Chapter 5 Economic statecraft (Week 6-8)

5.1 Discussion questions

  • Wong (2021). Why is China’s economic statecraft self-defeating?

  • Norris (2016). What are China’s strategic priorities? And how can economic statecraft serve China’s strategic interests?

  • How do we evaluate the effectiveness of China’s economic statecraft? (*)

“China’s Economic Statecraft” by Matt Ferchen 16:30-22:30

5.2 Self-defeating statecraft

Wong (2021) argues that China’s practice of economic statecraft is far less impressive that we often thought. It often sparks resistance and has not lead to any long-term strategic gains. She argues that China’s economic statecraft is not driven by grand strategic designs or an incentive to export autocratic political system. Instead, it is “something more practical and immediate: stability and survival.”

“China’s economic statecraft, then, is often employed to put out immediate fires and protect the CCP’s domestic and international image.”

Therefore, China has been focusing on

“national sovereignty and territorial integrity (such as Taiwan, Tibet, and the East China and South China Seas) and domestic governance (such as China’s treatment of the Uyghurs in Xinjiang and its handling of the COVID-19 pandemic)”

In terms of the approaches, China uses negative sanctions in a targeted and symbolic way, while focusing more on applying positive inducements. She divides the inducements into two types: the illegitimate subversive ones (“subversive carrots”) vs. the legitimate public ones (“legitimate seduction”). The former method works the best in countries that have little public accountability (Cambodia, Hungary, Serbia), but less well in countries with greater transparency (the Philippines, Australia, Sri Lanka, Maldives, Malaysia). The latter method is often applied to countries with more public accountability (Greece, Australia). Wong argues while the latter method seems to hold promises of long-term strategic gains by cultivating vested interests abroad, it also encounters several challenges: it takes longer and is getting harder (due to China’s economic model, assertive foreign policy, and economic coercion).

Taken together, she argues that while China has “mostly been able to achieve transactional, short-term objectives”, for countries with public accountability “China’s long-term strategic influence remains limited” (Wong 2021, 51).

5.3 A fairly effective channel

Norris (2016) begins by tackling China’s grand strategy. Here are the hierarchy of strategic priorities that he lays out:

  • Regime stability. This point is shared by Wong (2021). Somewhat differently, however, Norris emphasizes “Economic growth has come to replace communist ideology as the chief legitimizing dynamic underpinning the CCP’s popular credibility.” Recall that Weiss & Wallace (2021) also talks about the three pillars of CCP’s legitimacy: nationalism, economic growth, and public safety. Note that some scholars are concerned that CCP would replace economic growth with nationalism as the country’s economy slows down. See, for instance, this foreign policy argument: China Is a Declining Power – and That’s the Problem: The United States needs to prepare for a major war, not because its rival is rising but because of the opposite.
  • Prevent a balancing coalition against China.
  • Diversify and secure strategic raw materials supplies.
  • Taiwan issue.

Norris therefore argues that China’s economic statecraft relies on:

  • Ensuring good economic growth, which can help address potential domestic threats and fueling China’s growing military might.
  • Deepening integration into the global economy. This is because China’s economy has been relying on export-oriented model which calls for greater integration.
  • Exercising economic statecraft in an effective manner.

On the final point, Norris argues that China has been fairly adroit because of its own economy success and its mixed economy which allows the government to direct “private” economic actors for strategic ends. The cases he lists include China’s economic coercion against France, the Philippines, Taiwan, North Korea, Japan, and Mongolia. He also point to China’s diversification of strategic material supplies and acquisition of dual-use technologies. Finally, he points out China also leverages its influence via free trade agreements and institutions such as the Shanghai Cooperation Organization (SCO) and the Belt and Road Initiative (BRI).

5.4 How can we move this research forward?

The above readings overlap in discussing what China wants and whether its economic statecraft can get China what it wants. But there are still some gaps. Wong (2021) begins by laying out China’s short-term strategic focus. But evaluates its success via the criteria of long-term strategic gains. Norris (2016) makes the argument that China’s economic statecraft is adroit and effective. But he seems to focus heavily on the different approaches China employ rather than examining whether the statecraft does help China realize its strategic goals or not.

5.5 Data

CFR has some interactive resources. See here for a map of countries that have joined the BRI. See here for Belt and Road Tracker that covers the import, FDI, and debt from China.

AidData’s Global Chinese Official Finance Dataset (2000-2017) covers over 4000 records of Chinese official finance. For maps and visualizations, check out their homepage China’s Global Development Footprint.

Boston University’s Global China Databases.

World Bank’s Belt And Road Initiative Trade Costs Database

The American Enterprise Institute’s China Global Investment Tracker

5.7 Discussion questions (Week 7)

  • Ye (2019). What is her main argument? Is it convincing? What have you learned from this paper? What additional research can be done?

  • Dreher et al. (2021). What is the main argument? Is it convincing? What implications does the paper hold for your home country? For the U.S. or the EU?

