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Diplomacy in East Asia
Jan Polišenský, MSc., Ph.D.
Spring 2019
Economic Diplomacy of East Asia
Jan Polišenský, MSc., Ph.D.
Spring 2019
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Introduction to the Economic Diplomacy
• The post -World War II order is undergoing profound changes with
globalisation and the emergence of new economic powers.
• The economy has gradually taken over as the main driver of political
influence and global now transcend the old national or regional
divides.
Definition and General Background
• In the absence of a standard definition, it is generally agreed that
economic diplomacy can be defined in a number of different ways.
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Economic Diplomacy
• Economic diplomacy can bedefined as
– “the use of political means as leverage in international negotiations
with the aim of enhancing national economic prosperity, and the use
of economic leverage to increase the political stability of a nation.”
• Economic statecraft and economic diplomacy involve using diplomatic
skills with economic tools to advance a country’s economic, political
and strategic goals.
Global Rearch of the ED
• The term economic diplomacy implies the use abroad , by a state, of a
wide spectrum of economic tools to secure its national interest;
– the involvement of a range of actors
• civil society, public and private sector
– and an array of issues
• security, natural resources like water, climate, energy, trade, growth,
migration, investment, development, influence and negotiation
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Different Definition of ED
• three strands, each one wider in scope, that are common to all
definitions of economic diplomacy:
– 1) facilitating access to foreign markets for national business
– 2) attracting foreign direct investment (FDI) to a national territory ;
and
– 3) Influencing international rules to serve the national interest.
Goal of ED
• the goal can be as narrow as boosting economic growth or as broad as
developing geo-political influence and a diplomatic network .
• Definitions also include the notions of rewards and sanctions.
• Economic instruments have clearly become a major tool of political
diplomacy and foreign influence, as illustrated by the economic
sanctions imposed on Cuba, Iran and Russia.
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Importance of ED
• Globalisation and shifting power balances between the West and other
countries, particularly those in the Asia-Pacific region, are creating new
incentives for governments everywhere to rethink the balance between
their different national interests.
• In addition, pressing global issues, such as climate change and scarcity
of natural resources (for example, water, energy and minerals) are
growing challenges for governments And Economic Diplomacy is
central to all these issues
Diplomatic Studies and ED
• According to Maaike Okano - Heijmans
– From the diplomatic studies perspective and argues that the concept
and practice of economic diplomacy is becoming more
comprehensive, covering at least three types of diplomatic activity:
• trade and investment promotion (commercial diplomacy);
• negotiations on economic agreements (trade diplomacy); and
• development cooperation.
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A Comprehensive Approach to ED
• In recent years governments have strengthened the economic aspects of
foreign policy.
• For many developed countries in the West
– more attention to national economic interests is a sensible response to
increased competition from emerging economies, growing financial
constraints, and demands for transparency, accountability and result-driven
policies at home.
• For the governments of developing countries
– economic diplomacy is primarily a means to build a coherent economic
approach to foreign policy, while simultaneously converting their growing
economic muscle into political leverage
A Comprehensive Approach to ED
• For rising powers, ‘great power economic diplomacy’
– is a means to realise power transition and reshape the global order
(Zhang, 2014)
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Diplomatic Studies and ED
• seen from a diplomatic studies perspective, economic diplomacy serves
both economic and politico-strategic goals.
• Thus a comprehensive definition of economic diplomacy would see it
as an umbrella term that refers
– To the use of political means as leverage in international negotiations
with the aim of enhancing national economic prosperity,
– The use of economic leverage to increase a country’s political
stability.
Aspects of Economic Diplomacy
• In economic diplomacy, broadly conceived, economic/commercial
interests and political interests reinforce one another and should be
seen in tandem.
• Economic diplomacy is thus an umbrella term, involving several
strands that may be more economic or more political in purpose
– commercial diplomacy
• that is, generic and sector/company-specific trade and investment
promotion
– trade diplomacy
• negotiations between two or more countries that support economic
transactions and trade and/or investment agreements
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Aspects of Economic Diplomacy
– politically-motivated attempts to influence others
– either through positive engagement
• the premier example being development or economic cooperation
– by less benign means
• such as sanctions.
• Activities range considerably
– trade and investment promotion
• including through economic missions and intelligence sharing and
negotiations on economic and financial agreements
– To inducements
• development assistance
– coercive measures
• economic sanctions.
Economic – Business Diplomacy
• Economic diplomacy is distinct from business diplomacy in that a
public sector agent – a government agency, an official or a political
figure – is the principal actor
• While the private sector is either actively or passively involved,
businesses or their representatives are not the focus of analysis.
• An economist’s approach to economic diplomacy is also distinctive for
its focus on quantitative cost–benefit analyses that adopt an economic
logic to identify where and when economic diplomacy works.
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Importance of ED
• More generally, developed and developing countries note the growing
importance of economic and financial diplomacy and the challenge of
‘state capitalism’.
• This is hardly surprising as governments in latecomer countries
commonly play an important role in industries that are operated by the
private sector; for example, in sectors such as water management,
energy, agriculture and harbour development.
• For all countries, the growing challenges of security and stability are
another reason to invest in economic diplomacy.
Importance of ED
• Building closer ties or partnerships with some countries and not with others
denotes not mere diplomatic signalling but constitutes real attempts to avoid
isolation, create coalitions and to improve stability
– for example, the bilateral relationship of China and Japan and their respective
relations to neighbouring countries in the Asia- Pacific, which both regional
powers seek to court.
– Both Beijing and Tokyo employ a variety of economic diplomacy instruments
• including comprehensive economic partnership agreements and
development cooperation projects, in an attempt to strengthen their
relative position towards the other.
• A similar game is being played by the EU and Russia in their bilateral
relationship and neighbourhood region.
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Diplomatic Studies
• Within diplomatic studies, economic diplomacy is distinguished from other
forms of diplomacy in two ways
– First, MFAs are not necessarily leading the decision-making processes
• Economic diplomacy also involves various ‘line ministries’ such as those
involved in economic affairs, agriculture and infrastructure, as well as
development cooperation and climate change.
– The second distinguishing feature of economic diplomacy
• is its significant link with private sector bodies.
• This is a natural result of the fact that the direct beneficiaries of economic
diplomacy are, to a significant degree, non-government agencies
– small and medium-sized enterprises as well as big business.
Diplomatic Studies
– Importantly, the goals sought by these two beneficiaries – government
entities on the one hand, and the private sector on the other – differ
substantially.
• While private sector entities principally aim for economic merit
• most governments and for that matter non-governmental agencies
and civil society organisations, strive for so-called global public
goods, such as robust institutions to manage climate change, scarce
natural resources (water and energy, for example) and international
stability
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The Nexus Between Commerce,
Trade And Development
• As governments are actively re-emphasising economic diplomacy in their
foreign policy, there is a common trend towards developing stronger linkages
between three strands of economic diplomacy:
– trade diplomacy, commercial diplomacy and development cooperation.
– These economic diplomacy tools are employed most regularly in times of
relative peace, that is, when there is no need to resort to more extreme
instruments such as sanctions or, worse still, declarations of war.
– Commercial diplomacy, trade diplomacy and development cooperation were
largely separated until the 1990s, when the more developed countries in the
West largely dominated global political and economic affairs.
Economic – commercial Dipl.
• Of the various economic diplomacy strands, commercial diplomacy
probably has the broadest consensus and the most developed body of
literature.
• Economic diplomacy is sometimes even equated with commercial
diplomacy, particularly by those who have a dominantly economic take
on the subject.
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Trade and Investment Promotion
• both the general level and more specifically, via business advocacy – is a task that
all governments perform in some way.
• In general terms, the three key activities are:
– providing (market and technology) intelligence;
– offering concrete hands-on assistance, including with trade questions, market
access issues and trade missions;
– providing partner search and networking support
• These tasks can be performed by specialised trade and investment support offices
at home and/or by embassies or other representations abroad.
• The location of important new markets and production bases thus guides
government decisions to focus activities on a certain country or region, as do the
depth and breadth of economic relations and the involvement of the other
country’s government in the market. In other words, the more substantial the links
between the public and private sectors in a particular country, the greater the
incentive for others to invest in commercial diplomacy in relations with that
country.
Development Cooperation
• Development cooperation can be an expression of economic diplomacy in
two rather distinct, although not mutually exclusive ways, when seen from the
perspective of the country providing such assistance.
– First, it can be employed with the primary aim to promote more political
objectives such as good governance, democracy or human rights.
• This approach has been adopted by European countries:
• their activities have often been commissioned to non-governmental
agencies and geographically focused on the African continent.
– Another approach, which is more readily adopted by non-Western and new
players in the field, largely emphasises economic objectives.
– The rhetoric is one of adding to the economic strength of the recipient and
providing assistance, by linking assistance to trade and investment.
– To emphasise the mutual gains, this is commonly labelled economic
cooperation rather than development assistance/aid.
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Trade Diplomacy
• Trade diplomacy has become a popular policy instrument for
governments since the 1990s.
• This conforms with the argument that governments are more likely to
employ economic tools for political and foreign policy purposes during
periods of systemic change.
• The scare of economic crises in various parts of the world prompted
countries to work together in different ways, and the failure of the
multilateral trade negotiations in the World Trade Organization (WTO)
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Trade Diplomacy
• Trade diplomacy thereby shifted focus from unilateral liberalisation backed up by WTO
commitments to preferential liberalisation through bilateral and (inter) regional free trade
agreements.
– The motivations to engage in such talks are not just economic ones such as trade
liberalisation, preferential market access and trade diversion.
– Rather, and increasingly so, they involve a variety of economic, political, legal and
geostrategic considerations.
• Negotiations have come to involve issues of norm setting, rivalry for influence,
strengthening of partnerships, and resource allocation.
– Hence, the concept of trade diplomacy, rather than trade policy.
• This politicisation of trade diplomacy has been most apparent in the Asia-Pacific, where
negotiations on trade, investment and financial agreements play a major role in the
competition for influence
• While the European Union, on behalf of its member states, remains largely committed to
economic goals, aiming for economically ‘high-quality’ and ‘deep’ agreements, its latest
strategy document of October 2015 also evidences a shift in this direction
Trade Diplomacy
• As strategies and practice evolve in all three strands of economic diplomacy,
linkages between the various fields are multiplying.
• The conflation of trade and investment promotion (commercial diplomacy) and
development cooperation has been characteristic of many non-Western players
and is now becoming increasingly apparent including in countries like Denmark
and Australia.
• But development issues also increasingly feature in trade agreements, which come
to involve much more than economic issues alone.
• Economic partnership agreements, for example, have been conceived – next
to free trade agreements – as a way to move beyond issues of trade alone, and
may also involve cooperation in the field of energy and environment, science and
technology, trade and investment promotion and tourism.
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Interdisciplinarity
• Many different concepts are used in the research fields that contribute
to the study of economic diplomacy.
• This goes for economic diplomacy as well as for economic statecraft,
economic security, trade diplomacy, commercial diplomacy and
financial diplomacy.
Theory of ED
• economic diplomacy is primarily about processes and practices,
• economic diplomacy is defined in terms of means like economic
statecraft.
• Different from the rather narrow focus of most studies of economic
statecraft on coercive instruments such as sanctions and boycotts,
economic diplomacy is thought to involve also the employment of
economic instruments in non-coercive ways
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Economic Statecraft
• A major issue in the study of economic diplomacy originates in the
study of diplomacy
– concerns the extent to which economic diplomacy is tied to the state
or, alternatively, involves a broader range of private and other (nongovernmental)
actors.
– This is another important point that distinguishes economic
diplomacy from economic statecraft
• which generally considers actions taken unilaterally by the state and—
in its initial form as set forth
• Baldwin states that it does not address the domestic context.
