Master Thesis Political Science:
China’s Rise and the Global Economy: Capitalism and Power in the 21st Century
HOW DOES CHINA USE ECONOMIC STATECRAFT IN
ITS MARITIME DISPUTES?
Author: Phong Tran
Student ID: 11776706 First reader: Dr. Julian Gruin Second reader: Dr. Seiki Tanaka
Date: 18 June 2018
ABSTRACT:
China is already the second biggest economy in the world at $US 13.2 trillion in 2018, beating both the European Union and Japan, and should China sustain its current growth, it is expected to surpass the United States as the biggest economy within a decade, somewhere between 2025 and 2030. It is very important, therefore, to understand how China intends to use its economic stature on the global stage, especially in the more problematic and challenging area of territorial disputes. The aim of this paper is to examine if and how China uses economic statecraft in its maritime disputes in the East China Sea with Japan and in the South China Sea with Vietnam, the Philippines, and Cambodia. This could be a litmus test to show what kind of superpower China strives to be. Will it exercise restraint in the promotion of a “peaceful rise” image, or will it go down the “business as usual” path of previous great powers? Will it be able to effectively translate its economic power into political leverage? How will it decide to use its economic influence?
A. INTRODUCTION ________________________________________________________ 4
B. THE DISPUTES __________________________________________________________ 7
1. The East China Sea / Senkaku Islands dispute __________________________________ 7 2. The South China Sea Dispute _________________________________________________ 9
C. THE LITERATURE _______________________________________________________ 12
D. THEORIES AND RESEARCH DESIGN _____________________________________ 20
E. THE CASES ____________________________________________________________ 28
1. Japan - China Fishing Trawler Incident (2010) ________________________________ 28 a. Japan – China 2010 economic relationship ___________________________________________ 28 b. The Incident _____________________________________________________________________ 29 c. Analysis _________________________________________________________________________ 31 d. Evaluation _______________________________________________________________________ 34 2. Philippines – China Scarborough Shoal Standoff – 2012 _______________________ 37 a. Philippines – China 2012 economic relationship ______________________________________ 37 b. The incident _____________________________________________________________________ 38 c. Analysis: _________________________________________________________________________ 40 d. Evaluation _______________________________________________________________________ 42 3. Cambodia – South China Sea ASEAN Vote 2012 ______________________________ 45 a. Cambodia – China 2012 economic relationship _______________________________________ 45 b. The incident _____________________________________________________________________ 46 c. Analysis _________________________________________________________________________ 47 d. Evaluation:_______________________________________________________________________ 49 4. Vietnam HYSY981 Oil Rig Protest (2014) _____________________________________ 50 a. Vietnam – China 2014 economic relationship _________________________________________ 50 b. The Incident _____________________________________________________________________ 51 c. Analysis _________________________________________________________________________ 52 d. Evaluation _______________________________________________________________________ 55
F. OVERALL EVALUATION: ________________________________________________ 56
CONCLUSION _____________________________________________________________ 59
REFERENCES ______________________________________________________________ 61
Appendix 1 ____________________________________________________________________ 70 Appendix 2 ____________________________________________________________________ 71 Appendix 3 ____________________________________________________________________ 72A. INTRODUCTION
On September 8th 2010, the Japanese Coast Guard arrested Zhan Qixong, the captain of the Minjinyu 5179, a fishing trawler (Austin, 2010). Zhan, who had been operating in the vicinity of the disputed Senkaku Islands the day before, had rammed the Japanese patrol vessel Yonakuni with his ship as he was fleeing the scene (Branigan, 2010). Amidst growing diplomatic tension between China and Japan, reports emerging on September 22nd claimed China had begun an alleged “embargo” on its export of rare earth minerals to Japan (Bradsher, 2010). Rare earth minerals are used in the manufacturing of high tech products such as hybrid cars, wind turbines, and even military hardware, and China was the de facto sole supplier of these minerals on the international market (Bradsher & Tabuchi, 2010). On September 24th, Japan released the Chinese captain, in what appeared to be a political victory for Beijing (Fackler & Johnson, 2010). Two years later, on April 8th, 2012, the Philippines Navy found Chinese fishing boats operating around the Scarborough Shoal, another disputed area in the South China Sea, and began to arrest Chinese fishing boats (Miks, 2012). China’s Coast Guard responded quickly by deploying more ships to the area, which triggered a three months stand-off between the Chinese Coast Guard and the Philippines Coast Guard, heightening political tension in an already sensitive area (Perlez, 2012). Incidentally, during this period, over 1,200 containers of Philippines banana exports to China were held back at Chinese border for “quarantine concerns” (Perlez, 2012). The timing of this unexpected inspection prompted some to perceive it as a form of Chinese economic coercion as the quarantine caused the batch of banana exports to spoil, damaging Philippines fruit exports. While the standoff was eased by late June after some backroom negotiations under the United States’ mediation, the Philippines was not able recover its effective control over the Scarborough Shoal from China.
These are but two incidents of maritime disputes between China and its neighbours, yet they should be looked at in the greater context of China as a major global power wielding tremendous economic influence. China is already the second biggest economy in the world at
$US 13.2 trillion in 2018, beating both the European Union and Japan, should China sustain its current growth, it is expected to surpass the United States as the biggest economy within a decade, somewhere between 2025 and 2030 (Jamrisko, 2018). In 2017, China has already been the largest trading nation with a trading volume totaling over $US 4.2 trillion, more than the U.S.’s $US 3.8 trillion (Scott). Thus, it is very important to understand how China intends to use its economic stature on the global stage, especially in the more problematic and challenging issue of territorial disputes. This could be a litmus test to show what kind of superpower China strives to be. Will it exercise restraint in the promotion of a “peaceful rise” image, or will it go down the “business as usual” path of previous great powers? Will it be able to effectively translate its economic power into political leverage? How will it decide to use its economic influence?
These questions deserve great attention, not only because China is an economic titan, primed to become the next superpower, but also because the way that China handles its economic leverage for political goals has been shrouded in ambiguity. Unlike the United States, which is usually clear on its economic sanctions as such policies would often require approval from the legislative and judiciary branches, China has little transparency when it comes to foreign policies. On one hand, Beijing has been publicly vocal about its opposition to economic sanctions, as it repeatedly used its power in the Security Council to “criticize, ameliorate, and on rare occasions veto UN economic sanctions” against Myanmar, Zimbabwe, and Syria (Reilly 2012). On the other hand, Beijing has been quietly looking for ways to advance its political goals with its vast amount of wealth. Fuchs and Klann (2013) found that during the Hu Jintao’s administration, there was a certain deteriorating trade effect between China and countries which the Dalai Lama visited.
