June 2014
It used to be more straightforward. That was the sentiment expressed with some frequency in the aftermath of the Cold War. As we grappled with how best to define foreign and security policy interests in an era of failed states, asymmetrical warfare, and sub-national conflicts, contrasts were drawn with the days when the Iron Curtain still divided Europe. Back then, we knew who our enemies were, we knew where they were located, and we could even say with some certainty how they would choose to attack us if that moment ever came.
It was that notion, that things had once been so much less complicated, that sprang to mind as I read the speeches made by U.S. and Chinese officials at the Shangri-La Dialogue in Singapore at the end of May. If you knew nothing about the state of Sino-U.S. relations and simply took those remarks as a guide, you would be forgiven for thinking that the United States and China considered each other enemies. U.S. Defense Secretary Chuck Hagel accused China of undertaking “destabilizing, unilateral actions” in the South China Sea and promised that the United States would not simply turn a blind eye to such behavior in the future. In response, Lieutenant General Wang Guangzhong, the deputy chief of the Chinese general staff, said Hagel’s speech was “full of words of threat and intimidation” that made “a provocative challenge against China.”
Contrast that rhetoric, however, with some basic statistics and it becomes clear that things are, once again, much more complicated. China is now America’s second largest trading partner, with bilateral trade valued at $562 billion in 2013. U.S. companies now make about $50 billion a year in new direct investments into China, while Chinese investment into the U.S. doubled in 2013 to $14 billion. On top of that, Chinese investors hold tens of billions of dollars in U.S. public and private securities.
Therein lies the paradox that will make the process of managing the U.S. – China relationship so complex for policymakers over the coming few years. While Beijing becomes more assertive in its foreign policy and U.S. allies in Asia seek reassurances that Washington will remain steadfast to its security commitments, the two countries continue to forge deeper economic ties. Great power conflict can certainly arise in spite of deep and substantial trading relationships, as the First World War demonstrated. However, if you think that security priorities will always trump economic interests, look no further than the difficulty the West is currently having in decoupling bilateral trade and investment with Russia from Vladimir Putin’s adventurism in Ukraine. National security planning increasingly involves finding ways to protect security interests without jeopardizing economic relationships.
Until now, policymakers have often been able to ignore one side or the other of this balance as the mood suited. However, recent events indicate that such a luxury may be coming to an end. China is developing greater confidence in asserting its political interests both regionally and globally, and the political and economic components of the China–U.S. bilateral relationship are increasingly intersecting.
For example, only a few days prior to the exchange of barbs between U.S. and Chinese officials in Singapore, a grand jury in Pennsylvania indicted five members of the Chinese military on charges related to alleged computer hacking and economic espionage against a number of U.S. entities. China reacted furiously to the accusations and suspended bilateral cybersecurity consultations with the United States. The Chinese government is also reported to have ordered state-owned enterprises to sever links with U.S. consulting companies, alleging that such groups were spying on behalf of the U.S. government.
Espionage no longer entails simply purloining state secrets, while retaliation is no longer limited to expelling a few diplomats. The game is now played very differently simply because there is a far greater number of actors involved in the relationship. Many major U.S.–based professional services businesses such as accounting firms, law firms, and management consultancies have large footprints in China, and Chinese clients on their books. Chinese companies are actively acquiring stakes in U.S. businesses. And many U.S. financial services companies act on behalf of Chinese businesses on their international capital raising activities. The possibility of retaliating via the economic relationship by severing such ties is almost limitless and has a much greater potential impact than a simple diplomatic response.
The situation is further compounded by the continued dominance of state-owned enterprises in China’s economy. Much effort has been made to give these companies the appearance of any other multinational enterprise. Their shares are listed on international stock exchanges, their managers often have MBAs from Western business schools, and their company strategies emphasize a focus on competitiveness and profitability.
Nevertheless, doubts remain about the extent to which these state-owned enterprises are truly independent of China’s foreign policy apparatus. Secretary Hagel’s comments about China’s provocative acts in the South China Sea were prompted, in part, by the decision of CNOOC, one of China’s large state-owned oil companies, to deploy a deep water drilling rig in disputed waters also claimed by Taiwan and Vietnam. There appears to be no purely commercial reason why CNOOC would have chosen that particular point in time to undertake such a provocative act. This indicates that the move had broader political objectives and belies claims by Beijing that it is reforming the state-owned sector and giving it greater political independence. That is only likely to arouse further suspicion about the true motives of state-owned enterprises in all industries and in all parts of the world. Yet we cannot escape the fact that those companies are the principal interlocutors in the China-U.S. trade relationship.
As these complexities grow, the challenge for U.S. policymakers over the coming few years will be to try and maintain the balance between protecting national security and continuing to foster an important economic relationship – assuming that such a relationship is deemed worthy of preservation. That will be no easy task. It is entirely conceivable that foreign policy decisions aimed at countering an assertive China could have material consequences for the financial performance of U.S. companies affected by those decisions and, by extension, for the U.S. economy as a whole. Equally, businesses that continue to invest in China or partner with Chinese companies can no longer operate under the assumption that trade is immune to politics and that money can be made independent of the broader political relationship between these two countries.
Twenty years ago, policymakers had to adapt the national foreign and security policy apparatus to suit an era in which the potential for great power conflict appeared to be receding into history. Now, they are faced with the new challenge of a rising China that, economically, is one of America’s largest partners but which, politically, presents state-based challenges of a magnitude not seen since the days of the Soviet Union. U.S.–Soviet trade was often no more than negligible, which helped to make the policymaking process considerably easier. Indeed, the Soviet Union’s persistent internal economic problems and desire for more open trade relationships to overcome them meant that the bilateral economic relationship offered a tool with which the U.S. could pursue strategic political objectives. That is no longer the case. For the time being, much of the tension in Sino-U.S. relations remains confined to rhetoric, but that will not last forever. Eventually, political decisions will start to have an impact on trade relations. And if they don’t already, the depth of trade relations will bind the hands of security planners. Policymakers can only pine for past simplicity for so long.
David J. Chmiel is the managing director of Global Torchlight, an international political and security risk consultancy. He previously practiced for ten years as a corporate lawyer in the London and Chicago offices of a major international law firm. The opinions expressed herein are his own. He can be followed on Twitter @LONDJC
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