The hole in America's China defence


BRUSSELS – America’s defence against China is getting shape. It starts with the capacity to peek into China with massive investment in different forms of intelligence gathering – from spies to spy satellites. The second line of defence runs right up to China’s shores with frequent patrols by warships, sophisticated maritime patrol aircraft, and drones. Onwards, the Marine Corps and Army prepare to repel aggression by scattering combat units, artillery, and missiles across the first island chain that consists of Japan and Taiwan. America wants to remain close to China: a signal of both resolve and readiness.

The real punch comes from behind. While the first two lines of defence remain vulnerable, America seeks to exploit the full depth of the Pacific Ocean. Its vision of mosaic warfare and distributed operations disperses troops and aircraft across multiple bases, in the usual places, like Guam and Australia, but also increasingly in small islands like Micronesia, Palau, Manus Islands, and Tinian islands. Big navy ships become nodes of combat clouds, networks of smaller manned and unmanned platforms. The idea is to make American forces less vulnerable to Chinese missiles, to retain dominance in the Pacific, and hence the capacity to fight in China’s vicinity.

A third line of defence consists of partners in China’s broader environment. China is high on agenda of the partnership with Australia and the United Kingdom, AUKUS, the Quad, and increasingly of NATO. With a diplomatic charm offensive, Washington seeks to regain trust of various other countries and to strengthen ties with European nations on matters ranging from technology to human rights. The final line of defence is the strengthening of the state, mostly the continental United States, with investments in defence, infrastructure, industry, innovation, and education. To balance China in Asia, America must remain strong at home.

Fragility

But can it work? At first glance, it all adds up to a sophisticated balancing effort. It includes offshore balancing and elements of forward engagement. It encompasses military and diplomatic balancing. But there remain weaknesses in America’s defence. The most important one remains fragility at home. Partnerships depend on predictability. While the China challenge is one of the rare matters that Americans agree on, internal political discord casts a shadow over America’s future foreign policy. Even if it will want to continue to balance China, partners and allies worry that the disrespect and recklessness of Donald Trump might return.

American political fragmenting has many causes, but despite the booming stock market, few think the country is becoming stronger. Despite scarcity on the labour market and rebounding corporate profits, wages hardly keep pace with the increasing cost of life. Real wages for most Americans are not higher than forty years ago. These problems come with significant debt. The lowest income classes spend beyond their means, rely heavily on credit for covering their basic needs, and their share in the nation’s total net-worth is decreasing.

Moreover, despite now covering most of its energy with domestic resources, the whole nation depends for its standard of living on pre-financed imports, mostly from China. Even as a share of GDP, the overall trade and current account deficit is on the rise again. This inevitably means that external debt grows. In the long term, external debt becomes problematic when it must be serviced with an economy that loses its competitive edge. In that regard, it remains to be seen whether America truly manages to improve its education, infrastructure, and its capacity to make its innovative genius contribute to a new industrial revolution. Just being innovative, is not enough.

Trade

America has internal weaknesses; so has China. America’s model of debt-incentivized consumption mirrors China’s model of savings-driven investment and industrialisation. But from a broader strategic viewpoint, China is exploiting America’s fragility much more skilfully than the other way around. Its trade surplus with America supports its industrialisation. Moreover, it uses a part of its trade revenues to buy strategic assets, such as mines, ports, and foreign technology. To be sure, China has many unprofitable businesses, but its investment-industry-trade push still makes it more dominant along global supply chains.

We don’t know whether China will become the world’s largest economy. What we do know, is that the balance continues to shift in its favour. This becomes manifest in the bilateral trade relationship. Despite Trump’s trade barriers, China still represents over one third of American imports. The little dip from 34 to 32 percent in the last few years is mostly the result of routing Made-in-China goods via countries like Vietnam. The other way around, America only represents about 18 percent of China’s total exports. There is mutual dependence, but it is asymmetric.

This also becomes clear in the eagerness of American companies to invest in China. Despite Covid, renewed ambitions to bring factories back, and the ongoing trade conflict, American foreign direct investment in China, Hong Kong included, grew by US$ 22 billion last year, the largest increase in five years. Chinese direct investments in America, meanwhile, remained stagnant. American investments in the Chinese stock market remain bigger than the other way around, and there seems to be a rush, recently, of American funds to expand their portfolio in China. China, despite all the talk of a tech war, also remains the largest destination of American exports of R&D licences. Beijing does not need to steal American technology; American companies keen enough to sell it.