The aim of this paper is to examine if and how China uses economic statecraft in its maritime disputes in the East China Sea with Japan and in the South China Sea with Vietnam, the Philippines, and Cambodia. The research for this examination will draw from economic sanctions and economic inducement literature, as well close inspection on four specific cases
relevant to the disputes: Japan’s detainment of a Chinese Captain in the East China Sea in 2010 (1), China and the Philippines’s standoff at the Scarborough Shoal in the South China Sea in 2012 (2), Cambodia’s vote on the South China Sea in an ASEAN summit in 2012 (3), and China’s deployment of the oil rig HYSY891 in Vietnam’s Exclusive Economic Zone in 2014 (4). These four cases are chosen firstly because they are recent, within the last decade, so they still retain their relevancy. Secondly, they are the more prominent cases that are often cited when the topic of China’s economic sanctions is addressed (Riley 2012; Poh, 2017). Thirdly, each of these countries have significantly different political and economic relationships with China, which will be helpful in examining how those variables factor into Beijing’s economic statecraft approaches.
The first part of this paper will provide the background for each of the maritime disputes, explaining: which states are involved, what is under dispute, and what is at stake. The second part will evaluate the current literature on China’s economic diplomacy in general and establish the overall context for the cases. The third part will be the research design and the underlying theories through which the cases are studied. The fourth part will examine each case in detail. The fifth part will be an overall evaluation of the case studies and the framework, its generalizability and application in other situations. This will be followed by the conclusions.
B. THE DISPUTES
1. The East China Sea / Senkaku Islands dispute
Figure 1.1: East China Sea Maritime Dispute Map (Source: Barnes & Page, 2013)
The Senkaku islands, or Diaoyu islands as claimed by China, are a set of uninhabited rocks and small islands situated in the East China Sea. With a total land area of approximately 7 square kilometers, it lies to the East of mainland China, North-East of Taiwan, and South-West of Japan
(BBC, 2014). The body of water covering these islands is approximately 200,000 square kilometers. It is currently administered by Japan, but it is claimed by both China and Taiwan.
Japan claimed that it found the island chain to be terra nullis in 1884, so it officially annexed and recognized the islands to be under Japanese sovereignty in 1895, shortly after it seized Taiwan from China following the Sino-Japanese War (Hunt, 2017). At the 1951 Treaty of San Francisco, Japan renounced some of its territories which had been acquired during World War II, including Taiwan. Yet, the Senkaku set of islands was not among the renounced territory, instead, it was brought under the trusteeship of the U.S., and finally returned to Japan in 1971, under the Okinawa Reversion Agreement (BBC, 2014).
China, on the other hand, claimed that the set of islands had always been a part of its territory since the 14th century, and was administered by Taiwan. Since Taiwan, having been previously annexed by Japan in the Sino-Japanese war, was returned in the Treaty of San Francisco in 1951, the Senkaku islands should have been returned as well, as part of the package (BBC, 2014). Beijing’s position is that the Senkaku/Diaoyu islands were a part of Taiwan, and Taiwan being a part of China effectively means that the set of islands should have been returned to China. Thus, the crux of the legality of this dispute lies in two issues: whether the Senkaku islands were terra nullis when they were found by Japan in 1884, and whether Japan annexed the islands separately or together as a part of Taiwan.
The issue of ownership over the islands went largely untouched from 1945 until 1970, when a United Nations Agency, the Economic Commission for Asia and the Far East, surveyed the area around the Senkaku islands and found potential oil and gas under the seabed (Ikeda,2013). At this point, both Taiwan and China started staking their official claims to the island chain. The U.S. Energy Information Administration estimated that the East China Sea contains “60-100 million barrels of oil” and “1-2 trillion cubic feet” of natural gas in proven and probable reserves (U.S IEA, 2012). Chinese sources estimate “70-160 billion barrels of oil” and “250 trillion cubic feet of natural gas” in undiscovered but recoverable resources, which demonstrates tremendous the
potential of energy in this area (IBID). Compounded by the presence of natural resources is the complexity of the relationship between China and Japan, which elevates the nature of this dispute beyond a mere issue of resources competition. To China, the matter of the Senkaku/ Diaoyu Islands is tied to Japan’s imperial past, whereas to Japan, China is perceived to be increasingly aggressive and threatening as its economy grows bigger. The nationalistic sentiments attached to the dispute make it much harder to effectively resolve as they leave little room for compromise. Though the U.S. takes a neutral stance towards Japan’s sovereignty claims to the islands, it has had a security alliance with Japan since World War II, which would compel the U.S. to back Japan up in the case of escalating conflict. While the presence of the U.S. does allow a greater margin for crisis management as Washington could act as a mediator, paradoxically, it also heightens the stake in the dispute since three out of four biggest economies in the world have a vested interest in this rather small body of water.
2. The South China Sea Dispute
Whereas the East China Sea dispute is quite straight forward in terms of the subject in dispute and the claimants, the South China Sea is a much more complex problem for three reasons: the amount of natural resources present, the eco-geopolitical significance of this body of water, and the sheer number of states involved in this dispute.
The South China Sea is a body of water to the South of China, East of Vietnam, and West of the Philippines. Subsequently, it is called the Southern Sea (Nan Hai) by China, the Eastern Sea (Bien Dong) by Vietnam, and the West Philippines Sea (Dagat Kanluran Pilipinas) by the Philippines (Scott 2012: 1019). Within this body of water lies two sets of islands: the Paracel Islands and the Spratly islands, which are claimed and currently occupied by various states, in whole or in parts.
Covering an area of 3,500,000 square kilometers of the Pacific Ocean, the South China Sea is considered the third largest sea for maritime bodies of the same type, after the Mediterranean
Sea and the Caribbean Sea. The South China Sea contains a vast amount of natural resources, including fisheries products and hydrocarbons. It ranks fourth in terms of global marine production and contributes to 10% of the of the world fisheries catch. (Lague 2012). In term of oil and gas, the amount of proven reserves in the South China Sea is estimated at 7 billion barrels of oil and 900 trillion cubic feet of gas, far exceeding estimates in the East China Sea. (Kaplan 2011). The total amount of oil and gas (both proven and not yet proven) available here is unknown since few exploration surveys have been done due to the disputed status of the region, yet the fact remains that a large amount hydrocarbon is present.
More importantly, however, the South China Sea is one of the most important global trade routes as it connects the Indian Ocean to the West and the Pacific Ocean to the East. Half of the global commerce traffic and two thirds of the energy supplies to South Korea and Japan pass through here, prompting some to call it “the throat of global sea routes” (Kaplan 2011). A disruption in this ocean route could have a devastating effect on the global economy. Furthermore, as the connection between two large oceans, the control of the South China Sea would allow for intercontinental power projection. This demonstrates just how vital this body of water is in terms of its strategic value.
The main parties in this dispute are China, Vietnam, and the Philippines, and also Brunei, Malaysia, and Taiwan, though the former three states have more significant claims. For China, it stakes it claim over this body of water with a legally ambiguous nine-dashed line, otherwise known as the cow-tongue line, which covers everything in the region, whereas other countries have various overlapping claims (Scott 2016: 296-297). In terms of islands occupation, the Paracel islands are completely occupied by China, while the Spartlys are occupied by various countries to different degrees. The map below shows the convoluted overlapping areas where claimant states assert their sovereign rights. Though the status of occupied islands as shown in table 1.2 has not changed much over the years, it does not account for a certain recent political development in the area, specifically the reclaiming of submerged islands by China.
