Chinese Economic Statecraft

Commercial Actors, Grand Strategy, and State Control

William J. Norris

• Publisher: Cornell University Press
• Year: 2016
• ISBN:
  9781501704024
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

In Chinese Economic Statecraft, William J. Norris introduces an innovative theory that pinpoints how states employ economic tools of national power to pursue their strategic objectives. Norris shows what Chinese economic statecraft is, how it works, and why it is more or less effective. Norris provides an accessible tool kit to help us better understand important economic developments in the People's Republic of China. He links domestic Chinese political economy with the international ramifications of China's economic power as a tool for realizing China's strategic foreign policy interests. He presents a novel approach to studying economic statecraft that calls attention to the central challenge of how the state is (or is not) able to control and direct the behavior of economic actors.Norris identifies key causes of Chinese state control through tightly structured, substate and crossnational comparisons of business-government relations. These cases range across three important arenas of China's grand strategy that prominently feature a strategic role for economics: China's efforts to secure access to vital raw materials located abroad, Mainland relations toward Taiwan, and China's sovereign wealth funds. Norris spent more than two years conducting field research in China and Taiwan during which he interviewed current and former government officials, academics, bankers, journalists, advisors, lawyers, and businesspeople. The ideas in this book are applicable beyond China and help us to understand how states exercise international economic power in the twenty-first century.

Part I

On Economic Statecraft

1

What Is Economic Statecraft?

How should we think about this phenomenon called economic statecraft? How do we know economic statecraft when we see it, and how does it differ from “normal” commerce? Before going further, let us define a few key terms and elaborate on some of the concepts used throughout this book. We will begin by challenging a common misunderstanding in the field of international relations: that states conduct economic relations with each other. Although states may be uniquely responsible for writing the “rules of the road” or acting as referees in the international game of modern global economics, they are not the primary players on the field.

International economic activity (trade, investment, etc.) is actually conducted by commercial actors, not by states. Commercial actors are defined as those entities that actually carry out international economic transactions. Examples of these activities include buying and selling of commodities, making investments, selling products, building factories, purchasing assets, and employing workers. They are often (but not always) multinational corporations.1 Scholars engage in an intellectual shorthand when they refer to international economic relations between states. Generally speaking, this state-based orientation is a perfectly appropriate point of reference from which to analyze international affairs. When applied to questions of economic statecraft, however, it blinds us to some very important dynamics. That commercial actors, rather than states per se, conduct the majority of international economic activity is an empirical reality that has not been appropriately incorporated into a theory of economic statecraft. Understanding how states use economics to pursue their strategic objectives requires that we first focus more explicitly on the role of commercial actors, the entities that actually conduct the vast majority of international economic transactions.

The topic of civil-military relations provides an illustrative, epistemological parallel. Much of the civil-military relations literature problematizes the issue of state control of military power. This approach allows analysts to explore and understand important dynamics in the relationship between a nation’s military forces and its political leadership. At the heart of this type of inquiry lies what is essentially a principal-agent problem: how can a nation’s political leadership maintain control and be able to productively direct its military forces? Although analysts will often talk about “nations” exercising military might, technically speaking, armies, navies, and other services are actually responsible for conducting military operations. These military actors are beholden (to varying degrees) to a state’s political leadership. The intellectual challenge that the civil-military literature explores is how such control is (or is not) practiced. Indeed, analyzing the nature of exactly how states marshal, control, direct, and apply such military power has yielded interesting insights about doctrine, command and control, organizational culture, and national military effectiveness, to name but a few.

Just as states must rely on militaries to exercise national military power, so too must modern states rely on commercial actors to exercise national economic power. In both instances, states find themselves facing principal-agent challenges. That is, the state must work through agents with the specialized capacity to actually conduct the activity that will lead to the desired national political outcome. This principal-agent relationship introduces a host of challenges and complications into the international application of both military and economic power. For example, how does the principal ensure that the agent acts in the principal’s best interests if the agent’s goals are not identical to the principal’s? How can the principal monitor the agent’s behavior and credibly enforce compliance if the principal lacks adequate information or other resources? Such challenges must be overcome if the state hopes to deftly wield these forms of national power. We will return to this principal-agent framework in more detail in the next chapter. For now, we simply note the existence of a principal-agent dynamic inherent in the national exercise of both military and economic power. Just as the civil-military literature studies the components and particular dynamics of the state-military relationship, so too do we need to focus on business-government dynamics when analyzing economic power and its relation to national security.