ED and International Relations
• The most thorough attempt made to date to analyse economic
diplomacy from an IR and diplomatic perspective, by Nicholas Bayne
and Stephen Woolcock
– The authors argue that in economic diplomacy, governments try to
reconcile three types of tensions
• (1) the tension between politics and economics
• (2) the tension between international and domestic pressures; and
• (3) the tension between government and other actors, such as private
business and NGOs
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ED and International Relations
• Economic diplomacy may be largely concerned with actions taken by
the state, it also considers the dynamic environment in which the state
operates.
• Economic diplomacy thus cannot be seen as separate from the
domestic context
– (of both the sender and the receiving state) and the activities of the
state as influenced by other actors, such as private business and other
interest groups.
Building a Conceptual Framework
• Taking these insights into account, the state is may not be regarded as
the only player, nor as a coherent entity.
– It may be assumed, however, that the state is the primary actor in
economic diplomacy.
– Understood in such a state-centric realist framework, economic
diplomacy has been defined as the pursuit of economic security within
an anarchic system.
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Building a Conceptual Framework
• Economic security is thought to comprise the economic prosperity and
political stability of a nation
– it follows that economic diplomacy pursued by a government involves a
variety of instruments that are relatively more economic or more political in
character.
– In other words, economic diplomacy involves a ‘business end’ and a ‘powerplay
end’,
– all tools (in mirror view: expressions) of economic diplomacy can be placed
somewhere in between these two extremes. What is more, the two ends of the
spectre can be directly related to the two main determinants of the balance of
national interests—that is, economic prosperity on the one hand and political
stability and national security on the other hand. This also reflects the idea
that economic power involves different forms of power.
Economic Power
• Thomas Berger, ‘[e]conomic power is one of the most basic and
important sources of soft power’, but, ‘to the extent that it supports
military power [. . ., it] is [also] very much a form of hard power’.
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Instruments
• At the ‘power-play end’ are economic diplomacy instruments which generally
involve actions and negotiations that are primarily political in character, such
as sanctions (and the lifting thereof ).
– the primary drivers behind these activities are the strategic goals of a
government, and the underlying cost-benefit calculations follow a political
logic.
– Activities aim primarily to contribute to a stable international environment
and are often referred to as economic statecraft.
– At the ‘business end’ of economic diplomacy are found the cooperative
efforts by government and business that aim to achieve commercial objectives
that advance national interests, including trade and investment promotion
(commercial diplomacy).
– Here, cost-benefit calculations primarily follow an economic logic, and
maximizing business opportunities is the primary driver behind activities.
Instruments
– In between these ends are activities that may be more or less
economic or political, such as economic or development assistance
(and suspension of these activities),
– bilateral and multilateral negotiations on trade agreements (trade
diplomacy),
– financial and monetary policy/negotiations (financial diplomacy).
– Differences notwithstanding, it should be emphasized that the
distinction between the different strands is fluid and that strands may
overlap—implying that economic diplomacy is not a linear, but more
of a network concept.
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Definition of ED
• Geoff R. Berridge and Alan James, who defined economic diplomacy as
– (1) diplomacy concerned with economic policy questions; and
– (2) diplomacy that employs economic resources, either as rewards or
sanctions, in pursuit of a particular foreign policy objective.
• While the latter part of this definition is about economic tools that are used
for political purposes, the former part is about political tools—while the
objectives remain unspecified.
– Economic diplomacy is understood as the use of political means as leverage
in international negotiations, with the aim of enhancing national economic
prosperity and the use of economic leverage to increase the political stability
of the nation.
• Gilpin, the essence of economic diplomacy is to interrupt, employ and direct
commercial and political intercourse.
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ED and Goals
• Most expressions of economic diplomacy involve multiple goals and
can, in principle, be classified under more than one category.
– Sanctions primarily serve political and strategic goals
– while export promotion aims to strengthen one’s own industry and,
thus, primarily serves the nation’s economic prosperity.
• The primary goal of aid and trade negotiations is relatively more
dependent on the specific circumstances of a case and tends to vary
more between countries and across time.
Development Aid
• For example, while development aid from European countries and the
United States is on the whole more political in character and purpose
(aiming to promote good governance, democracy and human rights)
• Asian countries use such funds primarily to spur the economic
strength of the aid recipient and the aid provider, through trade and
investment.
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Development Aid
• Japan, China and India prefer to speak of economic cooperation rather than
of development aid.
• In a similar vein, trade negotiations can be more or less political in character.
• Here the roles are reversed, compared to the aid example
– while trade diplomacy is often more political in the Asian context—where
trade and financial agreements play a role in the competition for influence in
the region—
– European countries more often have commercial objectives and enhanced
cost-effectiveness in mind when negotiating bilateral or regional trade
agreements nowadays.
How to study ED?
• While the more economic expressions of economic diplomacy can be
researched relatively better by applying economic models to extensive
data sets
• more political expressions are commonly studied through case studies.
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Economic Diplomacy
• Each strand of economic diplomacy involves a wide variety of
activities and expressions
• Countries are more successful in economic diplomacy if they increase
the number of activities, conceive of new ways to conduct economic
diplomacy, or terminate activities that have proven unsuccessful.
• Porter states, that economic diplomacy is more than the sum of a
country’s activities.
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Economic Diplomacy
• The multitude of activion ties within the different economic diplomacy
strands form an interdependent system or network of activities.
• For example, imposing an embargo or suspending aid reduces opportunities
for trade and investment, while granting a country membership to an
international financial institution may increase commercial opportunities
in/with the target country.
• To be successful in economic diplomacy, any government must resolve such
trade-offs in accordance with the perceived balance of national interests and
its foreign policy strategy at large.
• Careful management of linkages and continuous investigation of existing and
potential economic diplomacy activities are thus of utmost importance.
Tools of Economic Diplomacy
• Economic diplomacy is the use of the full spectrum economic tools of
a state to achieve its national interests.
• The scope of economic diplomacy can encompass the all of the main
international economic activities of a state including, but not limited
to, policy decisions designed to influence exports, imports,
investments, lending, aid, free trade agreements,
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Tools of Economic Diplomacy
• Economic diplomacy is concerned with economic policy issues, e.g.
work of delegations at standard setting organizations such as World
Trade Organization (WTO).
• Economic diplomats also monitor and report on economic policies in
foreign countries and give the home government advice on how to
best influence them.
• Economic diplomacy employs economic resources, either as rewards
or sanctions, in pursuit of a particular foreign policy objective.
• This is sometimes called "economic statecraft"
Tools of Economic Diplomacy
• Direct
– Government export loans
– Export subsidies
• Indirect
– Bilateral treaties
– Multilateral treaties
– Contact of officials
– Expo
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Tools of Economic Diplomacy
• Positive
– Mentioned above
• Negative
– Sanctions
– Embargoes
Business Diplomacy
• Globalization has a major impact on how multinational national corporations
(MNCs) are organized nowadays.
• Statistics from the United Nations Conference on Trade and Development
(UNCTAD) show that the number of Foreign Direct Investments (FDIs) has
risen in the last 30 years
• Doing business internationally requires MNCs to deal with various local
requirements, national laws, and international agreements, negotiated by
different international groups such as the International Labour Organization
(ILO) and the World Trade Organization (WTO)
• MNCs need the capability to cope with complex interactions with multiple
stakeholders such as foreign government representatives and nongovernmental
organizations (NGOs).
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Business Diplomacy
• Despite today’s globalized economy, it is still governments that play an important role in providing
access to business opportunities
• (Boddewyn and Brewer, 1994; Hillman et al., 1999). Indeed, Luo (2001)
– states that, ‘from an MNC’s perspective, its foreign operations increasingly depend on educational,
technological, and industrial infrastructures built by host governments’
• Especially in emerging or recently emerged economies, governments are key stakeholders in the
economy, and without their support operating successfully in these economies is almost impossible.
• MNCs that are able to get this support, and as a result access these opportunities, will enjoy a greater
competitive advantage
• In order to operate successfully in the long term, MNCs need legitimacy:
– ‘a generalized perception or assumption that the actions of an entity are desired, proper, or
appropriate within some socially constructed system of norms, values, beliefs, and definitions’
– For this, MNCs should negotiate and make compromises with local governments, while
simultaneously taking into account the wishes and demands of the international and national
NGOs that oversee international firms in conducting business
Business Diplomacy
• Saner et al. (2000) explain which developments have caused these complexities.
– First of all, the public has become more critical and demanding towards corporate governance.
– Second, emerging markets such as Indonesia, China, Russia, India, Turkey, and Brazil will entail
challenges that MNCs need to take into account, such as weak institutional settings, cultural
aspects, and strong government roles
– The third development concerns the emergence of a variety of NGOs and communities. Saner et
al. emphasize that environmental standards and working conditions should be taken into account
in order to prevent conflicts that can damage an MNC’s image.
• Ruël (2013) adds an explanation of what might have caused the complexities MNCs face in today’s
business environment. He argues that developed markets are frequently entered by developing market
MNCs. This has fueled fear among businesses and governments in developed economies.
• This increased competition heightens the necessity for firms to build upon positive relationships in
foreign business environments, even in developed, ‘easy to access’ markets.
• Second, governments, MNCs, and NGOs need to collaborate in order to cope with global challenges
such as reducing poverty, climate change, and building sustainable economies. In order to survive in this
complex and rapid changing business environment, international businesses need to engage in business
diplomacy
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Business Diplomacy
• Business diplomacy and corporate diplomacy as describing the same concept.
• Business diplomacy as a concept is relatively new in the literature
• At the end of the twentieth century, it began to be dealt with at an academic level.
– One of the first references originates from the early 1990s in an International
Relations publication by Strange (1992).
– She recognized the increasing importance of firms and market forces in world
politics and described new, emerging forms of diplomacy.
– Strange (1996) claims that governments are losing authority and impact,
despite paradoxically that the number of government rules and regulations
in different aspects of societies has increased.
– Markets are dominating and the role of large and international firms is so
significant that governments are competing to have them within their national
borders. As a consequence firms have entered the diplomatic arena as an actor.
New Actors in Diplomacy
• New actors entered the diplomatic arena such as supranational organizations (e.g. the European Union),
or multilateral organizations (United Nations, World Trade Organization, IMF, World Bank), nongovernmental
organizations (Amnesty International, Human Rights Watch, The Red Cross), and last but
not least large international businesses such as oil companiess, financial companies, technology
companies and many others.
• Due to their size, impact, or public support, they have become diplomatic actors in their own right
(Ruël, 2013).
• In this context, Heine (2008) observes a shift from the ‘club model’ of diplomacy, where diplomats
mostly meet with host country government officials, to a ‘network model’ of diplomacy, with a much
larger body of and a more diverse set of players with whom diplomats have to engage, among others
representatives from companies.
– This view implies a broader definition of diplomacy than the ‘cold-war’ one.
• Melissen (2005) includes citizens and civil society in foreign countries as well in the definition of
diplomacy
– Central to the question of what diplomacy actually is are the aspects representation and
communication.
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Business Diplomacy
• Overall, in the literature, the terms ‘business diplomacy’ and ‘corporate diplomacy’ are not
generally recognized and only a limited number of scholars have applied these terms.
• According to Saner et al. (2000)
– ‘business diplomacy management involves influencing economic and social actors to create
and seize new business opportunities; working with rule-making international bodies whose
decisions affect international business; forestalling potential conflicts with stakeholders and
minimizing political risks; and using multiple international forums and media channels to
safeguard corporate image and reputation’
• In accordance, Saner and Yiu (2005) state
– ‘Business diplomacy pertains to the management of interfaces between the global company
and its multiple non-business counterparts (such as NGOs, governments, political parties,
media and other representatives of civil societies) and external constituencies’
• As a final example, Macnamara (2011)
– states that ‘corporate diplomacy would require corporations to engage in ongoing dialogue
with publics guided by specific principles and with mechanisms in place to balance power,
amortize conflicts, facilitate negotiation, and maintain relationships even in the face of
outright disagreement’ (p. 321).
