Geoeconomics and Statecraft in the Asia-Pacific

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Geoeconomics and Statecraft in the Asia-Pacific

The Diplomat speaks to Robert D. Blackwill and Jennifer Harris about geoeconomics and statecraft.

Geoeconomics and Statecraft in the Asia-Pacific
Credit: Council on Foreign Relations

Council on Foreign Relations Senior Fellows Robert D. Blackwill and Jennifer M. Harris, in their new book, War by Other Means: Geoeconomics and Statecraft, explore the role of economic and financial instruments in modern diplomacy. The Diplomat, in an interview, asked the authors to discuss a range of issues that are explored in greater depth in the book, including prescriptions for the United States as it looks to maintain geoeconomic influence in the Asia-Pacific in the 21st century. The following interview addresses the relationship of geoeconomic statecraft to traditional hard power; China’s geoeconomic clout (including the One Belt, One Road initiative); the Trans-Pacific Partnership and its effect on U.S. geoeconomic clout in Asia; and the importance of expanded U.S. geoeconomic interaction with India.

The Diplomat: The title of your book, War by Other Means, is a play on Carl von Clausewitz’s famous aphorism that “War is the continuation of politics by other means.” I found the title striking, because war to me has always implied employing kinetic violence against your opponent. Geoeconomic tools don’t involve violence. Why then evoke war at the onset?

Because going with “Economic Tools of Statecraft: Theory & Practice” would’ve short-changed what we have written here. We wrote this book because it is more and more clear that America has forgotten some of the most potent foreign policy tools at its disposal. In navigating first-order questions of war and peace, too many U.S. foreign policymakers—Democrat and Republican alike—view their options as largely confined to traditional diplomatic or military tactics; economic tools are seen as somehow out of reach or inappropriate. In fact, nothing could be further from the truth. If ever there were a time when America needed to remember how to flex economic, rather than military muscle, to work its will in the world, it is now, when we can afford neither to retreat into isolationism, nor bomb away our problems.

The tools and strategies we outline in the book are aiming unequivocally to matters of war and peace, and of preserving and extending American power—aiming, in other words, at the high table of American statecraft and grand strategy. We wanted a title that connoted that.

Debates surrounding the role of economic statecraft in U.S. foreign policy shake out to a kind of ‘trade for trade’s sake’ logic, arguing that strengthening the economic foundations of the U.S. (or any country) will lead in general way to greater power projection capabilities. That is true and well understood. By contrast, we are focusing on the specific use of economic instruments to produce beneficial geopolitical results, what we term “geoconomics.” We wrote this book as a wake-up call to a U.S. foreign policy establishment that has become over-militarized in recent decades, especially the fifteen years since 9/11—both to urge Washington to rediscover the lost art of American geoeconomic statecraft, and to recommend how it should go about doing so.

Reading the two chapters in your book on China, I was struck by the breadth of the instruments that have been available to Beijing to exert costs on its adversaries and dole out benefits to its partners. How have recent events, including the renminbi’s entry into the International Monetary Fund’s Special Drawing Rights (SDR) basket and overall equity market volatility, influenced your read of China’s strengths and vulnerabilities as a geoeconomic actor, if at all?

The short answer is not much. Surveying the current headlines on China—the equity market volatility; the RMB’s ascendance to the IMF’s SDR, the table of global currencies; and so on—none of this much fazes the long arc of China’s rise. You still have labor and capital meeting on a scale unprecedented in human history. Will it get tougher for Chinese leaders from here out? Absolutely. With much of China’s “easy growth” now tapped, Chinese leaders will have a greater systemic challenge; good policymaking will matter more than it has in recent decades. But many of the pressures China faces will actually serve to further incentivize Beijing toward geoeconomic policies. Take for instance, China’s need to reduce its bulk of ‘non-performing loans’. Among the easiest ways of doing so is to find worthwhile targets for state-investment, many of which now lay outside of China, in Central, South and Southeast Asia, for example, or in Africa. Thus, the rationale for China’s OBOR plans, or its broader state-led going out initiative, if anything, grows over the near- and medium-term; it makes economic as well as geopolitical sense. Moreover, because the primary conduits for these state-led investments—China’s so-called policy banks—are funded through the country’s current account surplus, they remain relatively insulated from the country’s broader economic turbulence.

In your discussion of the geopolitical aspect of the Trans-Pacific Partnership, you have an interesting parenthetical, which notes that “the geopolitical benefits for the United States could have been much greater had the administration set out to achieve them.” Focusing on Asia, what could the agreement have included to multiple the geopolitical dividends for the United States?

