Geostrategic Implications of China’s Twin Economic Challenges - by CWP alumni William Norris

Monday, Jun 19, 2017
by dsuchens

Introduction - China’s economic development is entering a phase in which its old growth model is reaching its limit. The Chinese government has embarked on an effort to reorient the economy from an investment- and export-driven model toward one predicated on a larger role for consumption and market forces. At the same time that Chinese policymakers are attempting this structural reorientation, China is also experiencing what many observers consider to be a new normal of much slower economic growth. Although both of these economic phenomena are likely to carry independent foreign policy and security considerations, they could also interact to uniquely affect Chinese foreign policy and security behavior. U.S. policymakers should carefully consider how China’s foreign policy could be affected by those twin economic challenges.

The economic downturn and concomitant structural shift in China’s economy has already begun affecting its foreign policy. Security, not economics, is becoming one of President Xi Jinping’s—and China’s—top strategic priorities. As China’s economy reorients domestically and becomes less reliant on international ties, it will likely become less constrained. Moreover, the current economic slowdown and reorientation in China is uncharted territory for the country’s rise; navigating this novel terrain could be more dangerous than is commonly realized.

To prepare for such eventualities, the United States needs to remain flexible in its strategic assessment of China’s grand strategy. Some of the strategic assumptions that motivated a rising China’s grand strategy may no longer weigh as heavily, and U.S. policy should be nimble enough to revisit those assumptions and adjust as necessary.

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Links Between Economics and China’s Grand Strategy

Economic development has been at the heart of China’s modern strategic vision.[i] Deng Xiaoping, who launched China’s economic reforms, drove a critical geostrategic reorientation away from Mao Zedong’s obsession with perceived existential threats facing China. Deng’s official reinterpretation of the international strategic situation allowed him to downplay military concerns and provided the ideological justification for prioritizing economic development.

Deng’s Four Modernizations campaign invested heavily in updating China’s agriculture, defense, science and technology, and industrial sectors, elevating economic development in each area over other strategic priorities, including traditional national security concerns.[ii] Because the world was no longer perceived as hostile, China was free to focus on economics. Now, after decades of compounding growth have made China an economic great power and with its military modernization beginning to bear fruit, China’s economic and security position enables it to revisit some of the strategic constraints under which it once operated. Given that so much of China’s post-Deng grand strategy has focused on securing the country’s integration into the global economic order, a secular shift toward low growth is likely to have a significant effect on China’s foreign policy and strategic orientation.

Until the 2008 financial crisis, a distinctly economic logic drove China’s foreign strategy. China relies on the ability to sell its products around the world much more than the United States does.[iii] China has used an export-oriented model of economic development that entailed deepening ties to the globalizing world economy.[iv] This model delivered near double-digit annual growth for almost three decades.[v] To enable this economic exchange, China needed steady access to a relatively stable international environment.[vi] Much of contemporary China’s grand strategy and foreign policy has thus been focused on securing China’s ties to the global system. For example, joining the World Trade Organization helped ensure steady access to markets abroad for Chinese exports. Japan’s official development assistance, which Chinese foreign policy helped secure, provided an important early source of capital. After the government response to the Tiananmen Square protests of 1989 left China cut off diplomatically and economically, overcoming Beijing’s isolation became an important foreign policy objective for subsequent presidents. Securing reliable supplies of raw material as China emerged as the world’s workshop motivated many high-level official delegation visits abroad under Hu Jintao.

These diplomatic efforts largely succeeded. China’s deep ties to the international economy propelled its growth to become the world’s second-largest economy.[vii] China now has greater economic sway in both its region and in the global system.[viii] Beijing’s maturation over the past forty years now permits it to revisit its grand strategic prioritization of economic growth and integration, and make greater use of its economic heft to pursue strategic objectives. Such a shift has been made even more likely by

The Effects of Xi Jinping’s Leadership

Whereas Deng redefined China’s grand strategy away from security and toward economic development, Xi has reemphasized security. Just as Deng’s de-emphasis on security concerns played an important part in clearing the way for China’s economic growth, Xi’s perspective is fundamentally shaping China’s grand strategy. Although Deng’s successors, Jiang Zemin and Hu Jintao, largely maintained his grand strategy, which prioritized economic growth and regional stability, evidence is mounting that Xi is placing China on a different trajectory.[i]

There are several indicators that suggest such a shift is occurring. First, Xi seems more willing to take geopolitical risks to stand up for China’s territorial interests, even if that means tolerating a higher degree of regional instability.[ii] Second, Xi has argued that national security, not the economy, ought to supersede all other concerns.[iii] Nonetheless, he recognizes that economic growth is critical to maintaining popular support for the Communist Party of China (CPC).[iv] He has advocated for painful reforms that could result in slower growth in the next few years to ensure continued long-term economic growth. He seems to be willing to tolerate a lower level of growth if that is the price of maintaining the party in power.[v] Third, Xi’s preoccupation with security—even at the expense of economic benefit—is also evidenced by recent legal measures. The National Security Law, which outlines the government’s authority to respond to threats, is designed to support the party and protect against potential subversion.[vi] Similarly, the law on nongovernmental organizations (NGOs), which regulates and effectively limits the work of foreign NGOs in China, could be construed as an effort to prevent external forces from undermining the party’s dominance of civil society. The potential economic blowback—an exodus of multinational technology companies unwilling to provide source code to the Chinese government or of foreign NGOs that help fill holes in the social welfare net—from these efforts has not had much restraining effect.[vii] Objections to such measures have not resulted in a moderation of these laws. Fourth, the Xi administration created the National Security Commission, a high-level coordinating body that elevated and centralized the internal and external security missions directly under Xi.[viii] Fifth, the sweeping military reforms announced in November 2015, while partly designed to enhance war-fighting capabilities, also indicate Xi’s desire to consolidate the party’s dominance over the military. Implementing military reforms of this magnitude will require diverting top-level attention away from the considerable economic workload.