• What at least seems central to these definitions of business diplomacy
and corporate diplomacy is the acknowledgment of a stakeholder
perspective of companies rather than a shareholder perspective.
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Diplomatic Actors And Organisation
• Although the state is by no means the only actor in economic diplomacy, it remains the
most central one.
• Vast differences exist, however, in the extent to which governments are active in the field of
economic diplomacy, as well as in how the interlinkages between politics and economics are
strategised and institutionalised.
• Differences also exist between countries and regions.
• A common characteristic of governments of many Asian countries, for example, is the fact
that they strategically allocate resources to spur growth of a vastly diverse private sector at
home and abroad.
• This may be the largest difference compared with countries in the Middle East and Russia,
where state-owned natural resource industries dominate the private sector – making for a
narrow, state-led economic diplomacy focused on the energy sector.
• Variations between Asian states, in turn, lie in whether the strong role of the state is
organised in formal ways – such as in China, Vietnam and Singapore – or more informally –
as in Japan, South Korea and Indonesia (Okano-Heijmans, 2012: 275–7).
• MFAs and the network of overseas representation are one characteristic
feature that has assumed particular significance within this system.
– But they operate in an increasingly complex network that manages foreign
affairs.
– Other ministries and semi-governmental agencies involved in the field of
economic diplomacy include those in charge of trade and economic affairs,
agriculture, infrastructure, as well as development cooperation and climate
change.
– No matter the level of development or the politico-economic culture of a
country, all share the continuous challenge of optimising extremely complex
decision-making processes in economic diplomacy.
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• A more recent trend concerns the merging of the offices responsible for foreign affairs,
trade and development.
– In Australia the conservative government, when led by Prime Minister Tony Abbott,
amalgamated the Australian Agency for International Development (AusAID) with the
Department of Foreign Affairs and Trade (DFAT).
• In the Netherlands and Denmark,
– the MFA took up responsibility for development cooperation years ago, foreign trade was
added in recent years.
• The government therefore increasingly needs to consider the voice of domestic
stakeholders engaged in development in international trade negotiations.
• A similar process of institutionalising links between commerce, trade and development in
foreign affairs
– For Example in Canada the foreign affairs and trade had amalgamated decades ago, and
development was added in 2014.
• While the above illustrates the challenges of managing interests and
responsibilities between ministries, economic diplomacy obviously
involves many more actors than representatives of nation-state
governments alone.
• Economic diplomacy involves government-to-government relations,
but is increasingly also about the build-up of government-to-business
networks and the
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ECONOMIC DIPLOMACY TOWARDS
THE FUTURE
• Side-effect of the global and financial crisis that started at the end of the
2000s
– is that it discredited Western standards for other countries.
– Instead, a more comprehensive approach that pragmatically links trade,
investment and development for economic and strategic purposes is gaining
ground.
• This trend is reinforced by the growing power and influence of China, as well
as India, Brazil
– European countries on a new economic diplomacy that emphasises national
economic interests.
– The redistribution of global power in the twenty-first century is also having
an impact on economic diplomacy in the field of economic governance
• First, the trend is towards more bilateral and regional economic diplomacy, at the expense
of multilateralism.
– Trade negotiations, for example, are moving away from the truly multilateral talks under the
auspices of the WTO and resulting in a strengthening of competitive multilateralism.
– Separately, EU countries are becoming partners and competitors in commercial diplomacy.
– A second change that the evolution of economic diplomacy is having on economic
governance concerns the emergence of new governance structures, at least partly at the
expense of existing ones.
– New governance structures established in 2014 include the New Development Bank,
initiated by the BRICS-countries, and the China-led Asian Infrastructure and Investment
Bank.
– Although these institutions still face major practical and strategic challenges, they are
probably the two most prominent examples of what may be new multilateral economic
diplomacy in the making.
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Sanctions
• Sanctions are part and parcel of international diplomacy, a tool for
coercing target governments into particular avenues of response.
– In most cases, the use of sanctions presupposes the sender
country’s willingness to interfere in the decision making
process of another sovereign government, but in a measured
way that supplements diplomatic reproach without the
immediate introduction of military force
Sanctions
• Sanctions are “domestic” measures and/or penalties applied by one
country on another with the purpose of controlling, prohibiting or
restricting financial or trade activity of persons, entities and
governments in order to achieve policy objectives.
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Differences
• TRADE RESTRICTIONS = ECONOMIC PROTECTIONISM
• TRADE SANCTIONS = ECONOMIC PENALTIES
Sanctions and Embargoes
• Economic sanctions are commercial and financial penalties applied
by one or more countries against a targeted self-governing state, group,
or individual
• Economic sanctions may include various forms of trade barriers,
tariffs, and restrictions on financial transactions
• An embargo is similar, but usually implies a more severe sanction.
Economic sanctions generally aim to change the behavior of elites in
the target country. However, the efficacy of sanctions is debatable and
sanctions can have unintended consequences
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Embargoes
• An embargo is the partial or complete prohibition of commerce and
trade with a particular country/state or a group of countries.
• Embargoes are considered strong diplomatic measures imposed in an
effort, by the imposing country, to elicit a given national-interest result
from the country on which it is imposed.
• Embargoes are generally considered legal barriers to trade, not to be
confused with blockades, which are often considered to be acts of war
Drawback of Embargoes
• Embargo can be an opportunity to some countries to develop
faster a self-sufficiency.
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Negatives of Sanctions
• Economic sanctions are used as a tool of foreign policy by many
governments.
• Economic sanctions are usually imposed by a larger country upon a smaller
country for one of two reasons.
– That there is a threat to the security of the former nation or that country
treats its citizens unfairly.
• They can be used as a coercive measure for achieving particular policy
goals related to trade or for humanitarian violations.
• Economic sanctions are used as an alternative weapon instead of going
to war to achieve desired outcomes.
• Some policy analysts believe imposing trade restrictions only serves to hurt
ordinary people.
Effectivity of Sanctions
• Researchers debate the effectiveness of economic sanctions in their
ability to achieve their stated purpose. Hufbauer et al. claimed that in
their studies 34 percent of the cases were successful
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The rise of economic issues in
diplomacy
• The concept of economic diplomacy has gradually emerged over the
past 50 years, as the economy has bec ome the main driver of
political influence.
• The post -second -world -war order, which started with the Marshall
Plan and the European economic project based on the European
Steel and Coal Community, was clearly economic.
• Thus, the major world economies conducted their diplomacy with
the focus on their economic, trade and private sector interest s. This
has possibly led to major reorganisations of their administrations.
Sanctions
• Economic sanctions, wherein economies use trade and financial ties
with other nations as diplomatic instruments, are not always used as
proactive moves or reactions to international deviance and are
relatively new as devices of international conflict resolution.
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Sanctions
• Sanctions are ultimately macroeconomic phenomena, and their effects should
be analyzed and forecasted as such.
• Scholars have become more concerned about the economic harm caused by
these policies, especially the target socioeconomic groups upon whom
potential damage is borne.
• Sanction effectiveness is a large issue in the academic literature and popular
media, where many claim sanctions are ineffective.
– Why continue to impose sanctions?
– The simple answer lies in the parsimony of other options: more negotiations,
placation, or war, regardless of whether the military option is initially debated
or not.
– Sanction use is likely to increase over time; this text attempts to expand our
understanding of these policies’ political economy.
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Definition of Economic Sanctions
• An economic sanction is a country’s discriminatory economic restriction of either
trade or credit flows with another country in an attempt to affect or reverse
current policy in the sanctioned nation.
• The target is the sanctioned country pursuing political policies deemed deviant by
other countries. Senders choose themselves by initiating economic restrictions
against this target nation.
• Sanctions involve economic weapons to wage a nonmilitary campaign, extending
the diplomatic process beyond verbal negotiations.
• Third parties also exist, as the final cast members, and their involvement level
depends on how they react to the sender’s initial policy.
• Some help the sender and others help the target, all depending on the potential
profits of those choices. There is much debate about the importance of third
parties and there is no consensus on whether multilateral sanctions or the
existence of sanction busting, third-party nations make any difference in policy
efficacy.
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Sanctions
• Sender nations must have economic connections with the target to
sanction effectively.
• Market economics shows that international trade free of market
barriers begets economic gains from comparative advantage and
specialization.
• Political economy is a simple tangent of international economics in
this sense: using trade and financial barriers as a political weapon
is meant to undermine target gains from trade to force political
gains for the sanction sender
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Sanctions
• Sanctions are used to exploit one specific similarity between sovereign
nations, regardless of any differences: citizens need to eat. Exploiting
the target’s necessity for certain goods is economic warfare, where
trade restrictions are used in lieu of military weapons.
Sanctions
• Sanctions—defined as mostly economic but also political and military
penalties introduced to alter political and/or military behavior—are
employed by the United States to discourage the proliferation of
weapons of mass destruction and ballistic missiles, bolster human
rights, end terrorism, thwart drug trafficking, discourage armed
aggression, promote market access, protect the environment, and
replace governments.
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Sanctions
• To accomplish foreign policy ends, sanctions take the form of arms
embargoes, foreign assistance reductions and cut-offs, export and
import limitations, asset freezes, tariff increases, revocation of most
favored nation (MFN) trade status, negative votes in international
financial institutions, withdrawal of diplomatic relations, visa denials,
cancellation of air links, and prohibitions on credit, financing, and
investment.
Sanctions
• Sanctions are not direct substitutes for war but for other diplomatic
tools, whereas war is the end of diplomacy. Fundamentally, a sanction
is nothing more than a quota or a quantity restriction on the amount
of goods, services, or financing flowing between two nations
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Sanctions
• A typical sanction places restrictions (ranging from 0 to 100 percent)
on exchange between the sanction-sender and the sanction-a nations.
• A typical protection policy places quantity restrictions, quotas,
restrictive taxes—tariffs, or both tariffs and quotas, on exchange
between the protective nation and other nations.
• Other protective policies, such as national preferences laws, may be
regarded as having some tariff or quota analogue
Sanctions
• Galtung outlined seven “dimensions” for classifying sanctions, which have
been a driving force in this literature and are paraphrased here:
1. Sanctions either reward (are positive) or punish (are negative);
2. Sanctions are aimed at individuals or the collective;
3. Sanctions are imposed due to internal or external actions by the target;
4. Sanctions are unilateral, multilateral or universal;
5. Sanctions are general or selective;
6. Sanctions are total or partial; and
7. Sanctions restrict a mix of the target’s trade, financing, communications, and
diplomatic relations.
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Basic Sanctions Theory
• Economic sanctions are just that: economic
• In less capitalist and democratic societies, that profit may be absorbed
by an autocratic amoeba of bureaucracy and market frictions.
• Thus, sanction effects may be superficial to governments, harsh on its
population, but must ultimately change the target’s politics to be both
credible and effective.
Sanctions
• We view these policies from the sender’s perspective generally, rather
than the target economy.
– Because of the economic connections between the two nations, and
the fact that the sender is initiating the policies, using this vantage
point should minimize confusion.
– For example, the target’s export market with the sender (the sender’s
import market with the target) reacts to the sender’s import sanctions.
– Analogously, the target’s import market with the sender reacts to the
sender’s export sanctions.
– We begin with import sanctions, which are akin to classic trade
barriers, restricting sender goods and services inflows from the target.
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The Conclusion of Sanctions
• Brookings Institute published an analyses and states
– A number of conclusions can be drawn from recent American use of
economic sanctions for foreign policy purposes:
The Conclusion of Sanctions
• Sanctions alone are unlikely to achieve desired results if the aims are large or time is short.
