Franz-Stefan Gady talks to Robert Ward and Yuka Koshino of the International Institute for Strategic Studies (IISS) about the growing importance of geo-economics in East Asia. Robert Ward leads IISS’ Geo-economics, Geopolitics and Strategy program and is Japan Chair, carrying out independent research. Ward writes extensively on strategic issues related to Japan, including its contemporary security, and foreign policies. Yuka Koshino is a Research Fellow conducting independent research on Japanese security and defense policy at the newly established IISS Japan Chair Program.
The Diplomat: What is a good definition of geo-economics and why has it gained more prominence in recent years in East Asia? How exactly do geopolitics and economics interact with one another?
Ward and Koshino: Geo-economics is an elastic concept. But a good place to start is with Edward Luttwak’s essay from 1990, “From Geopolitics to Geo-economics: Logic of Conflict, Grammar of Commerce.” Luttwak argues that “methods of commerce are displacing military methods — with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases.” Luttwak was writing at a time of concern in the U.S. about the threat from the rise of Japan and Germany. As we now know, these fears were overdone, particularly with regard to Japan, which, shortly after, lost economic momentum when its asset bubble burst in 1990-91. Geo-economics in its broadest sense may be understood as the deployment of economic power by a country to achieve strategic goals in foreign policy. Asymmetry of economic interdependence is important in the ability to project this power. Geo-economics is narrower than geopolitics as it does not use military means. But it is also broader in scope than mercantilism.
Geo-economics has gained in prominence in East Asia primarily because of the rise of China since it entered the World Trade Organization (WTO) in 2001. Notwithstanding the rapid increase in its spending on its military capabilities, China is primarily a geo-economic power, using its economic links with its neighbors to achieve political goals. One early example of this was China’s suspension for two months of exports of rare earths to Japan in 2010. This was related to growing bilateral tensions over the Senkaku Islands territorial dispute (which China also claims and calls the Diaoyu). Another example was the dispute between South Korea and China over Seoul’s decision to allow domestic deployment of the U.S.’s Terminal High-Altitude Area Defense (THAAD) anti-ballistic missile system. Beijing fears that the THAAD system could be used to spy on China and so used economic coercion, including the boycotting of South Korean-made goods in China, to try to force the South Korean government to change course. Chinese President Xi Jinping has formally articulated China’s geo-economic push via his signature policy, the “Belt and Road Initiative” (BRI) of foreign lending and development.
A book on the topic suggested that geo-economics is war by other means, a play on Carl von Clausewitz’s axiom that “War is the continuation of politics by other means.” Do you agree?
At its broadest, geo-economics involves the wielding of economic power to achieve strategic goals. The increased interconnectedness of the global economy since the 1990s has facilitated this. Economic tools thus now seem to be central to efforts at coercion between countries. The U.S.-China trade war that started in 2018 and reached what will probably be a temporary truce at the end of 2019 is a good example of this. Behind Washington’s concerns about China’s unfair economic practices lie bigger strategic dilemmas about China’s challenge to U.S. hegemony. The U.S.’s National Security Strategy of 2017 underscores the point, saying “economic security is national security.” But to describe geo-economics wholly in terms of being “war by other means” seems to ignore the subtleties of economic statecraft. The difference between the use of economic instruments for rivalry and their use for influence is important here. Unlike war, geo-economics is not necessarily destructive, as economic statecraft can involve influencing other countries through economic inducements and the (actual or perceived) threat of economic coercion, without doing economic damage.
What are some of the major instruments of states for conducting geo-economics? What state in East Asia has the biggest “arsenal” of such tools at its disposal so to speak?
Discussion of geo-economic instrument deployment in Asia must start with China. As noted above, China is primarily a geo-economic power and not, like, say, the Soviet Union, a proselytizing power. Unlike the Soviet Union, China has little desire to replicate its political system in other countries. But it does want other countries to subscribe to its view of the world and to recognize its interests and uses its economic leverage to this end. The various BRI routes — maritime, digital, arctic, even aerial — are arteries along which Chinese lending, investments and influence can flow. BRI is also significant in that it is the first time that China’s leaders have articulated an economic vision that is global and, at least in theory, integrated. One aim of BRI integration is also to create a Sinocentric economic ecosystem that allows China to bypass the U.S.’s global financial dominance.