Statecraft

Why should this be problematic? We live in a connected world and can no longer imagine it to be otherwise. Chinese imports are good for American consumers and so are profits from investment in China. The answer depends on the viewpoint. If your policy is to stabilise American consumption for a few more years, this is the way to go. If your objective is to balance China in the long run, this policy is counterproductive. We might well like to think of China’s advance in terms of aircraft carriers and missiles, but the most important advances it still makes container by container. It is in the low politics of trade and industry that balances of power are shifted; it is in the high politics of diplomacy and defence that one addresses the consequences.

“Tariffs are deeply unpopular with American consumers and businesses who bear the cost,” it is said. Tariffs make life expensive, indeed. What will be the price in the longer run, however, if American consumers addicted to Chinese imports suddenly come to realise that the Chinese market has become strong enough to make the shift to domestic consumption? If China would achieve that turning point, which can neither be taken for granted nor excluded, the economic adjustment shock will be much more painful for the United States and the strategic consequences even more difficult to handle. Imagine its debt-laden economy, dependent on increasingly expensive imports and supply chains it no longer dominates.

While China is motivated by power, America seems motivated by the next Christmas shopping. While China puts industrial prowess first, American policy prioritises consumption. This clash in terms of statecraft has diplomatic consequences. American companies invested in China become pressure points and the more China thinks that Washington will do everything to spare its consumers, it will feel limited urgency to take other American interests seriously. In addition, America’s pragmatism will dissuade its partners from becoming more security-minded in their dealings with China. Why should, say, Germany reconsider its partnership with China, when America also continues to put business first.

Diversification

It is in the commercial pragmatism of the West, that China finds opportunities to grow its national strength. But it also damages alternative partnerships. Washington has told India and ASEAN for many years now that they would become more important as counterweights to China. Yet, the American dependency on China further discourage it to overcome the difficulties to make that happen. It is much easier to continue dealing with a well-organized dictatorship than with India’s delicate democracy or the multitude of countries in Southeast Asia.

And there is indeed no trace of reorienting economic partnerships. Warships and diplomats visit country after country, but this remains a very shallow form of balancing absent genuine efforts to make those countries strong economically. The share of China in America’s total direct investments in Asia only continues to grow. In 2020, American investment in China increased by US$ 14 billion; it decreased by 609 million in Indonesia, US$ 78 million in Vietnam, and US$ 78 million in India. Even if one considers the last five years, the gap is astounding.

But is America not buying more from other countries now? WalMart has been keen on sourcing more from Vietnam, for instance, and apparel producers like Nike all opened factories in the country. But a lot of Vietnamese exports concern re-exports from China and through the Covid pandemic Vietnam’s vast production cuts has again made China a more reliable producer. American imports from China remain twice as large as those from ASEAN and nine times larger than imports from India. If there is to be a shift away from China, it remains very modest.

Washington has also vowed to compete with China as a donor. Hence the establishment of the International Development Finance Corporation (DFC), in 2019. But in the last five years, American aid to Asia has decreased significantly, and the provisional figures for 2020 and 2021 do certainly not reverse that trend. It must be difficult for American diplomats to reconcile the calls for deeper collaboration with Asian countries when so little is changing, and one can already anticipate the answer: “Show me the money!”

Water

The Chinese philosopher Lao Tze once compared effective influence with water. It is diffuse. It saturates the rock until it breaks. Also in other teachings and throughout history, the low politics of trade, industry and investment has often been seen as the bedrock of power and the incubator of changes at the level of high politics. But it is the economic domain that shapes the daily life of citizens the most and is hence the most difficult to change. It is easier to make superficial changes in high politics than to adjust customs and dependencies at the level of low politics. It is easier to confront rivals in distant lands than to change habits at home.

The current American narrative tries to combine the best of two worlds. Think of terms like “congagement” and “cooperative competition”. To some this suggest due pragmatism, an attempt to avoid an all-out collision. This is misleading, though. The so called-pragmatism reflects the incapacity of the state to align short-term commercial calculation with a long-term strategic aspiration: to preserve the balance of power with China, which is in fact crucial to prevent an all-out collision with a rising power that feels no longer restrained. It is the failure to balance at the level of low politics that makes conflict at the level of high politics more likely.

While China continues to see low politics as a stepping stone to a stronger position in high politics; Washington pretends that it can separate the two. Such business-friendly balancing cannot work. As the bilateral relationship grows more imbalanced, China does a better job in making it support its industrial ambitions in the long run, and, hence, to gain power. It also prevents America from substantiating alternative partnerships and alliances, and from empowering other Asian countries that can help balance China. More fundamentally, it breeds an illusion that one can prevail in great power politics without sacrifice; balance without the support of business. As long as Washington does not want to risk the ire of businessmen and consumers, it should not expect Asian countries to risk the ire of China.

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