– Sanctions—even when comprehensive and enjoying almost universal international
backing for nearly six months—failed to get Saddam Hussein to withdraw from
Kuwait. In the end, it took Operation Desert Storm.
– Other sanctions have also fallen short. The Iranian regime continues to support
terrorism, oppose the Middle East peace process, and press ahead with its nuclear
weapons program.
– Fidel Castro is still in place atop a largely authoritarian political and economic
system. India and Pakistan were not deterred from testing nuclear weapons by the
threat of draconian penalties. Libya has refused to produce the two individuals
accused of the destruction of Pan Am 103.
– Sanctions could not persuade Haiti’s junta to honor the results of an election. Nor
could they dissuade Serbia and others to call off their military aggression. And
China continues to export sensitive technologies to selected countries and remains
a society where human rights are violated.
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The Conclusion of Sanctions
• Unilateral sanctions are rarely effective.
– In a global economy, unilateral sanctions tend to impose greater costs
on American firms than on the target, which can usually find
substitute sources of supply and financing.
The Conclusion of Sanctions
• Secondary sanctions can make matters worse.
– Trying to compel others to join a sanctions effort by threatening secondary
sanctions against third parties unwilling to sanction the target can cause
serious harm to a variety of U.S. foreign policy interests.
– This is what happened when sanctions were introduced against overseas firms
who violated the terms of U.S. legislation affecting Cuba, Iran, and Libya.
This threat may have had some deterrent effect on the willingness of certain
individuals to enter into proscribed business activities, but at the price of
increasing anti-American sentiment, stimulating challenges within the World
Trade Organization, and drawing attention away from the provocative
behavior of the target governments.
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The Conclusion of Sanctions
• Sanctions are blunt instruments that often produce unintended and
undesirable consequences.
– Sanctions increased the economic distress on Haiti, triggering a dangerous
and expensive exodus of people from Haiti to the United States.
– Military sanctions against Pakistan increased its reliance on a nuclear option,
both because the sanctions cut off Islamabad’s access to U.S. weaponry and
by weakening Pakistani confidence in American reliability.
– More generally, sanctions can have the perverse effect of bolstering
authoritarian, statist societies.
– By creating scarcity, they enable governments to better control distribution of
goods. The danger is both moral, in that innocents are affected, as well as
practical, in that sanctions that harm the population at large can bring about
undesired effects that include bolstering the regime, triggering large scale
emigration, and retarding the emergence of a middle class and civil society.
The Conclusion of Sanctions
• Sanctions can be expensive for American business, farmers, and
workers.
– There is a tendency to overlook or underestimate the direct cost of
sanctions, perhaps because their costs do not show up in U.S.
government budget tables.
– Sanctions do, however, affect the economy by reducing revenues of
U.S. companies and individuals. Moreover, even this cost is difficult to
measure because it needs to reflect not simply lost sales but also
forfeited opportunities.
– Sanctions cost U.S. companies billions of dollars a year in lost sales
and returns on investment—and cost many thousands of workers
their jobs.
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The Conclusion of Sanctions
• Sanctions tend to be easier to introduce than to lift. It is almost always
more difficult to change the status quo than to continue with it.
– It is often difficult or impossible to build a consensus for rescinding a
sanction, even if there has been some progress on the matter of concern, if
the sanction has been shown to be feckless or counterproductive, or if other
interests can be shown to suffer as a result.
– This is likely to become the case with India and Pakistan, where U.S. sanctions
introduced in the wake of the May 1998 nuclear tests will frustrate attempts
to influence their behavior in this or other areas.
The Conclusion of Sanctions
• Sanctions fatigue tends to settle in over time and international
compliance tends to diminish.
– Inevitably, the issue that led to sanctions being introduced loses its
emotional impact. Concerns over the humanitarian impact of
sanctions also weaken resolve.
– At the same time, the target country has time to adjust. Working
around sanctions, import substitution, and any improvement of living
standards due to adaptation all make sanctions bearable. All of these
factors have eroded the impact of sanctions against Iraq, Libya, and
Cuba.
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Economic Diplomacy in International Relations
• Economic diplomacy studied through an IR lens is primarily
concerned with high politics and issues related to national security,
where national interests are primarily defined in terms of
(inter)national stability.
• When considered in the broader field of economic diplomacy, this
strand of research is characterized by an interest in power elements
rather than policy and process. Illustrative is Baldwin’s introduction to
his study
Economic Diplomacy in
International Relations
• On economic statecraft, which reads that it ‘is a study of economics as
an instrument of politics’.
• The high politics or power-play element explains why political
scientists who study the interrelationship between international politics
and economics regularly employ the term ‘economic statecraft’, or tend
to discuss the subject without linking it to any concept at all.
• In the former case, the focus is often on sanctions—negative or
positive—while research of the latter kind tends to address the
relationship between foreign policy on the one hand and trade or
investment on the other.
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Foreign Aid
• Hans Morgenthau
– Foreign aid is among the “real innovations which the modern age has
introduced into the practice of foreign policy,”
• Hans Morgenthau, a well-known professor of international
relations), who articulated the view that “Foreign aid is today and
will remain for some time an instrument of political power.
Foreign Aid
• Foreign aid, though large and commonplace, is not without
controversy, especially in major countries providing aid.
• This controversy centers on the volume of aid that donor
governments should provide and the related issue of the impact of aid
on development.
• Aid’s critics complain that aid has been inffective and should be cut.
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Foreign Aid
• The number of organizations and countries involved in providing
foreign aid is also large.
– Several dozen international organizations, like the World Bank, the
Asian, African, and Inter-American Development Banks, and the
United Nations Development Program (UNDP), plus approximately
thirty governments have significant programs of foreign aid
– rich countries of North America, Western Europe, and Japan
– oil-producing countries in the Middle East
– middle-income developing countries, like Korea, Thailand, and Turkey.
– Poor Countries India and China, provide aid to other poor countries.
Foreign Aid
• Foreign aid, though large and commonplace, is not without
controversy, especially in major countries providing aid.
• This controversy centers on the volume of aid that donor
governments should provide and the related issue of the impact of aid
on development.
• Aid’s critics complain that aid has been ineffective and should be cut.
• Aid’s advocates argue that it has been effective, can with reforms be
more effective in the future, and therefore, on moral and practical
grounds, it should be dramatically expanded
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Foreign Aid
• States are responsible above all for the security and well-being of their
own citizens.
• Why then would they provide their own scarce public concessional
resources to promote, among other things, the well-being of people in
other countries?
Foreign Aid
• aid is, indeed, primarily a tool of hard-headed diplomacy. (Aid’s impact
on the poor is incidental or instrumental—as a means of increasing
the security of the donor nation, for example, through reducing the
temptations of communism or terrorism.)
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Foreign Aid
• “realists” who argued aid was a tool for enhancing national power and
security was George Liska (like Hans Morgenthau, a well-known
professor of international relations), who articulated the view that
• “Foreign aid is today and will remain for some time an instrument of
political power.”
Foreign Aid
• Liberal internationalists and others of the liberal tradition in national
relations would see foreign aid as an instrument or reflection of the
tendency of states to cooperate in addressing problems of
interdependence and globalization.
• Growing amounts of aid have been channeled through international
institutions and used to expand international “public goods,” such as
controlling the spread of infectious diseases worldwide or reducing
environmental degradation.
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Foreign Aid
• Foreign aid has also been interpreted through the lenses of
“constructivism”—the newest tendency among international relations
scholars—as the expression of a norm that has evolved in relations
between states that rich countries should provide assistance to poor
countries to help the latter better the quality of lives of their peoples
Foreign aid
• It is not a policy but a tool of policy. It is sometimes regarded as
including trade and military expenditures abroad or is used to
encompass all public transfers among countries.
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Foreign Aid
• Foreign aid is defined here as
– a voluntary transfer of public resources, from a government to
another independent government, to an NGO, or to an international
organization (such as the World Bank or the UN Development
Program) with at least a 25 percent grant element, one goal of which
is to better the human condition in the country receiving the aid.
Foreign Aid
• Aid can be in the form of cash
– (grants or concessional loans),
– in kind (e.g., food aid),
– or in the form of debt relief.
• These transfers can fund a diverse set of activities: budgetary and
balance of payments needs in recipient countries, investment projects
and research activities, economic or political reform programs,
technical advice and training, and humanitarian relief
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Foreign Aid
• Aid can permit a recipient government to expand activities that help
realize the purposes of the aid
– it can increase investments in infrastructure, provide relief to a
suffering population, or ease the budgetary burdens of military
expenditures
• aid can expand the capacity of a recipient government to act in ways that
enable it to use all its resources more productively
– for example, aid can provide training and advice to government
offcials in budgeting, auditing, program management, planning, and a
host of other technical and managerial areas.
Foreign Aid
• aid can act as an incentive or as a payment for recipients to act in
ways favored by the donor by conditioning it on desired behavior on
the part of the recipient
– For example adopting economic policy reforms or supporting the
donor government’s positions in international forums) or reducing or
eliminating it when recipients behave in ways unwelcome to the aidgiving
government
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Foreign Aid
• foreign aid is a potent political symbol and signal
• As a voluntary transfer, it suggests approbation by the donor of the recipient
and vice versa.
• And rising amounts of aid often signal increasing closeness in relations
between donor and recipient, just as falling aid levels can symbolize cooling
relationships and disapprobation.
• Aid can also act as a general signal to other governments, demonstrating that
the government providing it is ready to stand behind the recipient
government in the face of pressures from hostile or aggressive governments.
• Finally, foreign aid often serves several of these functions at once.
Economic Diplomacy of China
• China’s annual average Gross Domestic Product (GDP) growth rate
has kept a historic pace of about 10%, making it one of the
fastestgrowing economies in the world.
– China emerged as the world’s second largest economy,
– it has also become an active economic player worldwide:
• the largest exporter of commodities, biggest manufacturer, principal
holder of foreign exchange reserves, biggest creditor nation, second
largest importer and second largest recipient of foreign direct
investments (FDI)
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• There is no uniform Chinese economic diplomacy across the board.
• In the Asia–Pacific regions, Beijing attaches great importance to both
economic and security interests.
• Apart from trade, investment and financial interests, China also seeks to
secure its sovereignty and territorial integrity through rivalry with Japan and
the Philippines over the disputed islands, on the one hand, and with the US
over political order in the Asia–Pacific, on the other hand.
• Therefore, while most ASEAN states have welcomed the US as a deterrent
against growing Chinese military buildup, their economies have become
increasingly dependent upon China.
• However, in Africa, Latin America, Central Asia and the Arab world, Beijing
focuses mainly on economic interests; its security interests are secondary and
minimal
• China’s economic diplomacy mostly targeted Japan, the US, Europe
and other developed economies that boast plentiful funds, advanced
technology and managerial expertise, regarded as indispensable factors
for China’s economic modernization drive
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Silk Road
• In September 2014, at Nazarbayev University, Kazakhstan, President
Xi Jinping proposed to build a ‘Silk Road Economic Belt’ to boost
cooperation with Central Asian and Middle Eastern countries;
• During his visit to Indonesia thereafter, President Xi suggested that
China and the South and Southeast Asian nations build a ‘Maritime
Silk Road in the 21st Century’. The two ‘Silk Roads’ indicate that
Beijing’s grand strategy has shifted from ‘looking eastward’ to ‘looking
westward’.
