War by Other Means

by Robert D Blackwill

  Investors had good reason to be nervous, it turned out, as Beijing officials subsequently announced (twice) that China would no longer welcome investments by pro-Taiwanese-independence businessmen.33 Beijing also reportedly delayed the granting of visas to some Taiwanese trying to visit the mainland, and boycotted the Computex 2004 conference in Taipei.34 Some PRC actions went further, targeting specific companies seen as having ties to Taiwan’s Democratic Progressive Party. A Taiwanese plastics company, Chi Mei, saw its stock price drop 5 percent overnight, while its plans to open a factory in China were postponed indefinitely.35 Officials in Beijing were uncharacteristically forthright about it all, explaining that “Beijing has been actively encouraging Taiwan investment in the mainland despite lingering political tension.… [T]he policy stems from a strong belief that closer economic ties will benefit and help accelerate eventual reunification of the mainland and Taiwan … [B]ut a small number of Taiwan investors have abused the policy … they have funded pro-independence politicians with profits earned on the mainland.”36 Zhang Mingqing, a former spokesman with the PRC’s Taiwan Affairs Office, noted that Beijing “does not welcome people who make money on the mainland and return to Taiwan to support independence.”37

  When President Chen was reelected in 2004, Beijing embarked on what became known as the “fruit offensive” of 2004–2005, aiming to “woo farmers in rural southern Taiwan by offering economic carrots to those who might have an interest in gaining access to the Chinese market.”38 Beijing allowed the importation of eighteen types of Taiwanese fruits (up from five) and promised to give duty-free status to fruit exports as well as ensure that customs clearance, inspection, and quarantine procedures were expedited.39

  When the Kuomintang’s candidate, Ma Ying-jeou, was elected president of Taiwan in 2008, TAIEX stock prices soared, a not-so-subtle sign that Beijing’s approval still weighed heavily on investor approval for the country.40 Just as Beijing has been quick with geoeconomic ways to punish earlier proindependence administrations, it showed equal zeal in using geoeconomics to reward Taipei for its choice of leadership in President Ma. The Taishang (Taiwanese business leaders who view economic interdependence as a catalyst for common visions of shared national identity, and who perhaps not coincidentally have hefty business deals and investments inside mainland China), always welcomed on the mainland, found even more favor.41 From Beijing’s perspective, the more economic interdependence there is between the two sides, the less likely Taiwan’s bid for independence becomes.

  President Ma proved to be a reliable supporter of Beijing’s efforts to deepen economic interdependence. A cross-strait currency swap agreement signed in August 2012 has cleared a path for China to use monetary policy as a means for further influencing Taiwanese behavior at the global level.42 Renminbi-denominated bonds, or “Formosa bonds,” were issued by four Chinese state-owned banks in late 2013, a move that further boosts Taiwan’s bond market and sets a precedent for other mainland Chinese issuers. With combined values of RMB 4 billion, the first issuance of these bonds helps give mainland China broader access to offshore renminbi funds as the market for Formosa bonds continues to develop.43

  China’s currency efforts—these Formosa bonds as well as a currency swap agreement that will reduce exchange rate risks between the two countries in both the trade and financial sectors—may well be as purely economic in motive as anything ever can be when it involves Taiwan.44 But from Taiwan’s perspective, even if the reasons are purely economic, when dealing with China it is the contingencies that matter. “With Taiwan hoarding hundreds of billions of yuan, especially now average citizens are also including renminbi as part of their assets, any significant fluctuation in the yuan’s exchange rate may undermine Taiwan’s financial stability,” explains Kenneth Lin, an economist at National Taiwan University. “With the renminbi’s exchange rate controlled by the government rather than decided by the free market, Beijing could wield it as a weapon.”45

  Keenly aware that reliable friends across the strait can be difficult to find, China worked to influence Ma’s reelection. Recalling its fruit offensive nearly a decade earlier, China embarked on another agricultural buying spree—this time of Taiwanese milkfish—as the 2012 presidential elections approached. In a bid to help President Ma win reelection, a company based in Wuhan signed a letter of intent to buy 200 tons of milkfish and milkfish products within two years—targeting Tainan milkfish farmers, concentrated in a part of the island that traditionally favors Taiwanese independence and is more closely aligned with Ma’s rival party, the Democratic Progressive Party.46

