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Lowell Angel Rabasa | Somi Seong Prepared for the United States Air Force Approved for public release; distribution unlimited PROJECT AIR FORCE The research described in this report was sponsored by the United States Air Force under Contract FA7014-06-C-0001. Further information may be obtained from the Strategic Planning Division, Directorate of Plans, Hq USAF. Library of Congress Cataloging-in-Publication Data Is Available For This Publication ISBN 978-0-8330-4464-8 The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R® is a registered trademark. Cover Design by Peter Soriano © Copyright 2008 RAND Corporation All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2008 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RAND URL: http://www.rand.org To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] Preface The rise of the People’s Republic of China in Asian economic and security affairs is one of the most consequential developments in the 21st century. China’s regional power and influence are growing at the very time that U.S. strategic equities in Asia are increasing. China’s rise raises the prospect of intensifying security competition in East Asia both between the United States and China and between China and Japan. These developments have prompted some American and Asian commentators to question whether China will eventually displace the United States as the predominant power in East Asia by gradually chipping away at the foundation of the U.S. network of defense alliances and security partnerships in the region. To address these potential challenges, this book analyzes how U.S. allies and major security partners have responded to the rise of China in the last decade in their domestic political, economic, diplomatic, and military policymaking. This book assesses the reactions of the five U.S. defense allies in Asia plus Singapore. Document- ing and assessing these responses are critical for U.S. policymakers and military plan- ners for several reasons. First, China is the big, new, and uncertain variable affecting the foreign policies and, in some cases, the domestic affairs of countries throughout East Asia. Second, understanding whether and how China’s rise will alter the con- tent or operation of U.S. relationships in the region will help the United States main- tain a robust network of alliances and security partnerships. Third, limited systematic research on East Asian responses to China has been done to date. This document is directly relevant to policymakers and military planners who are focused on ensuring that the United States maintains maximum access to the region and maximum freedom of maneuver in conducting U.S. diplomacy and mili- tary affairs. This book’s results will help policymakers and defense planners calibrate the tone and substance of U.S. regional diplomacy and military policies to ensure that U.S. alliances and security partnerships remain highly effective in shaping the strategic landscape in East Asia as China’s regional power and influence grow. This book is part of a substantial and growing body of RAND Corporation research—now spanning a decade—that examines the changing regional security environment in Asia and, specifically, China’s improving diplomatic and military capa- bilities. Recent RAND Project AIR FORCE work on Asia includes the following: iii iv Pacific Currents: The Responses of U.S. Allies and Security Partners in East Asia to China’s Rise t Roger Cliff and David A. Shlapak, U.S.–China Relations After Resolution of Tai- wan’s Status, MG-567-AF, 2007. t Roger Cliff, Mark Burles, Michael Chase, Derek Eaton, and Kevin Pollpeter, Entering the Dragon’s Lair: Chinese Anti-Access Strategies and Their Implications for the United States, MG-524-AF, 2007. t Evan S. Medeiros, Roger Cliff, Keith Crane, and James C. Mulvenon, A New Direction for China’s Defense Industry, MG-334-AF, 2005. t Keith Crane, Roger Cliff, Evan S. Medeiros, James C. Mulvenon, and William H. Overholt, Modernizing China’s Military: Opportunities and Constraints, MG- 260-AF, 2005. This research was sponsored by the Commander of the Pacific Air Forces and was conducted within the Strategy and Doctrine Program of RAND Project AIR FORCE for a fiscal year 2006 study, “China’s Rise Through the Eyes of U.S. Allies and Security Partners in Asia.” RAND Project AIR FORCE RAND Project AIR FORCE (PAF), a division of the RAND Corporation, is the U.S. Air Force’s federally funded research and development center for studies and analyses. PAF provides the Air Force with independent analyses of policy alternatives affecting the development, employment, combat readiness, and support of current and future aerospace forces. Research is conducted in four programs: Aerospace Force Develop- ment; Manpower, Personnel, and Training; Resource Management; and Strategy and Doctrine. Additional information about PAF is available on our Web site: http://www.rand.org/paf/ Contents Preface ................................................................................................. iii Figures ................................................................................................. xi Tables .................................................................................................xiii Summary ..............................................................................................xv Acknowledgments ................................................................................. xxv Abbreviations ......................................................................................xxvii CHAPTER ONE Introduction ........................................................................................... 1 Scope and Methodology ............................................................................... 2 Organization ............................................................................................ 4 CHAPTER TWO China’s Changing Economic Relations with Asia .............................................. 5 Trade Flows ............................................................................................. 5 China as a Key Export Market ..................................................................... 5 Declining Importance to China ................................................................... 8 China as an Assembly Hub for East Asian Electronics .......................................... 9 Trade in Services ......................................................................................11 Chinese Payments for Services, Factor Incomes, and Transfers ...............................13 Chinese Earnings from Services, Factor Incomes, and Transfers .............................14 Foreign Direct Investment: Competitors or Collaborators? ......................................15 Patterns of Foreign Direct Investment into China ..............................................15 Chinese Investment in the Six Nations ..........................................................17 Competition for FDI ...............................................................................18