An Issue of Externalities

The relationship between economics and national security is best thought of as one of externalities, a concept borrowed from the field of economics. It captures the notion that a given transaction may produce effects that are not fully internalized among the parties that are directly conducting the transaction. This book uses the term security externalities to denote such security effects.

Two caveats are in order. First, economic activity can also generate nonsecurity externalities. For instance, economic tools of national power can be used to pursue strictly economic objectives. Economic interaction may also easily generate environmental externalities. In this book, though, we are primarily concerned with the strategic, political, and security consequences that result from various economic interactions. As a result, the scope of inquiry is narrowed to focus on security externalities. Second, of course not all security externalities result solely from economic activity. There may be security externalities that stem from social changes, environmental activities, demographic trends, or any number of factors. This book, however, will be limited to those security externalities resulting from economic activity. Thus, the term “security externalities” is used to denote the security consequences arising as a by-product of economic interaction.

Joanne Gowa and Edward Mansfield wrote a seminal article on the security externalities arising from trade,2 although it should be noted that they use the term to describe one particular type of security externality, that of the efficiency benefits stemming from Ricardian gains. Such bolstering is undoubtedly an important security externality, but I would suggest that it is only one particular type of security externality. One can imagine a range of various types of security externalities, each with a distinct causal relationship between the specific economic activity and the security consequences stemming from that activity. Some examples of types of security externalities arising from economic interaction include sensitive technology transfer, loss of strategic industries, concentrated supply or demand dependence (in areas of trade, investment, and monetary relations), the forging of common interests resulting from currency unions, joint ventures, macroeconomic coordination, or even simple trade complementarity.

States are, to varying degrees, aware of these security externalities, and some externalities may be beneficial while others may be detrimental. Whether or not states or firms are conscious of these security externalities does not—strictly speaking—matter. Whether these security effects are intended or not also does not matter in terms of the security consequences of the economic interaction.3 Neither intentionality nor awareness changes the fact that a particular pattern of economic activity results in security effects for states. Intentionality does, however, play a role when it comes to the concept of economic statecraft.

Defining Economic Statecraft

Economic statecraft is defined as the state’s intentional manipulation of economic interaction to capitalize on, reinforce, or reduce the associated strategic externalities. Because the externalities are generated by commercial actors that are subject to incentive structures that are at least partly determined by states, states can seek to influence the behavior of commercial actors in an effort to achieve the state’s strategic objectives. Such manipulation occurs through a range of state policy tools including sanctions, taxation, embargoes, trade agreements, asset freezing, engagement policies, currency manipulation, subsidies, tariffs, trade agreements, etc. It ought to be noted that economic statecraft is analytically distinct from the security externalities themselves. Security externalities may be (inadvertently) generated by commercial actors engaging in various types of economic interaction simply for their narrow commercial reasons. For example, security externalities like the transfer of sensitive dual-use technology may simply result from the autonomous activities of commercial actors pursuing profits (without any direction by the state). Economic statecraft, however, is the intentional attempt of the state to incentivize commercial actors to act in a manner that generates security externalities that are conducive to the state’s strategic interests. To extend our example, if the state passed legislation requiring dual-use technology transfer as a prerequisite for awarding a lucrative government purchase contract, that would constitute economic statecraft. Economic statecraft thus requires an element of a state’s intentionality (i.e., a deliberate manipulation of commercial actors’ incentives).4 It ought to be noted that these incentives can be used to both encourage and discourage particular commercial actor behavior.

Given that the vast majority of international economic activity is actually carried out by commercial actors, an appropriate theory of economic statecraft ought to feature an explicit role for these commercial actors. Yet all too often commercial actors are missing in the international relations literature. Because commercial actors’ agency is generally absent from studies in international relations, the literature effectively assumes away the fundamental challenge for states seeking to wield economic tools of national power, namely whether or not the state can get the commercial actors to behave in a manner that produces the strategic effects the state seeks. As a result, the field continues to struggle with understanding the specific microfoundations of economic statecraft as it is actually practiced in grand strategy. This study seeks to address that gap.