But China is not the only player in the region with powerful geo-economic endowments. Japan, which despite its variable economic performance of recent years, remains the world’s third-largest economy, is also starting to finesse its geo-economic leverage in new ways. Hitherto, Japan had been largely content to flex its economic muscle in a benign way via investments abroad and official development aid. The rise of China has, however, forced some creative thinking in Tokyo, particularly since the start of the second Abe Shinzo administration in 2012. The imposition in mid-2019 of curbs on exports to South Korea of chemicals critical to Seoul’s semiconductor industry following renewed tensions over shared history looked —despite Tokyo’s denials — like an example of economic coercion for political ends. The Japanese government’s establishment of an economics unit in its National Security Secretariat (NSS) in 2020 is also important as it underscores the fusing of security and economics in Tokyo’s current strategic thinking.
To what degree has the U.S. withdrawal from the Trans-Pacific Partnership (TPP) impacted the geo-economics of East Asia? Is geo-economics in the region in general principally driven by the ongoing strategic competition between China and the United States and its allies?
That the TPP survived the U.S.’s exodus (being reborn at the end of 2018 as the Comprehensive and Progressive Trans-Pacific Partnership, CPTPP) was a major foreign policy achievement by Japan. CPTPP is Japan’s effort to maintain the existing rules-based economic order when there was growing uncertainty over U.S. regional commitment and leadership. Tokyo’s strategy is partly to lock the member countries into commitments to raise industrial standards. Japan also hopes that this will also persuade China, which is not part of the grouping, to raise its own standards. CPTPP thus plays to Japan’s economic strengths and, importantly, gives Japan a rule-setter role in the grouping by dint of its status as the largest developed-economy member. Japan’s strategy is similar in the proposed Regional Comprehensive Economic Partnership (RCEP), which includes China. The values- and quality-based approach to economic policy and thus to political leverage is also evident in another of the Abe administration’s signature policies, the Free and Open Indo-Pacific (FOIP) vision, which inter alia promotes free trade, freedom of navigation, and the rule of law. Shared visions of FOIP between the U.S. and its regional partner, Australia, are another achievement for Japan as a rules-setter in the region.
The countries of the Association of South-East Asian Nations (ASEAN) are an important area of geo-economic rivalry between the U.S. and China. This reflects the strategic importance of the region, not least its critical maritime routes, as well as the large size of ASEAN’s domestic market. China has had some success in exploiting the economic weakness of some ASEAN countries to weaken the bloc’s cohesion, for example via lending to Cambodia and Laos. China is also building a significant presence in the rapidly expanding e-commerce sector of Indonesia, ASEAN’s most populous country and largest economy. Its constant needling over territorial claims in the South China Sea is further evidence of the strategic importance that it attaches to the region. ASEAN is, however, wary of China’s involvement in the region and looks to Japan, which has a long history of investment and infrastructure building throughout the bloc, as an economic counterweight.
Is it fair to characterize geo-economics, like geopolitics, as largely a zero-sum game? Does an overemphasis by policymakers on geo-economic tools increase the risk of a deepening economic and political divide between trading partners (e.g. China and Japan)?
Geo-economics can be a subtle tool of statecraft. Witness Japanese policy. Like many major powers, Japan feels destabilized by the fragmentation of the multilateral rules-based order. This concern is well-founded. With few domestic resources of its own, Japan is dependent on an open and rules-based global trading system that protects smaller economies from the zero-sum assertion of national interests by larger powers. As such, Japan is now trying to deepen cooperation with countries and entities with similar views in order to reinforce multilateral cooperation and thus to sustain the system from which it has profited. In addition to the CPTPP discussed above, the Japan-EU Economic Partnership Agreement (EPA) and the Japan-EU Strategic Partnership Agreement (SPA) are important here. The EPA is more extensive than a traditional free-trade agreement, as it covers data flows, intellectual property protection, and labor rights. The SPA, meanwhile, is explicitly values-based (including democracy, human rights, and the rule of law) and envisions cooperation in a wide variety of areas including climate change and outer space.
