THE RISE OF CHINA:
ASSESSING “REVISIONIST” BEHAVIOR IN THE GLOBAL ECONOMY
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A Thesis
Presented to
The Honors Tutorial College
Ohio University
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In Partial Fulfillment of the Requirements for Graduation
from the Honors Tutorial College
with the degree of
Artium Baccalaureus in Political Science
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By Parker Smith
April 2019
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This thesis has been approved by The Honors Tutorial College and the Department of Political Science
______Dr. Takaaki Suzuki Professor, Political Science Thesis Adviser
______Dr. Andrew Ross Director of Studies, Political Science
______Dr. Cary Frith Interim Dean, Honors Tutorial College
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Table of Contents
I. Introduction 4
II. History: Contextualizing China’s Rise 24
III. Economic Conflict: The Case of International Trade 46
IV. Economic Expansion: The Case of Foreign Aid 81
V. Conclusion 109
References 130
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Chapter I.
Introduction
“It was the rise of Athens, and the fear that this inspired in Sparta, that made war inevitable.” -Thucydides, History of the Peloponnesian War1
“Our world is suffering from a bad case of ‘Trust Deficit Disorder’. People are feeling troubled and insecure. Trust is at a breaking point. Trust in national institutions. Trust among states. Trust in the rules-based global order.” -António Guterres, , Address to the 73rd U.N. General Assembly, 20182
The outset of the 21st century has marked the beginning of a new era in global affairs. While technological advancements and global development have molded the world into an increasingly globalized society, the Cold War conflict that dominated international politics for the second half of the 20th century has simultaneously come to an end. For many, it seemed that the collapse of the Soviet Union in 1991 was likely to mark the closing of an era clouded by fear, uncertainty, and sustained geopolitical instability. Perhaps, some said, the turn of the century would even mark the beginning of a new era characterized by peace, development, and the sustained promotion of democracy and liberty around the globe.3 The United States and its European allies had persevered through the century, vanquished the evils of Fascism and Communism, and
1 Thucydides, translated by Martin Hammond, The Peloponnesian War, Oxford World’s Classics (Oxford University Press, 2009). 2 Antonio Guterres, “Address to the General Assembly” (Speech, September 25, 2018), https://www.un.org/sg/en/content/sg/speeches/2018-09-25/address-73rd-general-assembly. 3 Francis Fukuyama, “The End of History?”, The National Interest, Summer 1989. 5
were prepared to lead the world into a new era defined by the penultimate power of
America, combating humanity’s worst diseases and working to end poverty and violence around the world.
This vision, however, has not come to pass. Instead, the new century has been overwhelmingly shaped by 9/11 and an interventionist, unending War on Terror that has drawn the United States into armed conflicts throughout the furthest, most undeveloped parts of the world. Waves of revolutions and genocides across the developing world have led to increased international instability and ignited the largest refugee crises since World
War Two, spurring populist backlashes that have transformed politics across Europe and the U.S. Additionally, a swelling global population has contributed to rapid climate change and extraordinary natural disasters, and ‘rogue’ states such as Iran and North
Korea have threatened to create nuclear ones. Furthermore, the financial crisis of 2008 and resulting recession have left the West struggling to regain its footing at a time when developing countries are beginning to close the gap with advanced economies and reshape global politics. Now in the second decade of the 21st century, the United States has entered into economic conflict with the country that most seriously threatens
American power and has the greatest potential to reshape the international order: China.
At a time when the world needs greater international cooperation to combat unprecedented threats and growing instability, the United States and China—now the two wealthiest, most powerful states in history—have descended into a trade war that could not only prove disastrous for both the U.S. and China themselves, but may also come to serve as the opening rounds of a 21st-century Cold War or renewed global economic crisis. 6
These contemporary developments are not entirely unexpected. The history of
China’s relationship with the west and the United States is one fraught with difficulties.
As China has gone from occupying just over a 2% share of total global gross domestic production (GDP) in 1980 to comprising more than 18% in 2017, a U.S. experiencing relative decline and facing various foreign and domestic crises has grown increasingly suspicious and fearful of Chinese power.4 Now the second largest economy in the world, even conservative estimates utilizing nominal GDP values rather than Purchasing Power
Parity (PPP)-adjusted rates indicate that the overall Chinese economy is on its way to overtake that of the U.S. in size by roughly 2030.5
Beyond China’s economic rise, there are also numerous areas of strategic conflict and disagreement with the U.S. and broader international community that have contributed significantly to tensions, such as disputes over Taiwan and the South China
Sea, and concerns about China’s outwardly focused Belt and Road Initiative.
Additionally, distinct ideological divides exist between China, the U.S., and the international order and institutions that the U.S. has upheld throughout the postwar era;
China is an authoritarian one-party state ruled by the Chinese Communist Party whilst the
U.S. is a democratic republic with a primarily market-based economic structure. China today not only represents an economic rival to the United States on a scale that America has never faced before, but it represents a rival with distinctly different modes of social and economic organization, and one that surely possesses its own vision for the world
4 IMF, “World Economic Outlook - GDP Based on PPP, Share of World,” International Monetary Fund, 2018, http://www.imf.org/external/datamapper/PPPSH@WEO. Simultaneously the U.S. has declined from commanding a roughly 22% share of the global GDP in 1980 to just 15% in 2017. 5 CEBR, “World Economic League Table 2018” (London, UK: Centre for Economics and Business Research, December 26, 2017), https://cebr.com/welt-2018/. PPP accounts for local prices and the buying power of local currency. 7
and ambitions for the future. In some respects, this scenario is comparable to that which led to the Cold War between the U.S. and the U.S.S.R.
In the face of contemporary economic conflict and escalating strategic rivalries, much of the literature surrounding the debate around China’s rise has remained too narrowly focused on the issues that directly pertain to American interests and generally comes from a perspective that favors an American view by default. More perspectives, broader discussions, and greater nuance is required within the field to fully comprehend the growing role of China in the world and the implications it may have for the U.S. and its allies. A failure to better understand the factors and contexts that shape U.S.-China relations similarly exists within policy circles, thus contributing to the inability of these two behemoth states to develop a stable and productive relationship to date. This thesis aims to contribute to the literature and current discourse by beginning to fill a gap in existing scholarship that lies at the overlap of China Studies and International Political
Economy. By seeking to draw in converging elements from Political Science, History, and Economics, I aim to improve our understanding of the causes of the U.S.-China conflict by exploring transactions in the global economy, contributions to international stability, the U.S.-China relationship, and the theoretical foundations that undergird each one.
Research Question
This thesis aims to answer a question that is central to understanding the ongoing economic conflict between China and the United States, but also a question that will prove insightful for better understanding power transitions and patterns of engagement 8
and leadership within the global economy more broadly: Is China a “revisionist” power that seeks to overturn the “status quo”? This terminology, and versions of it, is prevalent throughout academic literature in International Relations and Political Economy, but can also be found within government documents and policy choices. China and Russia have both been openly and officially labelled “revisionist” powers by the U.S. government under the Trump administration. The December 2017 National Security Strategy asserts that China and Russia intend to “shape a world antithetical to U.S. values and interests,” before going on to state that “China seeks to displace the United States in the Indo-
Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor.”6 Moreover, the document asserts that these developments, and similar efforts by other actors around the world, will gradually redefine and introduce a new “status quo”.7 Neither term is well-defined or explored more deeply within the document itself; existing scholarly literature on these terms is similarly lacking in clarity and nuance. Renowned International Relations professor and China Studies scholar Iain
Johnston has similarly stated that “For a concept at the core of international relations theorizing, it [is] disturbing how little thought…has gone into determining whether a state is status quo or revisionist.”8
While the immediate question at hand concerns the United States and China, this is only the case because China is perceived as the “revisionist” while the U.S. is recognized, generally, as the “status quo” in the contemporary international order. In
6 The White House, “National Security Strategy of the United States of America,” December 2017, 25-27, https://www.whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905.pdf. 7 The White House, 27. 8 Alastair I. Johnston, “Is China a Status Quo Power?,” Quarterly Journal: International Security 27, no. 4 (Spring 2003): 10. 9
investigating this case specifically, the project aims to draw conclusions about our understanding of power transitions and international stability more broadly; there have been, and will be, other state rivalries that can replace China and the U.S. in this equation. By assessing our understanding of what constitutes “revisionist” and “status quo”, I will explain how the question at hand—is China a “revisionist” power that seeks to overturn the “status quo”?—directly measures China against the U.S., but also provides a standard to directly measure China’s actions alongside broader standards of international cooperation and leadership.
Literature Review
In delving deeper into these concepts, it is informative to start with one of the earliest major works of history. Thucydides’ The History of the Peloponnesian War details the historical episode of an ascendant Athens coming into conflict with its
Southern neighbor Sparta, which already had an established presence on the Greek peninsula and possessed a substantial network of trade partners, client states, and allies.9
Despite shared Hellenistic cultural roots and a recent alliance between Sparta and Athens to defend the whole of Greece from an invading Persian empire, Sparta feared the rising prestige and power of Athens and ultimately went to war to limit its expansion. The conflict would last decades and devastate much of Ancient Greece. Thucydides, a general in the conflict and the primary historical source for the war, emphasized that the immediate grievances that had led to war were not overwhelmingly important, for it had been the general fear of a rising Athens that led to Spartan fear and a propensity to view
9 Thucydides, Hammond, The Peloponnesian War. 10
Athenian actions as malicious. Referring to his entire history of the event, Thucydides stated that “I shall be content if it is judged useful by those who will want to have a clear understanding of what happened—and, such is the human condition, will happen again at some time in the same or similar pattern. It was composed as a permanent legacy, not a showpiece for a single hearing”.10
This structural pattern of rising and reigning powers having a propensity to come into conflict with one another has since become a core element of international relations theories. The structural setting in which this conflict emerged is partly reflective of the
International Relations theory of realism, which posits the view that states exist in an anarchical, power-based international order and seek to balance against other states, whose strength could pose a threat.11 Realism continues to reflect the mainstream view among International Relations scholars, and Thucydides’ Trap has thus received substantial attention within the discipline, with numerous historical case studies of conflicts in the modern era serving to further strengthen these perspectives.12 World War
I, for example, has been interpreted as a conflict that largely occurred because of growing
German power, which placed that country into direct rivalry with the reigning British
Empire. Additionally, the Cold War conflict served as a battle between two rival powers jockeying with one another to establish their own global influence; the U.S. desired a rules-based international order valuing freedom and democracy, while the Soviet Union sought to establish international communism.
10 Thucydides, Hammond, 12. 11 Stephen M. Walt, “Alliance Formation and the Balance of World Power,” International Security 9, no. 4 (1985): 3–43, https://doi.org/10.2307/2538540. 12 Graham Allison, Destined for War: Can America and China Escape Thucydides’s Trap? (Houghton Mifflin Harcourt, 2017). 11
These concepts and trends are widely referenced in the debate around the increasingly complex and difficult relationship between China and the United States. The concept of Thucydides’ Trap has grown in popularity in the wake of the publication of
Graham Allison’s Destined For War: Can America and China Escape Thucydides’ Trap? and similarly themed works from other prominent scholars and officials, such as former
World Bank President and U.S. diplomat Robert Zoellick.13 The concept’s increasing popularity—perhaps emblematic of rising American fears about China rather than any sudden recent changes in China’s behavior—has become substantial enough that Chinese
President Xi Jinping regularly discusses it in his speeches. Xi has openly confronted the issue, stating in 2015 at a China-U.S. relations event in Seattle that "There is no such thing as the so-called Thucydides trap in the world. But should major countries time and again make the mistakes of strategic miscalculation, they might create such traps for themselves."14
Literature discussing Thucydides’ Trap outlines the big picture issue of the U.S.-
China relationship by seeking to explain the character of power transitions within international affairs, but in some ways it contributes to a problematic discourse that has evolved around the rise of China. The name of Allison’s book, Destined For War, is itself an issue, and not least because the author comes to the opposite conclusion and writes in a mildly sensationalist manner. The title itself, and the idea of the Thucydides’ Trap, underwrites a sense of inevitability: China’s rise is here, almost all similar historical cases have led to war, and thus we should engage in conflict with China sooner rather than later
13 Allison; Robert B. Zoellick, “U.S., China and Thucydides,” The National Interest, no. 126 (2013): 22– 30. 14 “Quotable Quotes on China’s Major-Country Diplomacy: Major-Country Relations," Xinhua English News.Cn, September 7, 2017, http://www.xinhuanet.com/english/2017-09/07/c_136591978.htm. 12
before they can amass strength and influence similar to that of the United States. While there are some scholars and officials that openly promote this viewpoint, such as Peter
Navarro, Director of the newly-created U.S. Office of Trade and Manufacturing Policy, there are also others who end up tacitly endorsing it through their analysis and their defining of key concepts.15
Under a strict view of Realism, and largely reflective of a view posited by scholars such as Schweller and Pu, China can be construed as a power that is inherently
“revisionist” by the very nature of its rise—if its own rise displaces the U.S. as the preeminent force in international affairs and the global economy, China will inherently upset the balance of power and thus be “revisionist” in the sense that it is, by its very nature of existing and growing, altering the status quo as it exists today.16 Under this definition, however, there is almost no view in which China can both grow stronger and be perceived as a cooperative force, regardless of if its practices uphold and support the
U.S.-led order. Similarly, China has followed its own unique developmental model that is defined by a statist capitalism and centralized control of the economy—is China inherently “revisionist” by developing in a manner counter to the neoliberal development model prescribed by the U.S.-led order to other powers?17 Additionally, even if we consider China to be “revisionist” by developing in its own way, might we not consider
China in the same case to be acting in line with the “status quo” concept of sovereignty,
15 Peter Navarro and Greg Autry, Death by China : Confronting the Dragon--a Global Call to Action (Upper Saddle River, N.J. : Prentice Hall, 2011). 16 Randall L. Schweller and Xiaoyu Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” International Security 36, no. 1 (July 1, 2011): 41–72, https://doi.org/10.1162/ISEC_a_00044. 17 Christopher A. McNally, “Sino-Capitalism: China’s Reemergence and the International Political Economy,” World Politics 64, no. 4 (November 5, 2012): 741–76. 13
which permits China to govern its self? China has also been derided as “revisionist” on the grounds that it seeks to establish a sphere of influence and is increasingly aggressive towards the outside world. This, scholars such as Tom Wright allege, sets them apart from other powers and demonstrates that China seeks to force its will upon other states for China’s own gain.18 Scholars commonly look at China’s engagement with Southeast
Asia or Africa to assess claims of Chinese mercantilism or to make the argument that
China is in the early stages of forming colonial, or even imperial, holdings that will be initially pulled in closer via investment, trade, and indebtedness.19 Rarely, if ever, are these arguments presented with the context that the United States has actively sought and done many of the same things throughout its existence, itself still possessing a network of widely dispersed territorial holdings across the Pacific in the 21st century. By drawing in these varied perspectives, the difficulty of assessing “revisionism” becomes clear.
This point leads us to our discussion of what exactly constitutes the “status quo”.
This, like “revisionism”, is also a problematic term that is often presented in such a way so as to contribute to further alarmist discourse surrounding the rise of China. In order to judge the degree, if at all, to which China is “revisionist”, we must establish some form of “status quo” to which China’s actions can be measured against. Here, we see that many scholars’ perspectives on these two concepts form a sort of feedback loop;
Schweller and Pu articulate that the “status quo” is best defined by simply the situation as it exists on the ground, with U.S. hegemonic power over the global economy and the
U.S.-led institutions that serve to facilitate and govern the global economy thus forming a
18 Tom Wright, “Deterrence and Great Power Revisionism,” Transatlantic Security and Future of NATO Series (The German Marshall Fund of the United States, May 2015). 19 Elizabeth Manero, “China’s Investment in Africa: The New Colonialism?,” Harvard Political Review, February 3, 2017, http://harvardpolitics.com/world/chinas-investment-in-africa-the-new-colonialism/. 14
natural “status quo” via the fact that they are what is currently in place.20 By this standard, free trade, a market-based economic structure, the protection of private property rights, adherence to international rules, and a commitment to multilateral diplomacy constitute some of the primary elements of the American status quo. This conception is similarly utilized as a measurement by Johnston, whose article Is China a Status Quo
Power? assesses China’s participation and engagement with existing norms and rules governing trade, finance, nuclear weapons, human rights, and other areas to determine if
China is a status quo power.21 Johnston argues that the concepts of ‘revisionism’ and
‘status quo’ themselves need to be more deeply explored in order to label China as being in one camp or the other, however his analysis still largely relies upon assessing if China has joined into the U.S.-backed positions and institutions that presently define the international community. It is, after all, a reality that most of the “rules of the game” have been hammered out and shaped primarily by western countries and those who have actively supported them. These rules or preferred policies, for example, have been outlined by scholars such as John Williamson, who is famous for coining the term
“Washington Consensus” to describe a general consensus on the core of neoliberal economic policies that emerged in the west in the final two decades of the 20th century.22
More recently, Williamson has similarly suggested that China’s own developmental path is leading to the emergence of a “Beijing Consensus” of economic policies, which stands
20 Schweller and Pu, “After Unipolarity.” 21 Johnston, “Is China a Status Quo Power? | Belfer Center for Science and International Affairs.” 22 John Williamson, “What Washington Means by Policy Reform,” in Latin American Adjustment: How Much Has Happened? (Peterson Institute for International Economics, 1990), https://piie.com/commentary/speeches-papers/what-washington-means-policy-reform. 15
more in opposition to rather than alongside the established “status quo” of the
Washington Consensus.23
In assessing deeper histories of international political economy—something often lost upon contemporary policymakers and particularly on economists—we find a more broad-based “status quo”. Rather than the “status quo” existing primarily in the sense of the practices and norms that govern the global economy today, we are also able to assess whether or not China, or any rising state for that matter, acts in accordance with how we might expect a rising power to act. This provides a more nuanced approach to assessing the role that contemporary China is playing in the global economy and in global affairs as a whole. In examining the economic dimension of international relations, it has been observed that rising powers tend to engage with the global economy in certain ways.
Stephen Krasner has showcased that, under the various liberal international orders, rising powers tend to gain more than others from an open trading system due to the fact that rising powers are generally experiencing high rates of economic growth and have numerous comparative advantages, and thus will act to see tariffs reduced globally; states that are established and reigning will generally increase rates of protectionism due to a slowdown in their own gains from openness and an uptick in the newly rising power’s gains.24 Interestingly, this sort of approach might suggest that both China and the United
States are acting expecting they would, with the U.S. now actively levying tariffs on a wide range of global actors. Additionally, this is not unlike the way in which the British
23 John Williamson, “Is the ‘Beijing Consensus’ Now Dominant?,” Asia Policy 13 (January 1, 2012), https://doi.org/10.1353/asp.2012.0012. 24 Stephen D. Krasner, “State Power and the Structure of International Trade,” World Politics 28, no. 3 (1976): 317–47, https://doi.org/10.2307/2009974. 16
Empire began to question free trade in the early 1900’s during the fading of its hegemonic power in the global economy.
Additionally, Charles Kindleberger’s work suggests that a rising global power would contribute to the provision of “international public goods” that are essential to maintaining an open and functioning global economic structure. Kindleberger has articulated a Theory of Hegemonic Stability that finds a historical pattern in which the strong, rising power provides for international stability through its immense economic and correspondingly substantial military strength.25 This stability is provided through five key economic functions: serving as a market for distress goods, providing counter- cyclical lending, maintaining stable exchange rates, ensuring macroeconomic policy coordination, and acting as a lender of last resort.26 These economic functions, hereby wholly defined as the “international public goods”, are essential to the sustained operation of the global economy, and thus they are generally provided for primarily by the hegemonic power, or by international institutions. While Kindleberger posited a model reliant on the actions and policies of one hegemonic state, Robert Keohane has expanded upon Kindleberger’s work and the theory of hegemonic stability by detailing
25 Charles Poor Kindleberger, The World in Depression, 1929-1939, History of the World Economy in the Twentieth Century: V. 4 (London, Allen Lane, 1973). The concept of a “public good” is one that is non- rivalrous and non-excludable. A classic example is the British Empire’s curtailing of piracy in the 18th century. 26 Kindleberger. 1. The ‘market for distress goods’ is an economic operation where the largest economy may have to allow excessive imports during times of global economic downturn, otherwise export industries around the world may suffer and collapse 2. Counter-cyclical lending is financing that occurs in the downturn of the business cycle. When states need lending to adjust their economic structures or stimulate growth, they often need access to outside sources of finance. 3. Stability in exchange rates is critical to an open global economy, as fluctuations in currency values can impede trade or make it too costly to engage in. 4. Macroeconomic policy coordination can ensure that two states do not pursue economic policy changes that may cause direct damage to industries or economies in other states. 5. The lender of last resort serves a critical function by providing financing to countries that have effectively run out of money, and need to spend money to survive major economic crisis. 17
that the dominant power may itself erect the institutions to facilitate the provision of the international public goods.27 Similarly, David Lake has found that states other than the hegemon can also contribute to the provision of international public goods through their own work, and that a rising power may often do so to complement the relative decline of a hegemon.28 Additionally, we can again find the language of “revisionism” in these areas, with Kindleberger utilizing the terminology of “free riders” and “hegemons” and
Lake adding the terms of “spoilers” or, on the other hand, “supporters”, into the discourse. While stability in the global economy can be maintained by a single hegemonic state, it is also possible through institutions and international cooperation. In existing literature, “revisionist” states can also be those that fail to contribute to international stability and remain committed to an open global economy. While “free riders”, for example, are typically small states that contribute little to international institutions and global governance but still reap benefits, Lake highlights that a larger state that does the same thing is more accurately termed a “spoiler”—closer to a
“revisionist”.29 This concept echoes sentiments from various commentators who feel that
China has taken advantage of the open international system erected by the U.S. and its allies, without China giving back and reforming itself sufficiently.30
27 Robert O. Keohane, “The Demand for International Regimes,” International Organization 36, no. 2 (1982): 325–55. 28 David A. Lake, “International Economic Structures and American Foreign Economic Policy, 1887- 1934,” World Politics 35, no. 4 (1983): 517–43, https://doi.org/10.2307/2010388. 29 Lake, 522. 30 The Economist, “China Has Gained Hugely from Globalisation,” The Economist, December 10, 2016, https://www.economist.com/china/2016/12/10/china-has-gained-hugely-from-globalisation; Emile Simpson, “Globalization Has Created a Chinese Monster,” Foreign Policy, February 28, 2018, https://foreignpolicy.com/2018/02/26/globalization-has-created-a-chinese-monster/. 18
These theories outline a “status quo” that is related to, but independent of, the practices and principles that the U.S. has established to fulfill the needs of global economic governance. While the U.S. may have initially (and perhaps still does) consciously aspired to provide the international public goods necessary to maintain an open and functioning global economy, the U.S. can still act against this “status quo” and could potentially be “revisionist” itself in a number of ways. This is important to note because scholars frequently tend to rely on a definition of “status quo” that fails to include these key elements and practices, and instead treat every U.S. or western action as being part of the “status quo”. This, as discussed above, distorts our understanding of the China-U.S. relationship, and leaves us with analyses that also often fail to capture the broader implications that China’s economic rise will have upon the foundational structures of the global economy. Scholars Carla Norrlof and Simon Reich have analyzed both the U.S. and China’s contributions to the provision of the international public goods in both crisis and non-crisis times over the time between 1996-2015 and have found that
China has been increasingly contributing to these fundamental elements of global economic governance; notably both China and the U.S. contributed jointly without ever conducting major, intentional cooperation.31
It must be noted here that although the “status quo” of the international public goods and the global stability that they bring are well-established concepts within the field of international political economy, the actual practices attached to the basic principles that govern the global economy have changed and evolved over time. One
31 Carla Norrlof and Simon Reich, “American and Chinese Leadership during the Global Financial Crisis: Testing Kindleberger’s Stabilization Functions,” International Area Studies Review 18, no. 3 (September 1, 2015): 244–45, https://doi.org/10.1177/2233865915573638. 19
example of changes in the underlying practices that have governed the global economy is the U.S. decision to drop the gold standard in the early 1970’s, which was directly linked to the change in the exchange rate system from fixed to floating rates, and the increased role of private money in international finance, in the IMF, and in the provision of the
“international public goods”. While these points will be more intimately explored later in the thesis, it is notable that China now endorses numerous policies that the United States initially followed (and has since rejected) in the immediate postwar era; this was the time in which global economic growth was most rapid and during which the U.S. was a true hegemon with a massive proportion of the world’s overall GDP.
