Geopolitical competition has led both China and the United States to increasingly securitize and weaponize their foreign economic policies. Securitization seeks to limit one’s economic vulnerabilities. It is defensive. Weaponization seeks to exploit others’ vulnerabilities. It is offensive. In a bilateral relationship, the economically less dependent (less vulnerable) party is able to impose – or credibly threaten to impose – relatively greater costs on the more dependent (more vulnerable) party.
So-called asymmetric interdependence is therefore a source of political-economic coercive power for one party and a source of vulnerability for the other party. Power and vulnerability are also embedded in networks, not just in bilateral relationships. A country that controls – or exerts substantial influence over – economic-financial networks can often exercise even greater power than in a simple asymmetric bilateral relationship. For a start, it can do so by deterring so-called third-party spoilers (and black knights) from undermining bilateral measures targeting another country. It can also do so by coercing third parties to align their policies with those of the coercer, thus imposing even greater costs on the coercee. A country that is highly dependent on a network controlled by an antagonist has an incentive to reduce its reliance on this network and, if this is possible, to create an alternative network.
Decoupling is generally understood as a policy that severs economic-financial ties in an attempt to reduce bilateral vulnerabilities. But even if country A manages to reduce its bilateral dependence on country B, it may yet be vulnerable to coercion due to its reliance on networks that are controlled by country B. Today, American-Chinese competition is about exploiting or limiting bilateral vulnerabilities as much as it is about leveraging or neutralizing the power embedded in economic-financial networks. With Washington continuing to exert significant power over many important economic-financial networks, Beijing is keen to reduce its dependence on US-controlled networks and to establish alternatives to them.
Securing trade routes
US-Chinese security relations are characterized by a classic security dilemma. Chinese attempts to reduce its own vulnerability by enhancing its military capabilities are seen as threat by America, and vice versa. China’s policies of pushing out the security perimeter in the South and South China Sea and of trying to break through the first island chain by laying claim to Taiwan represent an attempt to deny the United States and its allies the control over chokepoints critical to Chinese seaborne trade, such as the Strait of Malacca. By providing or denying China access to crucial sea lines of communication, Washington can exert network power at a relatively low cost, namely by controlling critical nodes or chokepoints.
US control of this crucial network of seaborne of communication is precisely what China is trying to contest. China’s naval strategy has shifted from ‘nears seas defense’ to ‘far seas protection’ in order to secure crucial sea lanes. Asymmetric capabilities are meant to deter the US navy from operating or at least from intervening in the near seas, while the construction of a blue water navy aims to secure crucial seaborne trade routes beyond the first and second island chains. China’s naval strategy is flanked by economic policies, such as the Belt Road Initiative, which seeks to reduce China’s dependence on seaborne trade through the construction of regional and even ‘inter-continental’ energy and transportation networks, while at the same time strengthening Beijing’s naval and security infrastructure along its major trade routes, connecting China to the Middle East (Djibouti, Pakistan, Sri Lanka). China’s geo-strategy is in large part informed by its dependence on critical imports, such as food and energy and hence its vulnerability to the interdiction of physical trade.
Managing trade dependence
China is more dependent on international trade than America. China is also more dependent on trade with America than America is on China. Aside from interdicting the physical movement of goods, China is vulnerable to coercive US trade policies. In order to reduce its vulnerability to antagonistic policies, China is seeking to set up bilateral and regional free trade agreements, like the Regional Comprehensive Economic Partnership. (The trade pact is shallow, but it is a start.) In the guise of ‘dual circulation’, a policy aimed at increasing domestic at the expense of foreign demand, China is also trying to reduce its overall dependence on international trade. China is trying to reduce both its bilateral dependence on the United States, while laying the foundations of more China-centered regional trade network.
Washington, having abandoned the Trans-Pacific Partnership but being aware of its diminishing influence in Asian trade, has been trying to counter Beijing’s attempts to create a more China-centered trade regime in Asia through initiatives, such as the Indo-Pacific Economic Framework (IPEF). This is meant to increase or rather preserve US network power.
Dealing with technological vulnerabilities
China is also very vulnerable to US export control policy. US policy is increasingly focused on denying China access to ‘critical and foundational technologies.’ With the help of the so-called foreign direct product rule, Washington is able not to just to prevent American companies from exporting critical technology to China. But it can also prohibit non-US companies that use US technology to produce designated goods from exporting them to China. By controlling a critical node of respective global technology production networks, United States is able to prevent China from acquiring key technologies, strengthening its coercive power.