  • What additional research questions can we examine with the Global Chinese Official Finance Dataset? (*)

What happened at Biden’s high-stakes meeting with China’s Xi

5.8 Fragmentation and mobilization

Ye (2019) argues that the BRI is a mobilization campaign aiming at addressing domestic and diplomatic challenges. She starts from the theorization/assumption that the Chinese state is ambiguous and fragmented. As a result of this nature, critical policy responses often require leadership interventions and mobilization (of fragmented interest groups).

She illustrates this theory by tracing the origins of the BRI. There are three separate efforts proposed by different agences: mutual connectivity (hulian hutong) in Asia, the Chinese Marshall plan, and China goes West. Against this backdrop, the BRI emerged as a mobilization campaign aiming at synthsizing these different proposals. The government achieve this via tapping into nationalism and allowing ambiguity and the latching on of different local and lower-unit interests.

“All in all, vague and non-obligatory rhetoric from the top leadership ensures that state companies and local governments can interpret and implement the BRI according to their own economic needs and local conditions. This tendency works to intensify China’s commercial interests abroad; it meanwhile contradicts political ambition that the BRI has thus far been preached overseas.”

— Ye (2019, 706)

As a result of this combination of ambition and ambiguity, there is much variation in the implementation of BRI projects. While some are exceedingly ambitious and unrealistic, others do have concrete business plans. Additionally, the BRI can further improve the domestic connectivity. The downsides, however, are two-fold. First, there could be diplomatic backlashes, particularly from recipient countries that hold unrealistic expectations of Chinese finance. Second, the urgently need domestic economic reforms are further delayed.

If you are interested in learning more about her arguments, I would also recommend her book. Here are some excepts.

“Political leadership in China, different from the developmental states, relies heavily on political mobilization, drawing on nationalist ideology, not institutions or “rational” planning that have defined the state intervention in the earlier risers."

— Ye (2020, 215)

“Mistrust of China-led globalization runs deep in many parts of the world. In fact, for China to more effectively expand global power, it has two likely options: either (1) adopt prevalent global rules and norms that can make its outbound expansion more acceptable, that is, bind its own hands, or (2) spend resources on political–security terms irrespective of commercial gains, that is, buy political influence. Both institutional binding and interest buying are incompatible with the SMG dynamics revealed here. On the other hand, China’s outgoing capital is often promoted through nationalist mobilization; on the other hand, it prioritizes commercial gains in overseas projects. Such dual characteristics have helped globalization in China from 1998 to 2018. They are insufficient, and can be disadvantageous, in globalization by China.”

— Ye (2020, 218)

5.9 Economic growth

Dreher et al. (2021) address one critical question concerning China’s overseas grants and loans. In particular, while some scholars argue that given China’s weak domestic institutions, Chinese finance are more likely to fund economically inefficient “white elephant” projects. Others, however, argue that China is more willing to fund and is more quickly to implement projects for the “hardware” of economic development. This debate, however, rests on weak empirical ground, particularly because of the lack of a comprehensive and granular dataset on China’s official financing. Relatedly, they also address the question concerning whether Chinese financing could undermine the effectiveness of Western aid since it undercut the quality of policies and institutions in recipient countries.

Their main results suggests that “an additional Chinese project increases growth between 0.41 to 1.49 percentage points two years after the financial commitment … a doubling of Chinese development finance to the average recipient country— amounting to an increase in US$146 million—implies a 0.05-1.33 percentage points increase in growth two years after commitment” (Dreher et al. 2021, 166). Their results also show that Chinese finance undermines the effectivensss of Western aid.

5.10 Policy lessons

Drawing from the above studies, one can reach several policy lessons. For instance, one may ask whether China can help countries aiming to catch up with industrialization and globalization? If we buy into the study of Dreher et al. (2021), then the answer appears to be positive (at least in the short run). Recall the arguments by Ye (2019), these countries may need to ratchet down their expectations about Chinese finance, particularly those overly ambitious ones. It may make sense to focus more on getting the more business-oriented investments, though its short-term economic impact is not as clear as ODA Dreher et al. (2021, 156).

5.11 Additional resources

Biden and China’s Xi hold ‘expansive and substantive’ virtual meeting

A U.S.-China Grand Bargain? The Hard Choice between Military Competition and Accommodation

Should the United States Abandon Taiwan?

Official Development Assistance (ODA)

A note on current problems with ODA as a statistical measure

Growth Towns: The Evergrande crisis, “common prosperity,” and the transformation of the Chinese growth model, by Ho-fung Hung

These charts show the dramatic increase in China’s debt

Biden Struggles to Stick to the Script on Taiwan Not for the first time, the U.S. president misspoke about the island at the center of U.S.-China tensions

Takeaway From the Biden-Xi Meeting: Jaw Jawing as Success

Lee John’s twitter thread on his book Fractured China, which argues that China’s behavior is inconsistent because it is not a unitary strategic actor as IR scholars assume.

Ma Jun on co-operation over climate change The environmentalist says China and the West can work together

Stalled Dreams With debts unpaid and Ethiopia on the brink of collapse, China’s decades-old Africa strategy may be starting to change.