  Even better, when Beijing’s milkfish farming tactics did not translate into voter support, China’s ranking official regarding Taiwan visited the province to learn why.47 Perhaps, as one commentator wrote in Taiwan’s leading newspaper shortly after Beijing’s listening tour, “the big fanfare China made about how much money it was spending to buy milkfish from Taiwan offended Taiwanese people’s sense of dignity.”48 At the same time, he cautioned against dismissing China’s geoeconomic tactics, heavy-handed as they were. Arguably most striking about the episode was not so much that China attempted to buy geoeconomic influence in such an open fashion or that the effort seemingly failed but rather that Chinese leaders later came to Taiwan to understand why. For Du Yu, deputy chairman of the Taiwan Affairs Office, and others, Zheng Lizhong’s visit came as evidence that Beijing is always learning, always seeking out ways to hone its geoeconomic techniques.

  Learning and adaptation aside, there may be limits to how far Beijing’s geoeconomic reward strategy can reach. Taiwanese citizens are becoming acutely aware of their deepening vulnerability to Chinese geoeconomic pressure, and public opposition to continued economic liberalization with China has caused Taiwan to partially hit the brakes.49 Nowhere were these anxieties more in evidence, however, than in the mass demonstrations that erupted in Taipei and across the country in March 2014, with crowds of 100,000 or more rallying against an acceleration of the Cross-Strait Services Trade Agreement.50 Polls suggest that roughly 90 percent of Taiwanese were against the agreement even though it favored Taiwan on paper, opening up eighty mainland services sectors to Taiwanese investment, compared with sixty-four Taiwanese sectors opened to mainland investors.51

  Nor has Beijing restricted itself to just incentives. Beijing’s patriotic army of hackers has actively used cyber warfare to target the Taiwanese government and infrastructure networks. For over a decade, Chinese hackers have launched countless cyberattacks intended to harass, disrupt, or paralyze Taiwan’s financial, transportation, shipping, military, and other networks.52 The external websites of at least one government agency were attacked by hackers 3.34 million times in 2012.53 The attacks have been enough to convince Taipei that a targeted, coordinated cyberattack could alter the strategic calculus, possibly “[determining] the tactical landscape before a kinetic [Chinese] military operation” aimed at reunification.54 Beijing insists it is falsely blamed for hacking in Taiwan, all the while conceding the utility of cyber warfare in shaping economies and infrastructure.55

  Beijing’s use of geoeconomic instruments to influence cross-strait dynamics in its favor has clearly been most effective when least aggressive. High-profile, high-pressure geoeconomic tactics used during the Lee and Chen presidencies backfired more often than not.56 But the far-reaching use of trade, investment, monetary policy, cyber warfare, aid, and the threat of sanctions has helped prevent Taiwanese independence and supported regime behavior favorable to Beijing. Given the economic interdependence linking the two sides, Beijing will inevitably continue to use geoeconomic tools to influence Taipei, thereby guiding the island’s geopolitical trajectory toward gradual reunification.57

  Finally, so much of the effectiveness of China’s economic interdependence strategy stems from the fact that it not only raises the costs of conflict for Taiwan but—because of the financial center that Taiwan represents to the world—also raises the costs of conflict for the rest of the world.58
China is quite aware that for Washington, Tokyo, or others who might look to deter China from military action to take Taiwan, there are reasons to think the economic costs for outsiders could be far higher than for virtually any other territorial dispute in the world. In this way, Taiwan’s systemic importance to global markets is likely more of a geoeconomic vulnerability than an asset for Taipei.