Figure 1.2: South China Sea Maritime Dispute Map (Source: Moss & Page, April 2016)
Paracels Claimed Paracels Occupied Spratlys Claimed Spratlys Occupied
China All All All 8-12
Vietnam All None All 25-27
Philippines None None Some 8
Taiwan All None All 1
Malaysia None None Some 5-6
Table 1.1: South China Sea Islands Occupation (Source: Kaplan 2011)
While the legality of each state’s claim is not within the scope of this paper, it is essential to point out that there are many parties involved in this dispute, and in many instances, the division has been drawn along the line of China versus the ASEAN states. This particular dynamic will later have a critical consequence in the way China handles the dispute.
C. THE LITERATURE
Economic statecraft is the intentional pursuit of foreign policy goals via economic means, including both incentives and punitive measures which affect the “trade, aid, finance, currency, and/or assets of the target state” (Kirshner 1997). Economic statecraft is distinguished from normal economic activities by its political goals, or its “pursuit of power rather than plenty” (Viner 1948). However, the study of economic statecraft focuses more on sanctions rather than incentives due to the prevalence of the former and the lack of the latter (Drezner 1999). The nature of this issue presents further challenges to the study of China’s economic statecraft in its territorial disputes for two reasons: China’s ambiguity when it comes to economic sanctions, and a lack of a systematic evaluation when it comes to incentives.
James Reilly (2017), in his study of “China’s Economic statecraft in Europe”, categorized China’s strategies into three different groups: specific reciprocity, diffusion reciprocity, and strategic engagement. Specific reciprocity is the use of a mixture of carrots and sticks, which China employs when it wants to influence a particular policy of a specific target, especially when the issue at hand is of greater significance to China. This is the most discrete approach which comes with a clear quid pro quo, and is usually exercised for short term political goals, such as discouraging the Dalai Lama’s visit in Europe. When France’s president Sarkozy announced that he would meet with the Dalai Lama in 2008, China postponed multiple trade talks with France and Chinese premier Wen Jiabao suddenly cancelled a prescheduled trip to Lyon for a China-EU summit. After France backed down, President Sarkozy was quickly granted a meeting with then President Hu Jintao, and normal trade relations resumed. (Reilly 2017).
Diffusion reciprocity is the use of incentives to promote mutual benefits between China and multiple states to influence a broad issue. Since 2010, China had pursued Market Economy Status (MES) in the World Trade Organization (WTO) and it had been lobbying European States, among them Italy and the UK. Meanwhile, China had been increasing trade and investments in Italy and the UK with the expectation that they would support its MES candidacy. In 2014 China’s State Administration of Foreign Exchange invested €3.5 billion in ten biggest Italian companies and China’s Premier Li Keqiang presided over €8 billion worth of trade deals between China and Italy, all in the hope that Italy would continue to help support China in the WTO. However, this approach does not always produce the desired result for China as it has failed to influence the EU over its MES.
China’s final approach to economic statecraft is the use of strategic engagement in which China seeks to influence the targets with increased structural economic linkage, hoping that in the long term, sustained economic engagement will produce favourable political outcomes. Reilly used China’s role in the Euro financial crisis in 2009 as the point of reference. Right after the crisis, China swiftly moved into Europe with financial packages and a message of confidence. China not only continued to hold European bonds, but it also established funds and increased investment into Greece, Portugal, Spain, Iceland, and Italy. This open-ended strategy so far has been less than successful as the degree of European public trust in China has not gone up by much.
These three strategies do have their own limitations. Specific reciprocity and diffusion reciprocity are short term measures with particular political aims, strategic engagement is a long-term approach. Whereas the active use of punitive measures along with incentives to coerce a target in specific reciprocity could convince the target to change its policy, it risks damaging China’s reputation and could be economically costly towards China as well. However, since this approach is used when the stake is more significant for China, it is still a useful tool. Diffusive reciprocity, on the other hand, is less effective as it focuses more on incentives and it lacks a coercing mechanism. If the target state refuses to cooperate, it might not be better off, but it
does not end up worse off either. Furthermore, in many cases, China is the one initiating the process, therefore, once China proves its goodwill with incentives, there is nothing that can prevent the target states defecting from Chinese expectations, such as in the case of the UK and Italy. Finally, strategic engagement is a long-term strategy, yet the return on such strategy is questionable as no one knows what kind of return China is expecting. Furthermore, the line between economic statecraft and pure economic exchange in the strategic engagement approach is not clearly defined because an increase in economic engagements can just be good for business. James Reilly understood this and tried to refine this line by qualifying that China accepted certain economic risk and political risk when it came to Europe in 2009. Yet, the degree of risk was not analyzed in-depth. Overall, this is a very relevant paper because it offers a useful framework to look at China’s use of economic statecraft when it deals with other states, as it looks at both the use of incentives as well as punitive measures. However, aside from the Dalai Lama issue, China does not have major disputes with Europe like it does with its East Asia and Southeast Asia counterparts. Furthermore, European states are at a different stage of development and have a different degree of resilience when it comes to China’s economic dependency compared to some Asian states, which could alter the dynamics of the analysis of China’s economic statecraft.
Even though the general consensus is that China is a formidable economic powerhouse, it has not effectively translated that into strategic political power, and in one of his earlier papers, “China’s Economic Statecraft: Turning Wealth into Power”, James Reilly (2013) he also explored this phenomenon. He argued that, despite the ability to control a vast amount of wealth, Chinese leadership’s ability to wield that wealth for political coercion is actually quite limited, for two reasons: China’s reluctance to publicly admit the use of economic coercion, and the rapid growth of China fueling regional resistance in neighbouring states.
Firstly, China does not publicly admit that it uses economic sanctions for two reasons: it opposes sanctions on principle due to the fear that it will be sanctioned itself (since the Tiananmen Square incident), and it desires to build an image of a peaceful rise. Though this does
afford China flexibility in its political dealings, this also leads to the fact that China has to use selective punitive trade measures without being able to aggressively and comprehensively implement sanctions. This disadvantage is also echoed by Christina Lai’s (2017) “Acting one way and talking another: China’s coercive economic diplomacy in East Asia and beyond”, as she noted that the inconsistency in China’s rhetoric and actions can also be counter-productive as it fuels distrust in Beijing’s intentions from neighboring states. Lai noted that effective economic coercion is usually more successful at the threat stage, yet, for the threat to work, the threat needs to be credible, that the rhetoric and the implementation needs to match. In case of the United States, the economic sanctions are formalized through official legislative mechanism which China does not use. The deniability and flexibility China was looking for through its economic statecraft dealings actually hamstring its efficiency.
