The Xi Jinping government may be realizing that North Korea’s value as a geopolitical ally is eroding and that North Korea will not reform and open up to the world as hoped, despite Beijing’s seemingly endless economic incentives intended to coerce Pyongyang to the contrary. North Korea may well in some ways be growing as a liability to Beijing at this stage. But that is hardly the point. Simply because the geopolitical risks North Korea poses for Beijing have increased is not to suggest that China can or will abandon Pyongyang. And while it may be a bad hand all around, China still holds all of the cards, largely thanks to its geoeconomic policies over the last fifteen years. In evaluating a given country’s geoeconomic options, just as with its geopolitical options, the operative calculus is not a cost-benefit analysis but rather an assessment of next-best alternatives. In this case, in Beijing’s view, the next-best alternative—more geoeconomic pressure on Pyongyang—would risk North Korea’s collapse.
Japan: Abating Territorial Sovereignty Concerns and Keeping U.S. Influence in Check
Relations between China and Japan, typically characterized as “warm economic ties, cold political relations,” have become “politically cold and economically cool.”92 Chinese and Japanese ambassadors have accused each other of provocations and flagrant disregard for their neighbors, even summoning images of famed Harry Potter villain Voldemort.93 Charged rhetoric aside, Beijing has employed geoeconomic statecraft readily, and punitively, in getting its message to Tokyo (and its ally, the United States).
Behind Beijing’s use of geoeconomic tools toward Tokyo lie two fundamental geopolitical objectives. First is protecting Chinese claims to territorial sovereignty. Once driven by the desire to develop oil and gas reserves around the islands, China’s claims to the disputed Diaoyu/Senkaku island chain now carry as well notions of national honor and regional strength.94 Second, China’s efforts to pressure Japan geoeconomically are often meant to weaken the strength of Tokyo’s alliance with Washington.
Over the course of the past decade, China has repeatedly cut trade flows to Japan amid political disputes. In 2001, following testimonies in a Tokyo court about World War II–era germ warfare research conducted on Chinese nationals and a visit by Prime Minister Junichiro Koizumi to the Yasukuni shrine memorializing Japan’s war dead (including convicted war criminals), Beijing announced plans to cut the annual quota for Japanese automobile imports by 40 to 60 percent.95 Five years later, when Tokyo approved new history textbooks that glossed over Japan’s wartime atrocities in China, Beijing engineered huge anti-Japanese demonstrations and consumer boycotts, dealing a further geoeconomic blow.96 The boycotts strengthened quickly over a short period of time, bolstered implicitly by the support of various Chinese ministries (what one Commerce Ministry spokesman called “rational patriotic activities”).97 Economic retaliation manifested in other mediums, too, as inspections of seaborne imports from Japan grew stricter, approvals of work visas for Japanese were significantly delayed, Japanese firms were requested to withdraw from an international trade fair in Chengdu, and outbound Chinese tourists were discouraged from putting Japan on their itineraries.98 As James Reilly of Australia’s Lowy Institute points out, even more noteworthy was the decision by Chinese banking and financial officials to withdraw from the annual World Bank–IMF meeting, held in October 2012 in Tokyo.99 As in 2001, declines in Japanese car sales and investments in China led JPMorgan to downgrade its projections for Japan’s economy for the final quarter of 2012.100
Beijing has used regulation of commodity trade flows to influence actions surrounding the Diaoyu/Senkaku territorial disputes. In 2010, a Chinese fishing trawler collided with two Japanese coast guard vessels near the contested island chain. The Chinese captain was arrested by Japanese officials; China retaliated by halting shipments of rare earth oxides, rare earth salts, and pure rare earth metals to Japan.101 These materials are crucial components in Japanese industries and manufacturing. Without them, Japan cannot produce electrical components required by U.S. and European companies. China’s geoeconomic move, one with significant implications for the global supply chain, ultimately contributed to Tokyo’s decision to release the fishing captain.102
A second instance of China’s leverage of rare earth exports was seen just a year later in attempts by Beijing to incentivize foreign companies reliant upon rare earths to move their production centers and technology to China in exchange for a low-cost supply of rare earths. Both Hitachi Metals and Toyota ultimately relocated plants in China, decisions that fold into Beijing’s strategic objective of growing its domestic rare earths industry.103
China’s intermittent use of rare earth bans toward Japan is striking for its brazenness. Beijing’s initial resolve to curtail Japan’s access to economically important materials seemed to mark a geoeconomic coming-out moment for China. Earlier instances of geoeconomic bullying toward Taiwan or North Korea seem feeble in comparison, as the rare earth bans highlight the first time China so boldly coerced a U.S. treaty ally. It is particularly telling that Beijing chose to strike out at Japan through geoeconomics rather than military actions. Some analysis of the rare earth bans miss this point: coercion, quite clearly, need not be explicitly stated to be effective. In fact, the arbitrariness of China’s regulatory system is part of what makes Beijing so effective in its use of geoeconomic instruments.104
