Oil, Iron, Mangoes, and Cash
Oil, Iron, Mangoes, and Cash
Abstract and Keywords
This book examines how China uses economics as a tool of national power in the twenty-first century. More specifically, it assesses the conditions under which China is more successful or less successful in its pursuit of economic statecraft. It explores economic statecraft in the context of contemporary Chinese grand strategy to show how China uses firms to pursue its foreign policy and other strategic goals. It also considers economics as it relates to national security as well as China's global search for strategic raw materials such as oil, China's use of economic statecraft in its relations with Taiwan, and China's sovereign wealth funds as an avenue of state control. Finally, it explains why the Chinese state can or cannot control the behavior of commercial actors that play important roles in economic statecraft.
“It can be a plot for a novel.”
This was how the man responsible for China’s largest overseas purchase of stock described the events surrounding the Aluminum Corporation of China (Chinalco)’s “Midnight Raid,” a successful, after-market-hours acquisition of 9 percent of Rio Tinto’s stock on the London Stock Exchange. The operation was conducted in January 2008 to block the consolidation of global iron ore supplies, which would have left 70 percent of one of China’s most strategic imports in the hands of two foreign suppliers. Such an outcome was unacceptable to the Chinese government, and it acted deftly through commercial actors to stop it. Yet in Sudan, similar Chinese commercial actors repeatedly acted in ways that directly undercut the government’s efforts to present China as a responsible stakeholder. Chinese national oil companies had taken the initiative to venture abroad in the 1990s. By the early 2000s in Sudan, they were providing foreign investment to a despotic regime, and Chinese economic actors supplied the regime with weapons that were used to carry out atrocities. At the same time, Beijing was expending considerable diplomatic capital to convince the international community that a “rising China” was a responsible state. Both cases centered on Chinese state-owned enterprises (SOEs) in extractive resources. Both firms were top Chinese companies venturing abroad in highly consolidated industries. But in one case, China was able to wield its economic power to advance its strategic interests, while in the other the SOE actively undermined China’s diplomatic efforts. Why the variation?
(p.2) These diverging outcomes are not limited to China’s state-owned enterprises. On several occasions, Beijing has tried to lean on private Taiwanese investors in mainland China in order to limit the electoral success of proindependence candidates on Taiwan. These efforts have had the opposite effect; in both the 2000 and 2004 national elections such activity galvanized domestic support for proindependence sentiment on Taiwan. Observers might conclude that toying with economics is not an effective tool (perhaps even counterproductive) for influencing the independence issue on Taiwan. Yet since at least 2008, China’s economic statecraft has significantly reduced the friction across the Taiwan Strait. Taiwanese independence has been largely eclipsed as an electoral issue. For the foreseeable future, de jure independence for Taiwan is off the table, and no proindependence candidate seems electable in Taiwan. Recent candidates from the DPP (the party traditionally in favor of independence) have gone to great lengths to reassure voters that they would not pursue independence. This outcome is largely the result of increasing economic ties between Taiwan and mainland China, ties the initial rationale of which was to generate this precise result. But once again, we are faced with a perplexing outcome: why was mainland China unable to use economic statecraft to limit support for Taiwanese independence in the early 2000s but had marginalized the independence issue only a few years later? In both instances, Beijing was working through private (not state-owned) enterprises; China’s economic statecraft is not limited to the realm of state-owned firms. Also, in both cases, the commercial actors were Taiwanese (as opposed to mainland) firms, illustrating that Beijing’s use of economic power is not confined to Chinese companies venturing abroad. The two cases have opposite outcomes but share many features in common: same geography, same strategic context, same historical context, same firm nationality, same private sector orientation, and same political leanings (i.e., sympathetic toward Taiwanese independence). Despite these similarities the outcomes were different. Why?