China and Middle East
• In 2013, the Arab world as a whole ranked as China’s seventh largest
trading partner whereas China is the Arab countries’ second largest
trading partner, and the largest one to nine individual Arab states
• In 2013, for instance, China became Algeria’s main commercial
supplier, surpassing France, which had traditionally been Algeria’s main
supplier (with US$6.6 billion before year’s end, while France, the
traditional supplier, exported less than US$5 billion)
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• However, contrary to the Western powers and Russia’s involvement in
the Libyan, Yemeni and Syrian conflicts, China has kept a guarded
distance from Arab politics
• DEGANG SUN AND YAHIA H. ZOUBIR argue that China’s economic
diplomacy has three major features.
– First, it attempts to engage in economic and trade activities with overseas
counterparts without interfering in the target countries’ internal affairs;
– Second, it relies on political and diplomatic measures to facilitate economic
expansion abroad;
– Third, it uses economic leverage (including development aid) to entice the
target countries to enhance closer economic ties.
• The application of economic diplomacy, the PRC has used, in some regions,
commercial relations to extract diplomatic support on such issues as human
rights, Taiwan and Tibet; but, in the Arab world, Beijing has often used
political means to achieve economic ends
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• China’s economic diplomacy towards the Arab countries is embedded
in its business-first strategic culture, i.e. making economic development
the priority of the government’s tasks.
• Strategic cultures of sovereign states differ and can generally be
categorized into two groups: geopolitics-driven and geoeconomicsdriven,
respectively
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• China’s economic diplomacy towards the Arab countries is driven more by
commercial interests than by security interests. In the face of ongoing Arab
revolts, the PRC has taken a pragmatic stance: seeking the maximum
economic benefits and minimum political adventures/risks
• Using the China Development Bank and the Export– Import Bank, Beijing
has become the major provider of low-interest development loans to the
MENA countries. These loans are contingent upon repayment via resources,
or are built around Chinese companies undertaking the projects employing
Chinese sources and using Chinese materials
Factors governing China ED
• The first factor governing China’s economic diplomacy relates to its
national conditions.
– Joshua Eisenman points out, ‘Unlike the Maoist era, when China’s
trade policies served its leaders’ political goals, now they aim to access
markets as part of China’s larger domestic development strategy’.
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– China’s economic diplomacy has shifted from the developed countries
to the developing nations, including the energy-rich Arab states.
– Compared with the developed economies that are suffering from
systemic economic slowdown and shrinking markets, the resource-rich
Arab countries in the Gulf and North Africa represent promising
emerging markets, which constitute ideal destinations for China’s
surplus capital and manufacturing goods.
– In 2013, China imported about 133 million tons of oil from the Arab
countries, representing 47.2% of the total imported volume
– With the rapid development of its economy, China has become
vulnerably dependent on the Arab markets and energy. As pointed out
by the official Xinhua News Agency, the Arab world is of great
significance to China’s ‘market diversification’ and ‘going-global’
strategy
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• Meeting the domestic demand has been the major consideration in
China’s economic diplomacy towards the Arab countries since 2011.
• The second factor driving China’s economic diplomacy towards the
Arab countries is the consolidation of China–Arab relations.
– Former Chinese Premier Wen Jiabao emphasized that
• China and the Arab countries share a lot of similarities, as both are
developing countries with long histories, brilliant civilizations and
glorious cultures; both were humiliated and colonized by Western
powers in the modern times; and both are seeking national
revitalization in the new era
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• China has realized that the Arab countries have different national
conditions and policy orientations and that China and the Arab
countries barely share real common values.
• Within the League of Arab States, the club of pro-Western, oil-rich,
tribally-based, geopolitically vulnerable Gulf Cooperation Council
(GCC) monarchies has strikingly different policy orientations from the
Arab republics, like Syria, Egypt and Algeria.
• Assistant Minister of Commerce, Qiu Hong, pointed out in September
2012 that:
– as two great developing economies, China and the Arab world are
undergoing a key historical juncture of economic and social transition
and are both faced with arduous tasks of improving people’s wellbeing.
Therefore, the two sides should consolidate their cooperation
and enhance their capacity to resist external ventures in win–win
development
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• The third factor propelling China’s economic diplomacy towards the
Arab countries is the top leaders’ perception of the rivalry that exists
among great powers in the new era.
• Since the new central leadership was elected in 2012, Chinese top
policymakers, particularly President Xi, underscored time and
again the desire to achieve the ‘Chinese Dream of National
Rejuvenation’ because great strategic opportunities are offered
to China in the twenty-first century.
• During the Central Economic Work Conference of February 2013,
President Xi highlighted that, ‘the connotation and conditions of our
strategic opportunities have changed, but [we] still boast precious
opportunities and favorable conditions for our development’.
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• In the longer run, China’s economic diplomacy in the Arab world will
produce a strategic outcome and may help to achieve Beijing’s grand
strategy of building a China–Central Asia–Middle East passageway in
the fields of logistics and energy, providing China with stable and
prosperous ‘close neighbors’ and ‘extended surroundings’, building the
‘Silk Road Economic Belt’, as President Xi advocated
Approaches of China’s economic diplomacy towards
the Arab countries
• China has adopted a number of measures to secure China’s economic
interests.
– First, China strives for new mechanisms to facilitate Sino–Arab economic
– development in its economic diplomacy. In 2004, former President Hu Jintao
paid a
– historic visit to the headquarters of the Arab League in Cairo, and the two
sides
– announced the establishment of the China–Arab States Cooperation Forum
– (CASCF), the most important mechanism for the promotion of bilateral
relations
– at the ministerial level conforming to the win–win approach
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• With abundant foreign exchange reserves, Beijing has established two
of the world’s largest sovereign wealth funds:
– the official China Investment Corporation (CIC)
– and the non-official and less transparent State Administration of
Foreign Exchange Investment Company (SIC).
• The Arab world is one of the major destinations for future investment
funds.
– Since the outbreak of the Arab revolts, Chinese policymakers
continued economic pursuits while avoiding getting enmeshed in the
Arab political chaos.
• China signed agreements on governmental, economic, trade and
technological cooperation with all Arab countries, except Somalia
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• Second, Chinese top leaders initiated economic diplomacy towards key
Arab countries through high-level exchange of visits. China’s high level
visits to the Arab countries have been more frequent since the
outbreak of the revolts.
• In the Gulf area, China has devoted greater attention to Saudi Arabia,
Qatar and the UAE, seen as the hubs of China’s economic diplomacy
• The Bank of China has established branches in the UAE, Qatar and Kuwait;
the Industrial and Commercial Bank of China has established branches in the
UAE and Qatar.
• Airline companies, such as Air China, China Southern and China Eastern
have established businesses in Saudi Arabia, the UAE and Qatar, as well.
• China is now the largest importer of Saudi oil.
• President Hu Jintao visited Saudi Arabia twice in 2006 and 2009; then
• Vice President Xi Jinping visited Saudi Arabia and Qatar in 2008 and former
Premier Wen Jiabao visited Saudi Arabia, the UAE and Qatar in early 2012.
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• Compared with the frequent visits to the GCC countries, China’s top
officials’ visits to Iraq, Lebanon, Yemen, Syria and other poor Arab
countries are much rarer, indicating that China’s economic diplomacy
centers on resource-rich and politically stable Arab countries
• Third, China strives to promote economic diplomacy through aid
packages.
• The assistance to Arab countries comes in different forms, such as
economic aid, training programs and the recruitment of Arab students.
– In 2012, more than 1,000 Arab professionals from different sectors
received professional training in China, and approximately 8,000 Arab
students were studying in China.
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• In June 2014, President Xi declared during the 10th anniversary of the
founding of the CASCF (China Arab States Cooperation Forum) that
in the next three years, Beijing would train 6,000 people to work in
Arab countries and have 10,000 artists visit each other in the coming
decade
• Through these economic packages and intellectual aid programs, China
strives to improve its national image as a ‘responsible power’ and
‘reliable brother’, in order to pursue successfully its economic
diplomacy in the Arab countries.
Actors of China’s Economic Diplomacy
• Interagency cooperation
– There exist various institutions in charge of implementing China’s economic
– diplomacy, divided into different agencies. Economic engagement abroad
involves
– more than the ministries of foreign affairs, commerce and industry; it is the
business
– units of the country, associations of industry and chambers of commerce, the
– financial sector, business schools and think-tanks, the tourism industry and a
host of
– domestic actors that are both the stakeholders and the prime movers
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Actors of China’s Economic Diplomacy
• China’s economic diplomacy is implemented through the close
coordination of different ministries and administrations, such as the
– National Development and Reform Commission (NDRC),
– the National Energy Administration, Foreign, Commerce, Science and
Technology,
– International Department of the Central Committee of the
Communist Party of China (CPC)
• Due to the central–local government dichotomy, China’s economic
diplomacy is also executed at the level of the municipal, provincial and
autonomous regions
Actors of China’s Economic Diplomacy
• China’s Foreign Ministry bears the major responsibility for
implementing the PRC’s economic diplomacy.
• Since the founding of the CASCF forum, China has viewed the Arab
countries as a ‘unified entity’—in spite of their different conditions—
and China’s Foreign Ministry plays a pivotal role in coordinating
different Ministries of Commerce, Science and Technology, as well as
the agencies from the ruling CPC.
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Actors of China’s Economic Diplomacy
• Second, the Ministry of Commerce plays an important role in
economic diplomacy
• towards the Arab world, especially in the negotiation of the China–
GCC Free Trade Area (FTA) and the hosting of the China–Arab
States Economic and Trade Forum.
Actors of China’s Economic Diplomacy
• China’s Ministry of Science and Technology has also contributed to
China’s economic diplomacy in the Arab countries, with the Asia and
Africa Department as the implementing organization.
• For instance, in its economic cooperation with Algeria, Vice Minister
of Science and Technology, Zhang Laiwu, suggested that Algeria
should emulate China’s ‘high-tech park’, and attract both Chinese and
Arab entrepreneurs to settle down in the high-tech park, and promote
industrialization of scientific and technological research
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Actors of China’s Economic Diplomacy
• Fourth, apart from the aforementioned three agencies of the ‘State
Council’ (habitually called ‘the government’), 中联部[Zhonglian Bu ],
i.e. the International Department of the Central Committee of the
CPC (customarily identified as ‘the Party’) is also a key player in
China’s economic diplomacy
• As a liaison office of the CPC foreign relations, Zhonglian Bu strives
to serve as a bridge connecting Arab ruling parties with China’s
through economic links.
Central–local governments’ coordination
• China’s economic diplomacy towards the Arab countries reveals its
power sharing not only among different ministries, but also between
the central and local governments.
• In China, provinces and municipalities are important actors in regional
diplomacy, and their economic exchanges are frequent with the
countries that adjoin them.
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Central–local governments’
coordination
• As of 2011, Chinese provinces, municipalities and autonomous regions
established 30 pairs of sister cities with their counterparts from the 22
Arab countries, implying that some local governments have also
participated actively in China’s economic diplomacy.
Central–local governments’
coordination
• The Ningxia Hui Autonomous Region and the Yiwu city of Zhejiang
Province are two typical examples Ningxia serves as a ‘melting pot’ of
Chinese and Arab cultures, therefore playing a pivotal role in
promoting bilateral economic cooperation.
• This is the only autonomous region at the provincial level, established
by the Hui majority. Landlocked and backward in infrastructure,
Ningxia is one of China’s poorest regions. However, it is now offered a
good opportunity to promote its economic and trade relations with
Arab countries.
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Central–local governments’
coordination
• Yiwu city of Zhejiang Province also plays an active role in
implementing China’s economic diplomacy towards the Arab
countries.
• Located in central Zhejiang Province, Yiwu is regarded as the largest
commodity distribution center in the world, and simultaneously the
largest business transaction hub of the Middle East countries in China.