To do so, I focus on the element of state control, whether the state can control or direct the behavior of the economic actors that are conducting the international economic activity. This is an important (and often overlooked) prerequisite for states to be able to conduct effective economic statecraft. Rather than assume that states can perfectly direct their economic power, I introduce an explicit role for the agency of commercial actors vis-à-vis the state. In particular, this approach focuses on the state’s ability to control or direct the behavior of commercial actors so as to generate security externalities. In fact, the distinction between security externalities and economic statecraft discussed above turns on this issue of state control. Because this approach to economic statecraft is a novel one, we should be explicit about how this definition of economic statecraft and this larger conceptualization of the relationship between economics and national security extends some of the existing work that has been done on the topic of economic statecraft.

International Relations and the Study of Economic Statecraft

David Baldwin’s Economic Statecraft is one of the field’s best efforts to understand the wide range of economic tools states could call upon to achieve their national interests.5 Much of the subsequent work in political science focused almost exclusively on sanctions and the coercive elements of economic statecraft. Such a conceptualization represents an overly narrow approach to the rich array of phenomena encompassed by the term economic statecraft.6 Baldwin’s work attempts to systematically catalogue and evaluate the various types of economic statecraft states can use to achieve their strategic objectives. By calling attention to the political rather than economic effects of using economic tools, he sought to challenge the view that economic statecraft is not an effective tool of international relations. The early chapters wrestle with the conceptual elements of how to analyze economic statecraft, while the later chapters discuss particular cases of economic statecraft. This work is often cited as the seminal modern text on economic statecraft, and it still provides a useful reference for students seeking to understand the economic tools of international power.

Baldwin focuses his scholarship on the phenomenon of “economic statecraft,” which he defines as “influence attempts relying primarily on resources that have a reasonable semblance of a market price in terms of money.”7 Essentially, Baldwin’s definition begins by saying that statecraft defines the range of tools, policies, etc. a state has at its disposal to pursue its interests in the international system.8 This definition is straightforward. He goes on to define economic as those transactions, goods, etc. that can be measured and priced in terms of money.9 This logic leads Baldwin to conclude that economic statecraft defines the activities, policies, etc. of a state that rely on resources that have a price tag. The purpose in constructing such a definition seems to have been to emphasize that the term “economic” merely defines the means employed (rather than the end-state goals that are sought, which may be purely political).10 At the time of his writing thirty years ago, it was important to make this case. Although defining economic statecraft in this way is not incorrect—and in the practice of international relations, states do frequently seek to achieve noneconomic ends by using economic means—today we are in a position to advance our understanding of economic statecraft beyond the basic claim that economic means can be used to pursue political ends. It would be interesting if we could say something about exactly how states use such tools. What is different about state use of economic tools as opposed to other means of international influence, and what are their limits? In what manner, exactly, do state applications of economic instruments produce the strategic consequences states seek? These are the questions that drive this book. The section above offered a new, more specific, analytically precise definition of economic statecraft that moves beyond Baldwin’s “intentionally broad” definition in favor of an understanding of economic statecraft that frames the strategic outcomes as security externalities that result from the economic activities of commercial actors. Defining economic statecraft in this way will allow us to be more precise about the conditions under which and the manner in which states seek to use economic interaction to promote their strategic goals. This definition provides a useful foundation for understanding how states actually mobilize and use their economic power to achieve their strategic objectives.

Of course Baldwin’s is not the only seminal work on this important topic. There is a long history of scholarly efforts to examine how states could use their economic relations to pursue security goals. In fact, unlike much of the more recent scholarship on the topic, many of these earliest works were empirically driven analyses that paid considerable attention to understanding the role of commercial actors in states’ foreign policy. Eugene Staley premised his 1935 work War and the Private Investor on the notion that the economic behavior of private-sector actors cannot be fully understood without also considering...

Table of contents

• Acknowledgments
• Introduction: Oil, Iron, Mangoes, and Cash
• Part I On Economic Statecraft
• Part II Securing Strategic Raw Materials
• Part III Cross-Strait Economic Statecraft
• Part IV China’s Sovereign Wealth Funds
• Concluding Implications
• Appendix 1. Coding of the Independent Variables
• Appendix 2. China Investment Corporation’s Direct Investments in the Aftermath of the Financial Crisis
• Notes
• Index