 

[i]. Elizabeth C. Economy, “China’s Imperial President,” Foreign Affairs 93, no. 6 (November 2014), pp. 80–91.

[ii]. Most visibly, this tendency has been evidenced in some of China’s territorial disputes in the East and South China Seas. For more on the domestic political forces at work in China’s East China Sea dispute, see William Norris, “Explaining Recent Senkaku/Diaoyu Tensions: The Domestic Dimension,” Education About Asia 19, no. 2 (Fall 2014), pp. 43–44.

[iii]. At the first meeting of China’s new National Security Commission on April 15, 2014, Xi presented his “holistic” concept of national security. In that speech, he noted that “[the] Party should make national security its top priority.” See Xi Jinping, “A Holistic View of National Security,” The Governance of China (Beijing: Foreign Languages Press, 2014), pp. 221–222. For a helpful, early discussion of Xi’s ideas regarding national security priorities, see David M. Lampton, “Xi Jinping and the National Security Commission: Policy Coordination and Political Power,” Journal of Contemporary China 24, no. 95 (2015), pp. 759–777. Also see Yiqin Fu, “What Will China’s National Security Commission Actually Do?” Foreign Policy, May 8, 2015, http://foreignpolicy.com/2014/05/08/what-will-chinas-national-security-commission-actually-do. Note that Xi’s understanding of security primarily revolves around maintaining the current regime in power.

[iv]. Specifically, rising individual incomes, rather than general economic growth, seem to be an important source of party legitimacy. For recent survey work to this effect, see Bruce J. Dickson and Mingming Shen, “They Have Issues: Do Public Goods Produce Public Support in China? Performance Legitimacy and Popular Support in China,” working paper, 2013: https://gwucpw.files.wordpress.com/2011/10/dickson-and-shen-they-have-is....

[v]. Here, Xi seems to have been deeply influenced by his interpretation of how Mikhail Gorbachev mishandled challenges facing the Soviet Union.

[vi]. National Security Law of the People’s Republic of China, July 1, 2015, http://www.cfr.org/homeland-security/national-security-law-peoples-republic-china/p36775.

[vii]. See, for instance, Paul Mozur, “New Rules in China Upset Western Tech Companies,” New York Times, January 28, 2015, http://www.nytimes.com/2015/01/29/technology/in-china-new-cybersecurity-rules-perturb-western-tech-companies.html?_r=0.

[viii]. Creating a national security council was something that previous administrations unsuccessfully tried. National security, particularly a renewed focus on internal security, has been a priority for Xi. Additionally, the propaganda apparatus and censorship efforts have both enjoyed a resurgence under him.

 

[i]. Wang Zhengyi, “Conceptualizing Economic Security and Governance: China Confronts Globalization,” Pacific Review 17, no. 4, (2004), pp. 523–545.

[ii]. The Four Modernizations were agriculture, industry, national defense, and science and technology. While military modernization was still one of the national priorities—particularly after the 1991 Gulf War, as evidenced by decades of double-digit spending increases that typically outpaced China’s annual GDP growth—Deng’s modernization efforts rested squarely on an economic, rather than a military, prioritization. Incidentally, this de-emphasis on security also facilitated Deng’s consolidation of power over the post–Cultural Revolution People’s Liberation Army, which had permeated almost all aspects of the society, economy, and governing spaces.

[iii]. While exports in the United States represented only 14 percent of GDP in 2012, Chinese exports were 30 percent of its GDP. Trade represents only 23 percent of the United States’ GDP, in stark contrast to China’s 42 percent. These figures, based on 2014 data from the World Bank, reflect the different structural characteristics between the U.S. and Chinese economic engines.

[iv]. By 2009, the magnitude of the U.S. financial crisis made it clear that China would likely suffer some economic setbacks as a result of slack demand for Chinese exports. With the financial crisis, China faced the dangerous prospect of a steep decline in demand abroad that directly affected China’s exports, which had been the cornerstone of its growth. To counter this decline and prop up GDP growth, China accelerated its planned investment projects and opened the investment spigots both through its monetary policy and its banking system. Effectively, China was offsetting and substituting investment for the export decline so that the top line GDP number remained relatively stable.

[v]. Between 1978 and 2005, China’s GDP grew at an average annual rate of 9.6 percent. See Carsten A. Holz, “China’s Economic Growth 1978–2025: What We Know Today About China’s Economic Growth Tomorrow,” World Development 36, no. 10 (2008), pp. 1665–1691. For official data, see the China Statistical Yearbooks from the National Bureau of Statistics of China. Even if growth slows, China is already the world’s second-largest economy and a massive regional actor in Asia.

[vi]. This access to the international economy has been critical for China’s success. With China’s accession to the WTO, China’s trade and overall GDP grew rapidly throughout the early part of the twenty-first century, further propelling China’s rise. By 2003, trade comprised more than half of China’s GDP. See “Merchandise Trade (% of GDP),” World Bank, http://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS?page=2.

[vii]. In 2007, China surpassed the United States to become the world’s largest trading nation in both total imports and exports.

[viii]. For more on how China actually employs its economic power, see William Norris, Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control (Ithaca: Cornell University Press, 2016).

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