Why is China sometimes able to marshal its economic power for strategic objectives and sometimes not? How should policy makers and analysts understand these dynamics? Current discussions of China’s economic statecraft have largely been framed in terms of whether China has been or will be able to use economic power to achieve its strategic objectives.1 Much of this work tends to argue one of two positions. One position is that China’s growing economic clout and the dominant role of the state in occupying the “commanding heights” of the domestic economic landscape suggest that China is indeed an emerging, mercantilist juggernaut of twenty-first-century economic statecraft. The other view is that the growing complexity and modernization that has underpinned China’s economic liberalization carries intrinsically limiting constraints on any meaningful coordination of China’s economic power. The Chinese state is simply too weak to effectively direct and control its growing economic clout.
(p.3) I suggest that the empirical reality encompasses both sides of this debate. At times, China seems incapable of marshaling its economic power to achieve strategic objectives. At others, China’s economic activity has advanced the nation’s foreign policy goals. A complex reality characterizes China’s strategic use of economics to pursue its national objectives, and framing the issue as an either-or question does not capture the rich variation found in recent history. Rather than argue that China is or is not able to employ economic means in pursuit of national objectives, I ask what the conditions are under which China is more successful or less successful in its pursuit of economic statecraft. One of my central findings is that economic actors play a pivotal role in both successful and unsuccessful episodes of Chinese economic statecraft. As we shall see, China’s ability to direct the activities of these economic actors is essential for economic statecraft.
Security analysts have focused intently on developing our understanding of the military dimensions of grand strategy: the manner in which force is applied, conditions under which military power is most effective, its limitations, etc. But we do not understand the economic elements of national power to the same degree. This state of affairs persists even though militarized conflict is actually quite a rare event in the international system. In the day-to-day conduct of international affairs, states more frequently rely on diplomatic and economic levers of national power rather than military tools to pursue their objectives. How should we understand the relationships among grand strategy, security, international economic activity, and the commercial actors that conduct those interactions?
In this book, I explore how China uses economics as a tool of national power in the twenty-first century. I am hesitant to generalize beyond China, although many of the conceptual frameworks should be able to apply to other states’ strategic use of economic power as well. For example, the rise of the BRIC nations (Brazil, Russia, India, and China), with their legacies of mixed domestic political economies, prompts several interesting questions regarding the manner and limitations of using economic power to achieve strategic and security goals. I address these broader questions through the lens of China.
Although I focus on China’s ability to control the behavior of commercial actors, my overall purpose is to take a close look at Chinese economic statecraft to see what it is, how it works, and why it is more or less effective. Economic statecraft can be broadly understood as state manipulation of international economic activities for strategic purposes.2 To do this effectively, states must first be able to control the behavior of commercial actors that conduct the vast majority of international economic activity. This prerequisite is often overlooked in studies of economic statecraft. I explore economic statecraft in the context of contemporary Chinese grand strategy to show how China uses firms to pursue its strategic goals and to show when the Chinese state can and cannot control the behavior of commercial actors. That knowledge, in turn, enhances (p.4) our understanding of how states in general use economic tools to advance national power.
So how much do we know about Chinese economic statecraft? Although there is a general understanding that Chinese economic statecraft is an important phenomenon, we still know very little. The current discussions tend to polarize. For example, a widely held assumption about China’s growing economic power holds that because China is a communist country in which the state has direct ownership of a significant portion of the productive economic assets, naturally the state can direct this economic capacity to strategically advance political, rather than purely commercial, goals.3 According to this perspective, rising China is an economic juggernaut4 and there is no need to problematize the issue of state control because state control of economic actors is a given in a communist nation. Indeed, there is something appealing about this logic that resonates with preconceptions of a Cold War–style command economy. The reality on the ground, however, suggests that such state control may not be unwavering. Indeed, the empirical reality of China’s partial reforms has generated considerable leeway for some economic actors that, at times, propels them along a trajectory at odds with the state’s objectives.
Thus, at the opposite extreme from the “economic juggernaut” perspective, we find the notion that modern China is such a complex entity that any semblance of a grand strategy is impossible; the state is simply never able to marshal its economic power in a strategic way.5 Again, the evidence suggests a more nuanced approach may be warranted. The reality in today’s China is that sometimes the state is able to direct the behavior of economic actors and thus shape the associated security externalities; on other occasions, the state is unable to control them. We need a theory of Chinese economic statecraft that accounts for this empirical complexity.