Methodology & Outline
Similar to there being various ways to define revisionist and status quo, there are an array of possible modes for operationalizing the concept to determine if a given state meets the established definition. Johnston, for example, has assessed broader issue areas to assess China’s compliance with the status quo norms and practices that are presently upheld by the U.S.-led order, looking specifically at the issue areas of sovereignty, free trade, non-proliferation, right to self-determination, and human rights record. He finds evidence of “revisionist” practice or intent is questionable, although simultaneously highlights that more areas of potential conflict are opening.32 Similarly, Wang and
French, examining more specifically within the issue are of the international economic system, analyzed China’s interactions with other states in the realms of trade, FDI, finance, and development aid by looking at the areas in which Chinese policy is distinct
32 Johnston, “Is China a Status Quo Power?” 20
from western practices and prescriptions; they conclude that if China is “revisionist” or at least frustrated with the status quo, it is primarily so in the areas of finance and development aid.33 In assessing the nature and patterns of the global economy itself, other scholars have used related approaches, with Ruggie and Abdelal investigating the role of multinational corporations, unregulated finance, and the status of multilateralism to draw comparisons with the governing characteristics of the global economy under Bretton
Woods.34
In this introductory chapter I have outlined some of the ways in which the concepts of “status quo” and “revisionist” have been articulated over time, and within the debate around the rise of China. I have further articulated that there is a lack of nuanced debate surrounding China’s relation to the “status quo”, which can be defined in various ways. In chapter two, I summarize historical developments within the international order and interactions within the global economy. Through this, I intend to highlight that a broader, historicized perspective on China’s rise both provides a more comprehensive understanding of China’s status as a potential “revisionist” power and serves to introduce new perspectives into the debate. Relying solely on contemporary analysis and technical assessments of Chinese policies obscures the big-picture concepts of power transitions and change within the overarching international order, and also limits how we might conceive of the ‘status quo’ and whether or not China is a ‘revisionist’ power.
33 Hongying Wang and Erik French, “China in Global Economic Governance,” Asian Economic Policy Review 9 (July 1, 2014), https://doi.org/10.1111/aepr.12068. 34 Rawi Abdelal and John G. Ruggie, “The Principles of Embedded Liberalism: Social Legitimacy and Global Capitalism,” July 1, 2009, https://www.hbs.edu/faculty/Pages/item.aspx?num=36533. 21
In chapter three, I will use a case study format to assess China’s policies as they relate to international trade. The trade deficit and tariff issues have been the most immediate and apparent elements of the evolving economic conflict between the U.S. and
China, but we can also assess China’s relations with the world more broadly and determine if its tariff levels and economic policies fit into the “status quo”. In this area, I will first investigate the evolution of the current complaints, actions, and responses that the U.S. and China have been mutually engaged in up to this point in the evolving trade war. Here, we will be able to determine if China is acting revisionist against a U.S.- defined status quo, partially as defined by assessing the causes of the current conflict. In order to measure against a status quo other than that defined by the U.S., we will assess
China’s status as a possible currency manipulator, as well as changes in Chinese tariff levels over time. The WTO and U.S. standards should be fairly similar, given that both are proponents of the Liberal international order and both propose to support freer trade around the world. However, understanding the present trade conflict can and China’s various trade policies can also shed light on whether China is destabilizing the global economy and if China is contributing to Kindleberger’s international public goods: does
China serve as a market for distress goods, maintain stable exchange rates, and, as much as can be measured in trade, ensure macroeconomic policy coordination?
Investigating the issue of trade not only provides direct insight into the conflict as it stands today, but also serves as a more straightforward measure of revision because it is a realm in which China is either supporting the status quo of free trade and open markets, or to some degree is not. By extension, we can logically say that China is either a supporter of the status quo, or to some degree is revisionist. Revisionism, however, may 22
have to be qualified if China is still a purveyor of the international public goods as they relate to trade. If China provides the international public goods but does so through an economic model and policy choices that do not align with those of the west, then China’s status as a revisionist may be a matter of nuanced perspective.
In the fourth chapter, I will examine the issue area of foreign aid, an increasingly contentious element of Chinese foreign policy. As American voters went to the polls in
2016 electing Donald Trump President on a platform that promised “America First” and a questioning of America’s role in the international community, China was busy ramping up its international commitments and interests in the developing world. President Xi
Jinping’s promise of one trillion dollars in development funds under the banner of the
“One Belt, One Road” project has sparked extreme concern and shock from many western policymakers. Still technically a developing country itself, new methods of accounting for China’s foreign aid have revealed unprecedented expenditures throughout its neighboring states and the developing world on a scale that now rivals U.S. aid volumes. American concern around the initiative is perhaps best encapsulated by Vice
President Mike Pence’s recent statement at the Asia-Pacific Economic Cooperation
(APEC) Summit in which he criticized the program as offering a “constricting belt” and
“one-way road”.35 Notably, it was the first summit in the organizations existence that did not conclude with a unified group statement at its end.
Aid is a significant area to analyze for revisionist practices because it is often utilized in part as a political and economic tool. Just as American aid and U.S.-backed
35 Agence France-Presse, “Apec Summit Fails to Agree on Statement amid US-China Spat,” The Guardian, November 18, 2018, sec. World news, https://www.theguardian.com/world/2018/nov/18/apec-summit- mike-pence-warns-of-chinas-constricting-belt-and-one-way-road. 23
institutions provide money conditional upon certain reforms that align recipient country policy more closely to western preferences, China may be promoting its own worldview with the foreign aid it disperses. Additionally, it could simply be providing “bad” aid or aid that does not fully comply with international guidelines and norms as they relate to aid composition or concessions. Chinese aid could also be displacing current aid programs from the U.S. and western institutions, another potentially revisionist practice.
These would all provide means by which China’s actions could be measured against an
American-defined status quo. However, Chinese foreign aid may also further the promotion of international stability through providing Kindleberger’s goods of countercyclical and long-term lending, or via acting as a lender of last resort.
24
Chapter II.
History: Contextualizing China’s Rise
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love…” -Adam Smith, The Wealth of Nations36
“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else.” -John Maynard Keynes, The General Theory of Employment, Interest and Money37
“I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms…I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” -Alan Greenspan, 2008 Congressional Testimony38
In seeking to understand the growing international influence of China in the 21st century we must first situate the contemporary issues within the broader scope of history and change within the international system. In doing so, the true magnitude of China’s potential to disrupt the current geopolitical landscape and the accompanying structures
36 Adam Smith, The Wealth of Nations, 5th ed. (Bantham Dell, 2003), 23–24. 37 John Maynard Keynes, The General Theory of Employment, Interest, and Money (Palgrave Macmillan, 1936), 383–84. 38 Andrew Clark Jill Treanor, “Greenspan - I Was Wrong about the Economy. Sort Of,” The Guardian, October 23, 2008, http://www.theguardian.com/business/2008/oct/24/economics-creditcrunch-federal- reserve-greenspan. 25
and rules that govern the global economy becomes clear. Moreover, seen from a deeper historical perspective, the position that both China and the United States occupy within international relations can be better understood and appreciated by policymakers of today. Whereas a 2018 U.S. Congressional Research Service report entitled China’s
Economic Rise: History, Trends, Challenges, and Implications for the United States traces the history behind China’s economic rise back to the Mao-era and particularly focuses on the decades around China’s “Reform and Opening Up” in the late 1970’s, I argue that China’s economic rise must be assessed against the backdrop of the Great
Divergence.39 Only from this wider point of view—one not rooted solely in the postwar era of American hegemony—can we both come to understand what it means that China is
“rising” and why countries such as the United States may fear such a development.
Furthermore, by looking carefully at the history of the liberal international economic order that the United States has upheld, we are able to see that even this system has been far from continuous in its governing practices and principles.
China, Britain, and the Great Divergence
China has historically been one of the great centers of human civilization and, according to the American Historical Association, “has the longest continuous history of any country in the world—3,500 years of written history.”40 One of the largest empires to have ever existed in both size and population, the Qing Dynasty ruled over China from
39 Wayne M Morrison, “China’s Economic Rise: History, Trends, Challenges, and Implications for the United States” (Congressional Research Service, February 5, 2018), 1–5; Kenneth Pomeranz, The Great Divergence (Princeton University Press, 2000), https://press.princeton.edu/titles/6823.html. 40 American Historical Association, “The Oldest Living Civilization,”, https://www.historians.org/about- aha-and-membership/aha-history-and-archives/gi-roundtable-series/pamphlets/em-42-our-chinese-ally- (1944)/the-oldest-living-civilization. 26
the mid-17th century until 1912, and was effectively the center of global production during the peak of its existence; the Qing Empire is estimated to have been responsible for as much as 30% of Global Gross-Domestic Product (GDP) during the late 1700’s and early 1800’s, more than any other single political entity.41 When the size of India and other Asian economies is also considered, it is evident that Asia was host to a majority of global economic activity for almost all of human history, a fact true until as late as the
1820’s. At this time all the productive forces of Western Europe and the fledgling U.S. amounted to less than 25% of the global share of production.42 As assessed by Andre
Gunder Frank, a desire to break into the markets of Asia was a driving force of European expansion and western imperialism; Christopher Columbus sailed from Spain in an effort not to find ‘new lands’, but in an effort to find quicker routes to China and India.43
Although the meeting of West and East unfolded over centuries, the accompanying processes are symbolized by the entangled history of the British Empire and China’s Qing Dynasty. The British Empire emerged out of the fires of centuries of
European conflict to become the preeminent political force of that continent. While the history behind England as the first-industrializing country in the history of the world is complex, it largely rested upon the decentralized nature of power within British society and the geopolitics of Europe; the pluralistic forces of a growing commercial class and
41 Jonathan Eckart, “8 Things You Need to Know about China’s Economy,” World Economic Forum, June 23, 2016, https://www.weforum.org/agenda/2016/06/8-facts-about-chinas-economy/; Max Roser, “Global Economic Inequality,” Our World in Data, April 26, 2018, https://ourworldindata.org/global-economic- inequality. 42 Angus Maddison and The Maddison Project, “Maddison Historical Statistics,” University of Gronigen - Growth and Development Centre, September 3, 2008, https://www.rug.nl/ggdc/historicaldevelopment/maddison/. 43 Andre Gunder Frank, ReOrient : Global Economy in the Asian Age (Berkeley : University of California Press, 1998). 27
free-thinking Protestant ideologies forged a dynamic society that spurred innovation and invention.44 Simultaneously, Britain as a country developed and existed in a state of economic and geopolitical competition to survive long centuries of European wars. On the other side of the world, the strong Qing bureaucracy ruled over a massive country and worked to prevent the development of new centers of power within Chinese society; the vibrancy that had created rich and powerful European societies was perceived by the bureaucrats of Imperial China as likely to lead to new classes and interests that would weaken the position of the Qing Dynasty and the bureaucrats with which it ruled.45 Even though the Qing Dynasty was host to more production and a far greater population than
England, England’s labor was increasingly freed up to be invested into the development of machinery and complex goods while China’s economy remained largely structured around farming and explicitly sought to limit the dynamism that had led to industrialization in England.
In 1793, these two political entities would formally meet when the Macartney
Embassy arrived in Beijing to negotiate with Emperor Qianlong of the Qing Dynasty to receive better terms of trade; British trade had previously been limited to a small district of a single port in the South of the country, far from the Chinese capital. The mission to the imperial court was troubled by difficulties of communication—a 12 year-old son of one of the British officials is reportedly the only individual that spoke both Chinese and
English, with other translations first going from Chinese to Latin, and then Latin to
44 John A. Hall, Powers and Liberties : The Causes and Consequences of the Rise of the West (Berkeley : University of California Press, 1986); Max Weber, translated by Stephen Kalberg, The Protestant Ethic and the Spririt of Capitalism (Oxford University Press, 2010). 45 Hall, Powers and Liberties; Kenneth Pomeranz, The Great Divergence. In his writings, Pomeranz has argued that the fortuitous proximity of coal within England was a significant contribution to that country’s newly emerging industries. 28
English.46 Notably, Lord Macartney is thought to have failed to kowtow before Emperor
Qianlong; under the Chinese Tributary system of international affairs, the Chinese emperor and the Chinese state had to be recognized as superior entities by foreign states to facilitate any meaningful relationship. While the debate over whether or not
Macartney’s reported failure to kowtow is ultimately what led Emperor Qianlong to reject the British entreaties for expanded trade with China will likely go unresolved, the event highlights the disparate world views of what were two of the strongest states of the day. England and the British Empire had developed within the context of the Westphalian system of international relations that emerged out of centuries of European warfare: states were defined by their territorial boundaries and were expected to treat other states as equal, sovereign entities that held rights over the territory they controlled. China, on the other hand, did not possess an explicit conception of a territorially-defined state, and instead viewed the world in a concentric-circles type Confucian hierarchy where China sat at the center of the universe.47 For other kingdoms and sovereign entities to be recognized, and to facilitate trade with China, they occasionally had to journey to Beijing and pay tribute to the Chinese emperor by acknowledging China’s superiority and bringing goods from their homeland. Whereas the European system of sovereignty is termed “Westphalian” for the treaty that outlined the model for the modern state, the
46 Valerie Hansen, The Open Empire (W. W. Norton & Company, 2000), https://books.wwnorton.com/books/webad.aspx?id=4294987876. 47 Alastair I. Johnston, Cultural Realism : Strategic Culture and Grand Strategy in Chinese History, Princeton Studies in International History and Politics (Princeton, N.J. : Princeton University Press, c1995., 1995); John Gerard Ruggie, “Territoriality and Beyond: Problematizing Modernity in International Relations,” International Organization 47, no. 1 (1993): 139–74. 29
Chinese interpretation of national sovereignty has been termed the Tributary System for its Sinocentric structure.48
When Lord Macartney failed to kowtow, he, perhaps unknowingly, failed to properly address China and its emperor—Macartney had instead assumed that he would be received and treated as an equal, as he was a diplomatic representative of a sovereign state. In a letter to King George III, the Qianlong Emperor imparted the following:
Our dynasty's majestic virtue has penetrated unto every country under Heaven, and Kings of all nations have offered their costly tribute by land and sea. As your Ambassador can see for himself, we possess all things. I set no value on objects strange or ingenious, and have no use for your country's manufactures.49
The ramifications of such a decision would ultimately culminate in the Opium Wars a few decades later—not received cordially, the British Empire instead forced trade concessions when it sent gunboats and warships up and down China’s coast and rivers, bombing major cities until the Qing government surrendered and opened the door to foreign trade.50 While the Qing government doubtless possessed structural issues within its administration that contributed to its downfall, the British entrance into China would set off a chain of events that almost obliterated the oldest continuous civilization in humanity’s history.
From 1840 up until the conclusion of the Chinese Civil War in 1949 China would experience its “Century of Humiliation”, undergoing the worst Civil War in human
48 David Kang, East Asia Before the West - Five Centuries of Trade and Tribute (Columbia University Press, 2012), https://cup.columbia.edu/book/east-asia-before-the-west/9780231153195. 49 “Qian Long: Letter to George III, 1793,”, https://sourcebooks.fordham.edu/mod/1793qianlong.asp. 50 Julia Lovell, The Opium War: Drugs, Dreams, and the Making of Modern China (New York, NY: The Overlook Press, 2014). 30
history and later experiencing suffering only second to the Soviet Union during World
War II. While China and other states that succumbed to European Imperialism were busied trying to simply survive the changes that Europe’s modernization processes had brought to the world, Europe itself was rapidly developing. Increases in per-capita income and GDP ultimately elevated Europe to an outsize position in the world relative to its total population and led to a massive gulf separating living standards in developed countries with those of developing states.51 President Xi Jinping has made catching-up and eliminating this distinction the signature goal of China and the Communist Party; by
2049, the 100-year anniversary of the Communists victory and rise to power, Xi hopes to create a “rich, strong, democratic, civilized and harmonious socialist modern country”.52
If such ambitions are successful and manage to hit their economic targets, which they thus far are largely on track to do, China’s economy will be triple the size of that of the
United States by 2049. While such a change is nearly unfathomable, it would essentially prove to be a course correction in the historical record, reestablishing Asia as the center of global economic activity and human civilization while also working to ‘converge’ with advanced nations on purchasing power and standards of living.
British Hegemony & the Crisis of Classical Liberalism
By the time the Opium War was initiated, European societies had made formidable progress in subjugating many parts of the world and were well on their way to conquering almost every major sovereign entity on the planet. In doing so, they would
51 Kemal Derviş, “The Future of Economic Convergence,” Brookings (blog), February 13, 2018, https://www.brookings.edu/opinions/the-future-of-economic-convergence/. 52 “Chasing the Chinese Dream,” The Economist, May 4, 2013, https://www.economist.com/briefing/2013/05/04/chasing-the-chinese-dream. 31
bring with them their ideologies and corresponding institutional designs. The British
Empire’s successes over China marked both symbolically and otherwise, a state on the precipice of a new level of power. With the defeat of Napoleonic France close to home and the submission of the Qing dynasty on the other side of the world, the British Empire marked the beginning of its new hegemonic reign. Newfound power brought a change of interests, and the progress of industrialization and the development of British manufacturing would create new industries seeking markets to sell their goods. Over time, political pressure for freer trade overtook a tradition of mercantilism, ceding international economic interactions to the forces of global markets rather than limiting them within state control and customs barriers. In the same decade that Britain forced concessions from the Qing Dynasty in the first Opium War, the Parliament would repeal the Corn Laws, lowering barriers to foreign trade and effectively providing an endorsement of free-trade policies.53 Other advanced nations would soon follow suit, and
Britain and France would sign a significant free trade agreement in 1860, accelerating the growth of markets and exchange in Europe.
Just as they joined Britain in promoting free trade, other advanced nations would come to support the international gold standard that British transactions with other countries began to rely upon in the late 19th century. This meant that national currencies now had a fixed value and could all be directly converted to gold at a set rate. By effectively sharing a common international currency in gold, international trade was encouraged further, and by the close of the 19th century global trade accounted for seven
53 Jeffry A. Frieden, Global Capitalism : Its Fall and Rise in the Twentieth Century (W.W. Norton, 2006), 4–5. 32
to eight times as much economic activity as it had in the early 1800’s.54 The world became more economically integrated as gold further facilitated global foreign investments, bringing the capital of newly-created European industrialists and bankers into the Americas, South Africa, Australia, and other regions of the world. Where national power and state interests had previously been active guides in the international affairs and economic interactions of states, power was now shifted—as Jeffrey Frieden put it, “markets, not monarchs, were the dominant force.”55 States still had power, but life was shaped increasingly by ever-evolving complex economic arrangements rather than edicts from Kings or feudal lords.
No longer insulated by customs duties, free trade left many agricultural industries vulnerable across Europe and the United States due in part to the links with gold. Because gold-backed currencies now operated in an international market where international transactions essentially took away from or added to a nation’s gold reserves, countries had to be careful to regulate their balance of trade. A prolonged trade deficit would gradually extract all the value in money from a country, and in this way gold was tied to prices and wages; as gold left the country, automatic adjustments to prices and wages occurred due to a decline in the overall sum of a nation’s finances. As a result, the demands and pressures of international trade that now dictated the money supply superseded the strength of domestic economies, and states that wanted any share of the high volume of international trade would have to be willing to cede power to ambiguous market forces. This system of exchange and the economic functions that resulted from it
54 Frieden, Global Capitalism. 55 Frieden, 5. 33
were effectively the most unrepentant Capitalist era of the global economy, and are known today by the term Classical Liberalism.
While free trade and the gold standard were viewed by politicians, bankers, and other elites as fundamental elements in the expanding global economy, the influence that international markets began to have on domestic workers could no longer be ignored by the end of the 1800’s. In the United States, farmers lashed out at gold in a wave of populism that threatened to radically transform American politics in the 1890’s.
Similarly, British elected officials began to call for “fair” trade, rather than free trade— something had changed. To some extent, the growth of the German and American economies had put pressure on Britain’s domestic agriculture and manufacturing sectors and those who worked in them, but it was also apparent that these pressures were in fact the direct result of market-based policies; increased competition across borders could hurt workers when it led to swings in currency values or the sudden shuttering of manufactories. Britain was no longer alone in being home to an increasingly industrial economy, and thus its outsize influence and economic advantage over the rest of the world began to wane. And yet, the world continued to rely on the banks of London and the associated gold exchange to facilitate the growth of these new industrial economies and the burgeoning realm of foreign trade. In this case, protectionist moves by Britain, such as the imposition of tariffs or limiting foreign trade via quotas, could be beneficial in insulating domestic industries and limiting the gains from trade that other nations, such as
Germany, might receive. However, there were incentives to resist this temptation, and
Britain largely continued to uphold and promote an open global economy. In large part, there was still profit to be made from international trade, but more significantly, growing 34
economic interdependence had tied foreign trade and investment to peace.56 If war were to break out in this new era of globalization, all countries and their citizenries stood to lose out on the gains that foreign trade and investment had been bringing to the world.
For these reasons, the global economy continued forward.
Of course, we know that history did not pan out with the development of a peaceful, globally-integrated economy in the early 1900’s. Instead, other European nations began to modernize and sought to increase their global power accordingly. Just as the issue of the “Thucydides’ Trap” pervades discussions of China and the U.S. today, it has also been applied to the German and British empires in the build-up to World War
I.57 While war broke out as a result of entangled alliances and the assassination of the heir to the throne of the Austro-Hungarian Empire, tensions between Germany and Britain were already high. Speaking as a Cabinet member in the months before the war erupted,
Winston Churchill highlighted Britain’s fading leg-up on the rest of the world when he said of Germany that “They build navies so as to play a part in the world’s affairs. It is sport to them. It is life and death to us.”58 When war finally did break out in Summer of
1914, the increasingly globalized system of open trade would all but come to a halt as states turned against one another and German U-boats patrolled the waters of the
Atlantic. There would be no wholesale restoration of widespread free trade and significant international exchange in the years immediately following World War I.
Instead, the nations of Europe would struggle to recover. Attempts at renewed multilateralism were made in the form of the League of Nations, but a lack of support
56 Karl Polanyi, The Great Transformation (Farrar and Rinehart, 1944). 57 Allison, Destined for War, 55–85. 58 Allison, 54. 35
from the United States—now well on its way to overtaking the preeminent position of the
British—left renewed international cooperation weak and hollow.
The 1920’s began with hopes of peace and was witness to sustained prosperity in the U.S. in particular. However, fueled by reckless speculation and poor banking regulation, the stock market crash of 1929 would set off the beginning of the Great
Depression. A lack of clear international leadership and pervasive instability in the years after WWI would ensure that the economic shock waves of this event would ripple across the world. The British, formerly the key piece in the gold standard system, were forced to detach their currency from gold in order to ease economic pressure facing the country, leading countless other states to do the same. Such a move marked Britain’s inability to continue functioning as a leader of the system it had created. At the same time, the United
States, now a major global power, furthered its own isolation with the passage of the
Smoot-Hawley Tariff. Aimed at protecting American domestic industries from a volatile international marketplace, the legislation led other countries to enact trade barriers to protect their own markets; international trade around the world would all but grind to a halt in the early 1930’s.
The near-total collapse of banking in the U.S. and a lack of strong international leadership served as two of the immediate causes of the Depression, however this unprecedented economic crisis had deeper roots. Karl Polanyi cites shared faith in self- regulating markets as the fundamental cause of the Great Depression and, ultimately,
World War II.59 While the complexities of his argument are too detailed to fully
59 Karl Polanyi, The Great Transformation. 36
enumerate here, the key elements are obvious enough. The Great Depression was fueled initially by an extreme and reckless speculatory bubble, one made possible due to lack of sufficient oversight and regulation of dangerous economic activity. The supposedly self- regulating market had led to economic crisis on a scale previously unimaginable, and with mass unemployment (25%) in places such as the United States, there was little room to let the market “self-regulate” in the long run. From Polanyi’s point of view, this had all happened because the economic functions had become disembedded from the state and society in the form of ‘markets’. Where in the late 1700’s economic systems had been far simpler and their foreign trade was generally controlled directly by governments, the systems of the early 1900’s were massive, complex, and loosely regulated. While people had once lived on homesteads in an agricultural society, industrialization had transformed life and introduced urbanization and the concept of poverty into society. The social disruption that orthodox capitalism had created was unsustainable; Polanyi cites the first
Five-Year Plan in the Soviet Union, the rise of Fascism in Central Europe, and the New
Deal in the United States all as simultaneous efforts to reassert state authority over the forces of markets, which had driven millions out of work and in to hunger. The breakdown of internationalism combined with the violent transformation of humanity’s most powerful societies proved untenable for peace, and it would take the worst war in human history for the world to come together again.
