Below, The Diplomat talks with Shaun Rein, managing director at China Market Research Group (CMR) and author of The War for China’s Wallet: Profiting From the New World Order, about China’s use of economic sticks and carrots in diplomacy.
You open your book with an overview of China’s use of its “wallet” to punish South Korea for allowing the deployment of the THAAD missile defense system. What lessons does the THAAD backlash against South Korean firms hold for China’s other economic partners?
Many Western nations have used economic sanctions historically to achieve its political objectives. The United States, for example, has done this with Iran and North Korea to arguably limited success — the difference is that America uses economic sanctions against unfriendly states and regimes that will push back against the U.S. because they view regime survival as the end game. In China’s case, Beijing will use economic hammers against friendly nations like South Korea or Norway to gain its political objectives.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
By limiting Chinese tour groups to South Korea, blocking Korean K-Pop stars from touring China, or auditing Lotte’s retail outlets in order to protest the deployment of THAAD, the Chinese government sent a very strong signal to other economic partners — one must abide to the objectives of China politically and thus profit by being a friend of China, or else they will face economic banishment. You can see how individual companies like Springer Publishing censored their own catalog of books in order to keep the China market open for their other titles.
You note in the book that China’s use of economic statecraft in political disputes is not new. How have China’s tactics evolved as it has grown both wealthier and stronger militarily?
China has used economic hammers for years against smaller nations like Norway after Liu Xiaobo won the Nobel Peace Prize, but we have seen China become more emboldened in the past two years as it has gotten stronger economically and as it has tried to fill the power vacuum left globally both by President Obama and Trump. In Obama’s case, the Chinese increased economic hammers against Southeast Asian nations because it felt Obama was a pushover and it could divide and conquer in associations like ASEAN.
During the Trump administration, China has increased its rhetoric because it sees a way to bring other countries closer to its orbit politically as Trump shifts more attention to domestic politics and away from America’s traditional role as the world’s policeman.
Given that, as you put it, China “may economically cripple nations one day with an economic hammer, lathering them with profits and flattery the next,” how would you recommend China’s neighbors approach the Belt and Road Initiative, which seeks to more closely intertwine regional economies?
If countries want to grow economically, I would suggest they get closer to China and take advantage of initiatives like OBOR. They need to understand that China is on the ascent while America remains an unknown with President’s Trump’s shifts in foreign policy. However, in order to extract the best for their countries, government should not lose independence and become what I call a “Hot Partner” country like Pakistan or Laos, as they lose political independence. It is better to be a “Warm Partner” country that remains respectful of China but is also able to forge close relations with the U.S. — Australia and Thailand are two countries that come to mind as playing the middle road quite well.
How can countries thread the needle between engaging China economically and maintaining political independence?
It is important that countries band together to lobby the Chinese government. China likes to divide and conquer, so will forge strong relations with Hungary in Europe or Cambodia in Asia, for example, to counter any initiatives against China. If current organizations like ASEAN don’t work because there are is a Cambodia or Laos providing roadblocks, then new organizations need to be created. China prefers to focus on bilateral relations where it can use its economic carrots and sticks to achieve its political aims. It is much harder to do that when you are a group of nations together.
Similarly, on the corporate side, companies should band together in trade associations like the European or American Chambers of Commerce and get governments to help them withstand pressure. No company, like a Springer or Google, can withstand China alone. They should have gotten stronger support from trade associations and, more importantly, their home governments.
The book outlines two separate but parallel tools in China’s economic toolkit: China’s “State Wallet” (decisions taken directly by the government), and the wallets of Chinese consumers, guided by Chinese citizens’ preferences. How are these two interrelated? To what extent does the Chinese state ‘control’ Chinese consumers’ interest in (or lack thereof) foreign brands or tourist destinations?
Many observers say that Chinese are inflamed by government propaganda and thus unsophisticated. The reality though is that everyday Chinese consumers do tend to feel the government is correct and that other nations, like South Korea in THAAD’s case, hurt the security of China. These consumers thus vote with their wallets by forgoing trips to unfriendly nations or boycotting their products. This happened to South Korea, as I showed in the book, and to specific brands like Lotte, Orion Cream Pies, and Amore Pacific Cosmetics.
In fact, while the government often fans the flames initially, they very often try to calm the situation after a certain point when the general population starts to get too angry and might stop the government from being able to forge friendlier relations again.
This happens every few years when China-Japanese tension rises. The government via the state media inflame passions, so Chinese start to protest. Eventually, the government tries to peter down the protesting by stopping people from demonstrating on the street or by censoring the most inflammatory posts on social media.
Having the Chinese state and Chinese consumer wallets directed at you in anger in tandem is a tough force to go against for any government, let alone company.