Secondly, beyond the inconsistency in rhetoric and actions, the rapid growth of China as well as its military maneuvers in the South China Sea and East China Sea motivate Asian states to balance against China via different means (creating alliances, building up military, engaging in international institutions), all of which reduces the effectiveness of China’s economic statecraft. Reilly (2013) noted that China’s carrots (incentives) approaches to different actors are also different: to poorer states, it promises aids and development projects, to richer states, it promises access to the domestic market, and to neighbouring states, it promises increased trade engagement and investment opportunities, all in order to bring them closer to the Chinese economic orbit. The fact that China does not officially admit its economic coercion measures to maintain deniability means that it is more difficult to qualify whether a particular trade policy has a political aspect to it.
Assessing China’s Economic Leverage from a different angle, John Lee’s (2012) paper “China’s Economic Leverage in Southeast Asia” argued that China’s economic leverage is surprisingly overestimated. Firstly, the image of a China’s peaceful rise has not been bought by Southeast Asian states, which means that they have been balancing or building resistance against China’s influence in various manners (seeking third party actors, building alliances, etc.). This
point is concurred by Lai. Secondly, the trade linkage between China and the Southeast Asian (ASEAN) states are not as critical as one might expect. This is because two thirds of the trade between China and ASEAN are not consumer trade but processing trade, which is usually double counted, and also is merely a part of the manufacturing network in Asia. China is only a cog, albeit a big one, in this chain and therefore ASEAN’s economy is still more dependent on the global market than China. Thirdly, neither the ASEAN states nor China are exporters of innovations, thus they are still dependent on advanced Western economies such as the US and Europe. It is estimated that more than half of export-manufacturing firms in China are foreign owned and 80 percent of Chinese export are from foreign invested firms. These numbers are roughly the same in Malaysia as well as Vietnam. In this sense, advanced economies do have significant influences over the Southeast Asian economy. Hence, the limitations to China’s economic leverage in Southeast Asia, as well as its reluctance to use coercive measures officially perhaps could explain why we have not seen much economic coercion in this region.
The lack of official economic coercion from China in Southeast Asia was explored in Angela Poh’s (2017) “The Myth of Chinese Sanctions over South China Sea Disputes”, in which she looked in-depth in the case of the Philippines and Vietnam. In the Scarborough Shoal Incident, in April 2014, the Philippines’ naval forces were sent to investigate the presence of Chinese vessels in the Scarborough Shoal in the Spratly islands, a disputed maritime area. The deployment of Philippines’ naval force then prompted Chinese maritime forces to intervene, and subsequently led to a two month standoff in the area. The tension was escalated with hostile rhetoric and increased deployment of maritime forces on both sides. In May 2014, in the midst of the incident, there were reports of a sudden restriction on Philippines’ banana exports to China for “food safety reasons”, and the media dubbed this as an implicit Chinese’ economic sanctions on the Philippines. Poh, however, believed that this is a tenuous case at best. Via official reports and interviews, Poh found that there had been a notice on increased Philippines banana export inspection in March 2014, a month before the Scarborough Shoal incident, thus, the connection between the incident and the restriction, while tempting, was dubious. Poh furthered her argument that if it was truly an economic sanctions attempt by China, the choice of a rather
trivial trade category such as banana was questionable, as it has neither the symbolic value nor any practical impact on the Philippines’ economy.
In the case of Vietnam, Poh chose the oil rig incident HD 981 as her case study. In May 2014, China deployed an oil rig HD 981 to an area within Vietnam’s Exclusive Economic Zone (EEZ), which prompted public outcry in Hanoi, and led both sides to send various surveillance and fishing vessels to the area. Public protests against China were organized in Vietnam, though the government quickly contained them. Poh noted that despite rising tensions and the fact that China could have exercised economic coercion to gain policy concession from Vietnam, there was no evidence of such actions. In fact, there were special orders from Beijing to provinces bordering Vietnam to maintain normal economic activities.
This part of Poh’s argument, however, is problematic on two levels. Firstly, Vietnam did not initiate the aggression, which means that there was no reason for China to use coercion to change Vietnamese policy in the first place. In the case of the Philippines, an economic coercion would seek to force the Philippines to call off its force, but in the case of Vietnam, the tension was the presence of the Chinese oil rig in Vietnam’s EEZ, and not Vietnam’s surveillance vessels. The subject of contention is important as it provides possible Chinese political goals. Secondly, without a discrete political goal, an economic sanction on an already hostile public in the target country would be counter-productive as it would further fuel hostility, which might then force Vietnam to implement unfavourable policy towards China to mollify the public. Poh’s analysis would have made sense if an economic sanction had been expected to happen but did not, but it becomes less relevant when an economic sanction was not expected in the first place. Even so, her argument does illuminate an important phenomenon, which is the lack of explicit economic coercion from China when it comes to the maritime territorial disputes in the South China Sea.
Nevertheless, the lack of coercive measures does not mean that China does not possess the capacity to use them. In his paper, “China’s Potential for Economic Coercion in the South
China Sea Disputes: A Comparative Study of the Philippines and Vietnam”, Madhu Ravindran (2012) found that the economic linkages between them and China made them particularly vulnerable to economic coercion, though in different ways. Drawing on the economic sanctions framework by Hufbauer (2009), Ravindran argued that China poses different degrees of threat to these two states should it choose to employ economic sanctions. Though the Philippines might be dependent on China in a few selected sectors, such as the service industries or electronic industries, Vietnam has a bigger stake as some critical parts of its economy, such as manufacturing or energy, are highly dependent on China. Thus, China has the capacity to inflict heavy damage on Vietnam’s economy, whereas the damage might not be as significant for the Philippines. Yet, causing economic damage does not automatically translate to political concessions. The presence of a powerful oligarch class which is also more vulnerable to China’s economic measures in the Philippines means that China is in a better position to extract political concession from Manila than Hanoi, where no such demography exists. China could have targeted the ruling Communist Party of Vietnam, yet, given the high public antagonism towards China, it means that even Vietnamese leadership are constrained in accommodating Beijing’s requests.
The general consensus is that despite having tremendous economic power, China has not been successful in translating that into political outcomes. This is due to the fact that China maintains a policy of ambiguity when it comes to economic coercion, since it wants to avoid being a sanctioned target as well as maintain its long-term image of a peaceful rise. However, this policy not only limits the effectiveness of China’s economic statecraft as it makes China’s rhetoric less credible, it also unwittingly increases the skepticism over China’s peaceful rise in East and Southeast Asia due to the inconsistency between China’s economic measures and military posture. Though China’s ambiguity towards economic coercion might explain the lack of explicit sanctions in the region, the use of China’s incentives to influence policies in its maritime disputes has not been well explored, and this is very important as economic inducements have played a significant part in China’s arsenal of economic statecraft in Europe. Furthermore, it is necessary to understand not only China’s motivation in its economic statecraft
strategy in maritime disputes, but also under what circumstances it would resort to economic measures, and how. Given the uncompromising nature of territorial disputes, the study of China’s economic influence over these issues would help to illuminate the manner in which China may rise to become the next super power.