There is much in TPP to like. And we are keenly aware of the difficulties of negotiating a trade agreement encompassing twelve countries and some 40 percent of global trade. But the fact remains that America has a schizophrenic relationship to trade as a foreign policy tool—one that stretches back at least to the early 1990s and the debates surrounding NAFTA. On one hand, we seem quite comfortable marketing completed U.S. trade agreements as national security imperatives. After finalizing the Trans-Pacific Partnership, both Secretary [of State] Kerry and President Obama have framed the twelve-country trade agreement as a referendum on U.S. leadership in Asia. Defense Secretary Ash Carter called the deal “as important to the military as an aircraft carrier.”

In truth, however, geopolitical objectives have always been peripheral to TPP. The same is true of nearly all of America’s bilateral and regional trade deals. Ever since Joint Chiefs of Staff Chairman Colin Powell appeared before Congress to argue that an already finalized NAFTA was “essential for the security of the long U.S. border with Mexico,” foreign policy arguments have been invoked as after-the-fact marketing to sell these deals domestically.

Far from a bid to answer China’s rising clout in Asia, TPP began as an attempt to revive the WTO’s flailing “Doha Round.” Policymakers hoped that by securing agreement on issues gridlocked in Doha, TPP could unlock a path forward at the WTO. In fact, as if to telegraph the extent to which TPP was not a foreign policy exercise, when the Obama administration decided to join negotiations, the agreement’s name was changed, the term “strategic” dropped from what was initially the “Trans-Pacific Strategic Economic Partnership.”

The point goes beyond a name. If TPP was really designed to advance U.S. geostrategic objectives in Asia, the result would look far different from the deal that appears on offer.

Begin with currency. China goes to great lengths to keep its currency artificially undervalued—intervention that has fueled its export-led growth of the past two decades and its status as America’s largest creditor. Without it, Beijing would have considerably less cash to bankroll external charm offensives or state-led “going out” investment campaigns. By geopolitical logic, meaningful TPP provisions curbing currency manipulation would seem obvious. The notion enjoys bi-partisan support in Congress. Yet, administration officials have remained opposed, broaching the issue with TPP partners only reluctantly and belatedly.

Or take state-owned enterprises (SOEs). Not only do China’s SOEs still account for roughly one-third of Chinese GDP—SOEs are also a major vehicle through which Beijing flexes geopolitical muscle. Had strategic interests been a meaningful factor in TPP, U.S. negotiators would have prioritized new disciplines to curb SOEs far more than they did. Instead, these provisions have been steadily watered down, and may mark a step backwards from previous U.S. trade deals.

Or economic bullying. With Chinese economic coercion on the rise, especially in Asia, TPP could have established new norms against this behavior and new defenses to help member states push back. To our knowledge, this was not even considered. The list could go on.

This is not to argue that TPP has no geopolitical stakes—if TPP can strengthen America and its allies economically, it will also presumably increase their geopolitical throw-weight. And if TPP can help countries overly dependent on China to diversify, they will be better able stand up to Chinese demands. TPP could accomplish both things. The central point remains, however, is that geopolitical considerations were not a primary, secondary, or even tertiary factor for the U.S. in TPP negotiations. And that is a shame—in part because it deprives America of a critical foreign policy tool precisely when we most need it.

Geoeconomic statecraft seems to be at odds with isolationist and autarkic impulses around the world today. How could this affect the United States? It’s striking, for example, to contrast China’s $890 billion One Belt, One Road initiatives with U.S.-led geoeconomic initiatives like the Trans-Pacific Partnership, which have seen considerable domestic opposition.

It is tempting to ask whether America is perhaps approaching a point where the costs of its role as the world’s buyer of last resort are beginning to surpass the benefits that this role has generated—most notably, an open, rules-based multilateral trade and investment system. In point of fact, however, many of the prescriptions we outline would leave the United States economically better off than the current policies Washington is pursuing. Do the geoconomic prescriptions we outline have costs? Of course they do. But so, too, does every foreign policy option – especially military options. In the height of the U.S. military involvement in Afghanistan, America was spending $713 million every three days. Were the U.S. to put senior level energies to, say, assembling a coalition in the Middle East to help blunt the economic transmission lines of Iran’s influence in the region, or to building defenses into our Asia Pivot to help steel U.S. allies in Asia from Chinese geoeconomic coercion — $713 million could go a long ways toward meaningful progress. That’s Monday through Wednesday in Afghanistan, for those keeping score.

Somewhat building off the previous question, in your research for the book, did you find that regime type influences the effectiveness of geoeconomic tools? Do democracies face unique constraints that autocracies do not?