American Hegemony & the Decay of Embedded Liberalism
The aftermath of the Great Depression and World War II would see widespread recognition that a new global economic system with clear leadership and governing norms and practices was needed to maintain not only international economic stability, but 37
also the stability of domestic polities in the face of deepening economic globalization.60
To answer this, a large host of Allied countries in World War II, led by economists Harry
Dexter White and John Maynard Keynes, collaborated at the Bretton Woods Conference of 1944 to draft a regime in which new institutions would act to constrain the worst excesses of capitalism, and rectify the Classical Liberal economic structures that had led to the Great Depression.61 This new system, governed primarily by the International
Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT), instead aimed to “embed” the forces of the market within the purview of states in order to both prevent global economic crises and ensure that the international community had resources at its disposal to limit the severity of crises when they did occur.62
At the same time, these organizations would ensure that any potential crisis did not lead to the beggar-thy-neighbor protectionism of tariffs and other trade restrictions that would lead to a closure of the global economy; this occurred during the Great
Depression and greatly worsened the effects of that crisis.63 The new system also centered on fixed exchange rates in which foreign currencies were pegged to the U.S. dollar, which was then backed by American gold reserves; instead of inflows and outflows of gold regulating the balance-of-payments system, the IMF would use American dollars as a reserve currency for countries in crisis. Additionally, capital controls would be available as a policy tool, equipping governments with the ability to regulate and control inflows and outflows of investment. Furthermore, this U.S.-led order would serve to
60 Benjamin J. Cohen, “Balance-of-Payments Financing: Evolution of a Regime,” International Organization 36, no. 2 (1982): 457–78. 61 Cohen. 62 John Gerard Ruggie, “International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order,” International Organization, no. 2 (1982): 379. 63 Kindleberger, The World in Depression, 1929-1939. 38
facilitate the provision of the five public goods identified by Kindleberger as being essential for addressing economic crises: serving as a market for distress goods, providing counter-cyclical lending, maintaining stable exchange rates, ensuring macroeconomic policy coordination, and acting as a lender of last resort.64
While this operated effectively for the first two decades of the postwar era, the overwhelming hegemonic power of the United States would begin to decline as early as the 1970’s, being partly exacerbated by the costly Vietnam War and postwar economic booms in Germany and Japan.65 The Oil Crisis of the 1970’s highlighted the inability of the IMF to fully address international crises while simultaneously leading to fundamental changes in U.S. economic policies that effectively brought the postwar Bretton Woods system to an end.66 The IMF’s lack of sufficient capacity to address the crisis led to the greater inclusion of private funds, private actors, and market forces for addressing and governing the global economy.67 Additionally, the U.S. would abandon the gold-backed dollar and end the system of fixed exchange rates, marking a unilateral American move to insulate the domestic economy and ensure social order in the face of international challenges.68 This is reflective of the Triffin Paradox, in which the U.S., as a provider of the reserve currency which other states drew upon, struggled to balance its domestic economic needs with its international obligations; the combination of sustained inflation and unemployment necessitated a devaluation of the dollar to maintain domestic
64 Kindleberger. 65 Charles P. Kindleberger, “Dominance and Leadership in the International Economy: Exploitation, Public Goods, and Free Rides,” International Studies Quarterly 25, no. 2 (1981): 242–54, https://doi.org/10.2307/2600355. 66 Cohen, “Balance-of-Payments Financing.” 67 Frieden, Global Capitalism. 68 Cohen, “Balance-of-Payments Financing.” 39
economic and social stability within the U.S.69 These changes would also lead to a rejection of capital controls, leading to a global economy that allows for ‘capital mobility’.
While the earlier Bretton Woods system operated under the guiding norms of what Ruggie termed “embedded liberalism”—a system in which the forces of markets were largely constrained by the power of the state—these fundamental changes draw into question if “embedded liberalism” continued to govern the system.70 The forces of the market had effectively overwhelmed the strength of the regimes that upheld this system and forced a departure from both the practices (i.e. fixed exchange, capital controls) that facilitated states’ ability to constrain destabilizing aspects of the global economy and the normative underpinning of the system, which was directly reliant upon the above practices that had limited the disruptive aspects of the global economy.71 Ruggie initially argued in his seminal 1982 paper that these developments, while reflective of a change in practice, maintained the core commitment to open markets and free trade, as well as critically maintaining the provision of the public goods necessary for international economic stability; change had been “norm-governed”.72
However, Ruggie later writes with Abdelal that the U.S.-led order underwent major fundamental changes that have elevated the role of private finance, disarmed domestic officials through eliminating capital controls, and emboldened multinational corporations, which now possess a degree of independence dangerous for international
69 Frieden, Global Capitalism. 70 John Gerard Ruggie, “International Regimes, Transactions, and Change.” 71 John Gerard Ruggie. 72 John Gerard Ruggie. 40
economic and social stability.73 This view is also roughly reflective of the argument posited by Jacqueline Best, who argues that technical fixes to the system, rather than deep-rooted reform, have led to a “hollowing” of the Keynesian norms that underwrote the Bretton Woods system.74 Where Keynes saw the market as an inherently flawed idea,
Best characterizes the post-1970’s regime as a “neoclassical synthesis” in which policymakers and economists came to view markets as perfectible.75 In analyzing
Keynes’ original writings, Jonathan Kirshner comes to a similar conclusion about the fact that a need to regulate capitalism was at the core of the principles debated at Bretton
Woods in 1944.76 Similar assertions are made by Eric Helleiner, who postulates that we may be in a sort of interregnum reminiscent of the Interwar period.77 These academics are not alone in the argument that the embedded liberal system that had governed international economics had broken down into a system of problematic neoliberal norms that led to a resurgence of faith in private markets. Even longtime Federal Reserve
Chairman Alan Greenspan drew faith in the self-regulating market pattern into question when he famously testified to Congress in 2008, saying that:
I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works.78
73 Abdelal and Ruggie, “The Principles of Embedded Liberalism.” 74 Jacqueline Best, “Hollowing out Keynesian Norms: How the Search for a Technical Fix Undermined the Bretton Woods Regime,” REVIEW OF INTERNATIONAL STUDIES., no. 3 (2004): 383–404. 75 Best. 76 Jonathan Kirshner, “Keynes, Capital Mobility and the Crisis of Embedded Liberalism,” Review of International Political Economy 6, no. 3 (1999): 313–37. 77 Eric Helleiner, “A Bretton Woods Moment? The 2007–2008 Crisis and the Future of Global Finance,” International Affairs 86, no. 3 (May 1, 2010): 619–36, https://doi.org/10.1111/j.1468-2346.2010.00901.x. 78 Treanor, “Greenspan - I Was Wrong about the Economy. Sort Of.” 41
While scholars such as Daniel Drezner and Michael Dooley have argued that the contemporary system still “works” in the sense that we have, just barely, avoided economic catastrophe on the scale of the Great Depression, their assessments largely ignore the role of norms in global economic governance and fall back on an argument that “good enough” was good enough in the wake of the Great Recession.79
It may be the case that the present system of global economic governance continues to uphold an open global economy and even largely provide Kindleberger’s international public goods, as noted by Norrlof & Reich.80 And yet these are practical policies, not norms or values. As Best argues, the values that underwrote Bretton Woods have been thoroughly “hollowed”.81 The early years of the postwar era were characterized by a clear desire, even a need, to restrict the disruptive forces of the market economy in order to make a return of the suffering and destruction that accompanied the Great
Depression and Second World War an impossibility. At their core, the Bretton Woods institutions and the policies of fixed exchange rates and capital controls were statist in nature, elevating the ideals and aspirations exhibited by the public rather than those desired by bankers and corporate interests. They prioritized the public good rather than the private. The departure from these policies, adoption of a “Washington Consensus” that advocates for greater deregulation and privatization, and the emergence of an overall belief that markets are perfectible has fundamentally delineated the normative values of the contemporary global economy from those that were instilled at Bretton Woods in
79 Daniel W. Drezner, The System Worked: How the World Stopped Another Great Depression, Reprint edition (Oxford University Press, 2016); Michael P. Dooley, David Folkerts-Landau, and Peter M. Garber, “Bretton Woods II Still Defines the International Monetary System,” Working Paper (National Bureau of Economic Research, February 2009), https://doi.org/10.3386/w14731. 80 Norrlof and Reich, “American and Chinese Leadership during the Global Financial Crisis.” 81 Best, “Hollowing out Keynesian Norms.” 42
1944. These developments have led to changes in the practices governing the global economy, and have additionally justified substantial changes in macroeconomic policy.
The electoral successes and popularity of figures such as Thatcher and Reagan in the
1980’s is reflective of the breakdown in the Keynesian norms that had been held in place in the earlier postwar era; both leaders’ respective parties had increasingly sought to dismantle key elements of the welfare state and reduce the role of government in economic affairs. These developments not only threaten to bring on greater instability within the global economy, as evidenced by the Great Recession, but undermine the emergence of a shared international consensus around the importance of stability and the mitigation of the most harmful aspects of market economics.
Discussion
This chapter has provided background I find necessary to any deeper understanding of China’s position in the global economy today. In outlining the Classical
Liberal system upheld under the hegemony of the British Empire, the Embedded Liberal system put in place after World War Two, and the evolutions in that system since then, I have aimed to present a generalized overview of the major changes in the global economy as it has operated under Anglo-American leadership for the better part of the past two centuries. In doing so, we are able to see how it is difficult to assert the existence of any clear “status quo” within the global economy; the specific practices governing interactions within the global economy have changed substantially over time. This contextualizes and complicates any assessment of China’s position within the structures governing transactions in the global economy today. What’s more, the practices governing these transactions have changed significantly under U.S. leadership 43
specifically, with the economics of the Bretton Woods system being much different than those of the more contemporary “Washington Consensus”. Here, we must remind ourselves that it was in fact the United States that brought an end to the Bretton Wood system by deciding to go off the gold standard in 1971—and devaluing the U.S. dollar substantially. One would be hard-pressed to argue that such a move, unilateral in nature, can be characterized as “status quo” at the time, and, as it set up a system of economic interactions that appear fundamentally different in their practices and their purpose, it surely seems to be a major “revision” of the system as it existed under Bretton Woods.
This is the most crucial takeaway from this chapter, and one that directly impacts how we conceive of China’s role in global economic governance in the 21st century, as well as that of the U.S. The American-sponsored Bretton Woods system, erected in the immediate aftermath of The Great Depression and World War Two, was created by policymakers who had the lived experience of the greatest crisis in human history. This set of institutions and their associated practices—fixed exchange rates, the use of capital controls, sustained promotion of free trade—was actively conscious of the most disruptive forces of market-based economies. There was, in large part, a consensus that markets needed to be “embedded” back under the purview of the state, and that the state should be equipped with the policy tools and international support necessary to mitigate the worst excesses and shocks inherent in the business cycle and market patterns. While
Ruggie initially argued that the changes that occurred after the collapse of the Bretton
Woods system had been “norm-governed”, I agree with his later view that the changes of the 1970’s represent a more fundamental break in governing norms. Where economists and policymakers once recognized the socially destructive power of unchecked markets, 44
today markets are more typically described as being “perfectible”, or in many cases their disruptive powers are passed off as a mere fact of modern life. There has been a fundamental break in both the practices governing global economics, and in the principles behind them.
However, I am reminded that this chapter began with a discussion of the early conflict between China and the British Empire. The inclusion of this historical era serves to emphasize the potential size of the Chinese economy in relation to the rest of the world, with the time before industrialization reflecting an era in which China, with a massive population even then, was home to up to 30% of global economic activity.
Moreover, while the nature of history lends itself to a narrative in which everything seems determined to have flowed naturally to the outcomes that we recognize today,
Britain had not necessarily been destined to be the economic dynamo that it became.
While the states involved in this story, and the paths they have taken to the modern day do surely matter, this history has been one more predominantly focused on the role of the market within society and the nature of change in the international system. Even looking back to the Qing Dynasty and the Opium Wars, China under that regime was fundamentally trying to prevent foreign goods and influence from entering and disrupting its own domestic economy, which was under threat from smuggled opium and weakened by the massive expansion of European power into markets and ports around the world.
While free trade and an open global economy have waxed and waned in certain eras, these have largely come and gone as the relationship between society and economics has been strained; in times of economic pressure, such as the Great Depression, countries 45
have sought to insulate themselves from international influence and control the ravages of dynamic markets in their own society.
There are few who would doubt that the process of globalization has been accompanied by increasing integration of international markets, which has brought many industries into disruptive competition with those in other countries. The desire and the need for a country to empower itself over the pure forces of market economics is visible even in the Trump administration’s economic orientation today. While ostensibly capitalists, Trump and the Republican Party came back to power in 2016 in part by catering to the vote of people who have seen factories and mines come and go in their communities, creating and then destroying jobs and livelihoods, and effectively depopulating American towns. While this foundational theme about the “embeddedness” of the market structure is harder to observe and less so spoken of, it is a thread that ties us to history, and one which we would do well to remember in a time where we increasingly speak of the “perfectibility” of market economics.
46
Chapter III.
Economic Conflict: The Case of International Trade
“No one will emerge as the winner in a trade war…We must promote trade and investment, liberalization and facilitation through opening up – and say no to protectionism." -Chinese President Xi Jinping, World Economic Forum, January 201782
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” -U.S. President Donald Trump, Twitter, March 201883
As this project has unfolded, so too has the trade conflict between the U.S. and
China evolved precipitously. To briefly acknowledge it or wholly avoid it is no longer possible, in part because it has become increasingly clear that major economic disagreements between the two parties are likely to remain, even in the event of any potential deal resolving the current dispute. In assessing the growing role of China within the global economy and determining whether or not that country constitutes a
‘revisionist’ power, we must look at that area which is both a pillar of the U.S.-led international economic order and which serves as the realm in which the present economic conflict began.
82 “Top Quotes by China President Xi Jinping at Davos 2017,” World Economic Forum, January 17, 2017, https://www.weforum.org/agenda/2017/01/chinas-xi-jinping-at-davos-2017-top-quotes/. 83 Donald J. Trump, Twitter Post, March 2, 2018, https://twitter.com/realdonaldtrump/status/969525362580484098?lang=en 47
As discussed in the previous chapter, the promotion of international trade, and of lowering import barriers and moving towards free trade in particular, is a fundamental element of the Liberal international economic order as it has existed since the mid-19th century. Trade across borders serves to augment the domestically-available resources of a given state, providing them the ability to sell their own goods abroad while purchasing from other states those goods which are prohibitively expensive to produce domestically.
As free trade has spread and the logistical technologies required to facilitate it have advanced, countries have been able to specialize economically rather than working towards economic self-sufficiency.84 This process—that is, the development of a truly global economy—has aided in enabling a more efficient use of resources, which in turn promotes economic development. In a corresponding negative manner, the decay of international trade and increasing of trade barriers can unlock destructive forces that spread damage across various segments of society; the 1930 Smoot-Hawley Tariff Act raised tariffs on imports into the United States, leading to reciprocal tariff increases and thus a decline in international trade that contributed to the length and depth of the Great
Depression.85 As previously outlined, trade practices have evolved immensely and are today governed under the auspices of the World Trade Organization (WTO), established in 1995 and composed of 164 member states.86
China has long been discussed in a negative light in the area of trade, frequently being decried by political pundits and outside observers as promoting “unfair trading practices” or of being a “currency manipulator”. And although aggressive policy course
84 Jeffry A. Frieden, Global Capitalism : Its Fall and Rise in the Twentieth Century (New York : W.W. Norton, 2006), 18–25. 85 Frieden, 180–86. 86 WTO, “What Is the WTO?,” n.d., https://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm. 48
of the Trump administration diverges from the policies of all recent U.S. Presidents, there does appear to be growing bipartisan support within domestic U.S. politics to confront
China on issues related to trade. Senate Minority Leader Chuck Schumer, for example, has called on President Trump to officially label China a currency manipulator and in
2017 stated that “We can work together to push back on China's rapacious trade policy,”.87 In 2015, then-candidate President Trump articulated a promise to label China as a currency manipulator “on day one”, as well as to institute a “zero tolerance policy” on forced technology transfers and to investigate “illegal export subsidies and lax labor and environmental standards”. In particular, the Trump administration has emphasized the significance of the U.S. trade deficit with China and views the significant imbalance as evidence that China has benefitted from an exploitative, one-way relationship.88 These issues provide an avenue in which China’s actions can be assessed to determine how
China fits into the U.S.-led trade regime under the WTO while also highlighting the relative decline of the U.S. and the ensuing lack of clarity relating to the WTO’s future.
To thoroughly understand China’s position on trade and its relation to the Liberal international economic order, I turn now to a brief synopsis of the trade conflict that has emerged in U.S.-China relations under the Trump administration.
Trump, China, and the Trade War
As stated above, the possibility of a trade conflict between the United States and
China began to emerge during the 2016 Presidential Campaign. As part of a broader
87 James Tennent, “Democrat Leader Says Trump Should Label China a Currency Manipulator.” 88 David Dollar and Peter A. Petri, “Why It’s Time to End the Tit-for-Tat Tariffs in the U.S.-China Trade War,” Brookings, October 5, 2018, https://www.brookings.edu/blog/order-from-chaos/2018/10/05/why-its- time-to-end-the-tit-for-tat-tariffs-in-the-u-s-china-trade-war/. 49
platform pledging “America First”, then-candidate Donald Trump had promised to not only get tough on China, but to reassess U.S. trade relationships more generally.89 Within just over a month of his inauguration, President Trump enacted multiple executive orders calling for close oversight of trade deficits and enhanced enforcement of antidumping laws and various trade duties.90 Some of the most significant policy moves carried out during the first two years of the Trump administration have been the scrapping of the
Trans-Pacific Partnership (TPP) trade deal with Japan and other Pacific-rim states, the pausing of talks on the Transatlantic Trade and Investment Partnership (TTIP) with the
European Union (EU), and the renegotiation of the North American Free Trade
Agreement (NAFTA) to the United States-Mexico-Canada Agreement (USMCA).91
In addition to reforming U.S. trade relations with various world powers, the
Trump administration simultaneously began opening multiple trade investigations that gradually built up to the ongoing conflict. Beginning April 2017, Trump directed
Commerce Secretary Wilbur Ross to assess the implications of steel and aluminum imports as they relate to matters of national security, specifically with the intention of ensuring that the U.S. had sufficient production capacity in the wake of any potential
89 Nick Corasaniti, Alexander Burns, and Binyamin Appelbaum, “Donald Trump Vows to Rip Up Trade Deals and Confront China,” The New York Times, December 21, 2017, https://www.nytimes.com/2016/06/29/us/politics/donald-trump-trade-speech.html. 90 Executive Office of the President, “Omnibus Report on Significant Trade Deficits,” March 31, 2017, 82 FR 16721, Federal Register, https://www.federalregister.gov/documents/2017/04/05/2017-06968/omnibus- report-on-significant-trade-deficits; Executive Office of the President, “Presidential Executive Order on Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws,” March 31, 2017, https://www.whitehouse.gov/presidential- actions/presidential-executive-order-establishing-enhanced-collection-enforcement-antidumping- countervailing-duties-violations-trade-customs-laws/. 91 Corasaniti, Burns, and Appelbaum, “Donald Trump Vows to Rip Up Trade Deals and Confront China”; The Economist, “The Renegotiation of NAFTA Is a Relief. But It Is Not a Success,” The Economist, October 4, 2018, https://www.economist.com/leaders/2018/10/04/the-renegotiation-of-nafta-is-a-relief-but- it-is-not-a-success. 50
national security threats.92 This act was complemented in August 2017 with directives by
Trump for the Office of the U.S. Trade Representative Robert Lighthizer to consider investigating the impact that China’s Joint Venture Laws were having upon American businesses and the American economy.93 Two months later, in October 2017, the United
States International Trade Commission (USITC) recommended to President Trump that actions be taken to protect the US solar panel and washing machine industries.94 These three investigations, each coordinated by a separate entity, have all led to tariffs and corresponding retaliation from China and other affected parties.
The ‘smallest’ of these investigations was the first to lead to tariffs, with the
Trump administration imposing “global safeguard” tariffs on $8 billion worth of imported solar panels and $1.8 billion of washing machines in January 2018, as recommended by USITC.95 Unilateral in nature, these limited tariffs are permissible for up to four years under WTO rules and were a direct response to industries petitioning for assistance due to pressure from more-competitive importers such as China, Taiwan,
South Korea, and other Asian markets. Key elements of “global safeguard” tariffs is that they must be temporary, backed by data that clearly shows harm to domestic industries,
92 Kevin Liptak, “Trump to Explore National Security Implications of Steel Imports,” CNN, April 20, 2017, https://www.cnn.com/2017/04/20/politics/trump-steel-national-security/index.html. 93 Executive Office of the President, “Presidential Memorandum for the United States Trade Representative,” August 14, 2017, https://www.whitehouse.gov/presidential-actions/presidential- memorandum-united-states-trade-representative/. 94 U.S. International Trade Commission and Peg O’Laughlin, “USITC Announces Remedy Recommendations in Its Global Safeguard Investigation Involving Imports of Crystalline Silicon Photovoltaic Cells (Whether or Not Partially or Fully Assembled into Other Products),” October 31, 2017, https://www.usitc.gov/press_room/news_release/2017/er1031ll857.htm. 95 Chad P. Bown and Melina Kolb, “Trump’s Trade War Timeline: An Up-to-Date Guide,” Peterson Institute For International Economics, December 1, 2018, https://piie.com/blogs/trade-investment-policy- watch/trump-trade-war-china-date-guide. 51
and specific to individual products. 96 Shortly after, on March 1 2018, President Trump announces the findings of Commerce Secretary Wilbur Ross’s investigation into steel and aluminum imports, with the President declaring the imposition of 25 percent tariff duties on steel and 10 percent on aluminum on the grounds of national security, applicable to all trading partners.97 In 2017, imports of these goods from China to the U.S. amounted to
$2.8 billion. This development marked a significant escalation of trade policy, with various commentators and outside observers expressing surprise that the Trump administration would impose unilateral tariffs on the grounds of national security— technically the only grounds under which a member of the WTO may impose tariffs without fully justifying their actions or acting through WTO mechanisms.98 China directly expressed their disagreement with the U.S. logic behind the use of the national security exemption, stating that U.S. claims “do not meet the ‘security exceptions’ provisions, but actually constitute safeguard measures,” referring to the type of tariffs utilized earlier by the U.S. to protect solar panels and washing machines.99 Whereas national security exemptions cannot be questioned by the WTO, a specific mechanism exists for allowing, and reducing over time, temporary “global safeguard” tariffs; these differences are why there has been extremely limited use of the national security exemption over the course of the WTO’s existence. Over the following weeks, the Trump administration would renegotiate steel trade quotas with South Korea, granting them a
96 WTO, “Trade Topics - The Agreement on Safeguards,” World Trade Organization, accessed April 9, 2019, https://www.wto.org/english/tratop_e/safeg_e/safeint.htm. 97 Ana Swanson, “Trump to Impose Sweeping Steel and Aluminum Tariffs,” The New York Times, December 10, 2018, sec. Business, https://www.nytimes.com/2018/03/01/business/trump-tariffs.html. 98 Kellie Ell, “Tariffs a ‘Complete Violation of WTO Rules’: Former Deputy Trade Rep,” March 2, 2018, https://www.cnbc.com/2018/03/02/tariffs-a-complete-violation-of-wto-rules-former-deputy-trade-rep.html. 99 Liu Kun, “From April 2, 2018, China Suspends Tariff Reduction Obligations on Some Imported Goods Originating in the United States.” (Ministry of Finance of the People’s Republic of China, April 1, 2018), http://gss.mof.gov.cn/zhengwuxinxi/gongzuodongtai/201804/t20180401_2857770.html. 52
permanent exemption from the new tariffs. Additionally, other key partners such as
Canada, Mexico, and the EU are granted temporary exemptions while the U.S. emphasizes that their primary targets are Russia and China.100
With tariffs on steel and aluminum set to go into effect on March 23, the U.S. first released the findings of the Trade Representative’s investigation into China’s “Acts, policies, and practices related to technology transfer, intellectual property, and innovation” on March 22.101 In remarks at the White House, President Trump and others suggested that this report will inform more tariffs in the near future and Ambassador
Lighthizer stated that “…we’ll file a WTO case. Because one of the actions here does involve a WTO violation.”102 The following day, the Office of the U.S. Trade
Representative requested consultation with China at the WTO as a precursor to potential use of more formal dispute settlement processes.103 While the two issues were technically divorced from each other, global tariffs on metals imports and frustrations with the technology transfer and intellectual property rights of U.S. companies operating in China
100 William Mauldin and Rhiannon Hoyle, “How Countries Won U.S. Tariffs Exemptions: Retaliation Threats, Intense Lobbying and an Emphasis on Alliances,” Wall Street Journal, March 25, 2018, sec. Politics, https://www.wsj.com/articles/how-countries-won-u-s-tariffs-exemptions-retaliation-threats- intense-lobbying-and-an-emphasis-on-alliances-1521838750. 101 United States Trade Representative, “FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974” (Washington D.C.: Executive Office of the President of the United States, March 22, 2018), https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF. 102 Executive Office of the President, “Remarks by President Trump at Signing of a Presidential Memorandum Targeting China’s Economic Aggression,” March 22, 2018, https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-presidential- memorandum-targeting-chinas-economic-aggression/. 103 Office of the United States Trade Representative, “Following President Trump’s Section 301 Decisions, USTR Launches New WTO Challenge Against China,” March 23, 2018, /about-us/policy-offices/press- office/press-releases/2018/march/following-president-trump%E2%80%99s-section. 53
quickly became intertwined over the course of five days that would rapidly escalate the magnitude of the U.S.-initiated trade spats.