Therefore, the motivation for this research is to understand the process which China might decide on if, when, and how it would decide to employ its economic leverage. Unlike other economic powerhouses such as the European Union or superpowers like the U.S., China does face a credibility problem when it comes to economic coercion. The U.S. and the EU are arguably more convincing in applying economic sanctions or even just the threat of economic sanctions because such policies would be official and public, and it would be bounded by the legislative branches of respective parties. Therefore, once applied, sanctions from the U.S. or the EU cannot be easily rescinded. Furthermore, with a clear intention, the U.S. and EU can call on other states to join in the sanctioning efforts like how they coordinated to impose sanctions on Russia during the Ukrainian crisis (Baker et al, 2014). China, on the other hand, does not have those options available, as it can neither signal its willingness to impose sanctions publicly, nor can it call on a coordinated effort from other states to do so. China can only put on certain ambiguous selective trade restrictions which reduce their effectiveness. However, since China maintains a principle of ambiguity when it comes to economic coercion and inducement, it is difficult to discern whether its foreign trade policies are economically or politically motivated. Understanding that motivation could be critical in devising the appropriate countering strategies and limiting the chance for miscommunication. For example, should another state such as Japan or the US mistake China’s restriction on certain products due to economic reasons for a political move, that miscommunication could spark a trade war, or escalate tension between the involved parties.
Furthermore, being able to see through China’s ambiguity and discern its intentions in economic diplomacy may help establish a pattern which can demonstrate how China wield its economic power, whether it would do so responsibly, or it would be just another bully. Thus,
while this research focuses on China’s economic diplomacy in the East China Sea and Southeast China Sea, it contributes to the literature in the bigger context of how China will behave as it rises to become the largest economy in the world and the next global superpower.
D. THEORIES AND RESEARCH DESIGN
According to Kirshner (1997), economic statecraft is defined as the intentional pursuit of foreign policy goals via economic means, which include both incentives and punitive measures, therefore, a study on economic statecraft needs to cover both of those aspects. However, since there has not been a framework that analyzes the effects of both incentives and sanctions in depth, in order to examine the ways in which China employs economic statecraft in its maritime territorial disputes in the East China Sea and the South China Sea, I intend to use three theoretical frameworks to map out this process. The first is Drezner’s (1999) “The Trouble with Carrots: Transaction costs, Conflict Expectations, and Economic Inducement”, which provides a rational choice explanation for the conditions under which a state would use economic inducement. Hufbauer’s (2007) theory in “Economic Sanctions Reconsider” would then cover the circumstances when a state would prefer economic coercion. Finally, Reilly’s (2017) “China’s Economic Statecraft in Europe” would add in the patterns of economic maneuvers that China has been using in Europe.
Whereas economic inducement, otherwise known as “carrot”, has been among the arsenal of states in their political dealings, it is not as frequently used as one might expect, and Drezner (1999: 189) also admitted that the literature on ‘carrot’ is “paltry when compared to the literature devoted to economic or military coercion”. Nevertheless, Drezner put forward a rational choice explanation for the use of economic inducements by states by investigating two questions: why do states not use ‘carrots’ more, and how useful are ‘carrots’ as a political tool? Since ‘carrots’ are essentially political quid pro quos, he argued that in an anarchical world order without an enforcement agency the transactional costs are high, and therefore they have not been more regularly used, especially when the states involved are not democracies or when they
operate outside of international regimes. The internal political mechanism of democracies or the legal framework of international regimes both function to bring down those transaction costs, which means that inducement are more likely to happen among democracies and within the structure of international regimes. However, it does not mean that only liberal democracies can apply economic inducement successfully. As economic inducement and economic coercion (‘sticks’) are both viable policy options, the more important question is: when do states prefer carrots than sticks? Drezner believed that the decision to pick one over the other depends on two factors: the nature of the relationship between the sender and the target, as well as the expectation of future conflicts between them. If the sender and the target have an adversarial relationship, then the sender would be more likely to pick sanctions over incentives as the first choice policy because it would enhance the reputation of the sender as a tough bargainer, and occasionally fulfill domestic expectations. If the sender expects frequent conflicts in the future with the target, it is also more likely to pick coercion over inducement first since offering inducement from the beginning would demonstrate a lack of bargaining power and weaken its negotiating position in subsequent conflicts. These two elements are also linked, as countries with adversarial relationships are more likely to have future conflicts. In short, Drezner (1999: 202) argued that “with allies, the rewards are put in place first, and then used as leverage when a conflict arises”, whereas “with adversaries, the conflict first arises, and if coercion fails, the sender then proffers the carrots”. The framework developed by Drezner provides us with the relevant variables concerning the policy options between sticks and carrots.
Having established when carrots work, we need to turn to the other side and examine when sticks work. Hufbauer (2007: 50) believed that, essentially, economic sanctions work when “the costs of defiance borne by the target” is “greater than its perceived costs of compliance”. Even though this sounds simple enough, the difficulty lies in determining the magnitude of those two costs and how each state perceives them. Furthermore, his framework depends on two factors: the relative size and leverage between the sender and the target, as well as the relative intensity of interest between the sender and the target towards the issue in contention.
Table 2.1 Expected outcomes, depending on relative motivation and sender leverage
Relative intensity of
interest
Relative size and sender leverage
T > S T = S T < S
T > S Failure Failure Success possible but not likely
T = S Failure Indeterminate
Success possible but depends on goal, with modest goals being more achievable than ambitious
goals T < S Success possible
but not likely Success possible Success S = Sender
T = Target
Source: Hufbauer (2009: 51)
In Table 2.1, Hufbauer (2009: 51) provided a summary of different outcomes based on the various combinations of the relativity in motivation and leverage between the sender and the target. The relative intensity of interests can be measured in terms of foreign policy goals, and he put them into different categories: modest policy change, major policy change, regime change, disrupt military operations, and impair military potential. The relative size and sender leverage, on the other hand, is measured by different political and economic variables. For political variables, Hufbauer looked at companion policies (military actions), international cooperation, presence of international organization, presence of international assistance, and the political nature of the target. For economic variable, he focused on the cost borne by the
targets (measured in absolute value and as a percentage of Gross National Product and GNP per capita), commercial relations (measured bilateral trade), relative size of the economies (measured by the ratio between their GNP), Economic Health and political stability, the type of sanctions, and the cost borne by the sender in imposing the sanctions (measured by a judgmental scale). Though Hufbauer did not provide the weighted value to those variables, they are useful in estimating the relativity between the sender and the target, both in term of the intensity of interest and the leverage. When it comes to China, however, two political variables do not apply: international cooperation and the involvement of international organizations. This is due to the fact that China has been intentionally ambiguous about its sanctioning policies. Its official stance is that it opposes economic sanctions because China wants to maintain flexibility and deniability when it comes to foreign policy and to uphold its “peaceful rise” image. The presence of international cooperation and the involvement of an international institution would formalize the economic sanctions, which contradict China’s official policy.