  North Korea: Preserving Chinese Influence over Pyongyang through Assistance Flows

  Absent Chinese assistance flows to North Korea, which are almost entirely geopolitical in design and objective, the Korean Peninsula would look vastly different today. The China–North Korea bilateral relationship, once deemed by Mao Zedong to be as close as “lips and teeth,” continues to be dominated by North Korea’s heavy reliance on China.59 Since the end of the Cold War, China, through its bilateral assistance to Pyongyang, has dictated the terms of North Korea’s domestic stability and its economic relations with the outside world. China has fashioned these terms along a series of core Chinese national interests, defined by Samuel Kim, a senior researcher at Columbia University, as the “five no’s”: no instability, no collapse, no nuclear weapons, no refugees or defectors, and no conflict escalation.60 Ensuring the continuation of the status quo on the Korean Peninsula, promoting stability along its borders, and expanding Chinese influence in the region has been the modus operandi for China’s assistance to North Korea.61 Chinese geoeconomic policy toward North Korea, in short, supports an overarching geopolitical strategy of buffering against any intensified foreign presence in the region.

  Despite ideological preaching of self-reliance (or juche), North Korea has been anything but self-sustaining since the end of the Korean War. While assistance from Beijing to Pyongyang has steadily increased since the 1950s, reaching new highs during the severe famine of 1994–1998, it was not until the late 1990s that China began to utilize its economic ties with North Korea in support of China’s geopolitical relationships within and beyond northeast Asia.62 Beijing’s leverage is considerable. China accounts for between 65 and 85 percent of North Korea’s total trade volume.63 It also serves as North Korea’s chief food supplier; while exact numbers remain unknown, fertilizer aid totals are thought to average 200,000 tons per year, while annual food aid from Beijing exceeds 2 million tons.64

  China has on three occasions also purchased gold from Pyongyang, cash-only transactions that point to the feeble state of the North Korean economy—and China’s desire to keep the hermit kingdom afloat.65 The last thing Beijing wants is a collapse of the Kim regime, a political transition thought to be rife with opportunity for U.S. intervention along China’s periphery.66

  But by far the most significant component of China’s geoeconomic leverage over Pyongyang is the export of approximately 500,000 tons of oil per year, which accounts for roughly 90 percent of North Korea’s energy imports (these export levels are all the more striking considering China’s own energy insecurity).67 Without this oil, the North Korean military would be seriously weakened and the already faltering industrial sector would come to a standstill. Beijing demonstrated its awareness of this dependence, using it to send a message to the Kim regime by shutting off the Liaoning–North Korea pipeline for three days after Pyongyang conducted missile tests in 2003.68 In April 2014, reports surfaced that monthly shipments of crude oil from China to North Korea had been halted in the first quarter of the year, suggesting Beijing’s displeasure at indications that Pyongyang sought to escalate tensions on the peninsula.69

  China has also shown itself unwilling to be supplanted by other oil suppliers. In October 2013, light oil heading to North Korea from Iran was held at port in China under a penalty of $2 million in storage expenses. Terms of a North Korea–Iran oil export contract dictate that Pyongyang pays Tehran for light oil but must route its purchase through China’s state-run petroleum companies for refining.70

  No one really knows the full sums of Chinese aid and investment to North Korea each year. In the words of one expert, “The aid that Beijing gives Pyongyang is kept and treated in China as a national top secret.”71 What is clear is that there is a gap between what North Korea expects to receive and where China actually directs its aid. Pyongyang may request support in niche sectors, but the majority of Chinese aid is funneled into sectors where China’s own needs lie (e.g., resource extraction, infrastructure development).72 The special economic zone (SEZ) currently under development in the North Korean city of Rason is one such example. Rason was already a warm-water port for both China and Russia, but China won fifty years of control over the port after promising an airport, new boat piers, a coal-fired power plant, a railway line connecting Rason with China’s Jilin province, and an additional $3 billion in investments. Chinese development of the SEZ creates trading opportunities for landlocked Jilin province, the potential for an Arctic shipping route to Europe, and a strategic port city for the Chinese navy.73

  Similar selection patterns are seen in China’s infrastructure development assistance to North Korea—essentially, the bigger the strategic benefit to China, the more likely it is that Beijing will support development. For instance, three high-speed rail tracks are currently planned to link Chinese and North Korean cities.74 Sources suggest that North Korea offered China development rights in seven major mines in exchange for railroad development.75 Thus, the Chinese have turned to building new bridges and wider roads at key border crossings—namely, Dandong and Rajin—to better transport coal and iron ore back into China.76 All infrastructure projects also serve the overarching geopolitical purpose of bringing North Korea more tightly into China’s web of geopolitical influence.