On April 1st, one month after the Trump Administration had announced steel and aluminum tariffs on the grounds of “national security”, China’s Ministry of Finance retaliated to these measures with an announcement that tariffs would go into place on
April 2nd on imported scrap metal and foodstuffs that amounted to $2.4 billion in imports from the U.S. in 2017.104 The following day, April 3rd, the Office of the U.S. Trade
Representative released a list of over 1,300 Chinese imports to the U.S. under consideration for 25 percent import tariffs—goods amounting to roughly $50 billion— due to the findings of the investigation launched in 2017 into China’s forced technology transfer and handling of intellectual property rights.105 The press release for this development goes on to conclude that “If the United States and China are unable to reach a solution through consultations, the United States may request the establishment of a
WTO dispute settlement panel to review the matter.” On April 4th, China responded in- kind with the threat of tariffs on $50 billion of imports from the U.S., primarily vehicles and agricultural products. Additionally, China requested WTO consultations in regards to the U.S. imposition of duties on steel and aluminum.106 The following day, April 5th,
President Trump issued a statement in response to China’s reciprocal tariffs, stating that
“Rather than remedy its misconduct, China has chosen to harm our farmers and
104 Liu Kun, “From April 2, 2018, China Suspends Tariff Reduction Obligations on Some Imported Goods Originating in the United States.”; Chad P. Bown and Melina Kolb, “Trump’s Trade War Timeline.” 105 Office of the United States Trade Representative, “Under Section 301 Action, USTR Releases Proposed Tariff List on Chinese Products,” April 3, 2018, /about-us/policy-offices/press-office/press- releases/2018/april/under-section-301-action-ustr. 106 World Trade Organization - Dispute Settlement, “Dispute Settlement - DS544: United States — Certain Measures on Steel and Aluminium Products” (World Trade Organization, April 5, 2018), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds544_e.htm. 54
manufacturers. In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section
301,”.107
In late May 2018, China offered concessions in the form of strengthened intellectual property laws and a commitment to increase imports of U.S. goods for the purpose of cutting the bilateral trade deficit by $200 billion in just two years.108 U.S.
Secretary of the Treasury Steven Mnuchin suggested that the “trade war had been put on hold,” however, the White House later indicated that it indeed intended to move ahead with the 25% tariffs on $50 billion of imports from China. In mid-June the White House announced two phases of implementation, with tariffs totaling $50 billion set for enactment on July 6th and August 23rd; China quickly announced that they would respond with comparable tariffs. After this promised retaliation, President Trump directed the
USTR for a list of further products for new tariffs on $200 billion of imports at a 10 percent rate, and followed up by threatening to impose tariffs on all imports from China to the United States. In just a few short months, the bilateral trading relationship between
China and the United States—the largest two-way trading relationship in the world— collapsed to such a point that the United States threatened to put tariffs on all Chinese imports, which provide for over 20% of all U.S. imports and include many products in the supply chain of American industries.109
107 Executive Office of the President, “Statement from President Donald J. Trump on Additional Proposed Section 301 Remedies,” April 5, 2018, https://www.whitehouse.gov/briefings-statements/statement- president-donald-j-trump-additional-proposed-section-301-remedies/. 108 Wayne M Morrison, “Enforcing U.S. Trade Laws: Section 301 and China” (Congressional Research Service, January 29, 2019), https://fas.org/sgp/crs/row/IF10708.pdf. 109 U.S. Census Bureau and International Trade Macroanalysis Branch, “Foreign Trade: Data,” U.S. International Trade Data, December 18, 2018, https://www.census.gov/foreign- trade/statistics/highlights/toppartners.html#total. 55
By late August, the U.S. and China had both enacted tariffs on $50 billion of imports from the other country, and China had responded proportionately to U.S. tariffs on steel and aluminum. Additionally, China filed a WTO suit against the U.S. for the earlier tariffs on solar panels, with the Chinese complaint echoing those of the U.S. in saying that:
The US side provides additional subsidies to renewable energy products such as photovoltaics manufactured in the country... The US subsidy policy has given the country's renewable energy industry an unfair competitive advantage and damaged the legitimate rights and interests of China's renewable energy companies.110
It should be noted here that the Chinese position is not fundamentally wrong: Tesla, the first new major American automaker to enter the market in decades, has relied on billions of dollars in government subsidies to bring down the price tag on its vehicles.111
Retaliatory U.S. tariffs of 10 percent on $200 billion of additional Chinese imports then went into effect in late September, prompting a proportionate response from China in the form of duties on $60 billion in imports from the U.S.112 While the U.S. initially pledged to up these tariffs from 10% to 25% on January 1st of 2019, the two countries negotiated a temporary truce at the G20 and bilateral talks have attempted to break the impasse and prevent further escalation. Although WTO litigation has been pursued by both parties, and other states involved in the trade disputes, the process can take years and does not promise an easy resolution; the Trump administration has openly expressed regret about
110 Ministry of Commerce Press Office, “Ministry of Commerce Spokesperson Speaks on China’s Prosecution of US PV Safeguards and Renewable Energy Subsidies at the WTO,” August 14, 2018, http://www.mofcom.gov.cn/article/ae/ag/201808/20180802775695.shtml. 111 Russ Mitchell, “As Tesla Tax Credits Disappear, Will Model 3 Deposit-Holders Stick Around?,” Los Angeles Times, July 3, 2018, https://www.latimes.com/business/autos/la-fi-hy-tesla-tax-credit-subsidy- 20180703-story.html. 112 Bloomberg News Staff, “Everything You Need to Know About Trump’s Latest Tariffs,” September 18, 2018, sec. Economics, https://www.bloomberg.com/news/articles/2018-09-18/everything-you-need-to- know-about-trump-s-latest-tariffs. 56
the U.S.’s earlier decision to allow China into the WTO in 2001.113 Moreover, the U.S. has argued that its implementation of unilateral tariffs in the name of national security is effectively unquestionable, with the U.S. Ambassador to the WTO stating that “The
United States wishes to be clear: if the WTO were to undertake to review an invocation of [the national security exemption], this would undermine the legitimacy of the WTO’s dispute settlement system and even the viability of the WTO as a whole”.114 Of course, if the WTO were not able to review invocations of the national security exemption, it seems that this could easily lead to widespread ‘national security’ claims by any member of the
WTO, which may genuinely undermine the WTO’s efficacy and legitimacy. The
Ambassador went on to state quite bluntly the position of the United States, saying that
“We would encourage the European countries to consider carefully their broader economic, political, and security interests,” and “We will not allow China’s party-state to fatally undermine the U.S. steel and aluminum industries, on which the U.S. military, and by extension global security, rely.”
In the above section, I have established a general timeline of the events of the
U.S.-China Trade Conflict as it has evolved under the Trump Administration. This synopsis raises a wide variety of questions and provides us a few areas to further assess
China’s behavior. In particular, assessing the nature of the trade deficit, as well as existing tariff levels, can provide greater context and understanding to U.S. sentiments of being cheated on trade. Additionally, we can turn to the role of the state in Chinese
113 Lesley Wroughton, “Trump Administration Says U.S. Mistakenly Backed China WTO Accession in 2001,” Reuters, January 19, 2018, https://www.reuters.com/article/us-usa-trade-china-idUSKBN1F82U1. 114 Tom Miles, “U.S. Steel Tariff Fight Stirs up a Swarm of WTO Litigation,” Reuters, October 30, 2018, https://www.reuters.com/article/us-usa-trade-wto-idUSKCN1N31NN. 57
economic policy to further assess “revisionist” behavior, in addition to assessing the longstanding grievances regarding currency manipulation.
China & Currency Manipulation
One of the most common criticisms of Chinese foreign economic policy comes in the form of allegations of “currency manipulation”. This line has been repeated over and over again by U.S. officials ever since China’s economy reemerged as a major player in the global economy in the 1980’s and 1990’s.115 China was indeed briefly certified as a
“Currency Manipulator”, along with Taiwan and South Korea, by the U.S. Department of the Treasury in the early 1990’s.116 More recently, President Trump ran his 2016 campaign on a platform that featured regular criticism of the Chinese state and aggressive posturing against various Chinese policies. Few charges, however, have been as pointed as Trump’s desire to certify China as a currency manipulator.117 The Chinese government,
Trump alleges, has taken on an active role in influencing the value of their currency, the
Renminbi. By artificially lowering the value of their currency, the Chinese state is able to give its export-promoting economy an unfair advantage in competing against other producers in international markets. While the Trump administration has not yet placed
China on the list of “Currency Manipulators”, China, in addition to Japan, Korea,
Germany, and Switzerland, has been on the “Monitoring List” since the institution of new
115 Eric Helleiner and Jonathan Kirshner, eds., The Great Wall of Money: Power and Politics in China's International Monetary Relations, 1st ed. (Cornell University Press, 2014), 116 Xiangrong Yu, Huili Chang, and Hong Liang, “History of ‘Curreny Manipulation,’ and Challenges Facing China,” Macroeconomy Research (China International Capital Corporation, December 20, 2016), 4, http://www.cicc.com/portal/business/rs/investweather///1482223027553F305043F2F436270244FD142672 2690B.pdf. 117 Charles Wallace, “China’s Currency Manipulation Is A Response to Trump’s Tariffs,” Forbes, July 21, 2018, https://www.forbes.com/sites/charleswallace1/2018/07/21/chinas-currency-manipulation-is-a- response-to-trumps-tariffs/. 58
criteria by the Trump administration in 2016.118 As China has recently utilized the exchange rate tool and devalued their currency as a mechanism to offset the impact of
U.S. tariffs implemented in 2018, the U.S. Department of the Treasury has announced— despite two years of passing on the opportunity—that it is now more seriously considering moving China into the “Manipulator” category.119 It is evident that allegations of “currency manipulation” are substantial, enduring grievances that are reflective of one realm of alleged “revisionist” behavior by China.
In examining this issue, we must first assess what “currency manipulation” is, and why a given country would want to engage in such a practice. In essence, “currency manipulation” is the practice of artificially altering the value of one’s currency, generally for the purpose of a) increasing the home country’s purchasing power in international markets through inflating the value of one’s currency, or b) making exports more competitive in international markets through reducing the value your own currency, thus making products cheaper to foreign buyers.120 The U.S. Treasury has recently updated the criteria for what determines if a country will be labelled a “currency manipulator”, a status that eases the process of enacting sanctions and tariffs from the U.S. government.
The Trade Facilitation and Trade Enforcement Act of 2015 establishes that a “currency manipulator” is a state that fulfills the following three criteria:
1. A significant bilateral trade surplus with the United States is one that is at least $20 billion;
118 Xiangrong Yu, Huili Chang, and Hong Liang, “History of ‘Curreny Manipulation,’ and Challenges Facing China.” 119 Wallace, “China’s Currency Manipulation Is A Response to Trump’s Tariffs.” 120 American Automotive Policy Council, “Currency Manipulation 101,” AAPC, 2016, http://www.americanautocouncil.org/currency-manipulation-101. 59
2. A Material current account surplus with the United States is one that is at least 3 percent of gross domestic product (GDP);
3. Persistent one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2 percent of an economy’s GDP over a 12-month period.121
The U.S. Treasury’s 2017 Trade Report details that there are no countries that currently meet these criteria; it also adds that no countries meet the old criteria for being labelled a
“currency manipulator”, as established in the Omnibus Trade and Competitiveness Act of
1988.122 The report goes on to note that China only fits into one of the three criteria: possessing a trade surplus of over $20 billion with the United States; Switzerland and
U.S. allies Japan and South Korea all fill two of the three requirements.123
While China’s trade surplus with the United States may be notably higher than those of Japan and South Korea, it is notable that these two major allies of the U.S. are closer to being labelled “Currency Manipulators” than China is. It should also be pointed out that a trade deficit of over $20 billion with China is inherently more likely than with any other country due to the overall volume of trade between the two nations. It is also reflective of the overall structure of the Chinese and U.S. economies, in which independent consumer interests and choices in the U.S. lead consumers and businesses to import significant volumes of cheap products from China—a future in which China is ever removed from the list of potential “currency manipulators” is hard to imagine if a trade deficit of $20 billion fulfills one of the criteria. Because we have not recently heard similar complaints about Switzerland or various U.S. allies being openly challenged as
121 U.S. Treasury Department, “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States,” October, 2018, https://home.treasury.gov/system/files/206/2018-10-17-%28Fall- 2018-FX%20Report%29.pdf. 122 U.S. Treasury Department, 2. 123 U.S. Treasury Department, 3–4. 60
“Currency Manipulators” despite some of these states also fulfilling the same, or more, criteria as China does, we must explore more deeply the relationship between the current account balance (i.e. trade surpluses and/or deficits) and the exchange rate mechanism.
While China has been accused of “currency manipulation” broadly speaking, they have in particular been suspected of devaluing their currency to boost exports; boosting exports in turn provides a greater account surplus and would contribute to the Chinese trade surplus with the United States. To investigate the validity of this line of argument, we can begin by simply finding out what the trend in Chinese exchange rates has been. In assessing data from the Federal Reserve Bank of St. Louis, we can clearly see that the value of China’s currency has actually appreciated over the past two decades; ever since being removed from the old “currency manipulator” list, the value of the Renminbi has trended upwards with occasional declines.124
Figure I. “Real Broad Effective Exchange Rate for China” 1994-2018. Retrieved from Bank for International Settlements, Federal Reserve Bank of St. Louis. Notably, a dip in the value of China’s RMB occurs in the 2-4 years following their ascension to the WTO—this type of engagement could possibly reflect cheating, giving
124 Bank for International Settlements, “Real Broad Effective Exchange Rate for China,” FRED, Federal Reserve Bank of St. Louis, April 2019, https://fred.stlouisfed.org/series/RBCNBIS. 61
Chinese exports a boost just as China was being accepted into the global economy and adopting freer trade. However, whether cheating of this degree constitutes “revisionism” must be more closely examined. In examining other analyses of alleged devaluation of the RMB, similar assessments—that is, that the RMB is appreciating and that China is not actively devaluing its currency—can be found, and generally paint a picture of a U.S. government that has simply responded far past the date in which any actual devaluation was occurring (i.e. early 2000’s). One report from the Brookings Institution actually highlights that the relative price of Chinese exports rose roughly 50 percent in the decade from 2005-2015; a RMB in the process of devaluation would have kept export prices lower.125 While less clear about the data utilized in their analysis, The Economist—well known for its pro-capitalist and free market sentiments—similarly assesses that, if anything, the Chinese government has manipulated its currency in the upward direction in an attempt to strengthen purchasing power so as to reduce the massive surpluses that anger China’s trading partners.126 This is the exact opposite of what the Trump administration alleges China is involved in; they claim that China is devaluing its currency to strengthen their export selling power so as to increase their massive surpluses and damage China’s trading partners.
125 Michael W. Klein, “What You May Not Know about China and Currency Manipulation,” Brookings (blog), November 30, 2001, https://www.brookings.edu/opinions/what-you-may-not-know-about-china- and-currency-manipulation/. 126 “China and Currency Manipulation,” The Economist, March 2, 2017, https://www.economist.com/finance-and-economics/2017/03/02/china-and-currency-manipulation. 62
Trade (Im)balances & Tariff Levels
As the Trump Administration has entered into economic confrontation with
China, the issue of the trade deficit has taken on huge importance in the debate. Trade deficits are part of the balance-of-payments regime discussed earlier and reflect the net value of all inflows and outflows of money through a given state. Thus, the balance of trade with one country is an account of the net value of exports to that country minus the cost of all imports, or purchases, from said country. If country A is exporting less value in goods and services to country B than country A is importing from country B, country
A will have a trade deficit with Country B. Country A, however, will not necessarily have an overall balance-of-payments deficit. In the case of China and the United States, the deficit lies on the American side, with a net gap in trade of $375.2 billion in 2017 between the U.S. and China.127 This means that the U.S. imported $375.2 billion more in value of goods and services from China than it exported to China over the course of the year.
The Trump administration has made narrowing this gap between the two countries’ trade balances one of the primary goals of the economic conflict. Speaking to the U.N. on concerns about the U.S. trade deficit with China, Trump said that “We will no longer tolerate such abuse. We will not allow our workers to be victimized, our companies to be cheated, and our wealth to be plundered and transferred,” however, available research on the trade deficit with China, and on trade balances in general, does
127 Ana Swanson, “U.S.-China Trade Deficit Hits Record, Fueling Trade Fight,” The New York Times, August 7, 2018, https://www.nytimes.com/2018/02/06/us/politics/us-china-trade-deficit.html. 63
not inherently indicate any of these things.128 In a 2018 analysis by U.S. Federal Reserve economists directly investigating the impact of a trade deficit with China upon American manufacturing, it was noted that Asian nations have long been responsible for the largest chunk of the American trade deficit, and that China itself has not been specifically responsible.129 This is highlighted in the statement that “In other words, the rise of China since the late 1980s—especially after joining the WTO in 2001—has not increased the total share of Asia’s contribution to the U.S. trade imbalance; China simply substituted out other Asian economies by taking their positions,”.130 Additionally, the Federal
Reserve article notes that the collapse of the Bretton Wood system in the early 1970’s directly contributed to sustained American trade deficits by dropping the gold standard, which led many foreign entities (individuals, companies, and governments) to invest in
U.S. treasury bonds due to the fact that U.S. dollars were the most secure currency under the new system. This has contributed to sustained American trade deficits because
American dollars being spent on imports from overseas generally cycle back into the U.S. economy via foreign countries using those same dollars to purchase treasury bonds. The
Federal Reserve article states that “Therefore, the current international monetary system—based on the U.S. dollar as the dominant world reserve currency and U.S. government securities as the most-sought-after store of value—is the root cause of persistent trade deficits in the U.S.”
128 Robert Delaney and Shi Jiangtao, “Trump Slams China at UN for ‘Victimising’, ‘Cheating’ and ‘Plundering’ US,” South China Morning Post, September 25, 2018, https://www.scmp.com/news/world/united-states-canada/article/2165733/donald-trump-insists-he-wont- meet-iranian-president. 129 Brian Reinbold and Yi Wen, “Understanding the Roots of the U.S. Trade Deficit,” (Federal Reserve Bank of St. Louis, Third Quarter 2018), https://www.stlouisfed.org/publications/regional-economist/third- quarter-2018/understanding-roots-trade-deficit. 130 Brian Reinbold and Yi Wen. 64
While trade imbalances do not necessarily indicate any specific relationship between two countries, they can indicate structural economic issues within a given country. While President Trump’s discussion of the trade deficit is oversimplified, he is not fundamentally incorrect that a sustained trade deficit is equivalent to a long-term net outflow of money from the United States. However, this is also a reflection of low consumer savings among Americans, who generally have a high standard of living that is fueled by credit spending. Americans had an average household savings rate of 7.83% of all disposable income in 2015, the most recent year that data is available for both countries. On the other hand, Chinese households saved an average of 37.07% of all disposable income in 2015.131 With American spending high and Chinese spending low, a trade deficit is effectively to be expected, as these numbers indicate that Americans are spending a far greater portion of their incomes than Chinese citizens are. This dynamic is then seen in the trade imbalance, where the U.S. is spending more on Chinese goods annually than China is spending on American goods.
In addition to the issue of the trade deficit, the Trump administration has put tariffs at the forefront of the conflict, instituting import taxes on a wide array of Chinese goods in the developing trade war. Rather than operating through the multilateral structure of the World Trade Organization (WTO), the U.S. has acted unilaterally and instituted tariffs outside of the formal legal process. This is directly counter to the long- espoused principles of free trade and non-discrimination that the U.S. has claimed to
131 OECD, “Household Accounts - Household Savings,” Organisation for Economic Co-operation and Development, 2018, http://data.oecd.org/hha/household-savings.htm. 65
uphold and represent.132 As discussed earlier in the chapter, the American government has taken such drastic action due to a perception that China’s own trade barriers are fundamentally unfair and have allowed that country to ‘cheat’ and push the costs of trade onto foreign enterprises and consumers. Many of these issues include non-tariff barriers, such as the Joint Venture Law that requires foreign companies operating in China to invest and engage in operations with a domestic partner.133 If China were indeed manipulating its currency, this policy would also serve as a non-tariff barrier by distorting prices of imports and exports. However, tariffs have nonetheless taken on a huge role in the evolving economic dispute with the U.S., and, as they are government-imposed taxes on imports, they form the primary barriers to international trade. We can assess trends in
China’s average tariff levels to determine if these are drastically out of line with international norms. Additionally, tariff levels are important to look at because they constitute the primary barrier to international trade and their reduction is one of the central goals of GATT and its successor institution of the WTO.
One mode of calculating this is through tracking China’s climb through income brackets, as established by the World Bank, and comparing Chinese tariff rates to the applied, weighted average tariff rate of all countries composing that income bracket. This measure provides a clear ‘status quo’ against which we can assess China; do China’s tariff rates match those of countries with similar levels of development, or does China
132 WTO, “Legal Texts: General Agreement on Trade and Tariffs 1947” (World Trade Organization, January 1, 1948), https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm. Non-discrimination means that tariff rates and entry barriers placed on a particular type of product must apply to all trading partners, rather than selectively choosing which partners will pay higher tariffs. 133 China Internet Information Center, “Law of the People’s Republic of China on Chinese-Foreign Joint Ventures,” China Internet Information Center, accessed February 23, 2019, http://www.china.org.cn/english/features/investment/36752.htm. 66
possess higher tariff levels than might be expected? If so, this might signify opposition to free trade and could constitute ‘revisionist’ practice. Under this model, countries are placed into 4 different categories based upon their Gross National Income (GNI) per capita. Low income countries have a GNI of less than $995; lower middle-income countries between $996 and $3,895; upper middle-income countries between $3,896 and
$12,055; lastly, high-income countries have a GNI of $12,056 or more (measurements in current U.S. dollars).134 For reference, the United States has been high-income for the entirety of the time the classification has existed. As I will look at the last 25 years of available data, starting in 1993, it is worth noting that U.S. GNI stood at $26,480 in 1993 and had climbed to $58,270 in 2017.135
In the case of China, we see that China was classified as low-income through
1996, and then again briefly in 1998. China advanced fully into the lower middle-income classification from 1999 up until 2009, at which point China ascended into the upper middle-income group in 2010. As of 2017 data available through the World Bank, China remained far poorer than advanced countries and complex economies such as the United
States, with a GNI that stands at $8,690 per capita. In 1994, however, this number stood at just $420. If we look at China’s tariff levels while still in the low-income category, we can see that it was at times higher than the average of low-income countries and other times it was below the average. In 1993, toward the end of the early years of China’s modernization, for example, the average Chinese tariff stood at 30.3%, more than double
134 World Bank Data Help Desk, “World Bank Country and Lending Groups,” The World Bank Group, 2019, https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and- lending-groups. 135 World Bank national accounts data, and OECD National Accounts data files, “GNI per Capita, Atlas Method (Current US$),” The World Bank - Data, 2019, https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=US. 67
the 14.9% average of low-income countries in the same year. By 1998, the last year
China was classified as low-income, Chinese tariffs had dropped to 15.5%, while the average of low-income countries was a comparable 15.4%. Unfortunately, the World
Bank does not maintain average tariff level data from lower middle-income countries, which included China up until 2009. However, we can observe that China’s tariff rate was within 1% of the average rate of upper middle-income countries over the time period of 2002-2009; China became a member of the WTO in late 2001 and was still a lower middle-income country over this time period. Despite this, China in the first decade of the
2,000’s actually maintained lower tariffs than could otherwise be expected based on trends of other countries, and possessed lower tariffs than upper middle-income countries in 4 of the 8 years over the time period 2002-2009.
