The China Challenge

[remarks as prepared for delivery at the CNAS Annual Conference, June 21, 2018]

[Ely Ratner] 

Ladies and gentlemen, thank you all for being here today. My name is Ely Ratner, Vice President and Director of Studies at CNAS. 

Before we move to the lunchtime breakout sessions, we wanted to take this opportunity to tell you about some of the new and innovative work we’re doing on China at CNAS. 

And in a few minutes, I’ll turn it over to my colleagues Liz and Dan to go deeper on two specific lines of effort currently underway at the Center. But first, I’m going to set the stage. 

While we all believe that America has everything it needs to succeed in this competition, it’s also the case that as we gather in this hall today the United States is falling behind, while China is making progress on undermining U.S. power and influence, weakening the United States in Asia, and establishing its own sphere of influence.

Now, it’s fair to stop here and ask: So what? So what if China becomes the dominant power in Asia? Because there are influential voices in the debate arguing that we shouldn’t worry. That China’s ambitions are limited, and even if not, that they’ll want what we want; that things would basically be the same. 

But that’s not how the three of us see it. Instead, we remain concerned that if the United States does not rise to this occasion, the result could be a China-led order that is less free and democratic, less open to U.S. trade and investment, more hostile to U.S. security alliances, and governed by raw Chinese power rather than agreed-upon rules and institutions. 

Of course, it wasn’t supposed to be this way. U.S. policy toward China since the end of the Cold War was predicated on the belief that China would gradually liberalize inside and out—freeing its society, opening its economy, and eventually coming to accept and support the prevailing international order. 

Instead, we find ourselves today in the midst of what CNAS Chairman Kurt Campbell and I have described as a “China reckoning,” where Washington can no longer deny the reality that Beijing is deepening its commitment to authoritarianism and increasing the role of the Communist Party in the economy, while using its newfound wealth and influence to refashion international politics in ways that are increasingly illiberal and at odds with U.S. interests. 

So, what are we going to do about it? And here’s the first big point I want to leave you with this morning: Rising to the China challenge is ultimately about us; about our own competitiveness.

We need to spend less energy trying to change China and instead focus more on ourselves, on developing domestic and foreign policies that enhance our national competitiveness, and the competitiveness of our allies and partners. 

This gets directly to my second major point, which both Liz and Dan will underscore as well: We, the United States, need to renew our confidence in ourselves. 

As we embrace the challenge of a new American competitiveness, we should proceed with the conviction and confidence that the foundations of American power are strong. I’m going to say that again because, every time you think about the China challenge, this is where I want you to start: The foundations of American power are strong. Our people, demography, geography, abundant energy resources, dynamic private sector, powerful alliances and partnerships, leading universities, and innovative spirit give us everything we need to win if only we’re willing to get in the game. 

So how do we do that? How do we derive more competitive strategies?

We just heard about the state of the military challenge in the previous session, which painted an alarming picture of America losing its strategic advantage. As harrowing as that prospect is, it is hardly the entire story.  

In fact, what makes the China challenge so daunting, so serious, so ultimately consequential, is that it resides not just in the traditional domain of security competition, but instead stretches across nearly every facet of international politics, including diplomacy, information, ideology, technology, and, of course, economics. 

And it is in this final arena of economic competition where the demand for new thinking, new research, and new strategies is perhaps most urgent. Where China is barreling ahead with geopolitical power plays, often in contrast to a Washington that is flatfooted and disorganized. 

Unlike the military competition, which is familiar territory for Beltway strategists, the commercial and economic competition remains poorly understood and not well integrated into our overall national security strategy.

I saw this first hand in my time at the White House in the final years of the Obama administration—where China policy was almost entirely divided between economics and trade on the one hand, and security and foreign policy on the other. Each had its own process, led by different people, with different priorities, different assumptions, a different language, ultimately producing strategies that were divorced, if not working at cross purposes, from one another. 

It was clear at the time, and only clearer today, that these worlds will have to be brought together for America to succeed in this competition. And that’s precisely what we’re doing at CNAS across several lines of effort—working at the nexus of economics and security. 

As Liz will describe in just a moment, we’re devising novel strategies to counter China’s use of economic coercion. And as Dan will discuss afterward, we’re developing new approaches to address the geopolitical implications of China’s Belt and Road strategy. 

We are looking at how the United States can work with trusted capitals to build up an alliance innovation base and coordinate on defensive trade and investment measures, and how the rapidly changing world of financial technology, including virtual currencies and crypto currencies, is reshaping the landscape of international security and the toolkit of economic statecraft. 

To show you what this looks like in practice, please let me introduce my colleague Liz Rosenberg, who directs the Energy, Economics, and Security program at CNAS. 

Liz, over to you.  

[Elizabeth Rosenberg]

Thanks, Ely. I want to talk now about how China is using unprecedented economic coercion to advance its national interests. 

