels of oil per day to China. In practice, this oil acts as equity oil and is traded by China on the global market for crude more easily shipped to and refined in China. The infrastructure construction is accomplished by Chinese companies which funnel much of the loan funds back to the Chinese economy. By comparison, the US enacted sanctions against Venezuela in 2015, perhaps reinforcing China’s play in South America.

Although the Chinese loans to Venezuela may prove an unwise investment, these projects hedge China’s risk to oil prices and buy significant political and economic presence in the western hemisphere – home to numerous developing states and Chinese partners. From the perspective of the Monroe Doctrine, China’s economic support of Venezuela is at best an indirect challenge to US primacy in the western hemisphere. At worst, China is building economic relationships with states viewed as hostile to US interests and that may serve as platforms for China to project geoeconomic power throughout the western hemisphere.

Conclusion

China is aggressively pursuing geoeconomics to influence regional competitors and advance its global geopolitical interests. China’s economic footprint empowers it to reflexively control competitor nations, make existing international institutions irrelevant, and capitalize on emergent opportunities in developing states. China’s efforts threaten to supplant US influence across the developing world. The US military is poorly suited to counter Chinese economic diplomacy. The US needs to develop geoeconomic tools capable of rapidly delivering economy-boosting infrastructure to developing partner nations. If America expects to maintain its economic and military advantages around the globe, it must also reinforce existing diplomatic, economic, and military relationships to avoid a premature end to US global primacy.

Major Aaron Sick has over 1000 flying hours in the F-16, including 400 combat hours during two tours in Iraq. He holds a BS in Aeronautical Engineering from the US Air Force Academy and a Master’s in Theology from Liberty University. He lives with his wife, Sarah, and son, Calvin, in Montgomery, AL.

Major Mark Nexon is a KC-135 and C-130 pilot, with over 3,000 total flying hours. He holds a BS in Military History from the US Air Force Academy and an MBA from Gonzaga University’s Jepson School of Business. He lives in Montgomery, AL with his wife, Michelle.

Both authors are currently enrolled in the Multi-Domain Operational Strategist concentration at Air Command and Staff College, and contribute as Senior Editors to Over The Horizon.

Disclaimer: The views expressed are those of the author and do not reflect the official policy or position of the Department of Defense or the U.S. Government.

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