James Reilly’s (2017) study of China’s economic statecraft in Europe provides a helpful insight to the way China practices economic statecraft elsewhere in the world. Reilly categorized China’s economic leverage into three different forms: Specific Reciprocity, Diffusion Reciprocity, and Strategic Engagement. Specific Reciprocity is used when China wants to influence a single target over a particular policy in the short term, and this approach utilizes both carrots and sticks. Diffusion Reciprocity is used when China wants to engage multiple states over a particular policy, and China does this by promoting mutually beneficial economic interactions in order to encourage the target states to help it achieve its goal. The third form of economic inducement is strategic engagement in which China actively builds multiple economic linkages between it and the target states, with the hope that those economic linkages will help produce favourable political outcomes in the future. Thus, among the three approaches, only specific reciprocity has a coercive side to it, whereas diffusion reciprocity and strategic engagement focus on building economic incentives. These policies, however, are not necessarily mutually exclusive, as China can still engage a state with specific reciprocity in the short term and strategic engagement in the long term.
Using the three frameworks by Drezner (1999), Hufbauer (2007), and Reilly (2017), I have developed a process to examine how China would employ economic statecraft in its maritime disputes in the East China Sea and the South China Sea. Examining the nature of the political goal and the number of parties involved, I categorize them into the three approaches identified by Reilly. After that, I evaluate the nature of the relationship and the expectation of future conflicts, as developed by Drezner, to determine whether China would employ carrot or stick or both. Lastly, I would utilize the sanctions framework by Hufbauer to evaluate whether that sanctions would be effective. Those will be the data points through which I will be tracing the process of how China exercises its economic leverage.
It is necessary to point out, however, that there are a few gaps in these frameworks. Firstly, whereas Hufbauer (2007:50-51) was quite thorough in his analysis of the preferences and outcomes when states decide whether or not to employ economic coercion, Drezner (2007) did not go that far. Drezner was able to point out when states are likely to employ economic inducement but he was not able to estimate the conditions which make economic inducement more or less likely to be successful. This is understandable, however, since there has not been nearly as much literature on economic inducement compared to economic coercion due to the lack of the former compared to the latter in real life, as explained above. Interestingly, Reilly (2017:178-179) found that when it comes to economic inducement, China also has a mixed record, as its carrots failed to produce the desired result when Beijing tried to induce London in helping its case in the WTO, which shows that even China does not know whether or not its economic inducement would work. While it would not be within the scope of this research to determine the efficacy of economic inducement in general, a reasonable assumption is that the degree of economic dependency on China and the degree of friendliness towards the Chinese government from the target state would positively correlate with China’s probability for successful economic inducement.
Secondly, even though Hufbauer (2007) did intimate how he compared the degree of relative intensity of interest towards the political goal that a sender state seeks from the target state when it imposes economic sanctions in the broader context, he did not specify the framework and the parameters he used when making the assessment. Hufbauer (2007:52-53) categorized political goals into five different types: modest policy changes, major policy changes (e.g. territory concession, security policy), regime changes, military adventure disruption, military capability impairment; and stated that the target state would likely to have a greater interest in the last four types, and it depends on the context for the first type. Therefore, even when it is a modest policy change, it is still a judgement call, depending on the political ramifications of the sought goal for both sides. While we might not always be able to accurately evaluate the relative intensity of interest between the target state and the sender state, an useful indicator to examine is the degree of willingness to escalate the political tension from either side. For example, in the case of China versus Japan in the fishing trawler incident in 2010, it was China which suspended diplomatic and socio-economic exchanges on multiple levels with Japan, whereas it was Japan which tried to back down and had to send the Chinese captain back instead of prosecuting him under Japanese law as initially planned. In the China versus Vietnam in the Oil Rig incident in 2014, however, it was Vietnam which escalated the situation by calling on multiple parties to get involved, and Vietnam kept sending ships to confront the China’s Oil Rig despite facing a larger number of Chinese vessels, and it was China that had to move the Oil Rig out a month earlier than scheduled. A higher willingness to escalate tension could be a credible signal for greater interest.
In the process tree below, first, I will determine whether China is seeking a specific goal or not, as specific goal would require China to use the reciprocity approach (Reilly, 2017). After that, I would determine whether the stake falls under the high stake or low stake for the target. A high stake goal means that economic measures are not likely to work in any circumstances, whereas a low stake goal means that there is room for compromise and coercion. A high stake goal would fall under major policy change, military impairment, and regime change. However, it is necessary to note that under certain political circumstances, a modest goal for one state could
be a major goal for another. If China is seeking to induce policy changes in a group, it would be more likely to use diffusion reciprocity, whereas if it is a single target, it is more likely to use specific reciprocity (Reilly, 2017). In the case of a single target, the nature of the relationship and the expectation of future conflicts are important determinants to decide whether a state would use sticks or carrots first (Drezner, 1999).
Should a state arrive at a decision to use sticks, it would need to consider the probability of successful coercion, at which point we would utilize Hufbauer’s (2007) outcome table, measuring the degree of economic leverage and intensity of interest between China and the target states. For economic leverage, we will look at relative economic size, bilateral trade, foreign aids, major trade products, and economic health of the target states. The relative economic size would help determine how significant would the damage from the sanctions be reflected on the sender state, in this case, China. Hufbauer (2007:89-90) noted that in 80 percent of coercion cases, the sender has an economy at least 10 times larger than the target. When it comes to trade linkage, the amount varies but Hufbauer found that on average across all political goals, successful coercion happens when the sender dominate at least 33 percent of the target bilateral trade, though that number is smaller (23 percent) when it comes to modest policy changes (Ibid). Major trade product would help to determine which industries would be most vulnerable to an economic sanction, foreign aids would help to determine the degree of dependency and friendliness between China and the target state, and economic health of the target state would determine how exposed the target state would be.
If the stick approach is more likely to work, then China would use stick, whereas if it is unlikely to work, China would either use carrot or go to stalemate. The decision whether or not to use carrots depends on the degree of economic dependency and friendliness towards the Chinese government from the targeted state. Should neither carrots nor sticks work, China would arrive at a stalemate decision, meaning that either applies economic leverage to no avail, or it does not apply any economic leverage at all. The reason that the former scenario could happen
is because China might miscalculate the effectiveness of its economic diplomacy, nevertheless, if China is certain that its policy will not work, then it will not employ economic leverage at all.
To sum up, the purpose of this paper is not to list out the different tactics of Beijing’s economic statecraft such as trade embargo, investment suspension, withholding aids, and so on. This paper aims to ascertain whether China has strategically employed economic diplomacy (inducement or coercion) in four particular incidents involving its maritime disputes with other states, using the above theories and constructed framework. In the lack of official and public announcements, the framework could provide a helpful guide on how likely it was that China had actually used economic leverage on the various states in those four cases.