• The fluctuating number of businessmen with foreign passports in the
city has exceeded 580,000, and 1,500 companies from over 20 Islamic
countries have set up offices in the city. It
Central–local governments’ coordination
• China’s national oil companies, such as the CNPC and SINOPEC, also serve as
important lobbies shaping China’s economic diplomacy in the Arab world.
• As long as they can obtain approval from the top leadership, these state-owned oil
giants are able to integrate their overseas investment strategy into China’s goingglobal
strategy.
• CNPC and SINOPEC investments in Sudan, South Sudan, Iraq, Saudi Arabia and
Libya are cases in point.
– For instance, the two companies own major stakes in the al-Ahdad, Halfaya and
Rumaila oil fields in Iraq.
– In order to foster closer relations with Baghdad, Beijing wrote off about 80% of
Iraq’s US$8.5 billion debt.
– President Xi and Premier Li warmly received Crown Prince Salman, Deputy Prime
Minister and Defense Minister of Saudi Arabia in 2014. The two sides reiterated
their determination to consolidate the bilateral strategic partnership
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Japan’s Economic Diplomacy Environment
And Establishment
• Economic diplomacy has been a characteristic element of Japan’s
foreign policy of the post-war period and is a key instrument in Japan’s
quest for national security.
• This emphasis on a strategy that holds that economic-commercial
interests and political interests reinforce one another, and should thus
be seen in tandem, contrasts with the traditional approach of
transatlantic powers, which attaches relatively greater importance to the
military–economic linkage in their quest for influence.
– As illustrated by the intense debate on whether, when and how Japan
will become a ‘normal’ country
Japan’s Economic Diplomacy
Environment And Establishment
• As the growth of the Japanese economy slowed from the 1990s and
Japan’s government became more active in the military field—albeit in
a non-combat role—political scientists’ enquiries largely turned to the
(alleged) ‘remilitarization’ of Japan
• The relative shift of attention towards developments in the military–
strategic field has resulted in a deficient understanding of shifts in
economic– strategic thinking among Japanese elites in recent years.
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Japan’s Economic Diplomacy
Environment And Establishment
• the Japanese state is not ‘normalizing’ but ‘adapting, dismantling and
innovating’.
• Like other East Asian so-called ‘developmental states’, Japan is not
converging on a neo-liberal (Anglo-American) norm, but, rather, is in a
transformative phase.
• While shifts are discernible in the field of military security, substantial
changes are also taking place on the politico–economic front.
Economics and Security in Japan’s
Diplomacy and Foreign Policy
• As the defeated power in the Pacific War and latecomer in a system that was
largely dominated by the United States and European countries, Japan in the postwar
period followed an approach to economic and foreign policy that
emphasized—to a greater extent than its Western counterparts— economic tools
for political and foreign policy purposes, and political tools for commercial
purposes.
– In the domestic sphere, the term ‘industrial policy’ is used to refer to such active
and conscious attempts by government to influence specific firms, industries, or
sectors.
– In the international context, the concept of economic diplomacy captures the
wide range of government attempts to employ, and direct economic and political
intercourse.
– Japan’s activism in this field may be thought of as the foreign policy implication
of Gerschenkron’s argument that latecomers in the world economy require a
centralized approach to industrialization and economic growth
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Japan’s Economic Diplomacy
Environment And Establishment
• Japan’s approach entailed a move beyond the emphasis on the
military–economic linkage that transformed European states into
established powers.
• And as is well documented, the Japanese ‘peace constitution’ and
security guarantee provided by the United States facilitated and
reinforced this tendency.
• Clearly, the Cold War not only had an impact on Japan’s security policy,
but also on its economic diplomacy.
Japan’s Economic Diplomacy
Environment And Establishment
• The so-called Yoshida Doctrine (Yoshida rosen, Yoshida dokutorin), which was
pioneered by Japanese Prime Minister Yoshida Shigeru in the 1950s and by
later prime ministers in the 1960s, became symbolic of Japan’s approach and
was premised on a focus on economic growth and passivity in global affairs—
sometimes referred to as mercantile or economic realism and free-riding.
• The domestic organization of the political economy that facilitated this
approach became conceptualized in the notion of the ‘developmental state’,
characterized by an interventionist government that guides and supports
social–economic development through industrial growth in a capitalist
environment.
• More specifically, Japan’s success was said to lie in the government–industry
partnership that had resulted in a system with the ‘firm as family corporate
paternalism’
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Japanese ED
• a hybrid public–private system, driven preeminently by marketoriented
private-sector calculations.
• The implications of this domestic organization for foreign policy
practice at large received relatively little attention, however, except in
studies on Japan’s industrial networks in South-East Asia.
Japanese ED
• The emphasis on economic and diplomatic means rather than on military means
to protect Japan’s national security is also ingrained in Japan’s comprehensive
security (sōgō anzen hoshō) policy, which was developed in the 1980s.
• In addition to the military field, this security policy addresses economic and
environmental dimensions.
• This conforms with the idea of economic diplomacy involving a ‘business end’
and a ‘power-play end’— as detailed in the previous chapter.
• In order to secure the balance of national interests, the Japanese government
adopted a ‘dual hedge’ strategy, wherein the alliance with the United States served
as a hedge against China’s military power and other regional security threats.
• At the same time, different partners were cultivated, especially in Asia and the
Middle East, to hedge against economic dangers—the so-called ‘military shield
and mercantile sword’.
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Japanese ED
• Two recurring themes in contextual debates about Japanese policies are
the role of the US–Japan alliance and Japan’s activities in the region.
• These have largely determined Tokyo’s economic diplomacy and can
be directly related to the two main determinants of the balance of
national interests—stability and prosperity—as the Japanese
government considers both the economic and the military benefits of
the alliance and of its own regional role.
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Japanese ED
• As economic security came to be discussed in China from 1997 onwards, the
‘friendship diplomacy’ framework that had characterized Sino- Japanese
relations after 1972 ended, and a sense of competitiveness between the two
regional powers strengthened.
• Although the formal rhetoric is still that of engagement, Japan seeks to dilute
Chinese power in multilateral frameworks and economic cooperation in the
region.
• The driving forces of regional cooperation in East Asia thus involve a
complex mix of defensive regionalism, economic interdependence and intraregional
competitive dynamics.
• Japanese policies shift, slowly but steadily, from an emphasis on the
‘business end’ of economic diplomacy towards more visible power play.
Theatres of Japanese ED
• In the early post-war period, Japan’s economic diplomacy activities focused on the East
Asian region.
• Its role has been characterized as that of a ‘network power’, in reference to the private–
public link between keiretsu networks and the Japanese government. As the (South-)East
Asian region developed and the challenge of China’s rising economic, political and military
capabilities expanded, the Japanese government broadened its economic diplomacy
activities to other regions, including Africa, Latin America, and Central and South Asia.
• This involved a refocus of development/economic cooperation efforts towards Africa and
India—regions where competition with China about political influence and energy
resources is fierce.
• The Japanese government is also reaching out with official development aid (ODA) and
economic cooperation projects to countries such as Bolivia, Chile and Kazakhstan, which
are growing in strategic importance because of their role as suppliers of the rare minerals
that are required for Japan’s high-technology sectors
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Processes of Japanese ED
• Characterizations of Japan’s ways of going about foreign policy point
to a ‘hybrid approach’, with one study addressing multilateral
assistance and finding a mix of proactivism, acquiescent activism,
defensive activism, and anticipatory activism.
• Other scholars posit that Japan’s international relations can be
compared with the practice of aikidō (‘the way of harmony’), because
of its emphasis on economic matters, most importantly a preference
for using economic statecraft positively rather than military
statecraft negatively.
Japanese ED
• The main trigger for change in Japan’s economic diplomacy came with
the start of economic reform in China in the late 1980s, followed by
the dramatic experience of the Gulf War of the early 1990s.
• These events ended Tokyo’s emphasis on so-called ‘chequebook
diplomacy’, in reference to Japan’s provision of cash but failure to
contribute manpower to international peacekeeping and military
operation
• Realizing the limits of its (publicly) passive diplomatic stance and in
response to foreign criticism of this one-sided approach, the Japanese
government slowly changed course since the mid-1990s.
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Tools of Japanese ED
• In the case of Japan, detailed studies of economic diplomacy tools
have focused on
– development/economic cooperation,
– negotiations towards trade agreements
– Sanctions
– trade and investment promotion
– business advocacy,
– Summitry
– Regional financial cooperation.
Tools of Japanese ED
• These instruments were pragmatically linked when politico-strategic
goals could largely be subordinated to economic/commercial
objectives (as was the case until the early 1990s), making for a
sophisticated and comprehensive economic diplomacy policy of the
Japanese government in cooperation with the business sector.
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Tools of Japanese ED
• The security guarantee that was provided to Japan by the United States from
the 1950s facilitated a positive approach to Japanese economic diplomacy.
• Official Development Assistance (ODA) came to be used as a tool to
improve relations with the East Asian region—also serving as compensation
for wrongdoings during the Pacific War and the colonial period— in
accordance with Japanese business interests.
– Following the 1985 Plaza Accord, ODA was used for restructuring Japanese
industry.
– Later, as (South-)East Asian countries developed, the Japanese government
placed growing emphasis on the environment
– From the 1990s, the new strategy increasingly comprises a joint economic
cooperation effort by the Japanese government and the private sector
involving ‘green’ energy and environmental technology
Japan’s economic diplomacy
• free-trade agreements and (official development) assistance points to a
remarkable degree of policy activism in the employment of these
economic diplomacy tools.
– Japanese attempt to respond strategically to common challenges—the
domestic economic recession and international pressure for policy
convergence and competition with China—
– the government is criticized for being slow in forging free-trade
agreements (FTAs, or Economic Partnership Agreements, as the
Japanese prefer to call them)
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Japanese ED
• A relatively new instrument (or, better, mode) in Japan’s economic diplomacy
toolkit concerns summitry and business representatives joining high-level
politicians on official visits abroad.
• Perhaps surprisingly, this practice has been more common in Western
countries than in the East, with Japanese bureaucrats expressing hesitancy to
embark on such efforts because of ‘the need to separate the public and
private spheres’.
• Amid intensifying competition—not least from South Korea and China—
Japan is now following the Western example. DPJ heavyweight Maehara, for
example, visited the United States and Vietnam for railway pitches. In Hanoi
in May 2010, together with (then) National Policy Minister Sengoku Yoshito,
Maehara tried to secure package deals by linking pitches for railroad and
nuclear projects, and offering economic assistance and cooperation.
Actors of ED
• Economic diplomacy is framed and undertaken by a variety of actors,
including domestic politicians, the private sector, and other interest
groups.
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Organization and Institutions
• Steering and controlling the many organizations and public–private
partnerships that form, influence and cooperate with the state is a
substantial challenge of modern governance.
• This goes for Japan’s economic diplomacy as well, in which a diverse
group of (semi-)government organizations and institutions is involved.
– Rivalry and turf battles between organizations exacerbate their
differences. This is clearly seen in trade negotiations, where
representatives from MOFA, METI and the Ministry of Agriculture,
Forestry and Fisheries (MAFF) openly clash when representing Japan
in negotiations with other countries.
Organization and Institutions
• The institutional structure of the (semi-)government organizations
involved in the tools that have traditionally dominated in Japan’s
economic diplomacy—trade and investment promotion and
development assistance.
– Primary responsibility to develop ODA policy lies with MOFA
– bilateral assistance is implemented by the New Japan International
Cooperation Agency (New JICA, which was established in 2008)
– primary responsibility for policymaking lies with METI
– Implementation is undertaken by the Japan External Trade
Organization (JETRO)
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Organization and Institutions
• The Japan Bank for International Cooperation (JBIC, formerly the Export–
Import Bank of Japan) complements this public–private effort, providing
financial schemes for various ODA and commercial projects. JICA, JETRO
and JBIC thereby form the core of a network that is referred to as the ‘3 or 4
Js’—of which Japanese embassies abroad are also part.