Economics and Grand Strategy
Despite a long-standing recognition of the organic relationship between economics and national security, the study of the economic aspects of grand strategy remains underdeveloped. Relatively little work has focused on the microfoundations of precisely how states might mobilize their economic interaction to further security goals. Specifically, the field suffers from too little research on the economic mechanisms states use to pursue their grand strategy under conditions of modern globalization.6 As a result, contemporary analyses of grand strategy remain incomplete. One reason for this underdevelopment may be found in a division between security studies and international political economy. As a result of these disciplinary barriers, we are left with incomplete treatments both of the economic elements of grand strategy and of the strategic aspects of economic interaction. Security studies often concern themselves almost exclusively with military matters (p.5) and pay little attention to the economic dimensions of grand strategy.7 Yet economic tools may also be used to achieve strategic national objectives.
Indeed, as China pursues a “peaceful development” (formerly “peaceful rise”)8 grand strategy, economic power promises to be a more and more attractive alternative to military force. In addition, China’s experience using economics to improve relations with many of its neighbors suggests that this economically oriented “peaceful development” approach produces favorable results. In contrast, China’s occasional attempts to take a more “assertive” position that relies on militarized tools of national power have proved counterproductive for China’s efforts to reassure the international community. The aggressive challenge to the USNS Impeccable, submarine patrols that violate Japan’s territorial waters, and escalating territorial disputes in the South and East China Seas are recent examples of China’s use of military tools that have stoked regional fears about growing Chinese power. Ultimately, such behavior provided a regional context that supported the American “rebalance” to Asia. Military power can thus be strategically counterproductive for China. At the same time, China’s economic success enables it to use economic rather than military tools to pursue its national interests. This book links China’s domestic political economy with China’s use of economic power as a foreign policy tool.
China’s Economic Statecraft
Surprisingly little work has been done to develop a systematic account of Chinese economic statecraft. China’s rise has attracted considerable attention, and some of this work has recognized the increasingly sophisticated nature of China’s foreign policy, but we do not yet understand the economic dimension of China’s foreign policy. A small but growing body of literature focuses on China’s use of economics in its foreign policy; that is the good news. The bad news is that while these works do occasionally recognize the salience of state-firm interactions, they still lack a robust way to generalize these dynamics. They mirror the shortcomings of the general literature on economic statecraft in international relations, namely an undertheorized role for commercial actors and their relationship to the strategic goals of the nation-state.
Works on China’s economic statecraft can be categorized into two types. The first starts from the perspective of China’s grand strategy. For example, Russell Ong has highlighted the influential role economics plays in China’s grand strategy.9 Although Ong notes the centrality of economics, he also calls for deeper analysis of the largely unexplored economic dimension of grand strategy. David Lampton’s The Three Faces of Chinese Power also calls attention not only to China’s growing military capabilities but also to China’s growing “soft power.”10 He parses China’s power into its coercive, remunerative, and ideational elements. I build on (p.6) these descriptive concepts by dissecting the business-government dynamics that underpin these strategic effects. In an insightful treatment, Phillip Saunders highlights the main motivations behind China’s international activism.11 Saunders neatly lays out the strategic rationale for China’s foreign policy actions, and economics features prominently in his analysis. Like many authors, Saunders struggles to accommodate the complex mixture of multiple actors and interests that pervade China’s attempts to use commercial activity as part of its grand strategy.12 We do not yet have a comprehensive framework that reflects China’s domestic political economic dynamics and their strategic international effects.
Rather than starting from the top and moving down, examining China’s grand strategy and highlighting economic aspects, a second approach looks explicitly at China’s economic behavior to better understand the grand strategic implications or consequences of economic interaction. Although this bottom-up approach holds out the possibility of a more fine-grained examination of the mechanisms of economic statecraft, it still lacks a capacious framework for analyzing actual practice. For example, Adam Segal has argued that China is making increasing use of economic statecraft in its pursuit of foreign policy objectives.13 Segal and Scott Kastner have done commendable work examining whether China’s use of economics has translated into strategic results.14 But asking whether China’s economic power is resulting in increased influence leads to frustratingly inconclusive findings. Both authors conclude that China’s growing economic clout sometimes can be leveraged for political objectives and sometimes not. I build upon their work by asking not whether China’s economic power is used strategically, but rather under what circumstances it can be used effectively. China’s sophisticated use of economics in its foreign policy is still a fairly recent phenomenon, and scholars are only beginning to explore the strategic implications of China’s economic power.15 I build upon this emerging work to understand China’s strategic use of economics.