E. THE CASES
This part of the paper will examine the four case studies in-depth, using the framework laid out in the previous section. Each of the case studies will cover four aspects: a) the general economic relationship between China and the counterpart state, b) the narrative of the incident, c) the analysis, and d) an evaluation.
1. Japan - China Fishing Trawler Incident (2010) a. Japan – China 2010 economic relationship
China’s GDP $US (Million) 6,100,000
Japan GDP: $US (Million) 4,939,384
Japan Export to China $US (Million) 149,450 - (19.41% total export) Japan Import from China $US (Million) 153,203 - (22.07% total import) Japan total trade with China $US (Million) 302,653
China’s total trade volume overall $US (Million) 2,973,766 Japan’s total trade volume overall $US (Million) 1,463,833 Major Japan’s Export Products to
China
- Machinery & Electronics (44%) - Metals (11%)
- Transportations (10%) - Chemicals: (8%) Major Japan’s Import Products from
China
- Machinery & Electronics (43%) - Metals (5%)
Foreign Aid from China None
Table 3.1.1: China – Japan Economic Relationship Overview in 2010 Source: World Bank, 2010. World Integrated Trade Solution (WITS)
The data shows that while China’s GDP was larger, it was only moderately so, only by over 8 percent. Secondly, although China was a major trading partner to Japan, accounting for 20 percent of Japan’s bilateral trade, the reverse is also true, meaning that Japan was also a major trading partner with China, accounting for approximately 10 percent of its total bilateral trade. Furthermore, though the specific products were different, both China’s and Japan’s major trading industry was machinery and electronics, meaning that China would not be able to effectively exploit this industry for leverage. Japan was still a major economy at that point and received no foreign aid from China, which means that Japan was neither vulnerable economically nor it was depending on China. Therefore, overall, China had low leverage over Japan.
b. The Incident
On September 7, 2010, Japan’s Coast Guard patrolling around the Senkaku islands found a number of Chinese fishing vessels operating in the area. There had been a spike in the number of Chinese trawlers in recent months (Smith, 2010). Usually, the presence of the Japan’s Coast Guard would have been enough to prompt Chinese fishing vessels to turn around the leave the area, and the majority of them did, except for the captain of the Minjinyu 5179. Not only did captain Zhan Qixiong refuse to leave the area when confronted, he also managed to deliberately ram the Japan’s Coast Guard ships on two separate occasions within an hour (Ibid). This unexpected defiance led the Japan’s Coast Guard to respond in kind as they arrested the captain and initiated the legal proceedings to prosecute him under Japanese law. This was an unprecedented show of force because typically, at worst, the captain and crews would only have been detained and returned to China instead of being brought to court. Understandably, Beijing was outraged over Tokyo’s handling of the situation. Had China decided to concede to Japan’s decision, it would have the same effect as publicly acknowledging that Japan had the legal rights and sovereignty over the disputed area.
Beijing quickly reiterated its claims over the Senkaku islands and insisted that Japan had no legal authority to detain the captain (Ibid). Political tension between the two countries
escalated quickly, as diplomatic exchange rose from ambassadorial level to minister level within a matter of days. By September 10, China decided to suspend the much awaited prescheduled talks with Japan over the East China Sea joint development. Meanwhile, domestic protests against Japan in China were simmering, yet Captain Zhan was still detained as political elites in Tokyo were trying to figure out what to do. By September 19, China unilaterally suspended all bilateral exchange up to the ministerial level with Japan and cancelled various socio-economic activities that had previously been planned between two countries. On September 22, China’s Premier Wen Jiabao declined to meet with Japan’s Prime Minister Naoto Kan at a high level meeting in New York over the detention of the captain (Brannigan, 2010) . Washington also started to get involved as it attempted various efforts for mediation.
Around this time, there were reports of a rare earth “embargo” from China to Japan. Rare earth metals are elements critical to the production and manufacturing of high tech products, including defense, aviation, electronics, and transportation. Though China only possessed 40% of the reserves, it accounted for over 95% of the global supply and had had been maintaining a monopoly position on rare earth metals. The report by Bradsher (2010) from the New York Times asserted that this “embargo” had direct relation to the Fishing Trawler Incident. Various news outlets picked up and circulated the piece. By September 24, Japan prosecutors released the captain and declined to press charges, citing diplomatic reasons for its decision (Austin, 2010). On September 29, Beijing reportedly lifted the alleged block and resumed rare earth shipments to Japan. However, in the Sixth China EU Summit, Premier Wen Jiabao emphasized that China did not and would not impose an embargo on rare earth exports (Xinhua, 2010). Yet, many still suspected that the rare earth “embargo” had a significant effect on the decision to release the Chinese captain.
c. Analysis
Expected outcomes, depending on relative motivation and sender leverage
Relative intensity of
interest
Relative size and sender leverage
T > S T = S T < S
T > S Failure Failure Success possible but not likely
T = S Failure Indeterminate
Success possible but depends on goal, with modest goals being more achievable than
ambitious goals T < S Success possible
but not likely Success possible Success S = Sender
T = Target
Table 3.1.2: China’s Expected Economic Coercion Outcomes in the Case of Japan Using the framework proposed, it is clear that the demand from China is quite specific: the release of the captain of the Minjinyu 5179. While there might be some domestic political backlash, this is not a high-stakes concession for Japan, and Japan is the only party involved in this incident. While Japan and China have strong economic linkages, the nature of the relationship tends to fall more on the adversarial side, especially since the incident involved a territorial dispute, coupled with anti-Japanese sentiment among the Chinese public. The expectation of future conflict can be considered high for two reasons: the larger dispute over the Senkaku islands had not been resolved, and similar confrontations between Chinese fishing boats and Japan’s Coast Guard would likely keep happening given that overfishing within China’s waters would continue to force Chinese fishermen to venture into other areas in search of undepleted fish stocks (Green, Michael, 2017: 71).
At this point in the process, China would need to consider whether an economic sanction would be the best course of action. Looking at the expected outcome table, it is quite clear that Japan and China have a similar economic size and China has no strong leverage over Japan. However, it is more difficult to gauge the relative intensity of interest over the release of the captain between China and Japan. On Japan’s side, the formal arrest of the captain was prompted by his unexpected defiance instead of a well-deliberated decision from Tokyo to demonstrate a show of force. Japanese officials noted that the captain was drunk when he rammed the Japanese Coast Guard and he did not seem to be under instruction from Beijing to test Tokyo or Washington’s resolve. While Japan was justified in its response, as there had been an increase in Chinese coast guard and fishing vessels in the area in previous months, Japan could still have simply detained the captain and released him to China like it used to do in previous occasions, and would not have suffered any significant political cost. Japan would still be able to maintain the status quo over its control of the area. The stake was different on China’s side however, as going along with Japan’s prosecution of one of its own citizens over a disputed maritime body would not only legitimize Japan’s authority over the Senkaku islands but also display a certain sense of impotency for itself. As the event played out, it was evident that China was the side that kept escalating the gravity of the arrest and Japan was the one that kept folding. Thus, in this particular incident, China seemed to have a greater interest compared to Japan. This leads to the outcome that an economic sanction from China could be successful in forcing Japan to release the captain. Yet, it needs to be noted that success being possible is far from success being guaranteed, and China would then need to decide whether it would gamble on an economic coercion with some possibility of success, or whether it should employ other strategies.