Figure II. “Weighted Mean Tariff Rate (%) Over Time”. Data Retrieved from World Bank.
Since ascending into the upper middle-income bracket, Chinese tariff levels have largely tracked with the average of upper middle-income countries, with the most divergent years being 2014 and 2016; in 2014 China’s tariffs were .4% higher than the average within its 68
income bracket, and in 2016 they were .5% lower. As of 2017 data, China’s average weighted tariff is 3.8% while that of the upper middle-income bracket is 3.7%.
During the entirety of this time period, the United States has been in the high- income category and has constantly maintained lower tariffs than the average of all high- income countries. American tariffs today are effectively the lowest in the nation’s entire history, and rank among the lowest in the entire world.136 Maintaining extraordinarily low tariffs demonstrates an enduring commitment to free trade, and also reflects that the U.S. is fulfilling the ‘international public goods’ in the form of serving as a market for distressed goods; exporting countries can rely on the U.S. market to sell their products and absorb surplus goods due in part to the low tariff barriers. In this analysis, it seems fair to say that China also is supportive of free trade, and by slashing tariffs from over
30% to just under 4%, and joining the multilateral World Trade Organization in the process, they have made substantial progress for a country whose GNI per capita remains a fraction that of the United States. Additionally, this chart highlights that China also serves to fulfill Kindleberger’s ‘public goods’. Whereas the spike in 2008 indicates that low-income countries drastically increased tariffs as a temporary response to the Great
Recession, China maintained its commitment to free trade and did not increase tariff barriers. This left China, and the U.S., open as markets for ‘distress goods’ in the wake of global economic crisis.
136 Drew Desilver, “U.S. Tariffs Are among Lowest in World – and in Nation’s History,” Pew Research Center (blog), March 22, 2018, http://www.pewresearch.org/fact-tank/2018/03/22/u-s-tariffs-are-among- the-lowest-in-the-world-and-in-the-nations-history/. 69
The State and Chinese Foreign Economic Policy
One does not need an intimate knowledge of history nor of politics to be aware that many concerns related to China’s rise on the global stage are related to the role of their government in the economy. Moreover, because of China’s unprecedented economic development, there is widespread concern that the authoritarian model and habits of the Chinese Communist Party may be emulated by other developing countries across the globe. John Williamson, the scholar that coined the term “Washington
Consensus” that outlines some of the neoliberal economic structures and priorities coming out of the West in the post-Bretton Woods, post-Cold War era, wrote another similarly-titled article in 2012 that instead asked a new question: “Is the ‘Beijing
Consensus’ now Dominant?”137 Williamson defines this “Beijing Consensus” as one marked by statism, specifically enumerating five policies: incremental reform, innovation and experimentation, export-led growth, state capitalism, and authoritarianism. In his description of ‘Sino-capitalism’, Christopher McNally also highlights the prominence of the role of the state due to China’s status as a late-developing country. While Britain and the United States may have industrialized organically as a result partly of cumulative individual actions in relatively free societies, countries that have developed in the time after these early transformations have often been largely driven with government guidance, which is able to enact changes to their economies that will bring about modernization. In the words of McNally, “Sino-capitalism thus encompasses a new application of state-led, state-coordinated, or state-guided capitalism”.138 However,
137 Williamson, “Is the ‘Beijing Consensus’ Now Dominant?” 138 McNally, “Sino-Capitalism,” 750. 70
similar state action has been utilized in the economic development of other late- developing economies, such as Germany and Japan.139
These characteristics of the contemporary Chinese economy are widely noted and make up a large part of, if not the main element of, the confrontation between China and the United States. In summer 2018 testimony (after the outbreak of the trade war) before the U.S.-China Security Review Commission, an entity created by Congress to monitor
China and China’s actions, Dr. Chad Bown of the Peterson Institute for International
Economics and a former member of the White House Council of Economic Advisors encapsulated this concern in his opening remarks when he said the following in relation to China’s economy:
Let me start off by recognizing that a major factor in the rising tensions that we're currently observing between the United States and China has been the resurgent role of the state in the Chinese economy. Since 2013, the trend away from private sector and toward state management is clear; the policy climate has discernibly shifted toward more state control.140
Specifically, there are two areas we can look at to breakdown U.S. concerns: Joint
Venture requirements and the “Made in China 2025” initiative.141
In seeking to foster economic development and grow their economy, China has prioritized acquisition of new technologies and protection of the state interest. To this end, China utilizes Joint Venture requirements that prohibit foreign investment into certain parts of the economy unless the foreign company operates with a Chinese partner.
139 Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Belknap Press, 1962). 140 Robin Cleveland and Carolyn Bartholomew, “Hearing on U.S. Tools To Address Chinese Market Distortions,” § U.S.-China Economic and Security Review Commission (2018). 141 Other elements of state intervention in the economy are also present and worthwhile, such as the subsidization of specific industries and the prominence of State Owned Enterprises (SOEs). However, elements of both of these mechanisms can be found in the two issues previously mentioned. 71
Through licensing and certification processes, these partnerships frequently mandate that the foreign enterprise doing business in China must provide valuable technology information.142 The U.S. government has characterized this as a violation of American companies’ intellectual property rights, and identifies the issue of Joint Venture requirements as a core element of the technology transfer regime. The U.S. government has characterized this as being even more problematic due to the nature of China’s centralized economy, which frequently has the end result of providing valuable information from foreign companies directly to the Chinese government; China’s three largest major aviation companies, for example, are all state-owned and, in the USTR’s words, “pressure” US companies to form JV’s via the size of the Chinese market.143
While this was a formal process before China’s accession into the WTO, the Office of the
U.S. Trade Representative has identified that the current regime often functions informally, which problematizes research into the issue and the institution of any potential enforcement mechanisms to limit these policies in the future.144 While there are separate issues relating to Chinese cyber theft and espionage, even the USTR discussion of the aviation sector does not indicate that there is strong systematic compulsion to transfer technology, but rather that doing so can indirectly give foreign companies increased leverage and market share within China’s domestic economy.
While the USTR’s findings that led to the unilateral tariffs on China casts an outlook that is overwhelmingly negative, surveys of U.S. businesses operating within
142 United States Trade Representative, “FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974.” P. 19 143 United States Trade Representative, 33. 144 United States Trade Representative, 20–21. 72
China do not paint the same picture. In a 2018 annual survey by the American Chamber of Commerce in China—cited by the USTR in their Sec. 301 report—46% of American companies answered “yes” to the question “Are you confident that the Chinese government is committed to further opening China’s market to foreign investment in the coming three years?”; only 17% said “no”.145 These numbers are improvements upon
2016, where only 34% of respondents answered “yes” and 26% answered “no”.
Similarly, across the Chamber’s “Services”, “Consumer”, and “Industrial & Resources” investment sectors, more companies said that foreign companies were treated equally or better than domestic companies than there were respondents who answered that foreign companies are treated unfairly. Only in the “Technology and other R&D-Intensive
Industries” classification did a majority (59%) state that foreign companies were treated unfairly. Notably, the survey later asks the following question, “How much technology and proprietary knowledge does your company share with your business partners and clients in China compared with those in other overseas jurisdictions outside your home country?” Of the four sectors outlined above, all said that they share less technology and proprietary knowledge with China than they do with other overseas markets, except for the “Consumer” category, which is also the sector where the greatest proportion of companies feel they are treated the same, or better than, domestic Chinese companies.146
The USTR report did not acknowledge or refer to this survey question.
Beyond general market access issues and perceptions of American businesses in
China, the “Made in China 2025” initiative has particularly drawn the ire of policymakers
145 AmCham China and Bain & Company, “2018 China Business Climate Survey Report,” 2018, 8. 146 AmCham China and Bain & Company, 31. 73
and businesspeople in other parts of the world.147 This policy aims to build up China’s high-tech sectors, and is especially concerned with prioritizing the Chinese automotive sector and New Energy Vehicles (NEV’s), which constitute major manufacturing sectors for countries such as the U.S., Germany, and Japan. In fact, Made in China 2025 has been modelled largely off of the state-led industrialization pursued by neighbors such as South
Korea and Japan, and is inspired by Germany’s 2013 “Industry 4.0” national plan to
“drive digital manufacturing forward”.148 Made in China 2025 is driven by top-down state planning, with the Chinese government subsidizing various high-tech sectors and encouraging acquisition or investment in technology companies outside of the U.S. in order to boost the development of domestic Chinese industries and expand their market share within China. While there are various elements of the policy that have drawn criticism from western leaders, the issue of technology transfer obligations hoisted upon automakers seeking to move production to China has been the most notable—this element, it is argued, differentiates Chinese policies from those of other countries. The
U.S. has especially expressed concern that the goal of the policy is to drive out U.S. auto production and market competition from China by strengthening Chinese companies, something highlighted in the USTR report that led to the most major tariffs.149
Ultimately, this could prove a threat to domestic manufacturing and employment in the
United States, where the auto industry is responsible for roughly 3% of GDP and serves
147 James McBride, “Is ‘Made in China 2025’ a Threat to Global Trade?” (Council on Foreign Relations, August 2, 2018), https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade. 148 Institute for Security and Development Policy, “Made in China 2025,” June 2018, 2; James McBride, “Is ‘Made in China 2025’ a Threat to Global Trade?” 149 United States Trade Representative, “FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974,” 29–32. 74
as the country’s greatest export sector.150 The U.S. government has become increasingly conscious of this development, and has considered increasing protectionism for the domestic U.S. auto industry in the form of 25% tariffs on millions of auto imports and vehicle parts.151 The domestic U.S. industry, however, has thus far been opposed to the move and the Motor and Equipment Manufacturers Association, representing auto parts suppliers, has stated that “Not a single company in the domestic auto industry requested this investigation.”152
Analysis
This chapter has outlined the course of the U.S.-China trade conflict that has emerged under the Trump administration. I have aimed to explore three major issue areas in trade that inform the debate over whether or not China is a ‘revisionist’ power: allegations of currency manipulation, tariffs and the trade deficit, and the role of the state in the Chinese economy. Taken in conjunction with the previous chapter’s historical background, we see that China has both a) enormous economic potential (i.e. per capita
GPD and income, currently at low levels, have significant room to continue expanding and in turn grow the overall size of China’s economy), and b) China is operating within a governing set of rules and institutions that have been established by first the British
Empire in the 19th century, and by the United States in the postwar era. On the issues surveyed in this chapter, we have established that, based on the U.S. Treasury
150 American Automotive Policy Council, “State of the U.S. Automotive Industry 2018: Investment, Innovation, Jobs, Exports, And America’s Economic Competitiveness,” August 2018, 5. 151 “U.S. Agency Submits Auto Tariff Probe Report to White House,” Reuters, February 18, 2019, https://www.reuters.com/article/us-usa-trade-autos-idUSKCN1Q706C. 152 “U.S. Agency Submits Auto Tariff Probe Report to White House.” 75
Department’s definition, China is not an active currency manipulator, and actually satisfies fewer of the requirements for such a classification than numerous U.S. allies and other countries. Moreover, the Trump administration’s complaints about the trade deficit belie basic economic wisdom, and China’s tariff barriers are largely in line with what we would expect them to be given their current stage of development. On the issue of the role of the state within the economy, however, China has actively sought to transfer foreign technology into its own domestic economy, and has erected unique barriers to foreign investment and business activity within the country in the form of Joint Venture requirements. Of the three areas assessed here, this is the most ‘revisionist’, but it remains a facet of China’s economic policy that requires more nuanced discussion.
Generally speaking, the postwar system established and upheld by the U.S. and its allies has sought to tie the world closer together and improve economic efficiency via free trade. For the most part, this is a priority that China appears to have agreed with, and today has both joined western international institutions devoted to freer trade (WTO) and has substantially lowered its import barriers. Another crucial element of the postwar system has been a system of floating exchange rates. While these have implications beyond trade, it appears that China has sought to actively fit itself within this apparatus by allowing its currency to float and managing its currency’s fluctuations to attempt to prevent major trade imbalances between countries; while China does not allow market forces alone to influence the RMB’s value, the Chinese government has acted to fulfill the function that floating exchange rates are partially intended to. This is, ironically, adjusting trade imbalances and regulating exports to prevent swelling imbalances on any one side. These findings directly indicate that China has contributed to Kindleberger’s 76
“public goods”, which are necessary for maintaining and open global economy. Through maintaining low tariffs, China has supported the “good” of maintaining an open market for distressed goods, and by managing its currency to attempt to limit trade surpluses,
China has contributed to policing a relatively stable system of exchange rates.
Functionally, China deviates from the norms of the U.S.-order through the imposition of foreign technology transfer requirements and in its handling of foreign investment more generally, where foreign companies are often subject to partnership laws and licensing requirements that are unlike policies of most other countries.
In this area, it may seem that we can easily term China a ‘revisionist’ that is acting against the ‘status quo’ established by the U.S. and its allies, who view technology transfer requirements as market access barriers—barriers to free trade. However, to do so would be to ignore the history of how economic development has occurred over space and time, and ignores China’s own past experiences. China’s state-led development model and a focus on building up domestic industries is reflective of how modernization has occurred in other late-developing countries such as Germany and Japan. Additionally, can we assess policies such as “Made in China 2025” as “revisionist” because of the role of the government in the auto industry? If so, how do we make sense of the U.S. government’s state-led intervention in the economy that salvaged American automakers in the wake of the Great Recession? Furthermore, Joint Ventures have been utilized as a means to not only develop China’s domestic economy, but also as a way to limit overall foreign economic influence within China. From a broader historical view, the West could perhaps be more understanding on this point. A desire to limit foreign influence in
China’s own economy was one of the contributing factors in China’s rejection of British 77
overtures in the early 1800’s; the Qing inability to suppress opium smuggling and limit the economic desires of European empires contributed directly to the “Century of
Humiliation” and the relative decline of China in the 1800’s. Even so, China today has allowed for far more foreign investment than other late-industrializers such as Japan, whose postwar development model limited foreign investment and imported foreign technology to boost domestic industrial growth.153
More than anything else, the Communist Party of China is concerned with its own future survival and the grip it holds on Chinese society. China is well-aware that foreign companies stand to make massive profits through entry into China’s domestic markets, and China simultaneously wants to develop its own strong domestic industries. From the perspective of China, technology transfers and joint ventures are part of a win-win scheme that allows foreign companies to reap great profits by moving their labor out of places such as the United States—where they might have to pay laborers a decent wage and abide by stringent workplace safety and business operation regulations—and into
China. While the Trump administration rightly cites the concerns of many American businesses to justify the unilateral imposition of tariffs upon China, it must be noted that the current situation—that is, American and foreign companies being subject to technology transfer requirements and the U.S. maintaining a substantial trade deficit with
China—has effectively been the case for the past few decades. Why, now, have concerns come to a head? After all, it is clear that China has all but jumped head first into joining
153 Joint Task Force of the National Research Council and the Japan Society, Global Economy, Global Technology, Global Corporations: Reports of a Joint Task Force of the National Research Council and the Japan Society for the Promotion of Science on the Rights and Responsibilities of Multinational Corporations in an Age of Technological Interdependence (Washington D.C.: National Research Council, 1998), https://doi.org/10.17226/6113. 78
the trade regime established by the U.S. and its allies after World War Two, and has emulated the economic development of U.S. allies and supporters of global capitalism such as Japan.
Indeed, as this project has unfolded the Chinese government has been willing to make concessions in many areas of trade, with Premier Li Keqiang stating in March
2019, roughly a year after the trade war began, that “We will further relax controls over market access, shorten the negative list for foreign investment, and permit wholly foreign funded enterprises to operate in more sectors,” in addition to making commitments to significantly reduce or altogether eliminate technology transfer requirements on foreign enterprise.154 In many respects, China appears to be receptive to the complaints of the
United States, which has effectively demanded that China make large structural changes to its entire economic structure and revise various existing laws, because we feel that it is negatively affecting us. And yet, China has neither required Americans to purchase the goods that have led to the U.S. trade deficit, nor has China forced American and foreign companies to come do business in China—businesses have elected to do so, and up until now, appear to have valued the potential for profit over their own intellectual property.
That is not to say that China is fully compliant with free trade principles and other norms and practices of the liberal international economic order. As the Chinese government itself has acknowledged, there are still substantial market access barriers and reforms that need to be made. While it makes sense for the U.S. and its allies to file
154 The State Council, “Speeches - Premier,” The State Council of the People’s Republic of China, March 5, 2019, http://english.gov.cn/premier/speeches/; Keith Bradsher and Chris Buckley, “Facing Slowing Economic Growth, China’s Premier Promises Relief for Business,” The New York Times, March 6, 2019, https://www.nytimes.com/2019/03/04/business/china-premier-li-keqiang-speech.html. 79
complaints against China in the WTO, which China has elected to join and gain the benefits of, unilateral tariffs by the U.S. are at least as revisionist of a practice as Chinese market access barriers if we are to equate the principles of multilateralism and non- discrimination with the value we place on profits to be had from freer trade. These principles, after all, have been core elements of the liberal international economic system that the U.S. has championed throughout the postwar era. Stepping back from the immediate issue of trade, though, these American actions and the current trends towards state control under the presidency of Xi Jinping appear more worrisome in the broader framework of the Thucydides Trap discussed earlier. As China becomes more powerful overall and begins to take an active interest in areas of the world where the U.S. has historically held influence, it is unsurprising that the U.S. now has major grievances with the problems that exist within China’s economy, especially given that technology is at stake and is indeed often vital to national security. A hard line put forward by the Trump administration may be an aberration within long-term American policy, but there appears to be growing bipartisan concern about the rise of China, and Donald Trump is still reflective of the outcomes of America’s democratic processes, thus indicating an
American population increasingly distressed about the position of China’s economy in the world. As tension and fear rises in the U.S. over a growing China, it is only natural that more of China’s actions will be perceived with suspicion and viewed as threats.
However, on actual trade policies, China is not nearly as ‘revisionist’ as popular discourse makes it out to be, and for having been a victim of western foreign policy historically, it seems understandable that China has maintained its tradition of incremental reform in the process of opening up its economy to the west in the 80
contemporary era. From China’s perspective, this view is all the more justified by the actions of the U.S., which have gone against America’s own stated and formal policies through instituting unilateral tariffs, perhaps highlighting that western countries may break their own rules if it is necessary to keep China down. At the same time, China has actively contributed to the practices necessary for maintaining the openness of the global economy as identified through Kindleberger’s “public goods”. Additionally, China’s efforts to regulate foreign investment and make it domestically beneficial must be put in the context of U.S. actions. The U.S. is perhaps now acting similar to China, passing the
Foreign Investment Risk Review Modernization Act of 2018 in order to better regulate investments into the U.S. economy.155 The questionable policy courses of both nations are evidenced by recent discussions on reforming the World Trade Organization— discussions which neither China nor the U.S. have been invited to, but which have instead been led by Canada, the E.U., and Japan.156 While China needs to be held to account if it is indeed pledging to join the liberal economic order and uphold the policy of free trade, the U.S. will only weaken the system if it acts like a hegemonic bully that is free to ignore its own rules and to compel other countries to do as it says.
155 U.S. Department of the Treasury, “The Committee on Foreign Investment in the United States (CFIUS),” 2018, https://home.treasury.gov/policy-issues/international/the-committee-on-foreign- investment-in-the-united-states-cfius. 156 Jack Caporal and Dylan Gerstel, “WTO Reform: The Beginning of the End or the End of the Beginning?,” Center for Strategic & International Studies, October 23, 2018, https://www.csis.org/analysis/wto-reform-beginning-end-or-end-beginning. 81
Chapter IV.
Economic Expansion: The Case of Foreign Aid
“Hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” -PRC President Deng Xiaoping, 1990157
“It is time for us to take center stage in the world and to make a greater contribution to humankind.” -PRC President Xi Jinping, Address to Communist Party Congress 2017158
“The United States is the world’s largest giver in the world, by far, of foreign aid. But few give anything to us…we are only going to give foreign aid to those who respect us and, frankly, are our friends.” -U.S. President Donald Trump, Address to the 73rd U.N. General Assembly, 2018159
As China continues to grow and become an increasingly powerful player on the global stage it has also increased the level of foreign aid that it provides to other states.
This development in China’s foreign policy has been met by intense concerns about the nature and impact of Chinese investment and lending abroad, and what, if any, China’s intentions and goals may be. In particular, Xi Jinping’s flagship Belt and Road Initiative
157 Huang Youyi, “Context, Not History, Matters for Deng’s Famous Phrase - Global Times,” Global Times, June 15, 2011, http://www.globaltimes.cn/content/661734.shtml. 158 Philippe Le Corre, “China: Xi Jinping’s 2021 Countdown,” Carnegie Endowment for International Peace, December 18, 2017, https://carnegieendowment.org/2017/12/18/china-xi-jinping-s-2021- countdown-pub-75100. 159 Office of the Press Secretary, “Remarks by President Trump to the 73rd Session of the United Nations General Assembly” (September 26, 2018), https://ee.usembassy.gov/remarks-president-unga2018/. 82
has drawn the intrigue and skepticism of both policymakers and citizens throughout the world. Launched in 2013, this project has promised to invest over $1 trillion among more than 60 countries that are collectively responsible for over two-thirds of the world’s population.160 The world is watching with a wary eye not least because the funds are coming from China’s authoritarian government, but also because of potential debt issues; over 20 of those same 60-plus countries are already at a high risk of debt distress.161
Figure III. “China’s Belt & Road Initiative”. Retrieved from Geopolitical Intelligence Services.
Mounting concern in the issue area of foreign aid, and specifically anxiety about the rollout of Belt and Road Initiative, is highlighted by the Trump administration’s recent about-face on foreign aid policies. Rather than slashing foreign aid as once
160 Andrew Chatzky and James McBride, “China’s Massive Belt and Road Initiative,” Council on Foreign Relations, February 21, 2019, https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative.; A full list of countries participating in the Belt and Road Initiative can be found at China’s State Information Center: https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076 161 John Hurley, Scott Morris, and Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective” (Center for Global Development, March 2018). 83
promised, the administration has worked quietly through Congress to replace the
Overseas Private Investment Corporation (OPIC) with a new institution known as the
United States International Development Finance Corporation.162 U.S. Senator Ted Yoho, who stated that his “whole impetus for running for Congress in the first place was to get rid of foreign aid,” was further quoted as saying that “I’ve changed, and I think
[Trump’s] changed, and it is all about China.” Notably, and despite the effort being bipartisan and the initial appropriated funds amounting to a sizeable $60 billion—just over double the budget of the former institution—the legislation was attached as a rider to a seemingly unrelated Federal Aviation Administration (FAA) reauthorization bill, and appears to have been celebrated with little fanfare.163 This stands in stark contrast to similar efforts made by the Chinese government, which regularly hosts festival-like conferences and issues proclamations about providing massive amounts of aid to the developing world, lauding everyone involved for promoting “win-win cooperation” and maintaining “a path of peaceful development,” among other claimed principles.164
Assessing the character and distribution of China’s foreign aid activities will prove insightful for this analysis because it is one of the most active and outwardly- focused elements of Chinese foreign policy. Examining foreign aid for revisionist practice is critical because Chinese foreign aid is both large in volume and quite different in its composition and distribution from foreign aid provided by the U.S. and other western countries, thus leading to a fear not only that it may displace western aid regimes
162 Glenn Thrush, “China’s Weight Fuels Reversal By Trump On Foreign Aid,” The New York Times, October 15, 2018, Vol. 168, No. 58, 116 edition, sec. Business. 163 Daniel Bases, “U.S. Development Agency Looks to Boost Funding to $60 Billion,” Reuters, September 25, 2018, https://www.reuters.com/article/us-usa-development-opic-idUSKCN1M501M. 164 U.S. Embassy & Consulates in China, “Remarks by President Trump and President Xi of China in Joint Press Statement” (Beijing, China, November 9, 2017), https://china.usembassy-china.org.cn/selected- quotes-press-statement-president-trump-joint-press-conference-president-xi/. 84
but also concern that Chinese aid will breed instability and be utilized to establish
Chinese spheres of influence throughout the developing world. Chinese aid, some allege, will also contribute to the promotion and survival of authoritarian regimes, as well as encourage the development of larger centralized states through the state capitalist model that China itself has utilized for its development.165 Because of these reasons, the issue of
Chinese foreign aid activity is a critical one to assess—China’s practices and principles may lie outside of the status quo established by the U.S. and its allies, and could be contributing to instability abroad. Additionally, whereas the U.S. and its allies have been willing to utilize military force to promote and uphold their own strategic interests abroad and, in theory, to also maintain international stability, China may see economic aid and development as its only viable route to support its interests overseas and work towards broader foreign policy goals. If China were to attempt unilateral military interventions or deploy Special Forces overseas in the same way that the United States does, it is likely that such moves would spur extreme concern globally.