• Other administrative agencies involved in Japan’s economic diplomacy include
METI’s Nippon Export and Investment Insurance (NEXI), which covers
losses incurred from political risks as well as commercial risks, and the New
Energy and Industrial Technology Development Organization NEDO).
• One of METI’s biggest administrative agencies, NEDO undertakes the
promotion of environmentally friendly and energy technology
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Five Strands of Japan’s Economic
Diplomacy
• The Japanese government has for a long time adhered to a policy that
integrates economics, politics and security.
• five pillars were emphasized in Japan’s Diplomatic Bluebook of 2011:
– (1) promoting the free-trade system;
– (2) securing the long-term and stable supply of resources, energy and
food;
– (3) the international promotion of infrastructure systems;
– (4) the promotion of Japan as a tourism-oriented nation; and
– (5) publicizing the Japan brand
Negative Sanctions
• Japan has traditionally held a strong preference for positive
inducements and has shied away from using sanctions and other more
blunt instruments at the ‘power-play end’ of economic diplomacy.
• That being said, its policies have shown remarkable shifts in recent
years. As hesitance about openly adhering to a (military) ‘stick’ is
weakening, the notion of comprehensive security appears to be subject
to partial reinterpretation. The key drivers of these policy shifts should
be sought in Japan’s declining ODA capabilities and the United States’
demands for a greater military role for Japan, with the alliance partner
propelling Tokyo to make greater use of its military power.
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Japanese Economic Diplomacy
• Japan’s commercial diplomacy is being revamped and linked to
development assistance in new ways, especially in the ‘green’ environmental
and energy fields.
• Tourism promotion is being elevated and is also quickly becoming an
important part of commercial diplomacy efforts.
• Formal unilateral sanctions are no longer taboo, even if they are still applied
only in exceptional cases
• Bilateral and multilateral trade diplomacy took off in the early 2000s and was
revamped in 2010, with regional rivalry and alliance politics as the key drivers.
• Japan’s financial diplomacy in the region, which seemed promising in the early
2000s, has lagged in recent years, while currency policies are moving in
opposite directions.
Japanese Economic Diplomacy
• Shift in the perceived balance of national interests, the case studies
show that slowly but steadily Japanese policies have moved from an
emphasis on the ‘business end’ of economic diplomacy to include
also a more outspoken and visible element of power play.
• At the same time, commercial diplomacy has been reinvented in
response to enhanced competition and rising global challenges such as
climate change and natural resource scarcity.
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Japanese Economic Diplomacy
• Japan’s inducement and sanctions’ regime—as well as its financial,
trade and commercial diplomacy—have in common is that they are
spurred by the ongoing change in the geostrategic and economic
power balances among countries in East Asia.
• Regional and global rebalancing thus appears to be the primary driver
behind Japan’s strategic reorientation.
• The evolving role of the United States and the US–Japan alliance plays
a key role
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Japanese Economic Diplomacy
• Hegemonic presence of the United States will be a more negotiated system
that will entail a more pluralistic organization of power and influence.
• Japan has economic and military benefits of the alliance with the United
States and is reconsidering their policies.
• Japanese government has also been strengthening and restructuring its
military capabilities since the 1990s, its diplomatic practice still emphasizes
economic means.
• This includes more forceful means of diplomacy, which can still largely be
seen within a comprehensive framework of economic diplomacy.
• Japan’s new economic diplomacy no longer relies on inducements per se, but
also includes more outspoken and forceful ways to defend its strategic
interests.
Japanese Economic Diplomacy
• The shifts in Japan’s economic diplomacy since the 1990s beg the question of
whether Tokyo is moving closer to the traditional policies of Western
countries, which generally adhere to a stricter separation of the public and
private and of the economic and military–strategic spheres.
• untransparent links between Japanese government and business (kan–min)
have been the subject of much debate since the 1980s, as foreign countries
grew increasingly critical of Japan’s ‘mercantilist practices’.
• The observation that while the economic importance to Asia of Japan as a
nation has decreased in relative terms, the importance of Japanese firms has not,
for they at least to an equal degree may be regarded as a success of Japan’s
economic diplomacy, which has evolved to a next phase.
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Japanese Economic Diplomacy
• the Japanese state can be seen to be adapting and innovating—that is,
reconsidering its tactics.
• This in turn raises the question of whether (or how) Japan’s path and
evolving policies may foreshadow the future of other states in East
Asia that follow a similar economic growth model and that learn from
Japan’s earlier successes and failures.
Japanese Economic Diplomacy
• The many differences of this group of countries notwithstanding,
Japan’s experience appears to be of interest for at least four reasons:
– 1) Japan’s roots of state-led development, which have inspired other
countries in the region;
– 2) the evolution of Japan’s policies in response to power shifts in the
region;
– 3) Japan’s decades-long experience as the only non-Western member
of the group of developed countries; and
– 4) Japan’s geographical and cultural closeness to one of the world’s
most rapidly developing regions.
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• "It is very possible that the Beijing Consensus can replace the Washington Consensus."
• in the wake of the crisis many Western governments, including France and the United
States, bailed out their financial sectors and many of their leading companies. These
bailouts made it harder for Western leaders to criticize Beijing's economic
interventions.
• In recent years, the "China model" has become shorthand for economic liberalization
without political liberalization
China Model of Development
• China's model of development is actually more complex.
• It builds on earlier, state-centered Asian models of development such as in South
Korea and Taiwan, while taking uniquely Chinese steps designed to ensure that
the Communist Party remains central to economic and political policy-making.
• Like previous Asian modernizers, China in its reform era has devoted significant
resources to primary education, resulting in youth literacy rates of nearly 98
percent; in many other developing nations, the youth literacy rate is less than 70
percent.
• China also has created highly favorable environments for foreign investment.
– However, Beijing government maintains a high degree of control over the
economy, but it is hardly returning to socialism.
– Instead, Beijing has developed a hybrid form of capitalism in which it has opened
its economy to some extent, but it also ensures the government controls strategic
industries, picks corporate winners, determines investments by state funds, and
pushes the banking sector to support national champion firms.
China Model of Development
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• In the 1980s and 1990s China privatized many state firms, the central
government still controls roughly 120 companies.
• Among these are the biggest and most powerful corporations in China:
– of the 42 biggest companies in China, only 3 are privately-owned.
– In the 39 economic sectors considered most important by the government, state
firms control roughly 85 percent of all assets
China Model of Development
China Model of Development
• In this type of authoritarian capitalism, government intervention in business is utilized, in a
way not possible in a free-market democracy, to strengthen the power of the ruling regime
and China's position internationally.
• When Beijing wants to increase investments in strategically important nations, such as
Thailand or South Africa, it can put pressure on China's major banks, all of which are
linked to the state, to boost lending to Chinese companies operating in those nations.
• For example, Chinese telecommunications giant Huawei, which is attempting to compete
with multinationals like Siemens, received some $30 billion in credit from state-controlled
China Development Bank, on terms its foreign competitors would have salivated over.
• By contrast, though the Obama administration wanted to drastically upgrade the United
States' relationship with Indonesia, an important strategic partner, it could not convince
many American companies to invest there, and, unlike the Chinese leadership, it could not
force them to do so.
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China Model of Development
• Increasing assertive Chinese diplomacy has alienated some other countries, particularly in
Asia.
• Yet along with more forceful diplomacy, Beijing has started to proactively promote its
model of development, and in some ways, its newfound confidence only adds to its global
appeal, since other, smaller countries want to join forces with a clearly rising power.
• But even as China has become more confident, its leadership still recognizes that it cannot
challenge American military power, at least not anytime soon.
• Despite boosting its defense budget by over 10 percent annually, China remains a long way
from developing a global blue water navy, or expeditionary forces capable of fighting far
from China's borders.
• Most years, the Pentagon's budget surpasses the defense budgets of all other major military
powers combined. "We need to think more on how to preserve national integrity. We have
no intention of challenging the US [militarily,]" admitted Major General Luo Yan, a senior
member of the People's Liberation Army
• In January 2009, In Davos (the World Economic Forum)
– The first senior Chinese leader to attend this forum was a former premier Wen
Jiabao
– Months after Lehman Brothers collapsed, triggering the global economic crisis,
Wen told the Davos attendees that the West was squarely to blame for the
meltdown roiling the entire world.
• Until the end of 2008 top Chinese official lived by Deng Xiaoping’s advice
– to build China’s strength while maintaining a low profile in international affairs.
• But in 2008 and 2009 the global economic crisis decimated the economies of
nearly every leading democracy, while China surfed through the downturn
virtually unscathed.
– The economic crisis, said former U.S. Deputy Treasury Secretary Roger Altman,
has left “the American model … under a cloud.”
China Model of Development
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• As Western leaders, policy-makers, and journalists questioned whether their
own systems had failed
• Chinese leaders began to more explicitly promote their authoritarian capitalist
model of development.
– Many Western governments, including France and the United States, bailed out
their financial sectors and many of their leading companies.
– These bailouts made it harder for Western leaders to criticize Beijing’s economic
interventions
China Model of Development
The Silk Road
• The original Silk Road came into being during the westward expansion of
China’s Han Dynasty (206 BC–220 AD) which forged trade networks
throughout what are today the Central Asian countries
– Kyrgyzstan, Tajikistan, Kazakhstan, Uzbekistan, Turkmenistan, and
Afghanistan, as well as modern-day Pakistan and India to the south.
• Those routes eventually extended over four thousand miles to Europe.
• Central Asia was thus the epicenter of one of the first waves of globalization,
connecting eastern and western markets, spurring wealth, and intermixing
cultural and religious traditions.
• Valuable Chinese silk, spices, jade, and other goods moved west while China
received gold and other precious metals, ivory, and glass products.
• The route peaked during the first millennium, under the leadership of first
the Roman and then Byzantine Empires, and the Tang dynasty (618–907) in
China.
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The Silk Road Economic Belt and the
21st-century Maritime Silk Road
• Strategy was first introduced in September and October 2013
• promoted by Premier Li Keqiang during the State visit in Asia and Europe
• The Initiative in the initial days was also called as "One Belt and One Road"
• Development strategy proposed by Chinese President Xi Jinping that focuses on
connectivity and cooperation between Eurasian countries and People's Republic
of China
• The strategy underlines China's push to take a larger role in global affairs, and the
desire to coordinate manufacturing capacity with other countries in areas such as
steel manufacturing.
• integration of the region into a cohesive economic area through building
infrastructure, increasing cultural exchanges, and broadening trade
– analogy to the historical Silk Road
The Silk Road Economic Belt and the
21st-century Maritime Silk Road
• Infrastructure networks
– Alternative for the US trading arrangmenets
• Financial institutions
– The Asian Infrastructure Investment Bank
– Silk Road Fund
• Geoeconomic integration
• University Alliance of the Silk Road
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AIIB Bank
• development bank that aims to support the building of infrastructure in
the Asia-Pacific region
• The bank currently has 56 member states while another 24 are prospective
members
• The Asian Development Bank Institute published a report in 2010 which said
that the region requires $8 trillion to be invested from 2010 to 2020 in
infrastructure for the region
• In June 2014 China proposed doubling the capital of the bank from $50
billion to $100 billion
• October 2014, twenty-one countries signed a Memorandum of
Understanding (MOU)
AIIB Bank
• The U.S. tried to keep Australia and South Korea from becoming
prospective founding members
– both join the bank in March 2015
• In 2015, the United Kingdom announced that the UK had decided to
apply to join the Bank
– becoming the first major Western country
– The announcement was criticised by the U.S. Obama Administration
• Germany, France and Italy followed in joining the bank
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AIIB
• AIIB, which, as its name suggests, will lend money to build roads, mobile
phone towers and other forms of infrastructure in poorer parts of Asia
• China’s official answer is that Asia has a massive infrastructure funding gap.