China has intensified efforts to wean itself off technological reliance on America. Beijing’s Made in China 2025 and China Standards 2035 policies are meant to turn China into a technological leader in its own right and to set future global technology standards in order to reduce China’s vulnerabilities and over time create its own network. Meanwhile, the US remains deeply concerned about its own trade-related technological vulnerabilities, as the passage of the recent CHIPS Act, which subsidizes the development and the onshore production of advanced semiconductors, as well as the various initiatives to cooperate more closely with its allies in terms of supply chain security, such as the EU-US Trade and Technology Council, demonstrate.
To prevent China from acquiring advanced US technology, Washington has complemented its export control policies with tighter restrictions on Chinese investment in the United States. Washington is even considering introducing outward investment screening in order to preempt the risk of technological leakage to China. Washington has also imposed limits on US financial investment in military companies and companies tied human rights abuses. But these are less effective, as China does not depend on American financing. Meanwhile, China has always maintained tight control over inward foreign direct investment, particularly in sectors deemed critical to national security including indigenous technology, recent liberalization efforts in selected sectors, such as finance, notwithstanding.
Creating A Parallel financial regime
Nearly eight decades after the creation of the Bretton Woods system, Washington remains the single most influential actor in the international monetary and financial realm. The United States is the largest shareholder of the International Monetary Fund and the World Bank, providing it with significant influence. It is also the largest shareholder of the Asian Development Bank (holding the same share of voting rights as Japan). This invariably provides it with significant influence.
Not surprisingly, China set up an Asian Infrastructure Investment Bank (AIIB), where Beijing is the dominant shareholder. Chinese government and state-controlled banks and companies have lent extensively to developing economies through the Belt Road Initiative, making China the world’s largest official lender – larger than the World Bank. The reasons for China’s foray into official international finance are multifaceted (export excess industrial capacity, diversify foreign assets, upgrade and recenter regional transportation networks). But laying the foundation of a parallel regional financial regime (or network) with China at its center has always been an important driver.
The United States also continues to be the most influential actor in international private capital and currency markets. This gives Washington power and renders Beijing vulnerable. For a start, China as an ‘immature creditor’ is forced to hold its international assets in renminbi. The United States is able to issue international liabilities in dollars thanks to its ‘exorbitant privilege’. Even though China is the creditor and the United the debtor, it the United States that has leverage due to China’s dependent on the dollar as a the dominant means of international payment.
Tackling currency vulnerabilities
Moreover, the international financial system remains largely dollar-based. Washington’s ability to prevent countries from engaging in dollar-denominated transactions, and, even more so, its ability to weaponize international dollar-based financial networks through secondary dollar sanctions makes Beijing feel more than uncomfortable. (Washington’s decision to freeze Russia’s international reserves will have done nothing to alleviate China’s concerns.) Once again, the dollar provides Washington with substantial network power, not just bilateral power, as it effectively allows Washington to deter third countries from engaging in dollar-based transactions with a target party or country.
Not surprisingly, Beijing has been trying to enhance the role of its own currency by internationalizing it. It managed to have it included in the International Monetary Fund’s special drawing rights’ basket. But underdeveloped domestic financial markets, extensive capital controls and continued government intervention in Chinese financial markets have so far held back the rise of the renminbi as an alternative to the dollar. But it is a first step. Similarly, the creation of Cross-Border Interbank Payment System (CIPS) as a future potential alternative to SWIFT (which is an inter-bank financial messaging system, not a payments system) as well as the creation of a digital yuan should be seen as attempts to lay the foundation of a alternative networks not controlled by the United States.
US-Chinese competition is systemic in the sense that its outcome will shape reshape the structure of the international system. But it is also systemic in the sense that it will see the emergence of, and competition between, alternative economic governance regimes and networks. Beijing is fully aware of the power and influence the present regimes provide the United States. It is no coincidence that it has launched the Global Security Initiative or other initiatives, such as the Global Development Initiative, as alternatives to what it regards as US-dominated regimes. And when the EU speaks of China as “systemic rival promoting alternative models of governance” or the United States in its recently released National Security Strategy refers to China as a “competitor with both the intent and, increasingly, the capability to reshape the international order”, it shows that Brussels and Beijing are equally aware of the power and vulnerability embedded in security, economic and financial networks.