This endeavor differs from earlier work in its emphasis on state control as an often overlooked prerequisite for economic statecraft. State-centric analyses of economic statecraft tend to treat the state as a unitary actor that can control its international economic behavior. By relaxing this assumption, I discover interesting variation around the state’s ability to control the commercial actors responsible for actually conducting international economic activities. I offer an explanation, derived from the economics literature on principal-agent challenges, of why the Chinese state can or cannot control the behavior of commercial actors.
Layout of the Book
We start with a discussion of economics and its relationship to national security before introducing a general theory of economic statecraft. The key lies in the (p.7) ability to control and direct this increasingly unwieldy economic tool of influence. To explain variation in state control, five factors are examined that reflect the business-government conditions under which states will be able to control commercial actors (and thus direct their activities to generate the desired strategic effects). These determinants of whether a state will be able to mobilize and direct its economic power are (1) compatibility of goals between the state and the commercial actors that carry on the economic activity of the state, (2) commercial market structure, (3) unity of the state, (4) the reporting relationship between the commercial firm(s) and the state, and (5) relative distribution of resources between the state and commercial actor(s).
Given the centrality of state-business relations in this account of economic statecraft and given the country’s growing stature in world affairs, China is an especially attractive test bed. Chapter 3 examines the role of economics in China’s grand strategy. Chinese economic statecraft provides useful variation across cases to illustrate and test the general theory. The data for these cases are drawn from more than two years of field research in China and Taiwan, involving interviews with current and former central and local government officials, politicians, academics, bankers, journalists, advisors, lawyers, and businessmen, as well as examinations of available primary materials in Chinese and secondary sources in both English and Chinese. Whenever possible, official documents and publications were used. When interviewing, multiple sources, independent confirmation, and triangulation (in which various interviewees are asked to describe the same events) were used. This work enabled me to reconstruct the intricacies of (attempted) economic statecraft. Paired comparisons help to hold background conditions constant while allowing the key variables to fluctuate. The empirical chapters describe in detail some of the most significant episodes in the contemporary Chinese strategic use of economics.
Chapters 4 and 5 focus on China’s global search for strategic raw materials. China’s search for oil comes to mind when one considers the role of the state in Chinese commercial endeavors abroad. Contrary to some popular conceptions, however, when Chinese oil companies embarked on their “going out” strategy, they caused strategic difficulties for the state. That difficulty is then juxtaposed with the state’s success in directing commercial actions to help prevent the upstream concentration of another strategic resource: iron ore. Chapter 5 examines China’s largest overseas stock market investment, its 2008 purchase on the open market of 9 percent of Rio Tinto’s stock. Examining China’s efforts to work through commercial actors to secure access to strategic resources, chapters 4 and 5 highlight the business-government dynamics responsible for determining when the state has been effective and when commercial actors have damaged national interests.
We then turn our attention to Taiwan, one of China’s top strategic priorities. This section goes beyond state-owned enterprises to include the wholly private actors that conduct the majority of cross-strait business. Chapter 6 examines (p.8) mainland China’s fruitless efforts to lean on Taiwanese firms conducting business in the mainland, and specifically Beijing’s use of coercive leverage against prominent Taiwanese corporations with mainland operations in order to influence the outcome of Taiwan’s presidential elections. In that instance, divisions between central and local government undermined the mainland’s ability to control commercial actors. The use of economic statecraft in this phase of the cross-strait relationship contrasts with the mainland’s current and more successful use of economics to achieve its objectives. Chapter 7 shows how mainland authorities worked together with Taiwan’s opposition parties, providing economic concessions to the support base of President Chen Shui-bian as part of a successful electoral effort to mitigate Taiwan’s appetite for independence.