How Taiwan Underwrites the US Defense Industrial Complex Advanced semiconductors play an important role in the defense industry, and Taiwan supplies the lion’s share of those chips.

China’s Global Network of Vocational Colleges to Train the World At Luban Workshops locals are trained on Chinese technology with Chinese standards as part of a full court press to globalize Chinese tech

Proportion of Tied Aid by OECD countries

A Power Struggle Over Cobalt Rattles the Clean Energy Revolution, which talks about how Chineses companies are challenging the Western dominance in Africa and its environmental repurcussions.

5.12 Discussion questions (Week 8)

  • Zhang (2019). What is her main argument? Is it convincing? Is her theory still valid today (and think about what alternative explanations you can offer)?

  • Lim & Ferguson (2021). What is the main argument? Is it convincing? What have you learned?

  • Why does China appear to rely so much on economic statecraft? Alternatively, is China’s soft power (or public diplomacy) successful? (*)

India-China ties going through a ‘bad patch’: Foreign Minister S Jaishankar | World News

Why China is building islands in the South China Sea

5.13 SCS

The meat of Zhang (2019) is the detailed archive and interview work that are used to compile the original dataset. These are drawn from her book project: China’s Gambits: The Calculus of Coercion.
Turning to her argument, it works in two steps. China resorts to coercion when the need to build up reputation is high. And China turns to nonmilitarized coercion when the geopolitical backlash costs are high. Her main argument revolves around the reputation/signaling theory. And she identifies an interesting pattern: when China becomes stronger, it uses military coercion less often.

This core part of her theory, however, still has some internal tensions. For instance, studies on strategic interactions have highlighted the importance of costs. Granted, there are some debate concerning cheap talk’s signaling values. But most scholars agree the higher the costs/risks that a state is willing to take, the stronger the signaling effects. So while the policy tools of militarized coercion can be more costly, one can reasonably argue that the reputational benefits are also higher (e.g. building artificial islands in SCS and risking military confrontations can better showcase China’s resolve than burning Philippine bananas). This moving part appears to be missing in the theoretical formulation sections (Zhang 2019, 123-125 and 127-128). That said, it should be noted that she carefully argues that grey zone tactics should not be counted as military coercion (see p. 134 and footnote 62). On this note, it should be added that in Figure 1, I was expecting to see a plot differentiating military and nonmilitary coercion.

One alternative explanation to her argument is that by around 2008 China began to have the capacity to exercise economic statecraft. That is, China had to rely on military coercion in the 1990s because it did not have enough economic clout. If so, the scope condition of geopolitical backlash is moot

Secondly, recall also the argument by Goldstein (2020). We can argue the pattern depicted in Figure 1 (Zhang 2019, 133) appears to dovetail nicely with the evolution of China’s grand strategy. In particular, both the second term of Jiang and the first term of Hu follow the peaceful rise strategy aiming at reducing neighboring countries’ concerns.

5.14 THAAD

Lim & Ferguson (2021) use the THAAD incident to discuss which industries are more likely to be sanctioned. They build on the existing sanctions literature and proffer three hypotheses: high asymmetric exit costs, high political costs, and domestic economic/political interests. While they find support for the first hypothesis, the support for the other two is much thinner. The paper also highlights three main concerns of the South Korean government during the dispute: Lotte, tourism, and EV battery industry.

The angle of studying informal sanctions (driven by the motivation to maintain plausible deniability) is a very interesting idea. It ties nicely with existing ideas that China has been very cautious and selective in applying negative sanctions (recall Wong (2021) and Zhang’s paper above). It should be noted that Reilly (2013, 8) has also made the observation that “Unlike US sanctions, which are formalised through domestic law and/or presidential decisions, China rarely openly declares its economic sanctions.”

Empirically, the interviews with South Korean officials and researchers bring in a new perspective of understanding China’s economic statecraft. Theoretically, they argue that they extend the existing sanctions theories by showcasing the unique constraints of informal sanctions (limited policy tools and augmented sanctions-busting incentives). Their argument on the benefits of applying informal sanctions also dovetails with the studies on China’s grey zone tactics.

A minor issue. When they talk about China-South Korea trade increasing by 13.6 percent in 2017, we also need to put things into a broader perspective. The two countries’ trade experienced a downturn in 2016. So the increase in 2017 only returned roughly back to the 2015 level. Also, one can argue that the increase is not that surprising given that the sanctions did not last very long, despite the rippling effects into 2018.

Zeng (2021) “Biding time versus timely retreat: Asymmetric dependence, issue salience, and conflict duration” holds the view that this sanction episode was initiated to gauge South Korean government’s resolve. In about six months the Chinese government basically dropped the sanctions measures and sought to patch up the relations because after the six-months attrition China realizes that the issue salience is higher for South Korea (relative to China’s). The intuition is that after the attrition, China realized that it is very difficult (even under the more conciliatory new president Moon Jae-in, who sworn in in May 2017) for South Korea to drop the THAAD deployment given the threats from North Korea.