The issue area of foreign aid is also informative to explore as it is one that allows for a clear juxtaposition of policies between both China and actors such as the United
States or The World Bank. Furthermore, this analytical frame provides for a range of ways in which we can conceptualize “revisionism” and the “status quo”. In investigating the nature and distribution of Chinese aid flows, we will also gain insight into the ways in which Chinese aid does or does not contribute to the international public goods. Foreign aid provides a window into assessing China’s contributions to the provision of countercyclical and long-term lending, as well as determining China’s role towards
165 McNally, “Sino-Capitalism.” 85
serving as a lender of last resort. In addition to these measures of international public goods, which are rooted in the necessity of upholding international stability, we must determine China’s commitments to international stability by assessing if Chinese aid promotes or emboldens authoritarianism, and whether or not it leaves states with unmanageable debts.
In analyzing foreign aid practices, there are a range of elements to consider.
While a chapter or article could easily be written about each of China’s bilateral aid relationships, I will survey the following aspects before assessing what they tell us about
“revisionism” and the “status quo”: aid composition, volume and distribution, sectoral and geographic focus, and the effects of aid.
Composition
In establishing what type of foreign aid China provides, and who it is given to, we must first establish clear definitions of foreign aid. China’s foreign “aid” may be better termed foreign financing, and is primarily comprised of what the Organization for
Economic and Co-operation and Development (OECD) terms “Other official flows”
(OOF), a type of financing which comes from official agencies and institutions but which possesses a grant or concessional element of less than 25%.166 For the most part, Chinese aid comes in the form of low-interest loans for economic development.167 This stands adjacent to “Official Development Assistance” (ODA), which is concessional in character and composed of at least 25% grant moneys, however both fall under the
166 Organization for Economic Co-operation and Development, “DAC Glossary of Key Terms and Concepts,” accessed October 14, 2018, http://www.oecd.org/dac/financing-sustainable- development/development-finance-data/dac-glossary.htm#ODA. 167 Andrew Chatzky and James McBride, “China’s Massive Belt and Road Initiative.” 86
accepted terminology of “Official Development Finance” (ODF). Chinese aid provisions, estimated to be comprised of somewhere between 60-80% OOF for the period covering
2000-2014, have thus fallen under scrutiny due to a general perception that the less- concessional OOF aid is more likely to lead to recipient country indebtedness and could result in significantly increased Chinese political and economic influence in countries that it claims to be assisting.168 OOF also is generally structured in a manner that brings direct future benefits to the donor country in the form of export credits that must be spent on goods from the donor, and is often comprised of government or state-owned industry investments.169
It is, however, essential to note that the World Bank’s aid flows to developing countries are comprised of a similar proportion of OOF for the same time period of 2000-
2014, with 64.3% of overall aid distributed by The World Bank being comprised of
OOF.170 This, however, was not the case for U.S aid, which comes overwhelmingly in the form of ODA.171 The breakdown of official U.S. aid in 2010, for example, was only
1.41% OOF; U.S. aid is primarily composed of development aid and military or security assistance.172 It is also worth considering how informative the categorization of ODA vs.
OOF is if both funds come from official sources, especially given that ODA is placed on a higher pedestal despite only being required to have 25% grants and concessions—does
168 Axel Dreher et al., “Aid, China, and Growth: Evidence from a New Global Development Finance Dataset,” SSRN Electronic Journal, 2017, 14, https://doi.org/10.2139/ssrn.3051044. 169 Wang and French, “China in Global Economic Governance,” 265. 170 Dreher et al., “Aid, China, and Growth,” 14. 171 USAID, “Foreign Aid Explorer,” August 26, 2018, https://explorer.usaid.gov/aid-trends.html. 172 Organisation for Economic Co-operation and Development, “Total Official Flows by Country and Region (ODA+OOF),” OECD.stat, 2019, https://stats.oecd.org/Index.aspx?DataSetCode=REF_TOTALOFFICIAL; James McBride, “How Does the U.S. Spend Its Foreign Aid?,” Council on Foreign Relations, October 1, 2018, https://www.cfr.org/backgrounder/how-does-us-spend-its-foreign-aid. 87
a grant equivalent to 25% of the total aid provision necessarily make the aid substantially different in nature? In researching the role and effects of ODA and OOF in development finance, it appears that there is a lack of substantial literature and analysis into OOF-type aid in general. Additionally, these grants are still typically contingent upon certain policy adjustments and reforms by the recipient country. While concessional aid and grants have been found to bring more development progress than other modes of aid, numerous scholars have rejected the notion that China’s use of OOF makes Chinese aid dangerous or malicious in nature. These positions are best encapsulated by analysis from Canada’s official International Development Research Centre:
…as the consensus on ‘aid’ has shifted within the Organization for Economic Co- operation and Development (OECD) and a growing number of ‘old donors’ have moved towards integrating ‘aid’ with ‘economic’ objectives, China’s aid program is becoming less exceptional.173
Other scholars have also argued that China, still itself a developing country, is still in the process of learning and refining its foreign aid practices, citing the recent inclusion of the
U.N.’s 2030 Sustainable Development Agenda into China’s own development model, which in turn informs foreign aid practices and prescriptions.174 For the sake of clarity and the scope of this analysis, the broader term Official Development Finance (ODF) will be utilized in this discussion, and any mentioning of the term ‘aid’ should be assumed to reflect ODF unless otherwise indicated.
173 Arjan de Haan and Ward Warmerdam, “Chapter 22 - China’s Foreign Aid: Towards a New Normal?,” in Research Handbook Economic Diplomacy (Ontario, Canada: International Development Research Centre, 2017), 2. 174 Matthew P. Goodman, “Parallel Perspectives on the Global Economic Order” (Washington D.C.: Center for Strategic & International Studies, September 2017), 81. 88
Volume & Distribution
Difficulties in parsing out what should or should not be considered foreign aid have contributed directly to difficulties in measuring the actual volume of Chinese foreign aid. Based on white papers from the Chinese government, one might believe that
China had only distributed $39 billion in overall ODF over the course of the PRC government’s entire existence from 1949-2009, just under 50% of which they say was provided to African states.175 Similar numbers are provided by the China Africa Research
Initiative at Johns Hopkins University, which utilizes Chinese government documents for the aid numbers it keeps track of; these show Chinese aid to all recipient countries increasing from around $500 million per year in the early 2000’s to only $3 billion per year in 2015.176 Given that the United States itself distributed over $50 billion in foreign aid for FY 2009 alone (and, it is worth noting, distributed $67 billion in FY 1949 alone), more than $10 billion more than what the PRC claims to have distributed in the 60 years up to that point, any potentially “revisionist” practices in Chinese foreign aid volumes would be negligible and presumably could not be sufficiently disruptive to warrant a legitimate challenge to the “status quo”.177
Chinese ODF, however, has been notoriously difficult to measure. This statement is supported by the work of numerous scholars who have similarly struggled to paint a completely accurate picture of Chinese foreign aid, especially in terms of the specific
175 Information Office of the State Council The People’s Republic of China, “China’s Foreign Aid,” White Paper (Beijing, China, April 2011), http://english.gov.cn/archive/white_paper/2014/09/09/content_281474986284620.htm. 176 “Data: Chinese Foreign Aid to Africa,” China Africa Research Initiative, accessed November 9, 2018, http://www.sais-cari.org/data-chinese-foreign-aid-to-africa/. The China Africa Research Initiative does not clarify the year for these dollar values or if they are inflation-adjusted, only stating that “All figures are reported in millions of US$ using annual exchange rates.” 177 USAID, “Foreign Aid Explorer.” Values expressed in real, inflation-adjusted dollars. 89
volumes provided.178 While the PRC government puts out White Papers detailing certain policies or stances, most information is restricted and kept fairly secret. This has prompted innovations in analytical methods, with the Aid Data research group currently at the forefront of research into Chinese ODF; AidData’s research utilizes local recipient- country and Chinese news articles, government statements of recipient countries and the
PRC, satellite imaging, light pollution, and other data to provide a more accurate picture of Chinese aid. This dataset also provides geotags and timeframes for every individual project assessed. This group, contrary to what the PRC claims, has concluded that China provided more than $350 billion USD to over 140 countries during the years 2000-2014;
U.S. aid was just under $400 billion USD over the same time period.179
Figure IV. Total Official Foreign Aid Commitments, U.S. and China. Retrieved from AidData.
The lack of comprehensive public data on Chinese foreign aid prior to the research of the
AidData team is evidenced by news headlines that ran after their first dataset publication:
178 Wang and French, “China in Global Economic Governance,” 265; Axel Dreher, Andreas Fuchs, Bradley Parks, Austin M. Strange, Michael J. Tierney, “AidData | Aid, China, and Growth: Evidence from a New Global Development Finance Dataset,” Working Paper (College of William & Mary, AidData, October 9, 2017), http://aiddata.org/publications/aid-china-and-growth-evidence-from-a-new-global-development- finance-dataset. 179 Dreher et al., “Aid, China, and Growth.” 90
the BBC read “China's secret aid empire uncovered” while CNN stated that “Report exposes size of China's secretive aid budget”.180 While other, typically lower measurements of Chinese foreign aid volumes are available, AidData’s methodological approach is a unique advancement that is likely painting a more accurate picture of
Chinese foreign aid volumes than we have previously held. Additionally, AidData’s findings are still largely in line with official Chinese statements, as AidData’s research on
Chinese ODA—the more concessional, aid-like type of finance—amounts to roughly the same numbers given by China and those supported by the China Africa Research
Initiative.181 Furthermore, the China Africa Research Initiative reference earlier separates out ODA from “Chinese loans to Africa”, which the project states amounted to $143 billion over the time period of 2000 to 2017.182 As AidData includes loans dispersed through OOF, these numbers suggest that various researchers have accounted for Chinese foreign aid and investment activity in divergent ways, but that the numbers are substantial and in the hundreds of billions of dollars.
The higher number of overall ODF from AidData is also not wholly unsupported; the RAND Corporation, a think tank funded in part by the U.S Department of Defense, has measured pledged aid commitments at “$124.8 billion in 2009, $168.6 billion in
2010, and $189.3 billion in 2011 — all far above the $1.7 billion [China] pledged in
180 Celia Hatton, “China’s Secret Aid Empire Uncovered,” October 11, 2017, https://www.bbc.com/news/world-asia-china-41564841; James Griffiths CNN, “Report Exposes Size of China’s Secretive Aid Budget,” CNN, accessed November 6, 2018, https://www.cnn.com/2017/10/11/asia/china-overseas-aid/index.html. 181 Axel Dreher, Andreas Fuchs, Bradley Parks, Austin M. Strange, Michael J. Tierney, “AidData | Aid, China, and Growth,” 9. 182 “Data: Chinese Loans and Aid to Africa,” China Africa Research Initiative, accessed April 14, 2019, http://www.sais-cari.org/data-chinese-loans-and-aid-to-africa. 91
2001.”183 In sum, the RAND estimations account for over $700 billion of total pledged initiatives in 2011, the final year of the report’s data range and before the Belt and Road
Initiative had even kicked off. A Congressional Research Service report from 2009 also lends credence to the findings of AidData, with the summary stating that “PRC foreign assistance and government-supported economic projects in Africa, Latin America, and
Southeast Asia grew from less than $1 billion in 2002 to $27.5 billion in 2006 and $25 billion in 2007.”184 These quantities are slightly higher than what AidData provides us, although it should be noted that this source is also from the U.S. government.
In addition to the aid volumes themselves, announced goals and plans should similarly be taken into consideration. While China may have spent roughly $350 billion on foreign aid over the past 10 to 15 years, the “One Belt, One Road” initiative promoted by President Xi has been promised to leverage over $1 trillion of development finance over coming years.185 The elements of Chinese finance and investment activity are factored in to this unprecedented $1 trillion remains unclear due to the opacity of the
Chinese government, yet despite this it would seem that the $1 trillion dollar number is actually on the lower end of projections for how much the entire project might eventually spend.186 The World Bank has assessed that the initiative has the capacity to “transform the economic environment in which economies in the region operate,” as the combination of the Silk Road Economic Belt and the New Maritime Silk Road seek to shape the future
183 Charles Wolf, Xiao Wang, and Eric Warner, “China’s Foreign Aid and Government-Sponsored Investment Activities,” Product Page, 2013, https://www.rand.org/pubs/research_reports/RR118.html. 184 Thomas Lum et al., “China’s Foreign Aid Activities in Africa, Latina America, and Southeast Asia” (Congressional Research Service, February 25, 2009). 2. 185 Jane Perlez and Yufan Huang, “Behind China’s $1 Trillion Plan to Shake Up the Economic Order,” The New York Times, May 13, 2017, https://www.nytimes.com/2017/05/13/business/china-railway-one-belt- one-road-1-trillion-plan.html. 186 “How Big Is China’s Belt and Road? | Center for Strategic and International Studies,” accessed October 16, 2018, https://www.csis.org/analysis/how-big-chinas-belt-and-road. 92
of economic interactions throughout Eurasia.187 While China has stated the project is open to all interested partners, current maps and established corridors clearly demonstrate that China is focusing on developing its own backyard and building up regional trade partners and corridors that can reduce China’s own transaction costs while at the same time creating and penetrating new markets. If the total investment flows of the initiative do end up totaling even close to $1 trillion, China may substantially alter trade patterns within the global economy, and if it contributes to a new era of economic development, it may accelerate a centuries-long process of reorienting the global economy around China itself and Asia more generally, the continent that has been host to a plurality, if not majority, of human population and economic production for much of history.188
Sectoral & Geographic focus
Chinese foreign aid practices are further notable due to its focus on geographic areas and economic sectors that are not typically addressed by U.S. or World Bank aid programs. An exemplary case of this is China’s first major foreign aid initiative, the
TAZARA railway project. After Tanzania had project proposals for an almost 2,000 kilometer railway connecting Zambian copper mines to a Tanzanian port get rejected by the U.S., Soviet Union, U.K., Japan, and other potential creditors, the Mao-era PRC opted to fund the project. 189 Where other creditors had described the initiative as “unfeasible” and unlikely to bring cost effective growth due to the difficulty of terrain and the sparsely populated nature of the region it ran through, China disagreed and deployed workers to
187 Caroline Freund and Michele Ruta, “Belt and Road Initiative,” World Bank, March 29, 2018, http://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative. 188 Frank, ReOrient. 189 Richard Bluhm et al., “Connective Financing: Chinese Infrastructure Projects and the Diffusion of Economic Activity in Developing Countries” (AIDDATA, September 2018), 3. 93
complete the project in under three years. Assessments of the project have indeed proved that the railway infrastructure brought significant regional development over time, leading to a corridor of economic activity and the creation of numerous villages and agricultural areas that were previously unable to sustain themselves without the
“connective infrastructure” provided by Chinese ODF. Similar findings have been established for a range of Chinese infrastructure investments, which often reach further inland and emphasize corridors connecting natural resources to port cities; this stands in contrast to western development practices, which usually focus on building up cities or connecting them overland to one another, rather than to a major port.190
This same research suggests that it may be the case that China’s own development experience, which has created enduring inequality between western provinces and those on the first-reforming coast, has equipped them with the knowledge needed to help other developing states overcome their own obstacles better than an advanced industrial country may be able to do. China has continued to provide ODF to these underserved sectors and regions in the 21st century while western aid primarily prioritizes humanitarian causes such as health and education services in better-developed regions of recipient countries.191 While this aid is still effective at bringing economic growth, it is simultaneously true that infrastructure projects in, for example, the African continent, are both a) what recipient country policymakers have asked for the most from purveyors of foreign aid, and b) are substantially more high-profile and visible to African publics, and thus tend to better promote Chinese influence and China’s presence on the continent.192
190 Bluhm et al., 12–14. 191 Larry Hanauer and Lyle J. Morris, “Chapter 7: Implications for U.S. Interests,” in Chinese Engagement in Africa: Drivers, Reactions, and Implications for U.S. Policy (RAND Corporation, 2014). 192 Larry Hanauer and Lyle J. Morris, 108–9. 94
Evidence of this continued infrastructure focus can be found in a wide range of countries. Standing in excess of $60 billion, the China-Pakistan Economic Corridor
(CPEC) has been a central element of China’s Belt and Road Initiative.193 While ostensibly foreign aid, the project doubles as investments for China; the infrastructure network being created will create new paths by which goods can reach China, which could be strategically important if future conflict occurs in the Pacific region.
Specifically, China is providing Pakistan with a network of thousands of miles of highways and railways stretching from the Kashmir region—adjacent to China’s Xinjiang province—all the way down to Pakistan’s coastal regions. China has also built up energy infrastructure along the path, creating hydropower facilities, wind farms, and coal power plants.194 This entire corridor leads down to Gwadar, where China has invested in the construction of a new deep-water port, and is set to establish their second overseas military base.195 As part of China’s cooperative foreign aid strategy, these plans are operating alongside Pakistan’s own efforts to bolster its emerging economic strength.
Nikkei has assessed the following:
The government of Pakistan plans to transform Gwadar into one of the world's largest port cities by 2055, housing steel mills, terminals for liquefied natural gas, oil refineries and other facilities. Under the plan, trade and industrial zones will be concentrated on the city's east side, while the western side of the peninsula will serve as residential and tourism areas.196
193 Center for Strategic and International Studies, “China-Pakistan Economic Corridor (CPEC),” Reconnecting Asia | CSIS, Updated 2019, https://reconnectingasia.csis.org/database/initiatives/china- pakistan-economic-corridor/fada2df3-183b-44cb-9a48-9124045ed840/. 194 Center for Strategic and International Studies. 195 “First Djibouti ... Now Pakistan Tipped to Have Chinese Naval Base,” South China Morning Post, January 5, 2018, https://www.scmp.com/news/china/diplomacy-defence/article/2127040/first-djibouti-now- pakistan-port-earmarked-chinese. 196 Go Yamada and Stefania Palma, “Is China’s Belt and Road Working? A Progress Report from Eight Countries,” Nikkei Asian Review, March 28, 2018, https://asia.nikkei.com/Features/Cover-story/Is-China- s-Belt-and-Road-working-A-progress-report-from-eight-countries. 95
Figure V. “China-Pakistan Economic Corridor (CPEC)”. Retrieved from Nikkei Asian Review, Center for Strategic and International Studies Reconnecting Asia Project.
Could these efforts be destabilizing, contribute to corruption, or result in high levels of debt? It is entirely possible, however, there is presently limited evidence to support such claims. Additionally, would this make China a ‘revisionist’? As will be explored later in the chapter, Pakistan has struggled with IMF debt burdens for decades. Additionally, we 96
can consider what U.S. aid to Pakistan looks like. The two largest areas of U.S. aid to
Pakistan are military assistance, and funding for Pakistan’s government.197 In the debate about ‘revisionism’, should we consider guns or highways to be more dangerous?
Chinese aid could create the infrastructure necessary for international development, whereas U.S. aid may contribute directly to sustained violence and government corruption. Effects of Chinese Foreign Aid
In assessing the effects of Chinese foreign aid, it remains largely unclear if
Chinese funding will lead to long term indebtedness, cause economic slowdowns, or simply prove less effective than western-style aid. AidData’s attempts at measuring these affects have instead concluded that Chinese development contributes to growth at roughly similar rates to aid from the U.S., as well as aid from OECD Development
Assistance Committee members as a whole. 198 The presence of Chinese aid has also not been found to lead to a reduction in western aid in terms of either volume or effectiveness. The Economist, which has characterized AidData’s research as “the most detailed study so far of Chinese aid”, has further noted “Because China is regarded as a rogue it is not roped into the co-ordination efforts among Western donors. That should change.”199 While some have hypothesized that China’s focus on infrastructure investment will lead to greater returns on investment and quicker development in recipient countries, there is currently no clear consensus on this point.
197 USAID, “Foreign Aid Explorer.” 198 Dreher et al., “Aid, China, and Growth,” 26–27. 199 “Despite Its Reputation, Chinese Aid Is Quite Effective,” The Economist, October 12, 2017, https://www.economist.com/china/2017/10/12/despite-its-reputation-chinese-aid-is-quite-effective. 97
Additionally, it remains unclear if China explicitly provides aid and assistance for malicious political reasons, such as propping up dictatorial allies or supporting authoritarian governments with natural resource wealth. If it is difficult to accurately measure Chinese aid levels, as already established, it is even more challenging to attempt to make the claim that Chinese foreign aid is then responsible for sustained authoritarianism or corruption in a given recipient country. It is true that China gives money and aid to authoritarian or human-rights-abusing governments, even if we do not know whether or not that aid emboldens or solidifies their rule.200 According to David
Dollar of the Brookings Institution, Chinese aid has no correlation with a country’s score on World Governance Indicators—while this does not refute the potential that China gives to more authoritarian governments, it does highlight that China is giving to strong and weak states alike and is not, at least at first glance, overtly targeting weaker or poorer states.201 Dollar notes that Chinese foreign aid distributions are largely “demand-driven” and usually go to states that have asked for aid or demonstrated significant need.
Much of the concern over China potentially supporting dictators or encouraging bad economic practice has come from the fact that Chinese aid operates without strings attached. In fact, if China is to be believed, any sort of conditionality for aid would come into conflict with one of the “Five Principles of Peaceful Coexistence” that govern
Chinese foreign policy, which pledge China to a policy of “non-interference in each other's internal affairs”, among other claims.202 This stands in opposition to western aid
200 Minxin Pei, “China’s Dictator Complex,” The Diplomat, September 27, 2011, https://thediplomat.com/2011/09/chinas-dictator-complex/. 201 David Dollar, “Where Is China’s Development Finance Really Going?,” Brookings (blog), October 12, 2017, https://www.brookings.edu/blog/order-from-chaos/2017/10/12/where-is-chinas-development- finance-really-going/. 202 “The Five Principles of Peaceful Coexistence --The Time-Tested Guideline of China’s Policy with Neighbours” (Karachi: Chinese Consulate General), accessed October 23, 2018, 98
policies, which are typically conditional to specific economic reforms. The IMF, for example, will provide lending conditional to reforms such as “balancing the budget, removing state subsidies, privatizing state enterprises, liberalizing trade and currency policy, and removing barriers to foreign investment and capital flows.”203 In numerous cases, IMF policies have led to economic contraction and social hardship, and exacerbated debts; in 2016 senior IMF economists wrote that “Greece’s debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief.”204 These debts, however, have been partly resultant from IMF and
European lending to Greece, indicating that Eurozone countries and U.S.-backed institutions have also created debt problems through aid—these debts will be harder to pay off due to the contractions in the Greek economy that have also emanated partly from
IMF and Eurozone policies.
