At a meeting in Germany on July 8, China’s president Xi Jinping told Japanese Prime Minister Shinzo Abe that “political issues … must not hinder the development of bilateral economic relations.” That’s a stunning de-linkage of economics from politics, considering that the Chinese government has spent much of the past few years doing precisely the opposite.
Since 2010, after all, security and political tensions between Beijing and Tokyo have escalated apace. This in, in turn, has put more than a few Japanese brands into the Chinese government’s crosshairs, exposing them to the wrath of online “netizens” and the slings and arrows of street protesters. A rise in manufacturing costs was already leading many Japanese corporates to look at alternatives to China for their Asia-based production and operations. Street protests and consumer boycotts in China have fueled a further diversification of Japan’s corporate FDI.
All that raises this troubling, yet important, question: just how durable—and vulnerable—are any country’s economic ties to China in the face of political headwinds and strategic strains?
Perhaps more than any country in Asia, China has experimented in recent years with the use of economic levers in coercive ways. To see this in action, just contrast Xi’s encouraging statement to Abe with another of his meetings in Hamburg—with South Korea’s new president, Moon Jae-in.
When Moon took office on May 10, he inherited months of tension with Beijing over the deployment of terminal high-altitude area missile defenses (THAAD). Beijing hates THAAD, viewing it is a threat to China’s strategic deterrent and a symbol of enhanced operational coordination between Washington and Seoul that could ultimately be turned against China.
And so China has turned up the heat:
It banned Chinese tour groups—pummeling Korea’s airline, hospitality, and duty free industries.
Its state and social media have encouraged unofficial boycotts of Korean products.
Regulators have cited “fire code violations” to pressure and shutter Korean businesses in China, including some 80% of the supermarkets operated by Lotte, the Korean firm whose land swap provided the golf course that will house the new THAAD batteries.
Moon, a left-of-center politician, seeks productive relations with China and dialogue with North Korea. So his election should, in theory, have changed all this. But it has not. Instead, Xi told Moon that THAAD remains a precondition to “overall” progress and placed the onus squarely on Seoul to “remove obstacles” to the improvement of relations.
What, then, is Beijing’s true policy: is it to be linkage of economics to politics (as with Moon) or de-linkage (as with Abe)?
This question matters for two reasons—first, because if blunt coercion is, in fact, some sort of “new normal,” then foreign governments and firms need to mitigate the risks of being caught in Beijing’s crosshairs; and second, because Beijing’s relations with so many countries are tense, thus any of them, particularly on
China’s Asian periphery, could become a future target. Just look at the Philippines, whose rocky relationship with Beijing has improved under President Rodrigo Duterte. Should Manila prepare for slag, ash, and fruit boycotts if its next president reverses Duterte’s accommodating stance in the South China Sea?
From my vantage point, at least, Beijing seems certain to continue using economic leverage for political and strategic ends. There are just too many examples of it now to doubt it.
But blunt coercion isn’t likely to become routine either. It is not, in other words, a “new normal” of Chinese statecraft. It is a tool—one tool—in an increasingly diverse toolkit.
It may be useful, therefore, to lay out a rough typology of precisely what Beijing now has in its toolbox:
With its $11 trillion economy, China is integrated with dozens of other economies, both big and small. It is the world’s number-one trader, manufacturer, and oil consumer. For some countries, it is among their biggest buyers of debt and/or providers of project finance and other forms of capital.
In fact, “going global,” especially through investments in advanced industrial economies, has given Beijing more economic levers to pull. One example is Spain. A report last week in POLITICO’s European edition suggested that, in 2014, Beijing held some 20 percent of Spanish bonds not held by that country’s residents.
This gave Beijing new leverage because the Rajoy government calculated that China might use its debt holdings to punish Madrid for criticism of Beijing’s human rights record or other political differences.
And yet because China’s economic interactions with the world are so diverse now, blunt coercion is one of just five types of leverage—and not necessarily the most important one.
Let’s call these five types: “passive,” “active,” “exclusionary,” “coercive,” and “latent” leverage.
When Beijing uses what I term “passive” leverage, it essentially lets China’s size, weight, and market power do the talking. In these cases, Beijing doesn’t need to threaten, cajole, or do much of anything at all to try to get its way. Instead, it will rely on foreign economic interests, such as companies with a stake in its economy, to pressure their home governments for stable, predictable, non-confrontational relations with China.
One example of this is the United States: for decades, Beijing has counted heavily on US firms and business lobbies to mitigate political risks and forestall potential disruptions to the US-China relationship.