Today’s form of geoeconomics comes with not only new options but also new diplomatic tools—globally competitive state-owned enterprises and deep-pocketed sovereign wealth funds, to name a few. Some of these instruments are, for a variety of reasons we examine at length, largely unavailable to U.S. and Western leaders. The emergence of a new generation of state capitalists— significantly larger, wealthier, more global, less democratic, and more sophisticated than their predecessors— raises important questions for U.S. foreign policy. For example, the only democracy represented among the world’s ten largest sovereign wealth funds is Norway. The concentration of such wealth and large levers of economic influence in state hands offers these governments new sources of power and foreign policy instruments.

Among nondemocratic rising powers, tendencies toward certain, often more coercive geoeconomic behaviors may arise out of an inability to achieve other, more preferable geoeconomic alternatives. The fact that these regimes do not have the luxury of convincing their neighbors, almost always wary, of any sort of economic integration premised on mutually advantageous agreement means they must fall back on other strategies. For example, President Vladimir Putin’s Eurasian Union project would not have come this far had it not been underwritten by the coercive financial might of the Russian state.

There is also frequent discussion of the vulnerability of democracies versus nondemocracies to geoeconomic influence; Hufbauer, Schott, Elliot, and Oegg argue that democracies are fundamentally more susceptible to economic pressure than autocracies. Thus, for democracies around the world, there remain several frequently discussed geoeconomic defensive policy options: trading with a third party, import-substitution policy, or smuggling and resource conservation programming. What remains missing in these discussions, though, is how a democracy adequately mobilizes a populace and private sector it often cannot compel.

You offer 20 policy prescriptions for the United States in the book. Number 10 is striking in the Asian context; you call for the United States to “make geoeconomic investments in India’s emergence as a Pacific power.” How can Washington accomplish this in the short-term?

Washington has demonstrated commitments to help India graduate into the ranks of global actors— backing India’s bid for UN Security Council membership; supporting the four multilateral nonproliferation regimes; deepening defense cooperation, including in the Indian Ocean; initiating a trilateral strategic dialogue with India and Japan; and enhancing our coordination with India in the East Asia Summit, the Asian Regional Forum, the ASEAN Defence Ministers’ Meeting (ADMM- Plus), and other Asia security forums. Washington has launched all these initiatives despite the troubling fact that India is arguably the most difficult country in the world on the subject of trade. One hopes that under Prime Minister Modi this may eventually change.

Nevertheless, U.S. efforts to anchor India as part of a broader Indo-Pacific theater make sense for several reasons— they help reinforce Asia’s current stabilizing balance of power, and they offer ASEAN states a crucial means of diversifying their economic and security relationships. But so far, U.S. efforts have focused primarily on security dimensions. Washington needs to make similar investments on the geoeconomic side, especially when nearly every major U.S. initiative from Central Asia to the Pacific relies on India’s continued growth trajectory and cooperation: the U.S. New Silk Road vision (quite separate from China’s “One Belt, One Road” initiative which also stretches into Central Asia, and, as such, is sometimes referred to as China’s New Silk Road) seeks to tie Afghanistan’s future stability to the markets and values of India, and the Indo- Pacific Economic Corridor concept and the U.S. Expanded Economic Engagement with ASEAN seek to do the same for our partners in Southeast and East Asia. In this context, the United States should continue support for Indian infrastructure projects, building upon the Infrastructure Collaboration Platform agreed to by President Obama and Prime Minister Modi.

With so much staked on an India that is growing economically and engaged regionally, supporting India in its bid for greater multilateral clout—backing New Delhi in its long-running desire to join the Asia-Pacific Economic Cooperation (APEC), for instance—would seem a minimum ante for the United States. We should also elevate our own economic engagement with India by launching a study group akin to the effort that laid the groundwork for the U.S.-EU trade agreement. The final pillar of U.S.-India strategy should be a maturing of the Indo-Pacific Economic Corridor. This vision of an economic corridor powered by new energy and transportation infrastructure would undermine Burma’s economic dependence on China and offer an answer to Beijing’s plans for its own corridor from the Indian Ocean to southern China.

Additional recommendations for the U.S.-India geoeconomic relationship could begin with a look at the use of collaborative development funds abroad. India is the top assistance power in its region; perhaps it is worth examining the potential for collaboration with the United States on aid to other countries of geopolitical importance. U.S. administrations should also not rule out the use of infrastructure development, modeling any such initiatives after Japan’s overseas development fund for India. India lacks the capital markets that would make it even more economically attractive, a gap the United States should be instrumental in helping to fill.