It is true that concerns have begun to emerge in a variety of countries with regards to Chinese aid—given the relatively early stages of the Belt and Road Initiative, more cases could surely emerge in coming years. Defaulting on Chinese debt has led to at least one country, Sri Lanka, to turn over ownership of a port to a Chinese state-owned enterprise in return for debt forgiveness.205 Notably, this deal was for a 99-year lease of
https://www.fmprc.gov.cn/mfa_eng/wjb_663304/zwjg_665342/zwbd_665378/t1179045.shtml. The other four claimed principles are the following: mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other's internal affairs, equality and mutual benefit. 203 Jonathan Masters and Andrew Chatzky, “The IMF: The World’s Controversial Financial Firefighter,” Council on Foreign Relations, November 1, 2018, https://www.cfr.org/backgrounder/imf-worlds- controversial-financial-firefighter. 204 Maurice Obstfeld and Poul M. Thomsen, “The IMF Is Not Asking Greece for More Austerity,” IMF Blog (blog), December 12, 2016, https://blogs.imf.org/2016/12/12/the-imf-is-not-asking-greece-for-more- austerity/. 205 “Chinese Firm Pays $584 Million in Sri Lanka Port Debt-to-Equity Deal,” Reuters, June 20, 2018, https://www.reuters.com/article/us-sri-lanka-china-ports/chinese-firm-pays-584-million-in-sri-lanka-port- debt-to-equity-deal-idUSKBN1JG2Z6. 99
the port, not unlike the 99-year lease the British had on Hong Kong until 1997.
Additionally, Nikkei Asian Review has assessed that Chinese BRI projects in Indonesia and Laos have been delayed in getting off the ground, and have drawn criticism locally within recipient countries due to the employment of significant amounts of Chinese workers.206
Pakistan has recently become one of the most contentious elements of the Belt and Road due to sustained Pakistani debt issues that have recently resulted in a Balance of Payments crisis in the autumn of 2018.207 Pakistan cut $2 billion of Chinese investment earlier in the year and rejected future projects, however newly elected Prime
Minister Imran Khan has had to petition China, Saudi Arabia, and the IMF for funds to stave off potential crisis. China, initially reluctant to provide more loans or debt relief, has been put into a contentious position: the IMF has indicated a willingness to assist
Pakistan, but only if they disclose the entirety of their financial accounts, including all records related to Chinese investment projects.208 While Pakistan’s financial distress may have been directly related to Chinese programs, it should be noted that this would be the
13th IMF bailout of the country since 1988. A short list of other countries have also renegotiated or cancelled BRI projects, often citing debt fears. However, the Financial
Times has directly addressed the case of Pakistan and others by noting that changes within electoral politics were largely the catalyst for a change in Belt and Road policy in
Pakistan, Myanmar, and Malaysia.209
206 Go Yamada and Stefania Palma, “Is China’s Belt and Road Working?” 207 Ben Blanchard, “China Promises Pakistan Support as Khan Tells of ‘Very Difficult’ Economy,” Reuters, November 2, 2018, https://www.reuters.com/article/us-china-pakistan-idUSKCN1N70VQ. 208 David Lawder, “IMF to Seek ‘absolute Transparency’ of Pakistan’s Debts in Bailout Talks,” Reuters, October 11, 2018, https://www.reuters.com/article/us-imf-worldbank-pakistan-talks-idUSKCN1ML0W1. 209 Raffaello Pantucci, “China’s Belt and Road Hits Problems but Is Still Popular,” Financial Times, November 15, 2018, https://www.ft.com/content/814b39ea-e8cd-11e8-a34c-663b3f553b35. 100
Additionally, there is cause for concern about China’s potential military expansion, which may be further accelerated out of a desire to preserve and uphold their investments abroad. China now contributes more than 10% of peacekeeping funds for the
U.N. along with thousands of troops, many of whom have been stationed in South Sudan;
China has had long ties with Sudan and the development of their oil industry, and has more recently floated the idea of partnering to construct a nuclear power plant within the country.210 China also adapted its naval policy in recent years to allow for navigation outside of Chinese territorial waters, a major policy change that even saw a brief Chinese naval deployment just off the coast of Alaska during President Barack Obama’s 2015 visit to the state.211 This policy change has happened as China has begun to expand its global reach through BRI, leading to Chinese anti-piracy missions and the establishment of their first overseas military base at Djibouti, with a second base being negotiated for construction near the Chinese port at Gwadar, Pakistan.212 While Chinese aid has not panned out as planned for a small group of the 60+ Belt and Road countries, there are clearly some economic distresses, as well as related military expansions that recipients of
Chinese aid should consider before accepting.
Analysis
It is evident both that Chinese foreign aid diverges in character from that of aid currently provided by the U.S. and most established international institutions, and that
Chinese foreign aid volumes are significant enough to make China the second-largest
210 “Spotlight: Sudan Expects to Play Bigger Role in Belt and Road Initiative" Xinhua | English.News.Cn, accessed October 28, 2018, http://www.xinhuanet.com/english/2018-08/28/c_137424486.htm. 211 Helene Cooper, “In a First, Chinese Navy Sails Off Alaska,” The New York Times, January 19, 2018, sec. World, https://www.nytimes.com/2015/09/03/world/asia/in-a-first-chinese-navy-sails-off-alaska.html. 212 “First Djibouti ... Now Pakistan Tipped to Have Chinese Naval Base.” 101
donor in the international community, after the United States. Chinese aid is primarily
OOF rather than more grant-based ODA, and Chinese aid is generally targeted at infrastructure and more rural areas rather than on humanitarian efforts and cities, as much other aid does. Additionally, Chinese aid is generally given without conditionality, as opposed to American aid practices or the IMF’s structural adjustment programs that require recipient country reforms generally in line with American and IMF policy prescriptions.213 These factors, along with the aforementioned differences in Chinese aid sectors, has led many to voice caution out of concern for what China’s other interests may be, but also out of anxiety that Chinese aid may promote bad economics and even prop up dictators and corrupt governments.214
Yet it is also true that the United States and its allies provide aid to deeply corrupt or authoritarian countries as well; Pakistan has historically been one of the largest recipients of U.S. foreign aid despite its corrupt government and the U.S. itself accusing it of promoting and funding the Taliban.215 Other major U.S. aid recipients include dictatorial regimes such as Egypt and the Philippines, where President Duterte has carried out thousands of extrajudicial killings; after meeting, President Trump has suggested that the U.S. should consider adopting capital punishment for drug crimes.216 Although we cannot conclusively say whether or not Chinese foreign aid promotes dictatorship, we can say that it would be difficult to justify that quality at which we might say Chinese aid is
213 Michael P. Dooley and Jeffrey A. Frankel, Managing Currency Crises in Emerging Markets (University of Chicago Press, 2003). 214 Jane Perlez and Yufan Huang, “Behind China’s $1 Trillion Plan to Shake Up the Economic Order.” 215 “U.S. Cuts $300 Million In Aid To Pakistan; Says It’s Failing To Fight Militants,” NPR.org, September 2, 2018, https://www.npr.org/2018/09/02/644117490/u-s-cuts-300-million-in-aid-to-pakistan-says-its- failing-to-fight-militants. 216 Natasha Bach, “Trump’s Reported Stance on Executing Drug Dealers Is His Latest Nod to the Philippines’ Authoritarian Leader,” Fortune, February 26, 2018, http://fortune.com/2018/02/26/trump- dealth-penalty-capital-punishment-drug-dealers-duterte/. 102
“revisionist”, as this practice would not be unique to China and is partially practiced by the U.S. and the institutions it promotes.217
Even so, it is also true that the United States and western institutions have extracted concessions and forced policy changes through foreign investments, albeit generally in the form of commercial bank finance and economic policy rather than foreign aid.218 Some have argued that the U.S.’s essentially unilateral economic actions created debt crises in Latin American states through external shocks and interest rate hikes; its own neighbor Mexico was forced to default on American loans and an array of
Latin states were all but forced to adopt austerity measures and other contractionary economic policies that produced economic and social hardship.219 These, and other cases, of western policy choices must be recalled when considering if it is China that is the
“revisionist” one.
Chinese aid, also, does not deserve characterization as “revisionist” based upon its differing content and distribution alone. If the Chinese preference for OOF rather than
ODA, and favoring infrastructure development rather than prioritizing humanitarian aid, are perceived as “revisionist” in nature, this is misguided. The OOF-nature of the aid has not limited it from promoting development, is reflective of the aid distribution of the
World Bank, and may even reflect innovation in what makes for “good” or effective foreign aid. Additionally, it has previously been established that infrastructure development is one of the major deficits facing developing countries and that many states have explicitly asked for this from their donors. To characterize these differences as
217 USAID, “Foreign Aid Explorer.” 218 Manuel Pastor, “Latin America, the Debt Crisis, and the International Monetary Fund,” Latin American Perspectives 16, no. 1 (1989): 79–110. 219 Pastor. 103
being revisionist practices that fundamentally challenge the status quo is to perceive anything that is different from our own policy preferences to be hostile. Is it possible that
Chinese aid policy is bad economics and could result in massive debts or other economic issues? Yes. Yet it is also true that western development, and developmental models, have not brought an end to poverty or otherwise even come close to elevating most developing countries to the status of the advanced industrial economies in the past 70 years of the postwar era. They have failed to close the gap between western countries and the developing world. While there are obvious dangers to waiting for a $1 trillion investment scheme to come to an end before significantly challenging or criticizing it, there should perhaps be a little more optimism than fear associated with a development scheme that is both thinking outside the box and is being funded by someone other than the U.S. or European publics. Moreover, the diverging sectoral and geographic focuses of
Chinese and western aid may actually serve to complement each other—perhaps western policymakers might seek to complement China’s focus on building up physical capital by continuing to promote foreign aid centered on humanitarian relief and building human capital, and could target it into areas where China has built up infrastructure.
In a final assessment, Chinese foreign aid is not “revisionist” against the “status quo” as it is defined by American and western policymakers. While Chinese aid differs in its composition and disbursement, it has not inherently displaced or challenged western aid. While some allege that China’s lack of conditionality is a guise for promoting authoritarianism abroad, there are also those who credibly argue that the presence of conditionality in western aid has acted as a tool to promote western ideologies and has actually limited aids’ effectiveness. Moreover western aid-givers provide funds to 104
authoritarian states as well. While China is by no means a promoter of good human rights or democracy, the U.S. similarly has a mixed track record abroad, especially when the outcomes of armed U.S. interventions are considered. A recent about face on foreign aid funding by the Trump administration may be reflective of a shift towards a United States that produces policies based primarily on short-term self-interest rather than on any supposed deeply-held principles. If anything seems true, it is that China and the U.S. both use foreign aid as a soft-power tool to promote their own individual interests—sometimes recipients and developing nations end up benefitting, sometimes they do not. In promoting their own interests, China and the U.S. both have a different model of foreign aid policies that is largely based upon on their own economic development experience; it is this that leads the U.S. to promote neoliberalism and privatization while the Chinese government simultaneously endorses large state-funded projects.
Beyond a juxtaposition with American aid policies or those of western institutions, we must consider what role China is playing in the provision of the international public goods, and the upholding of international stability generally. As discussed above, Chinese aid does not have to be inherently viewed as a corrupting or destabilizing force, in fact there is little compelling evidence that it fits into these descriptions. Furthermore, Chinese aid appears to have directly contributed to the provision of one of the most essential international public goods, that of countercyclical and long-term lending. As can be seen on the chart from AidData’s research on Chinese foreign aid distributions, China gave only $10 billion in foreign aid in 2008, but provided nearly $70 billion worth of aid in 2009 as the world went into deep recession. This is a clear case of providing countercyclical lending flows. Moreover, if China maintains a 105
commitment to foreign aid, it would also then be a primary provider of long-term lending. In becoming a countercyclical lender, China also has begun to up its role as a lender of last resort, as confirmed by Norloff and Reich’s analysis of China and the
United States’ respective openness to lending in the wake of the 2008 crisis.220
Although China appears to be contributing to the provision of Kindleberger’s international public goods and is thus acting in line with the status quo of taking on responsibilities expected of a global leader, China may also be continuing to promote economic instability. While limited, research does exist that highlights higher levels of local corruption in areas in which the Chinese government has distributed aid in
Africa.221 In addition to this, the case of South Sudan provides at least one example in which Chinese soldiers, albeit in the form of U.N. peacekeepers, have been deployed to a foreign country to protect Chinese investments overseas in a country racked by civil war.
While China may be overtly contributing to security stability through providing peacekeeping in this scenario, it is unlikely such a commitment would be made if China did not have strong interests in the country of Sudan. Further investments and aid distributions into unstable or authoritarian countries may eventually force China’s hand to become more involved militarily beyond its own borders in order to preserve China’s overseas investments, something that would be hard to pitch as “non-interference” or
“peaceful development”, to quote President Xi.222 While military adventurism can lead to
220 Norrlof and Reich, “American and Chinese Leadership during the Global Financial Crisis.” 221 Ann-Sofie Isaksson and Andreas Kotsadam, “Chinese Aid and Local Corruption,” Working Papers in Economics (University of Gothenburg, Department of Economics, October 2016), https://ideas.repec.org/p/hhs/gunwpe/0667.html. 222 “China’s Foreign Policy Experiment in South Sudan Raises Questions,” South China Morning Post, October 2, 2017, https://www.scmp.com/comment/insight-opinion/article/2113416/intervene-or-not-chinas- foreign-policy-experiment-south; “The Five Principles of Peaceful Coexistence --The Time-Tested Guideline of China’s Policy with Neighbours.” 106
stability or instability, varied perspectives provide various answers—did not the rising powers of the British Empire and the United States also engage in global military expansion to protect investments? China’s actions, while potentially contributing to international instability, may not be out of the ordinary in terms of what we should logically expect from a rising power, and do not differ from practices pursued by the U.S. and western nations. Additionally, Chinese overseas military activity up to this point in time is remarkably limited, and engaging in more anti-piracy efforts and naval patrols would contribute to policies that have been critical to maintaining an open global economy.
Although a definitive measure of the overall volume of Chinese aid appears elusive at present, the sources that are available indicate that China is playing a growing, substantial role as an international aid donor. Furthermore, continued growth in the
Chinese economy will presumably equate to continued spending on foreign aid and sustained investment abroad. Based on some of the most recent, detailed analyses available, it is likely that Chinese aid-giving now rivals that of the United States. This may indicate that China has the potential power to fully upend current regimes governing foreign aid and negatively impact western policy priorities. However, most claims to date regarding systemic issues within the entirety of Chinese aid policy seem to be exaggerated media reports rather than well-documented findings. However, because
China’s government activities are rather opaque and its role as a major purveyor of aid has only emerged within the past decade or so, it remains difficult to track the true structure and overall impact of Chinese projects, thus contributing to fear and suspicion among more traditional western donors. Chinese aid could surely become more 107
transparent if it wishes to alleviate concerns regarding the Belt and Road Initiative and the country’s growing role in the African continent.
Does this lack of opacity in turn reflect revisionist behavior? While Chinese aid could be primarily problematic in nature, why should China be compelled to disclose the details of all of its sovereign actions to its largest rivals? While the United States has been overwhelmingly suspicious of the Chinese Belt and Road Initiative, perhaps cooperation in the area of foreign aid could lend the U.S. greater knowledge of Chinese practices and a voice in shaping them. In 2019, both Italy and Portugal have signed on to the Belt and
Road, perhaps indicating a coming change of position among western countries.223 If we consider the ‘status quo’ to be the preservation of international stability, rather than the promotion of and adherence to U.S. policy priorities, one can reason that cooperation and engagement, rather than rivalry, should be pursued. Considering that the goal of foreign assistance is first and foremost considered to be bringing about the end of poverty, disease, and violence, even rhetorical cooperation between the rival powers of America and China could help to bring about progress on these issues and uplift the developing world. In much of the debate, rhetoric and perception drive the tensions that have contributed to deteriorations of relations between the two powers.
In considering China’s growing presence, the background of the Thucydides Trap and potential for war between the two great powers should also be considered: China is a major player in the ‘game’ of foreign aid, and likely one that is here to stay. If China continued its economic growth and opted to not spend any of its resources on foreign aid, this could plausibly be construed as being a ‘free rider’, and would likely be similarly
223 State Information Center, “Profiles -Belt and Road Portal,” Belt and Road Portal, Updated 2019, https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076. 108
condemned by the same people and governments that are concerned that China is currently contributing to the developing world. This has contributed to China’s growing influence and recognition in the world, and contributed greater funds to fulfilling the infrastructure and other needs of developing areas of the world—nothing about either is inherently revisionist. Even if one considers the Chinese position as revisionist, what policy action is taken from there? Should the U.S. deny aid to recipients of Chinese aid, or perhaps sanction them? Should the U.S. punish China itself directly, due to China’s contribution to assisting developing areas of the world with their financial needs?
Currently, the response seems to be largely rhetorical, with continued cuts to the U.S.
State Department under consideration and President Trump regularly calling into question the role of the U.S. in the world. More than anything else, the issues require greater attention, more nuanced perspectives, and tangible policy proposals for a path forward.
109
Chapter V.
Conclusion
“I shall be content if [The History of the Peloponnesian War] is judged useful by those who will want to have a clear understanding of what happened—and, such is the human condition, will happen again at some time in the same or similar pattern. It was composed as a permanent legacy, not a showpiece for a single hearing.” -Thucydides, History of the Peloponnesian War224
“In the face of massive, existential threats to people and planet -- but equally at a time of compelling opportunities for shared prosperity -- there is no way forward but collective, common-sense action for the common good. This is how we can rebuild trust.” -António Guterres, Address to the 73rd U.N. General Assembly, 2018225
This thesis has aimed to contribute new perspectives and answers to one of the most significant questions in the contemporary field of international relations: is China a revisionist power that seeks to overturn the status quo? With a population of over a billion more people than the United States, a military budget second only to the United
States, and an economy almost surely set to become the largest in the world within a few decades, the relationship between China and the United States will significantly shape the course of global affairs for many years to come.226 I have attempted to move from a
1 Thucydides, translated by Martin Hammond, The Peloponnesian War, Oxford World’s Classics (Oxford University Press, 2009). 225 Antonio Guterres, “Address to the General Assembly.” 226 World Bank Group, “Population, Total | Data,” accessed March 24, 2019, https://data.worldbank.org/indicator/SP.POP.TOTL?locations=IN&view=map&year_high_desc=true; China Power Project, “What Does China Really Spend on Its Military?,” Center for Strategic & International Studies, December 28, 2015, https://chinapower.csis.org/military-spending/. 110
panoramic overview of the major developments within the global economy in the past
200 years to an empirical analysis of China’s actions in the present day, specifically looking at the issue areas of international trade and foreign aid. The issue area of trade is particularly important to assess given the ongoing U.S.-China trade war, while the case of foreign aid provides a strong issue area to analyze China’s major foreign policy commitments and the prominent Belt and Road Initiative. In discussing and juxtaposing contemporary research with broader, overarching concepts and themes that have played out in international relations over the course of human history, this project has outlined two parallel stories that paint slightly different pictures of the international system. In this chapter, I will make final assessments of China’s relation to the narrower status quo that largely reflects contemporary American policy positions before going on to discuss the broader frame of Kindleberger’s public goods and the dynamics of change within the international system.
As stated above, the narrower scope in this debate is that of the contemporary situation surrounding the unprecedented political and economic rise of China in the past few decades, and is characterized by the issues and rhetoric that permeate U.S.-China relations specifically. As the dominant political, economic, military, and cultural power of the modern world, the United States in many ways represents the ‘status quo’ within the international system. China has grown and developed within a U.S.-led global order, and has been adopted into institutions that have their roots in the hegemonic position of the United States after the Second World War, such as the United Nations, World Bank,
International Monetary Fund, and World Trade Organization. Every action taken by
China is thus typically filtered through a lens that favors the disposition of the United 111
States. Chinese trade policy or foreign aid activities are infrequently examined on their own terms, but instead are juxtaposed with those of the U.S.—or at least, with American rhetoric—by default. China is not just growing and developing—it is challenging U.S. dominance and American prestige. China is not celebrated for its technological progress and the innovation that has domestically brought better lives to hundreds of millions—it is instead a thieving rival, determined to build better cars than the U.S. and destroy the jobs and livelihoods of ordinary Americans. China’s seemingly massive foreign aid contributions to underdeveloped parts of Asia, the Middle East, and Africa are not praised for the investment they have provided to the most desperate and impoverished areas of the world—they are instead viewed with suspicion, surely meant to enable dictatorship or undermine the influence of western ideologies and U.S. foreign policy objectives. From the American side of U.S.-China relations, it is the latter perspective that dominates the discussion. In the wake of a perception of fear, there is little positive to celebrate about China’s economic transformation and geopolitical rise. As Thucydides noted over 2,000 years ago, fear was a central part of the Peloponnesian War, saying that
“It was the rise of Athens, and the fear that this inspired in Sparta, that made war inevitable.” Failing to acknowledge that the debate around the concepts of revisionism and status quo are too reliant on an American-centric definition and outlook furthers these antagonistic views and fuels aggressive policy choices.
When we consider China’s policies and actions in the case study areas of trade and foreign aid, what does this first, narrower scope tell us? Based on the evidence presented here, I argue that even from a more ‘pro’-U.S. viewpoint, China does not appear to be a revisionist power—however, that does not necessarily mean they are a 112
status quo power either. China has increasingly opened up its markets to foreign trade and is not intentionally manipulating its currency or engaging in other activities in order to deliberately increase the size of the U.S. trade deficit with China. These are facts reflected in U.S. policy documents and data from U.S.-backed institutions. While Chinese developmental policy has favored a strong role for the Chinese government in the economy, issues surrounding intellectual property theft, joint venture requirements, and other market access barriers are both partly overblown and reflect the problems associated with taking a narrower, U.S.-defined reference point for what constitutes the status quo.
The U.S. may complain about China’s state-owned enterprises, automotive subsidies, and top-down plans to build strong industries, but what of American policy?
Oftentimes, the rhetoric of policymakers and commentators does not reflect actual U.S. actions or policy choices. Was it not the federal government that spent $475 billion on the
Troubled Asset Relief Program (TARP) to stabilize U.S. banks after the Great
Recession?227 This program also included tens of billions of dollars to salvage the
American automotive icons of General Motors and Chrysler. These policies are anything but the free market economics that American policymakers prescribe to other countries around the world, and acted as massive subsidies to businesses that otherwise would have failed and gone bankrupt. Moreover, how do we make sense of the role of the defense industry and the U.S. military’s Defense Advanced Research Projects Agency (DARPA) in the American economy? According to DARPA’s website, the U.S. military has played
227 U.S. Department of the Treasury, “TARP Programs,” U.S. Department of the Treasury, November 15, 2016, https://www.treasury.gov/initiatives/financial-stability/tarp-programs/pages/default.aspx#. 113
a fundamental role in the American economy, stating that “the commercial sector has adopted and expanded upon many of the agency’s results to develop wide-spread applications in fields as diverse as manufacturing, entertainment and education.”228 U.S. government-funded research at DARPA has “invented the digital protocols that gave birth to the Internet,” and “provided many of the essential advances that made possible today’s computers and communications systems.” If China invests public money to build up their automotive sector and has a strong state presence within their economy, how do we justify calling them a revisionist if the U.S. government has similarly played a critical role in the U.S. auto sector and the broader stability and technological progress of the
American economy in general?
Additionally, to what extent can China be accused of revisionist behavior for erecting market access barriers that appear to have genuinely served as a win-win relationship between the Chinese domestic economy and foreign investors seeking to make profits from cheap labor for multiple decades? We must acknowledge that issues relating to IP theft, joint ventures, and technology transfer seem to have only attained major significance today, when China now poses as a major U.S. rival. We should also consider that, in the longer view of history, large foreign influence in China’s domestic affairs contributed substantially to the Century of Humiliation and a long period of social and political anarchy within China. And perhaps what takes the most credence out of allegations of direct and clear revisionism is the way that the U.S. has proposed to deal with the problems they see in China’s economic policies. America under the Trump
228 Defenese Advanced Research Projects Agency, “Paving the Way to the Modern Internet,” DARPA, Updated 2019, https://www.darpa.mil/about-us/timeline/modern-internet. 114
Administration has effectively entered into economic war with China, imposing massive, disruptive unilateral tariffs without first going through the U.S.-backed World Trade
Organization and the multilateral processes established there. Furthermore, a great irony of the trade spat is that the U.S. is seeking to punish China partly for the large role of their government in economic affairs—in response, the U.S. has had to utilize government bailout money to alleviate the burden American farmers have faced from
China’s response to America’s unilateral tariffs. In under a year, these expenditures have risen to over $10 billion, and threaten to soar significantly higher if the U.S. government helps all affected industries.229
Considering the subject of foreign aid—still from a narrower, U.S.-based conception of the status quo—China’s actions are not substantial enough to be rightly deemed revisionist. Instead, China’s actions are different. They could reflect a new status quo, but I argue that this does not have to inherently mean that they are revisionist.