Using “active” leverage, by contrast, means that China doesn’t just let its size do the talking. Instead, it will try to take a direct hand in shaping rules and norms in other countries.
Beijing’s goal here has been to use its economic power—or the lure of Chinese foreign direct investment—to lock in its political and economic preferences, and potential advantages for Chinese firms. For example, if a country hopes for investment under China’s multitrillion dollar “Belt and Road” infrastructure initiative, it will probably tread carefully around China’s political preferences and adopt some of its preferred investment provisions.
Beijing’s success with this tool will surely vary. In Africa, for instance, distinct countries have had distinct degrees of success in fending off Chinese conditionality. But generally speaking, the weaker the recipient state, the more susceptible it has been to this form of pressure from Beijing, which can include: agreeing to convert debt owed to China into equity; accommodating China’s preferred labor practices by agreeing to “buy and hire Chinese” in contractual provisions; giving contracts to Chinese state-owned enterprises; adopting Chinese technological and engineering standards as default standards; or accepting Beijing’s procurement rules.
Third, there is Beijing’s use of “exclusionary” leverage. Rather than attempting to shape rules and choices in other countries, this type of leverage means granting or denying access to China’s own domestic market in an effort to ratchet up the pressure.
This is just the form of leverage China has wielded against South Korea recently, with Chinese regulators citing safety rules to restrict Lotte’s operations. Beijing has clearly hoped to persuade Lotte and other Korean firms to compel a change in their government’s policies on THAAD.
My colleague, Matt Sheehan, has offered another useful example of this use of “exclusionary” economic leverage tied to a political goal—namely, China’s effort to foster its own view of “cyber sovereignty,” which, of course, includes government censorship. The United States and China have a strong political disagreement about cyber sovereignty. But US firms have nonetheless accommodated China’s views to ensure continuing access to its market, agreeing to build alternate versions of their products or situate data in China.
Beijing’s use of what I term “coercive” leverage is even more direct. Here China doesn’t simply wield access to its market as a weapon but attempts to inflict discrete punishments tied to discrete “offenses.”
The best recent example of this is probably Mongolia. One week after Ulaanbaatar permitted the Dalai Lama to visit last November, Beijing imposed new fees on Mongolian commodity exports to China, piling on new cross-border transaction costs. And when Mongolia relented, China’s foreign minister Wang Yi drove home the point, noting that Beijing hoped Mongolia had learned its “lesson.”
Another example is Norway. Once China’s largest source of salmon imports, it fell behind the small Faroe Islands after the Norwegian Nobel Committee awarded the Nobel Peace Prize to Liu Xiaobo. Oslo ultimately got Beijing’s intended message: a new bilateral seafood agreement came only after a joint statement in which
Norway conceded Beijing’s main political concerns.
Finally, there is what I would call Beijing’s “latent” economic leverage—in other words, the coercive cards it holds but chooses not to play.
This is the leverage Washington hopes China will use against North Korea. But thus far, Beijing has used it to shape Washington’s actions as much, if not more, than Pyongyang’s.
Not Every Problem a Nail
What can we learn from China’s use of these five distinct economic levers? Personally, I don’t see a clear pattern, yet one scenario stands out from the extremes on the spectrum of alternatives:
At one end of this spectrum, Beijing can simply let nature take its course, relying on “passive” leverage to influence debates in other countries. Depsite growing tensions, this still seems to be Beijing’s preferred course with the United States, where it continues to lean on partners in the business community and binding economic ties.
At the other end of the spectrum, China can try to go “hard and heavy,” as it did with Mongolia and Norway. With both countries, Beijing tried to reverse their policies by delivering a short sharp shock. And although its efforts produced concessions, these are small economies, not necessarily representative, and landlocked Mongolia was unusually vulnerable.
To me, therefore, the South Korean case seems a real harbinger.
It shows that Beijing is learning to mix and match from among these five tools in the kit. China wielded “exclusionary” leverage by restricting Lotte’s operations in China yet simultaneously deployed direct leverage through its restrictions on Chinese tour groups.
What Beijing has not yet done, I think, is develop a systematic ladder of escalation—moving from limited actions, on to stronger actions, and finally on to tactical and strategic “punishments” aimed at compelling foreign governments to act as China wishes.
Such a step-by-step, carefully calibrated escalation ladder would be a momentous turn in China’s use of economic coercion.
So it bears watching.
As China develops a heftier role in the world economy, it will have greater capacity—and thus a greater temptation—to do just that.