In the case of these rare earth bans, China achieved far more through smartly adapting tools of geoeconomic coercion than it could have obtained through other means. Beijing successfully sent a signal of strong protest against Japan’s territorial claims (but not to the point of Tokyo invoking the U.S.-Japan treaty alliance); secured the release of a Chinese fishing captain (ended one of the causes of the 2010 crisis); and consolidated its market share (by forcing Japanese rare earth firms to relocate to China), thereby enhancing its ability to translate supply chain power into geopolitical leverage.105 Perhaps most important, these geoeconomic moves signaled to the world that Beijing was no longer afraid to take on a U.S. treaty ally. In fact, some analysts have suggested that the rare earth export bans were aimed not at Japan but rather at the United States. “The evidence has shown that Japan was prepared and resilient regarding the possible risks of a rare earth shortage,” notes Yun Zhang, an associate professor of international relations at National Niigata University in Japan.106 “On the contrary, the U.S., and its defense sector, in particular, was much less prepared as it had lost capability throughout practically the entire rare earth supply chain.”107
Two years later, after the Japanese government purchased part of the disputed Senkaku/Diaoyu island group (a step Japanese leaders claim was intended to prevent Tokyo’s conservative governor from buying the islands), riots forced the shutdowns of Japanese manufacturers located in China, costing Japanese carmakers alone upward of $250 million in losses.108 In the context of relentless anti-Japan media coverage, nearly two-thirds of Chinese citizens voluntarily boycotted Japanese products, a trend that increased Japanese concerns about an economic recession.109 Here China is uniquely positioned, able to exercise certain kinds of geoeconomic leverage in ways that other countries are not. Following the escalations over the Senkaku/Diaoyu islands, Japanese exports to China fell 14 percent in September 2012 from the previous year. As a result, the bilateral trade deficit reached around $7 billion, while Japan’s overall exports sank 10.3 percent year-on-year.110 Japanese automobile manufacturers again took the brunt of the damage, with Toyota posting the largest drop, 48.9 percent on year in September 2012.111 As tempers flared, Chinese authorities began other economic recriminations, including cutting commodity flows to Japan (decreasing the number of permits to mine rare earths by 41 percent).112
These continued territorial disputes and Japanese prime minister Shinzo Abe’s December 2013 visit to the Yasukuni shrine have only continued the geoeconomic fallout from Beijing. Incensed Chinese consumers produced a substantial decline in bilateral trade levels in the first half of 2013, the first such in four years. And in
the last few years Chinese producers have shifted en masse to new components suppliers, replacing Japanese parts with those manufactured in South Korea—clarifying the costs that Tokyo could expect for future assertive geopolitical behavior.113
Chinese monetary policy toward Japan has remained relatively unchanged amid territorial disputes and other geopolitical disagreements. But there are signs of at least rhetorical bluster. In 2012, again surrounding the Japanese purchase of the Diaoyu/Senkaku islands, an op-ed in the China Daily by prominent trade expert Jin Baisong urged China to use its power as Japan’s biggest creditor, with $230 billion in bonds, to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s fiscal crisis to a tipping point.114
Jin further threatened that China should do what no other country ever has—invoke the WTO’s security exemptions clause to impose economic sanctions upon Japan.115 While sanctions ultimately did not materialize, Japan-related stocks fell sharply in both Hong Kong and Shanghai, impacting Japanese automobile and appliance manufacturers in particular.116 Chinese investors blamed “barriers” for an overall drop of 9.1 percent year-on-year.117 It is not just Japan that suffers from these tactics. China also pays a price, borne primarily by Chinese consumers and manufacturers. That boycotting Japanese goods and suppressing Japanese investment in China hurts Chinese workers, however, only underscores Beijing’s tolerance of pain when it comes to accepting domestic costs for its geoeconomic policies.118
China also actively uses cyber tools in hopes of weakening Tokyo’s resolve for staking Japanese territorial claims. Shortly after cyberattacks on the Japanese parliament in the summer of 2011, Chinese hackers attacked Japanese commercial firms, stealing information pertaining to Japanese defense equipment (fighter jets, helicopters, submarines, and destroyers) as well as nuclear power plant design and safety from Japan’s Mitsubishi Heavy Industries.119 Despite Japan finding Chinese-language script in both instances of hacking, Beijing denied having any hand in the attacks.