Chinese foreign aid has utilized different methods of financing, focused on different sectors of economic development, and has not required states to adopt internal political or economic reforms in the same way that western aid regimes have. These policies diverge from western aid practices, however, it is not evident that this has made Chinese aid destabilizing or less effective than western aid contributions. Thus far, there is limited evidence that Chinese foreign aid has had major negative impacts on recipient nations.
While some countries that have joined the Belt and Road Initiative have struggled with
229 “Trump Approves Second Round of Trade Aid Payments for U.S. Farmers,” Reuters, December 17, 2018, https://www.reuters.com/article/us-usa-trade-farmaid-idUSKBN1OG2BI; Jeff Cox, “Full-Scale Bailout for Industries Impacted by Tariffs Would Cost $39 Billion, US Chamber Says,” July 30, 2018, https://www.cnbc.com/2018/07/30/full-scale-bailout-for-industries-impacted-by-tariffs-would-cost-39- b.html. 115
debts, there is not systematic evidence that China is trying to put states into debt traps or otherwise extract concessions from them. Additionally, recipient nations have effectively made sovereign decisions to take low-interest Chinese loans, which recipients have agreed to pay back.
Some may argue that Chinese foreign aid to countries such as Pakistan or South
Sudan is strategic in nature, aiming to secure new military ties and protect Chinese investment. Would this make China revisionist? The United States pursues many strategic and military objectives through foreign aid. Indeed, in 2017 almost 1/3 of all
U.S. aid—$15 billion—was military assistance, with the major recipients including
Pakistan, Afghanistan, Iraq, Israel, Egypt, Ukraine and the Philippines.230 The U.S. has distinct strategic priorities in each of these countries, all of which struggle with corruption and some of which are dictatorships. Additionally, even if we consider the case of Pakistan alone—one of the most high-profile Chinese aid recipients and a country highlighted in recent media reports—is Chinese or American aid more revisionist?
American aid to Pakistan, as discussed earlier in this thesis, is largely military aid and funding for government operations. Chinese aid has resulted in the construction of highways, railroads, ports, and renewable energy infrastructure. Armaments are, I argue, more destabilizing than infrastructure. Moreover, there are those who would point to
Chinese aid as creating debt issues in Pakistan as well. As noted earlier, the IMF has already provided 12 major bailout packages to the Pakistani government in the past few decades. Assumedly, if this aid was effective, Pakistan’s economy would have reformed and not required repeated assistance. Chinese aid could create further debts, or it could
230 USAID, “Foreign Aid Explorer,” December 19, 2018, https://explorer.usaid.gov/aid-dashboard.html. 116
plausibly lead to the economic changes Pakistan needs in order to move off of dependence on foreign financing. Chinese foreign aid has clearly become more high- profile and significant in volume in recent years, but as assessed here, this does not in it of itself qualify Chinese practice as revisionist or destabilizing.
The second, parallel story here is one beyond the context of just U.S.-China relations, and is instead about change within the entirety of the international system.
Additionally, it is about the public goods necessary for upholding the liberal international economic order specifically.231 While the United States has been the hegemonic power of the postwar era, it has not always dominated the international system; the rise of the liberal international economic order predates U.S. hegemony, and was established in the
19th century by the British Empire. In providing historical background and an assessment of China’s contributions to Kindleberger’s international public goods, I have attempted to provide a point of reference beyond that of just U.S.-backed policies and institutions.
Additionally, I have emphasized that the debate around the rise of China must be more cognizant of history. While many commentators and policymakers appear to have been taken by surprise by the rapidly growing influence of China, consideration of the historical events of the modern era question whether we should be so surprised. China is, after all, the most populous country on Earth, and was historically one of the primary centers of human economic activity in the world. Indeed, it may have been the largest economic power in the world as recently as the early 19th century, just prior to the hegemonic reign of the British Empire. China today has over four times as many people
231 Other conceptions of international order exist, such as Soviet goals of global communism, or the previously-referenced Sino-centric Tributary system, which existed in East Asia prior to the 19th century. 117
as the United States—if and when China’s per capita GDP grows to just half that of
America’s, the overall size of the Chinese economy will be double that of the United
States. They are now a major player in international affairs, and likely one that will sooner take center stage rather than one that comes and goes.
Xi Jinping’s Chinese Dream is partly an ambition to ‘close the gap’ with the advanced industrial countries of the world by 2049, the centennial of the People’s
Republic of China. This goal emanates from a desire to rectify the failures of the Century of Humiliation and bring China back to a position of respect and power within the international order. Does it make China revisionist for seeking to return to the position of wealth and power it once commanded, prior to the age of western imperialism? If China were attempting to establish a new basis of international relations and was adopting practices and principles outside of those that define the liberal international economic order, it would make China revisionist. However, thus far China has largely embraced global capitalism and has moved towards supporting the principles of free trade and multilateral diplomacy—the signature elements of the postwar U.S.-backed order and of the broader liberal international economic order—and has in some ways respected international norms and rules moreso than the United States itself. The U.S. began the trade war by essentially breaking its own rules. If China were actively and clearly breaking the rules, we would almost certainly deem them a revisionist power. However, these are the actions of the United States.232 Perhaps China’s entrance into the liberal order will contribute to changes in the practices governing transactions in the global economy, but these, too, have changed over time and under unilateral American decisions
232 Frank, ReOrient. 118
as well. If China upholds free trade and multilateralism, but supports practices that differ from full faith in free markets, it would even be hard here to argue that China is clearly a revisionist, as the U.S. previously supported practices during the postwar Bretton Woods era rules that differ from those in place in the 21st century.
When we consider the issue areas of trade and foreign aid from this broader historical and international perspective, rather than a solely U.S.-driven one, China’s actions and policies are supportive of the status quo. This status quo is, as indicated above, that of upholding stability within the liberal international economic order, and can be measured via Kindleberger’s public goods. As China has developed, they have correspondingly lowered their tariff levels and have maintained a commitment to an open economy. Indeed, they have done so faster than they might otherwise be expected to. In doing so, and in maintaining low tariffs throughout the Great Recession, this has directly contributed to fulfilling Kindleberger’s first public good: maintaining a relatively open market for distress goods. Furthermore, China has also worked to maintain the stability of their currency, actually acting to uphold the strength of the Renminbi in order to prevent it from undercutting trade goods of other countries. Through this, China has fulfilled the public good of maintaining relatively stable exchange rates. Notably, these findings are evidenced by both U.S. policy documents and data from U.S.-backed institutions.
Through the negotiations that are attempting to end the trade war, we have also seen that
China is open to fulfilling another of Kindleberger’s public goods: coordinating macroeconomic policies. This is evidenced by the fact that one of the most significant details to come out of negotiations thus far is that China will commit to dramatically increasing its annual imports of American goods, indicating an adjustment of economic 119
policies specifically for the purpose of reducing America’s trade deficit.233 Additionally,
China has discussed reforming a variety of laws, including those surrounding intellectual property and the joint venture system.
Further contributing to the liberal international economic order, China has begun to utilize its vast foreign reserves to provide foreign aid to developing countries around the world. Through doing so, it has not only provided much-needed infrastructure investment and development finance to developing areas of the world, but it has also fulfilled the final two public goods identified by Kindleberger. Significant foreign aid allotments, if sustained, would contribute to the provision of countercyclical and long- term lending. This is especially reinforced by data presented earlier that highlighted that
China’s foreign aid provisions were particularly high in the year 2009, at the height of the
Great Recession. Furthermore, while debts to China could become an issue for developing countries, China has also worked to fulfill Kindleberger’s fifth and most important good: acting as a lender of last resort and providing liquidity to nations undergoing economic crisis. This is clear from China’s aid to countries facing economic crisis, such as Pakistan, but also from their actions in 2009 as noted above.
In conclusion, based on the evidence examined in this thesis, China is not a revisionist power in the global economy. Even when the status quo is defined by the narrower scope of contemporary U.S.-backed policies, China actually appears to be more supportive of this status quo than, in some cases, the U.S. itself is. In issue areas where
China could be deemed to be more revisionist, such as the strong role of the government
233 Reuters, “US and China Are Sketching the Outlines of a Deal to End the Trade War,” CNBC, February 21, 2019, https://www.cnbc.com/2019/02/21/us-china-outline-of-deal-to-end-trade-war-reuters.html. 120
in China’s economy and the potential for Chinese aid to create international debts or support authoritarian regimes, these facts are also true of U.S. policies despite what U.S. rhetoric may indicate. Furthermore, when viewed from a broad historical perspective, it is evident that China is contributing to some of the fundamental practices and public goods necessary for upholding the liberal international economic order. More than anything, the
Communist party is almost certainly more preoccupied with its domestic affairs and trying to remain in power than it is with changing the rules and principles governing the global economy.
If China is not an overt revisionist, and the U.S., in fact, appears to be the country acting out against its own established rules and principles, how do we make sense of contemporary international affairs? U.S. actions may be emblematic of America’s relative decline in international standing. We must remember that the British, who originally pioneered the liberal international economic order, lost ground in the early 20th century due to the fact that other countries’ economies were growing and rivalled that of
Britain’s; the Great Depression was marked by the British going against their own rules and dropping the gold standard under the pressures of economic crisis, contributing to a breakdown of the international system. Today, the U.S. may be acting out against its own stated rules and principles due to a similar dynamic. Indeed, this possibility is becoming more widely discussed, and is symbolized by the Trump administration.
We can see this in a number of areas. In January of 2017, for example, the
Brookings Institution release a report from Robert Kagan entitled “The Twilight of the
Liberal World Order”, with the summary stating the following: 121
In recent years, the liberal world order that has held sway over international affairs for the past seven decades has been fragmenting under the pressure of systemic economic stresses, growing tribalism and nationalism, and a general loss of confidence in established international and national institutions.234
Similarly, the Council on Foreign Relations released an article by its President, Richard
Haass, at the outset of the trade war, entitled “Liberal World Order, R.I.P.”, with a subheading stating that “The liberal world order is under threat from its principal architect: the United States”.235 CFR’s subsidiary, Foreign Affairs, has similarly released an article entitled “Liberalism in Retreat: The Demise of a Dream”.236 In February of
2019, the London School of Economics hosted professors John Ikenberry and Mary
Kaldor for a talk entitled “Crisis of the Liberal World Order, or is the West in Decline –
Again?”237 Locally, at Ohio University, the 2019 Baker Peace Conference was themed
“Temple of Peace? International Cooperation and World Order since 1945” and closed with a panel termed “Erosion of the Liberal Order?”238
These concerns have not gone unaddressed by American policymakers. In
December 2018 U.S. Secretary of State Mike Pompeo spoke at the German Marshall
Fund, stating that the Trump administration is building a “new liberal order”—one that
234 Kagan, “The Twilight of the Liberal World Order.” 235 Richard Haass, “Liberal World Order, R.I.P.,” Council on Foreign Relations, March 21, 2018, https://www.cfr.org/article/liberal-world-order-rip. 236 Robin Niblett, “Liberalism in Retreat,” February 21, 2017, https://www.foreignaffairs.com/articles/2016-12-12/liberalism-retreat. 237 John G. Ikenberry and Mary Kaldor, “Crisis of the Liberal World Order, or Is the West in Decline - Again?” (February 27, 2019), http://www.lse.ac.uk/Events/LSE- Festival/NewWorldDisorders/Events/20190227/crisis-of-the-liberal-order.aspx. 238 Ingo Trauschweizer, “2019 Baker Peace Conference To Focus on International Cooperation and World Order Since 1945,” Ohio University | College of Arts & Sciences, February 19, 2019, https://www.ohio- forum.com/2019/02/2019-baker-peace-conference-to-focus-on-international-cooperation-and-world-order- since-1945-2/. 122
would function better under Trump’s policy of “America First”.239 What exactly this means, however, is unclear. In the first two years of the new U.S. administration, Trump has questioned the role of NATO, sharply criticized the leaders of European democracies, and openly stated that “I’m a nationalist.”240 Furthermore, Trump has said “I like China and I like President Xi a lot,” as well as stating of North Korean dictator Kim Jon-un that
“We fell in love.”241 When then-candidate Trump received a question regarding Russian
President Vladimir Putin’s assassination of journalists in 2016, Trump stated of Putin that
“He’s running his country and at least he’s a leader, unlike what we have in this country,” before going on to say “I think our country does plenty of killing also.”242 This rhetoric, and American actions in the ongoing trade war, may truly suggest a new order of some type, although it remains to be seen if it will be ‘liberal’, as Secretary Pompeo has stated.
Beyond commentary and rhetoric, further evidence that the U.S. is turning back against its own claimed principles of multilateralism is seen elsewhere, too.
While at the library, browsing through magazines such as the Economist and the
Financial Times and reading articles with headlines such as “Xi Jinping and his empire” and “Will China Dominate Science?”, I came across a publication called Z Magazine. In an article entitled “Moral Depravity Defines U.S. Politics”, Noam Chomsky highlighted that recent American politics and discourse surrounding current events have not paid
239 Julian Borger, “Trump Is Building a New Liberal World Order, Says Pompeo,” The Guardian, December 4, 2018, sec. US news, https://www.theguardian.com/us-news/2018/dec/04/us-president-donald- trump-is-building-a-new-liberal-world-order-says-mike-pompeo. 240 Quint Forgey, “Trump: ‘I’m a Nationalist,’” POLITICO, October 22, 2018, https://politi.co/2AoDWIO. 241 Saheli Roy Choudhury, “President Trump Cites China’s Respect for His ‘Very, Very Large Brain,’” CNBC, September 27, 2018, https://www.cnbc.com/2018/09/27/president-trump-cites-chinas-respect-for- his-very-very-large-brain.html; Trump on Kim Jong-Un: “We Fell in Love” (Wheeling, West Virginia, 2018), https://www.bbc.com/news/av/world-us-canada-45696420/trump-on-kim-jong-un-we-fell-in-love. 242 Jeremy Diamond CNN, “Timeline: Donald Trump’s Praise for Vladimir Putin,” CNN, accessed April 6, 2019, https://www.cnn.com/2016/07/28/politics/donald-trump-vladimir-putin-quotes/index.html. 123
enough attention to the most significant contemporary issues that exist, saying that
“humanity faces two imminent existential threats: environmental catastrophe and nuclear war…These are the most critical and urgent questions that have arisen in all of human history.”243 Here, Chomsky has highlighted what is at stake in the politics of the 21st century.
The U.S., however, is headed in the wrong direction. Indeed, in 2017, the Acting
Ambassador to China under the Trump administration resigned because of the American decision to pull out of the Paris Climate Accords; the only others to reject the Accords have been Nicaragua and Syria.244 This development is all the more concerning given that many leading scientists have recently assessed that human activity is causing irreversible changes to the planet, and that we may be precipitating the 6th mass extinction of life on
Earth.245 Furthermore, the United States has recently decided to withdraw from the
Intermediate-Range Nuclear Forces (INF) Treaty, one of the hallmark arms treaties of the
Cold War era.246 While Russia is likely violating the treaty, it is problematic that the
American response has been to abandon it all together. Rather than work diplomatically to reduce any escalation of tensions, President Trump has pledged to build up the
American nuclear arsenal “until people come to their senses”, further proclaiming that
“It's a threat to whoever you want to include, China and it includes Russia and it includes
243 Noam Chomsky and CJ Polychroniou, “Moral Depravity Defines U.S. Politics,” Z Magazine, February 1, 2019, https://zcomm.org/zmagazine/moral-depravity-defines-u-s-politics/. 244 Tracy Wilkinson, “Acting U.S. Ambassador in China Quits over Climate Deal Withdrawal,” latimes.com, accessed March 25, 2019, https://www.latimes.com/politics/washington/la-na-essential- washington-updates-acting-u-s-ambassador-in-china-quits-1496758867-htmlstory.html. 245 Damian Carrington, “Earth’s Sixth Mass Extinction Event under Way, Scientists Warn,” The Guardian, July 10, 2017, sec. Environment, https://www.theguardian.com/environment/2017/jul/10/earths-sixth-mass- extinction-event-already-underway-scientists-warn. 246 Tom Nichols, “Mourning the INF Treaty,” Foreign Affairs, March 4, 2019, https://www.foreignaffairs.com/articles/2019-03-04/mourning-inf-treaty. 124
anybody else that wants to play that game.”247 President Trump may be a passing phenomenon in American politics, but nonetheless embodies and represents the democratic choice of a nation that Foreign Policy magazine has recently argued may be
“the Sick Man of the 21st Century”, referring to a term use for the declining Ottoman
Empire in the early 20th century. 248
In the second chapter of this thesis, I discussed the concept of ‘embeddedness’ and ‘disembeddedness’ within the global economy. Karly Polanyi argued that it was the overwhelming faith in markets and power of the global economy that brought about the political stresses of the 1920’s and 1930’s. These stresses culminated in the erosion of democracy globally and the establishment of the authoritarian, nationalistic regimes that sparked the worst war in human history. Today, we see increasing stress in international affairs, and sustained faith in the free market economic structure within the United States in particular. In 2018, not even 10 years after the second-worst economic crisis in
American history, the U.S. Congress elected to roll back a substantial amount of the very reforms it had just put in place to regulate the banking industry and prevent the Great
Recession from happening again.249 In 2019, the Trump administration has put forth a budget that calls for massive cuts to the American welfare state in the form of reduced spending on Medicare and Medicaid, and instead proposes “market-based health care
247 “US to Build up Nuclear Arsenal - Trump,” October 22, 2018, sec. US & Canada, https://www.bbc.com/news/world-us-canada-45946930. 248 David Klion, “The American Empire Is the Sick Man of the 21st Century,” Foreign Policy, April 2, 2019, https://foreignpolicy.com/2019/04/02/the-american-empire-is-the-sick-man-of-the-21st-century/. 249 Alan Rappeport and Emily Flitter, “Congress Approves First Big Dodd-Frank Rollback,” The New York Times, May 25, 2018, sec. Business, https://www.nytimes.com/2018/05/22/business/congress-passes-dodd- frank-rollback-for-smaller-banks.html. 125
grants.”250 These, along with cuts to a wide variety of domestic programs, are justified on the basis of deficits that are predicted to exceed $1 trillion annually for the next four years; the deficit grew substantially after a major tax cut in 2017. Additionally, it proposes major increases to military spending, beyond what the Pentagon has requested.
While the administration’s budget is unlikely to be approved in full, it nonetheless highlights that preferences for privatization, deregulation, and an erosion of public power are priorities of contemporary policymakers. These priorities stand in opposition to the
‘embedded’ economic structures that policymakers formed at Bretton Woods during the final days of World War Two, which favored the subordination of economic affairs to state action and recognized the socially disruptive forces that unquestioning faith in free markets can unleash.
When viewed alongside current events in Britain and France, similarly architects and leaders of the advanced democratic nations of the world, the fabric of western society appears to be, at best, under substantial stresses, and at worst, coming apart at the seams.
The ‘Brexit’ process has caused one of the greatest political crises in British history and has simultaneously threatened the survival of the European Union—an institution with the primary mission of protecting peace in Europe. Similarly, France has seen the
“Yellow Vest” movement in the past year, with tanks deployed in the streets of Paris to suppress thousands of rioters. Each of these three situations—Trump’s election, Brexit, and the “Yellow Vests”—has seen its roots in economic dissatisfaction among the respective nation’s citizens. Much of this dissatisfaction has emerged out of resentment
250 Jim Tankersley and Michael Tackett, “Trump Proposes a Record $4.75 Trillion Budget,” The New York Times, March 12, 2019, sec. U.S., https://www.nytimes.com/2019/03/11/us/politics/trump-budget.html; Office of Management and Budget, “Efficient, Effective, Accountable: An American Budget,” Budget of the U.S. Government, 2019, https://www.whitehouse.gov/wp-content/uploads/2018/02/budget-fy2019.pdf. 126
towards the rate and process of globalization and the cascading effects, or at least perceived effects, it is having on workers within each country. At the same time, the world is now 10 years removed from the Great Recession and, as the business cycle moves ever forward, appears to be set for renewed global recession.251
These facts must be taken alongside historical trends. When viewed in the context of an erosion of the Liberal order and an upsurge in populism and strong-man rulers across Europe and the developed world, the coming decade of the 2020’s may look eerily similar to the 1920’s. Additionally, scholars such as Ruggie, Best, and Kirshner have argued in recent decades that the global economy of today is substantially different than that Embedded Liberalism which was initially enacted at Bretton Woods after the conclusion of the Second World War, and instead incorporates many elements of the unrepentantly capitalist era that preceded it. I have highlighted earlier in this chapter that
China, based on the case studies explored in this thesis, is not a clear revisionist in the global economy. Of the issue areas of trade and foreign aid, one of the most plausibly revisionist elements of Chinese policy is the favoritism of state-guided development and the constraining of foreign influences within China’s domestic economy via joint ventures and market access barriers. These, however, are practices partly reflective of major elements of the Bretton Woods system that was established by policymakers with the lived experience of the Great Depression and World War II. The Embedded Liberal system prioritized the role of the state and acknowledged the need to constrain the forces of free markets.
251 Sam Meredith, “Paul Krugman Warns of a Possible Global Recession This Year or in 2020,” February 11, 2019, https://www.cnbc.com/2019/02/11/paul-krugman-warns-of-a-possible-global-recession-this-year- or-in-2020.html. 127
If the road ahead is defined by a Thucydides’ Trap-type confrontation between the U.S. and China or a general return to great power conflict instead of sustained focus on international cooperation, the world may be headed for some of the greatest crises in all of human history. When we consider the even longer scope of history and the fact that
China, due to demographics, may inevitably reorient the global economy towards Asia, it becomes plausible that China may be the third leader of the liberal international economic order which had first been pioneered by the British Empire, and recently upheld by the United States. There is, as earlier-discussed scholars such as Lake have argued and findings from Norrlof and Reich suggest, also the opportunity for both nations to act as simultaneous supporters of the global economy as well.
Are there problematic elements of Chinese economic policy? Surely, as there are with America’s as well. However, rushing headlong into conflict rather than working diplomatically through established channels will do little to bring China further into the fold. Instead, the current course of American actions appears to be driving headlong into the Thucydides Trap, increasing the risk of conflict and war between the two strongest nations on Earth. This, is the ultimate question of U.S.-China relations and, I believe, of global affairs in the 21st century. Will the U.S. and China go to war? Or will they learn to cooperate and coexist?
Looking to the past to predict the future is a dangerous game, however, in the context of Thucydides’ Trap, the above discussion, and the current trade war, the world appears primed for great crisis—potentially, the worst it has ever seen. After months of negotiations, China and the U.S. do not seem to be moving to an easy or mutually beneficial resolution to the present economic conflict. Here, too, are echoes of the past— 128
it is perhaps a tragic historical irony that the most concrete information to come out of negotiations to date have been the following 1) China will restructure its economy to vastly increase its purchases of American goods and change its laws to increase protection of foreign companies, and 2) China will work to prevent the trafficking of the opioid fentanyl into the United States.252 It remains to be seen if the tariffs will be removed, or if the trade war will even have a resolution. Will this return the world to the bipolar order that existed throughout the Cold War, with the looming threat of nuclear devastation? If so, a tenuous peace could remain throughout the coming century.
However, as I have outlined here, there is also room for cooperation in the global economy.
China is not an unproblematic country and I do not wish for this research to be interpreted as uncritical praise—the authoritarian nature of its government and the imprisonment of potentially millions of ethnic Uighurs in 2018 and 2019 reflect a deep antipathy to democracy and freedom within the Communist Party. However, if international peace is to be maintained, the U.S. would do better to use China’s rise as a moment of self-reflection upon U.S. domestic practices and the American orientation towards our allies and the Liberal order. The simple path forward is to make China the enemy, a vague ‘revisionist’ power set out to dismantle democracy and freedom around the world. However, it may be American economic policies and reckless interventionism abroad that do more to breakdown global governance and fulfill these ends. China has contributed to upholding the liberal international economic order, but to be adopted into it
252 Context for these two points: 1) The MacCartney Embassy and British Empire were directly asking China to purchase British exports. The British Empire would later attack China to force the Qing to allow more trade. 2) China pleaded with the British Empire to stop the illegal smuggling of Opium into China. 129
successfully, we must allow China some flexibility and recognize the historical path that it is coming from—partly a long history of turmoil that was made worse by western powers. If we fail to approach policy decisions and scholarly understandings of China from a nuanced and interdisciplinary perspective, we risk pushing China away from market reforms and multilateral diplomacy and, possibly, toward the aggressive revisionism that we fear. To do so would be to threaten not only peace, but the future of humanity.
130
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