Last, we examine China’s sovereign wealth funds, specifically China’s propensity to use overseas direct investment as a tool of economic statecraft. As China continues to liberalize its economy, traditional avenues of direct state control seem likely to weaken. China’s massive, state-controlled finance entities, however, seem well-placed to continue exerting state influence over strategic commercial conduct. Two of these government financial entities are juxtaposed to understand the institutional dynamics that make the State Administration for Foreign Exchange (SAFE) an effective tool of economic statecraft, whereas the National Social Security Fund (NSSF) has little potential as an instrument of national power. Understanding this variation provides insight into the conditions under which Chinese state capital can be used to pursue political (rather than commercial) objectives. Finally, chapter 10 evaluates a case of contemporary strategic concern: the China Investment Corporation (CIC). Earlier chapters develop different aspects of the theory; chapter 10 walks the reader through an application that evaluates the CIC’s potential as an instrument of Chinese economic statecraft. The evidence suggests that the CIC will function on a largely commercial basis (albeit “with Chinese characteristics”).
Scholars have struggled to accommodate the role of multinational corporations in international relations. Most work on economic statecraft fails to explain exactly how states exercise their economic power. In particular, efforts to study the national use of economic tools of power have failed to consider the more or less independent commercial actors that characterize modern interstate economic interaction. The next chapter specifies how economic interaction may be used to generate security consequences. Firms, not states, conduct the vast majority of transnational economic activity, and I suggest that if states wish to use economics to pursue strategic objectives, they must resolve a series of principal-agent issues inherent in the practice of economic statecraft.
(1.) See for instance Daniel W. Drezner, “Bad Debts: Assessing China’s Financial Influence in Great Power Politics,” International Security 34, no. 2 (Fall 2009): 7–45, in which Drezner argues that China’s foreign exchange reserves will be of limited strategic use. For other good treatments of China’s economic power see David M. Lampton, The Three Faces of Chinese Power: Might, Money, and Minds (Berkeley: University of California Press, 2008); and David Shambaugh, China Goes Global: The Partial Power (New York: Oxford University Press, 2013).
(3.) “They [Chinese SOEs] are designed to facilitate the goals of China’s Communist Party and to help achieve the goals of the country’s 12th Five Year Plan. They are guided by the government rather than by market principles,” according to Michael R. Wessel, “Opening Statement of the Hearing Co-Chair,” from US-China Economic and Security Review Commission, Chinese State-Owned and State-Controlled Enterprises: Hearing before the U.S.-China Economic and Security Review Commission, 112th Congress, 2nd session, February 15, 2012, 5. In that same hearing, an international lawyer, Timothy Brightbill, added, “Because SOEs ‘often behave as instruments of Chinese foreign policy,’ SOE investments and operations in the U.S. market also raise national security and other strategic concerns. The primary motive of SOEs often is not merely economic, but rather to further the objectives of the government, whether it be to obtain advanced technologies, secure access to raw materials, maximize production output or achieve geopolitical influence.” From “Written Statement of Timothy C. Brightbill before the U.S.-China Economic and Security Review Commission Hearing on Chinese State-Owned and State-Controlled Enterprises,” ibid., 84.
(4.) See for example Ian Bremmer, “State Capitalism Comes of Age: The End of the Free Market?” Foreign Affairs, May/June 2009, 40–55; and Souvik Saha, “CFIUS Now Made in China: Dueling National Security Review Frameworks as a Countermeasure to Economic Espionage in the Age of Globalization,” Northwestern Journal of International Law & Business 33, no. 1 (Fall 2012): 199–235. Another work that portrays a rising China as threatening and destabilizing is John Mearsheimer, “China’s Unpeaceful Rise,” Current History 105, no. 690 (April 2006): 160–62.