China’s geoeconomic pressure against Japan has not gone entirely unchecked. Some experts believe that “economic coercion has proven counterproductive in China’s maritime disputes.”120 In response to economic pressure and the consumer boycotts of 2013, Japan has refused to back down over the island claims, instead strengthening its cooperation with other Asian neighbors. The Japanese have realized their vulnerability to Chinese geoeconomic influence and have slowly begun to look elsewhere in the region for support, including India and Vietnam.121
Japan has also initiated a geoeconomic blitz with the Pacific Islands, several of which are connected to the so-called second island chain, a term often used by military strategists to describe the likeliest path that attempts at expanded Chinese maritime influence may take beyond the South China Sea. At the seventh Pacific Islanders Leaders Meeting (PALM), held in Fukushima in May 2015, Japan pledged $440 million in aid to Pacific Rim countries, bringing its total aid commitment to $1 billion from 2013 to 2019. In addition to outspending China in the region, Japan is also far more proactive in humanitarian and disaster relief efforts—all of which appear to be paying off. At Japan’s urging, the thirteen Forum Island Countries (Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, Cook Islands, and the Federated States of Micronesia), together with Australia and New Zealand, ended the recent PALM gathering with as forceful a message—clearly intended for Beijing—as Tokyo could have hoped to send, resolving that “maritime order should be maintained in accordance with the universally recognized principles of international law,” and reiterating the significance of “exercising self-restraint and peacefully resolving international disputes without resorting to the threat or use of force.”122
Seen in its dealings both with Japan and (as the coming section discusses) across Southeast Asia, China’s larger goal is a test of the U.S. alliance system in Asia. Thus far, the United States and Japan appear to be responding with political-military measures, which is helpful but hardly sufficient. This is a geoeconomic contest—China’s entire strategy is predicated on the belief that exercising a military option in the next decade would simply prove too costly for the United States and Japan, and for that matter China itself. Thus Beijing builds and exercises its power projection not primarily through the deployment of military assets (except in the South and East China Seas) but rather through coercive and incentivizing geoeconomic policies toward its neighbors.
Southeast Asia: Expanding China’s Sphere of Influence
In December 2009, under heavy pressure from China and despite UN objections, Cambodia agreed to deport twenty ethnic Uighurs seeking asylum back to China to face prosecution in connection with the violent antigovernment protests that had occurred in Xinjiang months earlier.123 Shortly after, China’s vice president, Xi Jinping, arrived in Phnom Penh bearing gifts: $1.2 billion in grants and loans.124 The U.S. State Department responded to Cambodia’s decision to deport the Uighurs by scuttling a shipment of 200 military trucks to Cambodia.125 Three weeks later, Beijing sent 257 trucks.126
In China’s neighborhood, a fast-changing and heavily contested test case for Beijing’s use of geoeconomics is Southeast Asia. The many projects demonstrating China’s geoeconomic influence in Southeast Asia are all cross-subsidized by China’s considerable non-geoeconomic strengths—namely, that it is a proximate power, and a big one at that.127 China directs its geoeconomics in the region primarily at three deeply interrelated objectives: imposing costs on countries that cross China on territorial disputes, disrupting the U.S. system of alliances in Asia, and keeping old friends (including Cambodia, Laos, and Myanmar) close.