Economic policies have been longstanding features of China’s domestic political management and its international engagement strategy. In the last decade, however, China has increasingly used targeted economic policies to bully foreign capitals and forcibly advance its foreign policy goals. This economic coercion is recognizable in discrete cases where Beijing punishes countries for policies that offend its view of sovereignty or territorial claims. 

Here are just a few recent examples that impact our treaty allies. Japan: We’ve seen China slash rare earth minerals exports to Japan following a clash over the disputed Senkaku islands. The Philippines: China let Philippine bananas rot in port after tensions with Manila over a disputed reef in the South China Sea. South Korea: In response to South Korea’s deployment of a missile defense system, China cut tourism to South Korea and throttled back imports of cosmetics and music. China has also forced to their knees specific foreign companies from these countries that are operating in China.

The mechanisms China has used to cut off trade and investment have involved China claiming to enforce health and safety regulations and to protect Chinese travelers and by fostering nationalist boycotts. In these various efforts, China does not use a clear declaratory policy or a specific legal or administrative regime. This informality offers China flexibility and deniability in its economic coercion. It has also made it hard for foreign countries to mount official WTO trade complaints. 

At CNAS I’ve been working with colleagues to study these cases and what they suggest about China’s evolving economic statecraft and the expanding core interests that trigger Beijing’s economic coercion. It’s clear to us that China is learning across cases and is improving its ability to impose direct costs on its targets while minimizing effects on its own citizens and firms. 

It has been difficult for policymakers in Washington and in ally capitals abroad to understand and respond to Beijing’s economic coercion campaigns. Even if unwarranted, we’ve observed a powerful sense of defeatism in East Asia, in particular, about the perceived inevitability of China’s success in bending foreign companies’ and governments’ policies to Beijing’s will. In the United States there is frustration but a much more limited awareness of China’s targeted economic coercion because U.S. entities have only relatively recently been directly targeted.  

Some of you may work for these companies that have been targeted—U.S. airlines and auto manufacturers are examples. 

So what is to be done? 

The United States needs a broad tool kit to respond to the various national challenges from China with a forceful and internationally coordinated approach. A case-by-case approach is doomed to fail since China has already proven it can win concessions and leverage by gradually picking off targets with ad hoc measures. 

Also, it will not be enough to adopt narrow policy changes in the economic or technology sectors. And we cannot not just double-down on a trade war with China. That will still leave China too many opportunities to harass U.S. firms and bully our allies. 

This is going to be a difficult uphill battle to counter China’s coercion. China holds many cards, by having drawn close to many of the major allies of the United States through economic relationships. China is the most important trading partner to 130 countries at present and is also a vital trading partner of the United States. 

But the future need not be bleak for the United States. We have policy options and some important comparative advantages that will not disappear soon. We have deep, liquid capital markets, a stable currency market in which to store value, a dependable regulatory regime, and outstanding technological innovation—in addition to the advantages that Ely mentioned earlier. Our financial and economic advantages will be a source of influence and a tool to push back on China. 

At CNAS we have been focusing on specific ideas the United States should implement to address China’s coercive economic challenge. I’ll lay out five of them now. 

First, coordinate internally. The U.S. government should centralize its initiatives to counter Chinese economic coercion. This will bridge the divide between economists and strategy and defense experts—a problem Ely discussed a few minutes ago—and will make it easier to work closely with allies targeted by Chinese coercion. 

Second, diversify trade away from China. The administration should assist allies in diversifying their trading relationships away from Beijing, ensuring that China is not their sole customer and that it does not control key supply chain nodes. 

Third, more information, more disclosure. The U.S. administration should gather, analyze, and publicly disclose, much more information about China’s coercion of foreign firms. A better, public understanding of the realities of doing business with China, and the tactics it uses to cause pain for companies, will be a deterrent to Beijing and help Washington and allies organize to counter it more quickly and effectively. 

Fourth, financial compensation. Congress should authorize funding through a U.S. Treasury Department–administered facility to compensate targets of coercion. Financial support for targets will stiffen their resolve against Beijing’s demands, build trust in the United States, and, in turn, force China to think twice before using coercion.

Fifth, anti-boycott measures. Congress should consider reviving anti-boycott statutes. This type of legislation could help push back against China’s stoking of nationalist fervor to incite boycotts or protests that punish foreign countries and companies. Importantly, it would give U.S. companies a legal basis for refusing to comply with Chinese coercive economic measures against third countries—and partners—such as Taiwan and South Korea.

These ideas and others demonstrate that the United States does have options, excellent options, many of which it can and should implement urgently and right at home. 

For some other ideas that the United States can implement to respond to other forms of China’s emerging economic statecraft I’ll turn it over to Dan Kliman, Senior Fellow in the Asia-Pacific Security program at CNAS. 

