Editor’s Note: This article is part of our Below Threshold Competition: China writing contest which took place from May 1, 2020 to July 31, 2020. More information about the contest can be found by clicking here.
Johnathan Falcone is a United States Naval officer, entrepreneur, and graduate of the Princeton School of Public and International Affairs. He can be found on Twitter @jdfalc1. Divergent Options’ content does not contain information of an official nature nor does the content represent the official position of any government, any organization, or any group.
National Security Situation: The People’s Republic of China’s (PRC) economic activities threaten the U.S.-led financial order.
Date Originally Written: June 02, 2020.
Date Originally Published: October 26, 2020.
Author and / or Article Point of View: The author believes that conflict between the U.S. and China is underway, and China has fired the first salvos in the economic and financial domains. The article is from the perspective of U.S. economic strategy to maintain competition below the threshold of kinetic war.
Background: The PRC emerged from the 2008 financial crisis with increased capability to influence markets abroad and undermine U.S. leadership. Through new institutions, such as the Asian Infrastructure Investment Bank, and new development plans, including Belt and Road Initiative (BRI), China is making strides towards bifurcating the international financial system.
Significance: Beijing uses its growing economic might to erode international support for the Republic of China (ROC) (Taiwan / Taipei)– the most likely source of armed conflict – and to increase military capacity beyond its shores. Coercive economic strategies like tacit regional acquiescence and strategic land acquisition threaten the non-kinetic nature of today’s competitive environment. Below are economic-based options to strengthen the existing U.S.-built financial order while simultaneously limiting the PRC’s capacity to project regional influence and stage wartime assets.
Option #1: The U.S. takes action via proxy and encourages Southeast Asian and Pacific Island countries to increase bi-lateral trade volume with the ROC.
For countries in China’s near-abroad, diplomatic recognition of Taiwan is not possible. On the other hand, increasing trade with the ROC, a World Trade Organization member, is less provocative.
Risk: As Taiwan’s largest trading partner, China will threaten and apply economic pressure to achieve political aims on the island. If Taiwan diversified its trade activity, economic coercion may no longer prove effective. This ineffectiveness might encourage China to pivot to military pressure against Taipei and its citizens. Substantiating this concern is the fact that China has already demonstrated its willingness to aggressively protect its economic interests in the South China Sea.
Further, the existing One-China Policy may be endangered if an increase in bi-lateral partnerships appeared to be U.S.-orchestrated. Although ROC independence would not be explicitly recognized, encouraging action symbolically consistent with an independent international actor could increase military posturing between the U.S. and China, as seen in the 1995-96 Taiwan Straits Crisis. If tensions were to heighten again, the U.S. Navy would be opposing a much more capable People’s Liberation Army-Navy force than in previous crises.
Gain: In addition to limiting China’s ability to apply economic pressure, bi-lateral trade would tie regional interests to ROC. China’s BRI has undermined relationships between ROC and neighboring countries, reducing incentives to aid Taiwan militarily and limiting U.S. military capacity to respond if China were to act aggressively in the region. Substantive partnerships with the ROC create de facto buy-in to the U.S.-led financial system, increasing the number of potential partners to assist U.S. forces in case of war.
Option #2: The U.S. lowers barriers to trade and access to markets by joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreement.
The original Trans-Pacific Partnership (TPP) was developed as part of the U.S.’ “strategic pivot to Asia” during President Obama’s administration. President Trump campaigned that he would withdraw the United States from negotiations and did so in 2017.
Risk: The new CPTPP has left the door open for the PRC to join. If Beijing and Washington were members of the same trade zone, it would become easier for both to circumvent tariffs, thereby undermining each state’s ability to compete with non-military tools.
Also, when it comes to CPTPP, friction exists between U.S. grand strategy and domestic politics. TPP received harsh opposition from both the political left and right. Although there was agreement that there would likely be overall economic growth, many feared that American middle-class workers would be negatively impacted. As such, this option may be politically untenable.
Gain: This option encourages regional buy-in to the U.S.-led financial order. CPTPP already creates a new market bloc that will bring about economic prosperity under U.S.-influenced rules. U.S. membership in the agreement would amplify its benefits. Chinese markets will have to liberalize to remain competitive, undermining the PRC’s alternative offerings to nearby states.
Today, China bullies developing countries into economic agreements with political concessions in exchange for access to Chinese markets. U.S. entrance into CPTPP would decrease both PRC coercive power and regional dependency on Chinese markets.
Option #3: The U.S. leverages international institutions and assists strategically significant holders of Chinese debt obligations to refinance through the World Bank and International Monetary Fund (IMF).
China infamously financed the Hambantota Port Project, a port in southern Sri Lanka with access to the Indian Ocean. When the project failed, China negotiated a deal with Sri Lanka and now owns the port and surrounding land, granting Beijing unchallenged access to strategic waterways.
Risk: Existing tensions between Western and the five BRICS (Brazil, Russia, India, China, and South Africa) states could be exacerbated at the World Bank and IMF. BRICS nations have routinely called for fundamental reforms to the Bretton Woods system to reflect the rising economic influence of developing states. This financial intervention to refinance Chinese debt through Western channels could accelerate BRICS’ efforts to develop a competing financial channel.
Gain: Beijing touts development projects in the Maldives and Djibouti, whose outstanding debt owed to China stands at 30 percent and 80 percent of their national Gross Domestic Products, respectively. Default by either state would resign strategic territory in the Indian Ocean and mouth of the Red Sea to the PRC. Refinancing would ensure China does not acquire access to these strategic staging areas and would demonstrate the liberal financial system’s willingness to protect vulnerable states from predatory practices.
Other Comments: The PRC will continue to project influence and hold an alternative vision for the world economy. The objective is to demonstrate the value of free markets to developing states and tie regional interests to ROC’s quasi-independent status.
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