  China’s largest investments in North Korea are probably in commodities and natural resources. While the terms of these deals tend to reflect a “strategic discount” for Beijing, from China’s perspective a reduction in price does not always translate into commercial success.77 In 2012, for example, a $40 million investment by one of China’s largest mining companies, Xiyang, flopped when the North Koreans again seized the iron ore mines and evicted the Chinese.78 Apart from a few high-profile failures, China undoubtedly has access to these resources with little to no competition and at low prices.79 Price discounts of this sort aside, it seems safe to conclude that China’s commodities investments in North Korea, whether in iron ore or gold, also serve its broad geopolitical interests in promoting Pyongyang’s stability (and consequently its ability to act as a buffer against U.S. and South Korean encroachment).

  Beijing seems to be evolving its sense of what this stability requires, however; increasingly, Chinese direct investment in North Korea, in addition to supporting Chinese geopolitical objectives and keeping Pyongyang afloat, is also now targeted at encouraging economic reform. After Pyongyang’s nuclear test in 2009, as the West sought to further economically isolate North Korea, China has taken the opposite approach, seeing it as an opportunity to engage with and invest in North Korea in hopes of nudging its political and economic trajectory toward reform.80 More than 150 Chinese enterprises have invested in North Korea, primarily in mineral resources, manufacturing, construction, food, medicine, transportation, and light industry, since at least 2003.81 To further encourage private sector investment, in August 2012 China established a $490 million fund for investment in North Korea under the auspices of the central government’s China Overseas Investment Company.82 The renminbi is also slated to become legal tender in special economic zones at Rason, Hwanggeumpyong, and Wihway Island.83

  Beyond these nudges toward political and economic reform, China has also used its investments in North Korea to encourage forthrightly helpful geopolitical behavior from Pyongyang. Using infrastructure development as an incentive, Beijing hoped to encourage Pyongyang toward participation in the six-party talks aimed at dismantling North Korea’s nuclear program, for instance, with the donation of a $24 million glass factory in 2004.84 In fact, by virtue of its geoeconomic handling of North Korea, China holds virtually all of the external influence over the
country.

  China’s considerable trade and assistance statistics with North Korea would actually be far higher were they to account for black market trade or to include Chinese assistance in building and exporting weapons from North Korea to other rogue states.85 In late 2009, a company named Union Top Management was created in Hong Kong just days before an Ilyushin IL-76 aircraft transported arms from Pyongyang to Iran.86 North Korean tank parts and other military equipment bound for the Republic of Congo were discovered behind sacks of rice on a boat that had been loaded in China while it was refueling in Durban in early 2010.87 A shipment of missile parts from North Korea thought to be headed for Syria on a Chinese-flagged ship was intercepted in 2012 outside Pusan, South Korea. North Korea’s illicit trafficking networks allow Beijing a backdoor means of evading its stated nonproliferation commitments.88

  UN- and U.S.-led sanctions regimes have done little to curb Chinese economic assistance to North Korea. Since 2006, China has supported all UN Security Council resolutions against North Korea, but only after it first diluted the proposed measures. Despite issuing a 236-page list of goods banned for export to North Korea and shutting down ties to North Korea’s Kwangson (Foreign Trade) Bank, Beijing circumvents its own sanctions. Money can be readily transferred into North Korea from the Bank of Dandong, a state-owned Chinese bank.89 Although Chinese exports to North Korea may have shrunk to $1.59 billion in the first half of 2013, even embargoed goods are finding their way back into the North via Dandong’s thriving black market.90 Ultimately, China’s plans to expand trade, investment, and infrastructure around its North Korean border are at the core of a geopolitical strategy aimed at buffering against the U.S. pivot to Asia and bolstering China’s regional influence—strategic objectives that China’s UN obligations are unlikely to change.91