Of course, geo-economic tools are not all benign and their deployment can be destabilizing. The U.S.’s weaponization of trade policy since 2018, particularly against China, and the resulting escalation in U.S.-China trade tensions helped to slow global trade growth in 2019 to the slowest since the 2008-09 financial crisis. The impact of U.S.-China tensions was therefore felt globally. The U.S. government’s inclusion of Huawei, China’s largest telecommunications company, and other Chinese firms in its Entity List, which restricts sales of U.S. components to these companies, and its opposition to its allies using equipment from Huawei in their 5G systems further adds to political and business uncertainty. “Techno-nationalism” with regard to China is also creating concerns about “great power” rivalry driving broader industrial decoupling from Chinese supply-chains. These worries may be overdone — there are few alternatives to China in terms of scale and infrastructure quality. But the uncertainty is destabilizing for business and so comes at a cost to growth.
Are democracies like South Korea or Japan better at playing the geo-economic game in the region than, for example, a state capitalist and autocratic actor like China, or is it the other way around?
The governments of democracies have to face elections thus to be accountable for how they defend their countries’ interests, deliver economic growth, and use taxpayers’ money. This has a significant impact on how they can deploy geo-economic tools. For all his hardline rhetoric against China, even U.S. President Donald Trump could not ignore the damage experienced by his political supporters in the U.S. agricultural sector after China imposed tariffs on U.S. food imports in 2018 in retaliation for U.S. duties on Chinese imports. He was thus willing to cut a deal with China — the Phase One trade deal — in late 2019, which calmed bilateral tensions but which left the main structural differences between the two countries unaddressed.
Non-democratic governments have greater room geo-economic maneuver to start with. Thus, Xi was able to allocate large sums of Chinese cash to politically important but potentially unviable BRI projects overseas without proper due diligence. But even here there are constraints. BRI’s foreign lending is not uncontested within China, which after all still has significant investment needs of its own. The rust-belt northeast of the country, for example, needs fiscal support to reboot its ailing economy, and around 30 million Chinese also still live in poverty. Allegations of “debt-trap diplomacy,” in which China is said to fund unviable projects in order to secure Beijing’s access to resources, have also stung Beijing. The Hambantota port project in Sri Lanka, in which Colombo was unable to service the debt incurred to the Chinese from the development and ended in the 99-year lease of territory to China, is one of the best-known examples. But there are others, particularly in Africa, with Kenya, Ethiopia, Mozambique, and Zambia, for example, all struggling to repay Chinese loans. Increasing payments problems by borrowers explain recent shift to a more cautious lending stance by China and the desire to boost the quality of projects funded.
What do you think are some of the biggest misconceptions by policymakers about geo-economics in East Asia?
One is that the largest players hold all the geo-economic cards. Japan shows how smaller players also have agency, even if they need to build coalitions to maximize their impact. (Post-Brexit U.K. could also learn from how Japan has used its geo-economic strengths to build this agency.) Another is that geo-economics as a tool of statecraft is inevitably adversarial. Asia has enormous infrastructure needs — the Asian Development Bank reckons some $26 trillion will be needed in Asia to sustain economic growth momentum in 2016-30. The scale of the requirement exceeds even China’s financial muscle and suggests opportunities for joining forces between China and Japan. Although to date there has been little in the way of collaboration, China and Japan are both, at least formally, open to cooperation on infrastructure projects in the region. Japan also uses its openness to joint projects as a means of reassuring China that its intentions with FOIP and elsewhere are benign. A notable example is China’s agreement to the Japan-led “G-20 Principles for Quality Infrastructure Investment” at the G-20 Osaka Summit in 2019. Bilateral geo-economic cooperation could be a powerful means of integrating China into the rules-based order.
Will geo-economics be the single most important determinant of East Asia’s political future?
Economic statecraft will certainly be a key determinant of East Asia’s political future. China’s growing economic heft against the background of the deep integration of the region’s economies makes this inevitable — China is the largest market for and largest supplier of imports to Japan, South Korea, and Taiwan. But East Asia is a complex region. Geo-economics will interact with a number of other factors that will also influence its political direction. The regional security balance is one. As is now well known, China’s military spending is rising quickly as it seeks to build its projective power. Although China’s spending on defense lags well behind that of the U.S., it still accounted for around 60 percent of defense spending in Asia in 2019. Japan’s internal security debate is also evolving in response to this, albeit within its tight constitutional and fiscal constraints. The predictability of the U.S.’s commitment to the region is another. This has been a perennial concern of Japan and other democracies in the region, and these concerns have risen sharply since President Trump took office in 2016. A more isolationist U.S. would benefit China and put yet more pressure on Japan’s geo-economic toolkit as an important means of stabilizing the regional and international order.