• ADB and World Bank loans support everything from environmental
protection to gender equality, the AIIB will concentrate its firepower on
infrastructure.
• Critics warn that the China-led bank may fail to live up to the environmental,
labour and procurement standards that are essential to the mission of
development lenders.
• ADB (Asian Development Bank) has a capital base (money both paid-in and
pledged by member nations) of just over $160 billion and the World Bank has
$223 billion.
• The AIIB will start with $100 billion in capital
AIIB
• China will use the new bank to expand its influence at the expense of
America and Japan, Asia's established powers. China’s decision to fund
a new multilateral bank rather than give more to existing ones reflects
its exasperation with the glacial pace of global economic governance
reform
• The same motivation lies behind the New Development Bank
established by the BRICS (Brazil, Russia, India, China and South
Africa).
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AIIB and other banks
• The ADB is dominated by Japan
– Japan’s voting share is more than twice China’s and the bank’s
president has always been Japanese.
• IMF dominated by US
– Reforms to give China a little more say at the International Monetary
Fund have been delayed for years, and even if they go through
America will still retain far more power.
• China is, understandably, impatient for change. It is therefore taking
matters into its own hands.
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U.S. vision for the New Silk Road?
• For the United States, the New Silk Road refers to a suite of joint
investment projects and regional trade blocs that have the potential to
bring economic growth and stability to Central Asia.
• Obama mphasized the need for Afghanistan to build an economy
independent of foreign assistance.
Trump and new policies
• Prior to Donald Trump's election as US President, it could be expected
that Washington's Trans-Pacific Partnership (TPP)
– a free-trade alliance of 12 Asian and Pacific economies
– FTA would be a counterbalance to rising Chinese power.
• Trump however, pulled the US out of the deal a day after taking office.
– While it still includes Australia and Japan, both major economies,
without Washington's backing the TPP will be far smaller if it
manages to nevertheless go ahead.
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Chinese AID
• Official statistics
– Not published
• Chinese AID
– Without strings attached
– Without colonial history
– China was “colonized”
– Beijing Consensus
• Chinese development without democratization
• Developing country to Developing country
– China
• Peaceful rise a Peaceful development
• China's 'non-interference' model gives African leaders more freedom and the
opportunity
• China’s cheap technology and infrastructure
• China’s hunger for energy resources
• China’s friendship with respect
• China sells arms in order to cement relationships with some African leaders.
Sudan, Ethiopia, Zimbabwe
• In Angola, China has proposed low-cost loans (1.5%), to be paid back in oil
• Cheap infrastructure
– For Africans or for Chinese national interests?
• Angola – Chinese schools, hospitals
China and neocolonialism
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• 1971, the support of African nations was crucial in the PRC joining the
United Nations (UN), taking over the seat of the ROC on Taiwan
• Jian Zemin declared to Chinese entrepreneurs, "Go out" encouraging
businessmen to conquer world markets
• In 1990 China agreed to join in UN peace-keeping responsibilities in Africa.
China in Africa
• Criticism of China’s human rights is (predictably) increasing in the West, as China rises.
• Some of the concerns are genuine, while others may hide political agenda.
• Common criticisms are over areas such as human rights, environment, and labor standards.
• As Chinese enterprises expand overseas, especially in Africa, criticisms of exploitation are
increasing.
• China is “providing free-interest loans and aid and we are a reliable backup for Africa’s
economic development.”
• China pledged to give Africa 10 billion dollars in concessional loans over the next three
years, and is accelerating its drive to pour vast sums of money into developing
infrastructure in many African nations.
• This has been welcomed by African leaders.
China and Africa; concerns over rights
and exploitation
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• China spends in Africa, because its massive foreign exchange reserves are
largely denominated in dollars, and Beijing needs to diversify those assets. “
• Western countries may also have double standards and be part of a wider
agenda whereby the rich countries are feeling threatened by the rise of a
potential economic competitor.
• Western standards of human rights and raising those as issues are a good
thing, but their own aid policies have often been with their own interests in
mind, so caution is probably warranted for anyone bearing gifts.
China and Africa; concerns over rights
and exploitation
• 1971, the support of African nations was crucial in the PRC joining the
United Nations (UN), taking over the seat of the ROC on Taiwan
• Jian Zemin declared to Chinese entrepreneurs, "Go out" encouraging
businessmen to conquer world markets
• In 1990 China agreed to join in UN peace-keeping responsibilities in Africa.
• 11,000 PLA soldiers in 18 UN missions
• US provides 26% of UN peacekeeping budget, but supplies
• China supplies only 3% percent of UN budget
• 2007, first UN peacekeeping mission under Chinese command
• China provides more personnel than US
China in Africa
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• China maintains a more restrictive foreign investment regime than its major
trading partners, including the United States.
• China became the world’s top destination for foreign direct investment (FDI) in
2014, according to the United Nations Conference of Trade and Development
(UNCTAD)
• China relies on an investment catalogue to encourage foreign investment in some
sectors of the economy, while restricting or prohibiting it in many other
industries.
• The Chinese government has stated that it welcomes foreign investment.
• China attracted USD 120 billion in FDI in 2014, surpassing the United States as
the world's top destination for annual FDI flows for the first time since 2003
Chinese FDI
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• http://www.wri.org/blog/2014/05/where-are-chinese-investments-africa-headed
China’s OFDI Flow to Africa, 2004-2012
• http://www.wri.org/blog/2014/05
/where-are-chinese-investments-
africa-headed
China’s OFDI Stock in Africa by Industry by the
End of 2011
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• http://www.wri.org/blog/2014/05/where-are-chinese-investments-africa-headed
Where Are Chinese Investments in Africa
Headed?
• https://data.oecd.org/fdi/fdi-flows.htm#indicator-chart
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• In 1980, China, India, Brazil and South Africa had a combined GDP of $720
billion (5.5 percent of global GDP).
• As of 2013, they represented $14 trillion (19.1 percent of global GDP).
• Formerly the recipients of overseas investments, emerging economies like
China, India and Brazil are now playing an increasingly important role as
investors
• In 2014, China’s overseas investments, known as outward foreign direct
investments (OFDI), rose 14.1 percent to $102.9 billion, while China’s inward
OFDI only rose 1.7 percent to $119.6 billion. At this rate, China’s outbound
investments will overtake inward OFDI within the next two years.
The Rise of Emerging Economies
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• As reported by China’s Ministry of Commerce (MOFCOM), China’s OFDI is
largely concentrated in Asia (mainly in Hong Kong), although investment has
increased significantly in Latin America and Africa over the past five years.
Where Is China Sending its Investments?
Five major Chinese investments in 2016
• £6bn – China General Nuclear will have a 30% stake in the UK’s Hinkley Point C nuclear
power project, approved this year.
• £5.3bn – Insurer Anbang bought Strategic Hotels & Resorts from private equity group
Blackstone.
• £2.8bn – The Dalian Wanda conglomerate bought Legendary studios, which made Godzilla
and Pacific Rim.
• £1.4bn – Flight comparison site Skyscanner sold to Chinese travel firm Ctrip.
• £300m – Chinese businessmen and investors spent a combined £300m on three West
Midlands football clubs, West Bromwich Albion, Aston Villa and Wolverhampton
Wanderers.
• https://www.theguardian.com/business/2016/dec/26/china-to-rein-in-foreign-investment-
as-domestic-growth-stalls
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• Despite the reported concentration of Chinese investments within
Asia, official Chinese OFDI statistics may not fully reflect the final
destinations of China’s OFDI. Like companies from many countries,
some Chinese companies initially invest in tax havens or offshore
financial centers where there is minimal or no tax, such as Hong Kong
or the Cayman Islands
• Then, these companies reinvest this same money in other destinations,
such as Africa and Latin America, through their subsidiaries in these
offshore financial centers. Official Chinese OFDI only indicates the
initial destination of investment
The Final Destinations of China’s OFDI
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• many major mergers and acquisitions occur using money that initially
flows through Hong Kong. In 2011, Sinopec, China’s biggest oil
refiner, acquired 30 percent of Galp Energia (Brazil) for $5.2 billion
through its Hong Kong subsidiary, Sinopec International Petroleum
Exploration and Development Corporation (SIPC)
• This $5.2 billion would be recorded as OFDI in Hong Kong, rather
than in Brazil
• http://www.wri.org/blog/2015/01/china%E2%80%99s-overseas-investments-explained-10-graphics
The Final Destinations of China’s OFDI
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• By the end of 2012, 90 percent of China’s OFDI was invested in six
sectors—leasing and business services (33 percent), finance (18 percent),
mining (14 percent), wholesale and retail trade (13 percent), transportation
and storage (6 percent) and manufacturing (6 percent)
– However, this may not reflect the whole story.
– Part of the investments made in leasing & business services (33 percent) were
set up as investment and asset management subsidiaries in OFCs, so these
investments could have been reinvested in other industries
– Meanwhile, domestically, the majority of China’s loans were invested in the
manufacturing sector, as China accounted for 22.4 percent of world
manufacturing in 2012, the largest in the world
Sectors Receiving Chinese Investments
• China’s OFDI in Africa is accelerating rapidly, increasing from $1
billion in 2004 to $24.5 billion in 2013
• A large amount of the investments went to extractive industries,
such as mining and oil extraction.
• By the end of 2013, 4 percent of China’s OFDI stock, or $26.2
billion, was in Africa. By 2013, the top eight recipients accounted
for 61 percent of China’s OFDI stock in Africa, with South
Africa alone receiving 22 percent of China’s OFDI in Africa
Regional Spotlight: China’s Presence in Africa
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The Silk Road Economic Belt and the
21st-century Maritime Silk Road
• It was unveiled in September and October 2013 by Premier Li Keqiang
during the State visit in Asia and Europe
– Infrastructure networks
• Silk Road Economic Belt
– the 'belt' includes countries situated on the original Silk Road
through Central Asia, West Asia, the Middle East, and Europe
– The initiative calls for the integration of the region into a
cohesive economic area through building infrastructure,
increasing cultural exchanges, and broadening trade
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The Silk Road Economic Belt and the
21st-century Maritime Silk Road
• It was unveiled in September and October 2013 by Premier Li Keqiang
during the State visit in Asia and Europe
– Infrastructure networks
• Maritime Silk Road
– investing and fostering collaboration in Southeast Asia, Oceania,
and North Africa (the South China Sea, the South Pacific Ocean,
and the wider Indian Ocean area)
The Silk Road Economic Belt and the
21st-century Maritime Silk Road
• It was unveiled in September and October 2013 by Premier Li Keqiang
during the State visit in Asia and Europe
– Financial Institutions
• The Asian Infrastructure Investment Bank, first proposed by China in
October 2013, is a development bank dedicated to lending for
projects regarding infrastructure. As of 2015, China announced that
over one trillion yuan ($160 billion US) of infrastructure projects
were in planning or construction
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EU – Taiwan Economic Relations
• All European countries, with the exception of the Holy See, have
established diplomatic relations with the People’s Republic of China
(PRC), and, consequently, have developed non-official ties with
Taiwan.
• The latter are limited to the economic and cultural sphere, and should
leave aside any move or transaction suggesting that Taiwan is anything
else than a part of China under the PRC’s rule.
• Since the Republic of China (ROC) on Taiwan lost its United Nations
(UN) seat to the PRC in 1971, and suffered major diplomatic setbacks,
only the United States has expressed concern for the future of Taiwan.
• European countries have never been a party to the settlement of the
Taiwan issue, with the exception of the United Kingdom which had
participated in the Cairo and Potsdam inter-Allied conferences, in 1943
and 1945 respectively.
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