Beijing has staked its claims in no fewer than eight territorial disputes in the South China Sea. Broadly speaking, China’s “nine-dash line” (the shorthand reference to China’s self-drawn maritime map) claims the bulk of these waters, overlapping with claims of Brunei, Malaysia, the Philippines, and Vietnam, and stretching over roughly 90 percent of the South China Sea.128 The Chinese have staked claims to island reefs there, including the Paracel and Spratly Islands as well as the Scarborough and James Shoals. Chinese claims to these territories, however small, suggest an interest both in developing untapped energy reserves and in building strategic military outposts.129 China also disputes a series of maritime boundaries along the Vietnamese coast, off Borneo, in the waters north of Indonesia’s Natuna Islands, and near the Philippine islands of Palawan and Luzon.
Beyond simply recovering territory China perceives as its own, prevailing in these claims would enable China to maintain close control of trade routes and, more important, expand its military umbrella to much of Southeast Asia—eventually resulting in a “string of pearls” that could counter the rebalancing of the U.S. military to Asia and the rise of Indian power projection in the region.130
For Beijing, however, realizing this vision requires weakening the current U.S. alliance system. China’s territorial strategy is designed to push the U.S. Navy beyond the “first island chain,” usually understood to include the Greater Sunda Islands, Japan, the Philippines, and Taiwan. Should it succeed, China would be able to seal off the East China Sea, the South China Sea, and the Yellow Sea, rendering it nearly impossible for the U.S. Navy to reach Korea in the event of war.131 Some in China talk about going further, eventually pushing the U.S. Navy beyond the “second island chain,” which runs along the eastern coast of Japan to Guam and then down to the Maluku Islands.132 This would mean Japan and the Philippines could be cut off from American naval support.133
Beginning roughly in 2010, Beijing has grown increasingly aggressive in these claims, exerting administrative prerogative and tightening fishing regulations in the contested areas, moving a large oil rig inside waters within Vietnam’s exclusive economic zone, instigating near-collisions between Chinese and U.S. naval vessels and aircraft, and declaring an East China Sea air defense identification zone (generating speculation that China will soon declare a similar zone for
the South China Sea).134 China has paired these more conventional military escalations with a full spectrum of geoeconomic pressure—positive to coercive to forthrightly punitive. As described earlier, Japan found itself on the receiving end of Chinese geoeconomic fallout, beginning with the 2010 rare earth ban and still continuing intermittently in various forms.
In 2012, the Philippines came in for similar geoeconomic treatment amid territorial disputes with Beijing. After a Philippine naval ship attempted to arrest Chinese fishermen working off the disputed Scarborough Shoal in 2012, China refused to allow 150 containers of bananas to enter its markets, claiming that the bananas were “crawling with insects.” This was a symbolic move with the suggestion of more to come; it hit the core of the Philippine agricultural sector and cost farmers some $760,000. Subsequently, the Chinese also slowed inspections of papayas, mangoes, coconuts, and pineapples from the Philippines. These targeted geoeconomic steps dealt a substantial blow to Philippine exports, as more than 30 percent of local fruits go to China.135 Around the same time, the Chinese government announced that it would begin an annual ten-week fishing ban on waters around the Scarborough Shoal, allegedly to replenish the fishing stock.136 Additionally, China sent out a directive to travel agencies that tours to the Philippines were highly discouraged.137
To help Manila absorb some of the economic shock, the United States accepted more fruits from the Philippines. But while this marked progress in Washington’s geoeconomic acumen, it was far from enough to help Manila withstand the pressure. Within several weeks the Aquino government relented. As soon as the Philippines pulled its ships from around the Scarborough Shoal, Beijing dropped the banana ban and abandoned the economic coercion. At least in this case, Beijing’s heavy-handed use of geoeconomics was unambiguously effective in getting Manila to stand down over its claims to the shoal.
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