[Daniel Kliman]

Thanks Liz. If economic coercion is one of China’s power plays, then its Belt and Road Initiative, is another.

The Belt and Road Initiative, sometimes called “One Belt, One Road,” is Beijing’s grand vision for an interconnected world, brought together through a web of largely-Chinese funded physical and digital infrastructure.

Some observers have called the Belt and Road “China’s Marshall Plan.” This is the wrong way to think about it. To start, the Belt and Road is much more ambitious. While the Marshall Plan focused on Western Europe, China, through the Belt and Road, seeks to link together Asia, the Middle East, Africa, and Europe. Further, the resources involved differ sharply. In 2017 dollars, the Marshall Plan cost the United States about $122 billion. Between 2014 and 2017, looking at both construction and investment, Beijing has devoted around $340 billion. And that number continues to grow.

Last but most importantly, the objectives of the Marshall Plan and the Belt and Road differ— fundamentally. The Marshall Plan was ultimately about empowerment. It aimed to rebuild war-torn economies and strengthen fragile democracies. The Belt and Road is a vehicle to advance Chinese influence, create leverage, and it is ultimately harmful to good governance and human rights.

Let’s now look deeper at how the Belt and Road is reshaping the world to China’s advantage.

For one, the Belt and Road is paving the way for a more global Chinese military. Djibouti is a primary example, where China first built a commercial port, then followed up with a nearby military facility—its first overseas base. 

The Belt and Road also breeds long-term debt dependence on China. Sri Lanka is a case in point, where the government agreed to a debt for equity swap with Beijing, giving China a 99-year lease over a strategically located port. 

Then there is governance. The Belt and Road is eroding governance as China seeks to win support from local elites for specific projects. This is challenge not only in the Indo-Pacific but also in Europe. In 2017, the European Commission opened an investigation into Hungary’s awarding of a public works contract to a Chinese firm.

In addition, the Belt and Road is serving to export elements of China’s domestic surveillance regime. This is occurring now. In Kenya, Huawei, a leading Chinese information technology company, is publicly and proudly partnering with the government to construct what it calls“safe cities” that leverage thousands of surveillance cameras feeding data into a public security cloud.

Just like the challenge posed by China’s economic coercion that Liz discussed, the Belt and Roadpresents the United States and its allies and partners with a problem set that demands new tools. Now is the time to think creatively—and be ambitious—and at CNAS we are coming up with concrete policy recommendations.

So what should the United States do?

The first recommendation: The United States should offer a positive vision that can serve as a compelling alternative to the Belt and Road, and China’s economic model more generally. This starts with advancing a development path for other countries that is “free, open, and sustainable” model, that is predicated on attributes like quality innovation, financial sustainability, and the transfer of skill. The United States should also advocate for regional connectivity initiatives— drawing an implicit contrast with the top-down vision that is the Belt and Road. And the United State should consider rejoining the Trans-Pacific Partnership—or pursue a similarly ambitious high-quality trade and investment agreement. 

The second recommendation: The United States must debunk Beijing’s narrative that China is inevitably ascendant and America destined to decline. Today, the United States lacks a coherent counter-narrative and the information toolkit to promote it. One step forward would be to create a 21st century institution—or institutions—to fulfill the role the U.S. Information Agency played during the Cold War, an agenda that was disbanded at a time when many wrote of the return of strategic competition. 

The third recommendation: The United States should double down on support for good governance abroad. Transparency, civil society, and rule of law serve to inoculate governments against the type of backroom Belt and Road deals that leave them with a lasting financial hangover and China with enduring leverage. When it comes to address the Belt and Road—and the China challenge more generally—American values and interest go hand-in-hand.

The fourth recommendation: The United States should seize opportunities to cooperate with allies and partners. When addressing the Belt and Road—and in the broader competition with China—allies and partners remain America’s unique advantage. Looking at the Belt and Road, the United States can work with allies and partners to shape, and where necessary, constrain China’s pursuit of military access overseas. In concert with allies and partners, the United States can also marshal the resources to compete with the Belt and Road, particularly in areas where it has a comparative edge, such as information technology. Imagine a digital development fund under the auspices of the OECD that would support information connectivity projects in developing countries as a sort of counterpoint to China’s exportation of its surveillance model.

To close, looking at the scope and scale of China’s power plays, it is easy to succumb to Beijing’s narrative. But as you have heard from both Ely and Liz—and now me—that would be a mistake. The United States has a decisive vote in shaping the 21st century. Now is the moment for a new American competitiveness. Whether serving inside government or working outside, whether Democrat, Republican or Independent, whether in industry or academia, we invite you, as members of the CNAS community, to join us in this effort to address the China challenge. 

The United States can win the competition with China—and at CNAS we are laying the foundation to do just that. Thank you all for your time.