(6.) A more complete theory of economic statecraft would connect the microlevel behavior of global commercial actors with the larger, macrolevel strategic consequences of that economic interaction for nation-states. Norrin M. Ripsman and T. V. Paul, Globalization and the National Security State (New York: Oxford University Press, 2010), systematically test various claims in the globalization literature regarding national security, but they mainly test particular hypotheses derived from the globalization literature rather than generating an integrated theory of economic statecraft.
(p.244) (7.) While military aspects play a key role in a country’s grand strategy, grand strategy also includes an economic element. See especially discussions of the full spectrum of tools available to states in the introduction of Paul M. Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, 1st ed. (New York: Random House, 1987); and Barry R. Posen and Andrew L. Ross, “Competing Visions for U.S. Grand Strategy,” International Security 21, no. 3 (1996): 8 n. 2.
(8.) Following an internal debate, China’s senior leadership decided to change the name of its grand strategy from “Peaceful Rise” (which was seen as too destabilizing) to “Peaceful Development” (which carried less threatening connotations). Although still in its early stages, initial policy indications of Xi Jinping’s “China Dream” motif, his “New Silk Road Economic Belt,” and his “21st Century Maritime Silk Road” all suggest a prominent, continuing role for economics in China’s grand strategy. See, for instance, Xi’s September 7, 2013, speech at Nazarbayev University in Astana, Kazakhstan, in which he first proposed his “New Silk Road Economic Belt” vision, or his October 3, 2013, speech to the Indonesian parliament in which he laid out his ideas for a “21st Century Maritime Silk Road.” Incidentally, President Obama was forced to cancel his plans to attend this APEC summit because of a US government shutdown, poignantly underscoring regional concerns about the permanence of the US presence in Asia.
(9.) See Russell Ong, China’s Security Interests in the Post-Cold War Era (Richmond, Surrey: Curzon, 2002); and Russell Ong, China’s Security Interests in the 21st Century (New York: Routledge, 2007).
(11.) Phillip C. Saunders, “China’s Global Activism: Strategy, Drivers, and Tools,” Institute for National Strategic Studies Occasional Paper No. 4 (Washington, DC: National Defense University Press, 2006).
(12.) See for instance Da Wei, “Has China Become Tough?” China Security 6, no. 3 (2010): 97–104; and Linda Jakobson and Dean Knox, “New Foreign Policy Actors in China,” SIPRI Policy Paper, no. 26 (September 2010).
(13.) See Adam Segal, “Chinese Economic Statecraft and the Political Economy of Asian Security,” in William W. Keller and Thomas G. Rawski, China’s Rise and the Balance of Influence in Asia (Pittsburgh: University of Pittsburgh Press, 2007). Segal also grapples with the question of whether China’s use of economics is effective. See his “China’s Economic Statecraft: Markets, Trade, Power, and Influence,” a paper he presented at the Assessing China’s Rise: Power and Influence in the 21st Century Conference at MIT (February 9, 2009).
(14.) For Kastner’s quantitative complement to Segal’s paper see “Buying Influence? Assessing the Political Effects of China’s International Economic Ties,” a paper he presented at the Assessing China’s Rise: Power and Influence in the 21st Century Conference at MIT (February 9, 2009). For additional work on China’s influence see Anders S. Johansson, “China’s Growing Influence in Southeast Asia—Monetary Policy and Equity Markets,” The World Economy (2012): pp. 816–37, and papers presented at the 2013 International Studies Association annual meeting by Evelyn Goh, “The Forms of Chinese Influence”; Michael Glosny, “Chinese Perspectives on the PRC’s Influence”; Scott Kastner, “Measuring the Effects of China’s Influence”; Rosemary Foot and Rana Inboden, “China’s Influence on Asian States in the UN Human Rights Council”; and John Ciorciari, “China’s Influence on Monetary Policy in Developing Asia.” For an optimistic assessment of China’s growing regional role see Arvind Subramanian and Martin Kessler, “The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?” Peterson Institute for International Economics Working Paper 12–19 (October 2012).
(15.) For a good example of such scholarship see Deborah Brautigam and Xiaoyang Tang, “Economic Statecraft in China’s New Overseas Special Economic Zones: Soft Power, Business, or Resource Security?” International Affairs 88, no. 4 (2012): 799–816.