There are, however, other factors at play here. Firstly, Japan and China have strong bilateral economic linkages with each other such that an economic sanction from either side would have a backlash effect. Secondly, since both Japan and China belong to the World Trade Organization, any unsanctioned unilateral economic action would risk punishment and retaliation from other members. Thirdly, Japan is backed by the United States, meaning that
punitive economic actions would be less effective. Given these conditions, it is more likely for China to not use economic leverage to pressure Tokyo.
d. Evaluation
On surface, the analysis seems to contradict the rare earth metals “embargo”. However, upon closer inspection, it is apparent that there was no “embargo” in the first place. Though the New York Times did publish an article stating that “Chinese customs officials are halting shipments to Japan of so-called rare earth elements”, which prompted many observers to conclude that this was an unofficial embargo and a form of economic coercion. Below is the data on China’s Export of Rare Earth Materials (Commodity HS 280530, 2846) to Japan in 2010 and 2011 in term of metric tons.
Figure 3.1.2: China’s Export of Rare Earths to Japan from 2010-2011 Source: United Nations Comtrade Database.
(Appendix 1 and 2) 0 500 1,000 1,500 2,000 2,500 3,000 Ja n-10 Fe b-10 Ma r-1 0 Ap r-10 Ma y-10 Ju n-10 Ju l-1 0 Au g-10 Se p-10 Oc t-10 No v-10 De c-10 Ja n-11 Fe b-11 Ma r-1 1 Ap r-11 Ma y-11 Ju n-11 Ju l-1 1 Au g-11 Se p-11 Oc t-11 No v-11 De c-11
China Export of Rare Earths to Japan (HS 280530, HS2846) in metric tons
HS 280530 HS 2846
There was a strong dip in terms of Rare Earth Material export to Japan in October 2010, and this could be interpreted as a lag effect from an “embargo” implemented in September. However it would be difficult to explained why the export continued to be low in November 2010 when everything had been resolved by October. Thus, it made little sense for China to continue with the embargo, if there had ever been one, after it had reached its goal. While it is plausible that China extended the embargo for deniability, this move would be more costly for China in the long run as it would be a violation of the WTO rules. Assuming that China wanted to continue the embargo even longer to send a message, the peak in December 2010 followed by a deep dive in January 2011 and February 2011 then a strong surge in March 2011 would signal a confusing message. It would also not make sense for China to use this as a signal because not only it is a weak signal, since China insisted on there being no embargo, Beijing’s suspension of various socio-economic exchanges and diplomatic talks with Japan had already demonstrated its displeasure loud and clear.
It should be noted that while the trade volume of rare earth elements in October and November was low, it was low in comparison to August and September but not when compared with January and February when there was no major incident. This means that this trade volume was not something out of the ordinary. Furthermore, while it was true that there had been a restriction on China’s export of rare earth material, this restriction had been announced and imposed much earlier, in 2009. In fact, the rare earth quota between 2010 and 2011 was perfectly consistent with each other. China did announce that it would only export “30,300 metric tons” of rare earth minerals in 2010, and by the middle of the year, only “7,976 tons” were left. (Areddy, Fickling, Shirouzu, 2010). Thus, the sudden dip by the end of the 2010 could be due to the fact that China had already used up most of their annual export quota in the earlier half of the year, and Japan, being the largest importer of Chinese rare earth in 2010, felt that restriction the most. It was a coincidence that the dip took place at the same time as the fishing trawlers incident, but data has shown that two events were unlikely to be related. The dip would have happened regardless of whether the captain was arrested or not. Therefore,
there was no concrete evidence to suggest that China applied economic coercion against Japan in this incident, and this conclusion agrees with our analysis.
China's Export Quotas on Rare Earths
(metric tons)
2005 2006 2007 2008 2009 2010 2011 2012 Domestic 48,010 45,000 43,574 34,156 31,310 22,513 22,712 N/A Joint Venture 17,570 16,070 16,069 15,834 16,845 7,746 7,472 N/A Total 65,580 61,070 59,643 49,990 48,155 30,259 30,184 31,130Figure 3.1.3: China’s Global Export Quotas on Rare Earths in metric tons Source: Morrison M.W., Tang R., 2012.
An important point needs to be addressed here though, that is China having the capability to use rare earth metals as a bargaining chip is different from China actually doing so. Being the de facto supplier of rare earth minerals does put China at an advantageous position to hold Japan hostage to certain demand, however, it is also a double edged sword as it would incur great cost to China. Firstly, as mentioned above, imposing unilateral and unofficial trade restriction on Japan would likely to be a violation of various international free trade agreements. In fact, the U.S., EU and Japan did bring this rare earth restriction to the WTO and China lost the appeal (Reuters, 2014). Furthermore, due to the restriction, notwithstanding the motivation behind, Japan was prompted to diversify its sources of rare earths import, reducing the degree of dependency on China (Kaneko, 2012). This means that if the restriction was meant to be a mean to coerce Japan, it would have been unnecessary and costly for China, as not only China would have suffered international trade punishment from the WTO, it would also have pushed Japan further away from its sphere of influence. Therefore, even though China could hypothetically use rare earth metals to coerce Japan in the short run, the trade restriction is unlikely to have been a form of economic coercion.
2. Philippines – China Scarborough Shoal Standoff – 2012 a. Philippines – China 2012 economic relationship
China’s GDP $US (Millon) 8,560,050
Philippines GDP: $US (Million) 250,100
Philippines Export to China $US (Million) 6,160 - (11.85 % total export) Philippines Import from China $US (Million) 7,136 - (10.92 % total import) Philippines total trade with China $US (Million) 13,296
China’s total trade volume overall $US (Million) 3,866,981 Philippines’s total trade volume overall $US (Million) 117,345
Major Philippines ’s Export Products to China - Machinery & Electronics (71%) - Minerals (11%)
Major Philippines’s Import Products from China - Machinery & Electronics (36%) - Chemicals (11%)
- Metals (10%)
Foreign Aid from China None
Table 3.2.1: China – Philippines Economic Relationship Overview in 2012 Source: World Bank, 2010. World Integrated Trade Solution (WITS)
The economics data show that China has a much bigger economy, 34 times the size of the Philippines’s. While China is an important trade partner to the Philippines (second biggest import partner and third biggest export market), in 2012, China only contributed approximately 11 percent to Philippines trade. Though a significant amount, it still falls well below the 23 percent threshold average for successful coercion when the sender state seeks modest policy changes in the target state (Haufbauer, 90). The Philippines, on the other hand, only made up 0.3 percent of China’s total trade, hence, should China decide to put sanctions on the
