China Stops Putting Economics First

China Stops Putting Economics First

Is Beijing's foreign policy temporarily off course, or is it revealing its true direction?

Tensions with Japan led China’s leaders to stay away from a meeting of global finance chiefs held in Tokyo last week. This is an example of China’s increasingly assertive foreign policy, which is endangering the mutually beneficial economic environment it built with the United States and other trading partners.

It wasn’t always this way. From 1997 to 2005, China had an exceptionally adept foreign policy. Beijing orchestrated a number of moves that drew favor from its neighbors—and from many observers in the United States as well.

China offered $1 billion in aid to Thailand during the 1997 financial crisis without the tight conditions imposed by the International Monetary Fund (IMF). It also established the China-ASEAN (Association of Southeast Asian Nations) Free Trade Agreement and did not require immediate reciprocity in tariff reductions from the Southeast Asian states. China also encouraged the development of the “ASEAN Plus Three” framework to link itself with South Korea, Japan and Southeast Asia, and in many settings Beijing stressed that China would have a “peaceful rise.” Overall, there was a major effort by the Chinese (and those who spoke for China in the West) to say that Beijing’s leadership was focused on economic development, not military strength.

Since about 2005, however, China has pursued a much more assertive, less cooperative foreign policy. Beijing has made assorted efforts at slowing progress in the East Asian Summit (where the United States has some influence). Most importantly, China has taken an aggressive stance on a series of territorial issues, from the dispute with Japan over the Senkaku/Diaoyu Islands to disagreements with the Southeast Asian states over the Spratly Islands and the South China Sea. Beijing has also reinitiated its disagreements with India over sovereignty in Arunachal Pradesh.

Those who want to portray Beijing’s policies in a favorable manner have said that these territorial disputes are long-standing ones and that China is just reasserting old claims.

Yet, there are some new developments that cast doubt on the view that China is just pursuing a cooperative, “economics first” strategy. In the South China Sea, China has been willing to use force to impose its will on Vietnam and the Philippines regarding disputed claims. To protect its shipping on the Mekong River, China now has put its armed patrol boats on a part of the Mekong—to the dismay of the government in Laos.

Moreover, in contesting sovereignty over the Senkaku/Diaoyu Islands, China has adopted very aggressive policies toward Japan. Beijing cut off supplies of vital rare-earth metals (necessary for manufacturing many electronic devices). Chinese ships repeatedly have violated Japanese waters, and one even rammed a Japanese Coast Guard boat.

Now, apparently in protest over the transfer of ownership of the Diaoyu Islands from a private investor to the Japanese government, Beijing has decided to withdraw the participation of Chinese state-owned banks from this month’s World Bank/IMF meetings being held in Japan.

What should we make of this new, more strident Chinese foreign policy?

It is possible that maneuvering behind the scenes over the current political transition is exacerbating nationalist trends in China and no one wants to take the unpopular step of stopping protests and taming the rhetoric.

It is also possible that, because of censorship and government control of research institutes, many in the Chinese leadership and the Chinese public more broadly actually believe that the Senkaku Islands and the entire South China Sea belong to China.

However, the senior leadership in Beijing and the top figures in the research institutes all have access to foreign sources. They know that, at a minimum, China’s claims are overstated.

No official explanation has been given for the withdrawal of the state banks from the World Bank/IMF meetings. Since Beijing has succeeded in getting a Chinese citizen, Min Zhu, appointed deputy managing director of the IMF, presumably China wants to keep reasonable relations with the fund. Thus, the world is left to intuit that this should be seen just as a protest against Japan. The problem with this type of blunt diplomacy is that it appears petulant and is unlikely to solve anything. Only an offer to seek arbitration of some kind is likely to move the Senkaku/Diaoyu controversy beyond the present miasma.

What does this tell us about the bigger issues in Chinese foreign policy? Have the Chinese misjudged the advantages of coercion? We don’t know the Chinese leadership’s views on these issues, but the current trend casts doubt on the idea that economics is China’s principal concern.

China continues its rapid military modernization, has recently used its clout with Cambodia to block any resolution within ASEAN of the South China Sea territorial issues, and thwarts the United Nations in developing a comprehensive approach to the Iranian or Syrian situations.

In addition, although specialists have been familiar with the problems of Chinese intelligence penetrating corporations, the American public has only recently gotten information on these intrusions. Chinese hacking into U.S. government and corporate computers occurs on a frequent basis. Then there was the attempt by Chinese-owned Ralls Corporation to buy a wind farm in Oregon overlooking a U.S. military base. This month, the release of information by the House Intelligence Committee that two Chinese telecommunications corporations, Huawei and ZTE, are failing to provide transparency on their operations indicates that strategic objectives prevail over economic ones in many parts of Chinese foreign policy.

Since China is no longer a net purchaser of U.S. Treasury securities and now wants to shift its capital outflows to equity purchases, Washington has greater leverage than it did when Beijing was a principal financier of the U.S. fiscal deficit.

China is unlikely to give up its mercantilist diplomacy, so the United States should pose choices for Beijing. If China’s next leaders want a cooperative economic environment, then they need to pursue a less abrasive foreign policy. If the stridency continues, then we know that the peaceful rise was only a phase—and the United States is in for a more direct challenge.

David Denoon is a professor of politics and economics at New York University and director of NYU’s Center on U.S.-China Relations. He previously served as vice president of the U.S. Export-Import Bank and as deputy assistant secretary of defense. He is also author of The Economic and Strategic Rise of China and India (Palgrave Macmillan, 2007).