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  • Writer's pictureJohn Lash

Prioritizing Economic Diplomacy in Foreign Policy with China

As nations emerge from the exposed fragility of the pandemic, many countries have initiated or enhanced foreign investment national security reviews as a tool to help protect their national interests. It has become too easy to depict China as an existential threat to world order, which has created an inability to distinguish between justified criticisms and the scapegoating of self-inflicted domestic issues.

Nations have started to ignore first principles thinking around key wicked problems facing the world, including economic and national security, domestic production, supply chain resiliency, environmental constrains, funding priorities and surveillance.

These problems cannot be solved through protectionist foreign policy, but rather through proactive and pragmatic risk mitigation. The questions that need to be asked are:

  • Where can a nation compete and when should that nation collaborate for components of their critical infrastructure?

  • What can be done given the known nation-specific and industry-specific constraints?

  • How can nations create risk-informed procurement requirements along the technology supply chain?

  • How should global standards be set for transparency and objective independent testing in supply chains, product development, software engineering, and communications infrastructures?

Solving the next generation of global issues requires the collective strength of alliances and partnerships – whether through collaboration or competition, the steps toward progress require the participation of China.

Globalization and Constructive Engagement

Globalization in the 21st century is represented by a strengthening economically and technologically driven links that develop an interconnectedness between nations around the world, creating a complex network impacting security, economics, and geopolitics.

With the U.S. and China locked in global strategic competition, the norms which govern – whether formally or informally – world order are in dispute based on competing visions of the future. The U.S., along with international partners, attempt to advance an economic vision which embraces free and fair trade, transparent standards for technology and data, as well as adherence to both national and international regulations which govern economic order.

The approach to order between the U.S. and China under President Clinton, Bush, and Obama were largely that of constructive engagement, with Clinton noting that isolation of China as unworkable, counterproductive, and potentially dangerous. The constructive engagement was one which crafted an approach to China that was pragmatic and principled, but one which sought to affect change without direct conflict and protectionist policies.

An important question for the world is whether the principles of constructive engagement and collective pressure would result in better domestic and global outcomes than a multitude of trade wars with the world’s largest economy (based on purchasing power parity – PPP) and primary trading partner for many nations.

Illuminating China

As the U.S. has furthered its Grand Strategy as the world’s leading superpower, during the last decade, China has also established a well-articulated view of the future. Broadly, the Chinese attitude towards the future focuses on two issues: dependency and control. China has been historically dependent on the rest of the world to be consumers and suppliers; however, there is a desire to have control over those two concepts in order to control their fate. In many cases, these efforts have been either misunderstood or misrepresented generally.

China’s globalization advancements can be summarized in simple economic terms: China represents an expansive new market with untapped consumer demand and is home to a rising middle class. The heuristic evidence, generally, supports the proposition that the U.S. focus on free trade capitalism has created an economic justification as tacit endorsement for the authoritarian and hierarchical governmental structure in China.

Belt and Road Initiative

The heart of Made in China 2025 and the Belt and Road Initiative (BRI) are to reduce dependency to create a positive societal and cultural impact in China; notably, those goals do not include evidence that China has sought to inspire ideological change or engaged in outright military conflict.

Importantly, while critiques of BRI are often coined as “debt trap diplomacy,” research has shown that Chinese banks have been willing to restructure the terms of loans and have never actually seized an asset from any country – including the often-cited Sri Lankan port of Hambantota. Notably many of the countries that are the recipients of Chinese loans have the highest risk ratings according to the Organization of Economic Cooperation and Development, meaning that the countries were unlikely to receive funding otherwise, making China an important partner to finance future growth, mobility, and access.

During the pandemic, the term adversarial capital was utilized to describe investments made by foreign nations, primarily China, in financially vulnerable companies that may present national security issues. However, the premise of adversarial capital ignores the opportunistic and resilient nature of the capital markets, relying on a flawed assumption that these markets are inherently inefficient and that there are worthy companies that have been overlooked by either domestic or allied venture capital.

If governments truly believe in the premise of adversarial capital and inefficient capital markets, or if there are companies that through investments by foreign nations would present national security risks, then those governments should properly incentivize domestic investment in those companies or industries to mitigate against the risk.

Investment from China, and investment in China, create opportunities which significantly benefit the United States and the rest of the world. The risks associated with this relationship are known. In addition, much of the narrative around China as a nefarious actor lacks nuance and an ability to consider private industry and entrepreneurs as business actors from China rather than agents acting on behalf of the Chinese government.

Courage in Foreign Policy

Thurgood Marshall famously stated, “It takes no courage to throw a rock.” Courage in foreign policy is an abstract concept, whether it is intended to seek justice or equality or to hold nations accountable for global norms – the courageous policies required for meaningful progress around the world are often hard to define. Each nation seeks to utilize their instruments of power to their own domestic benefit through the use of diplomatic, economic, or military action.

At the core of the challenge is how the concept of national security is interpreted in time, place, and space. The notion of national security is, rightfully, open to interpretation and extremely difficult to define with precision, as nations need to be able to adapt regulations to address new or evolved threats and vulnerabilities. However, that expansive view can impact the boundary conditions for where and how economics should impact the interpretation.

The broad discretion around national security in economics can be found when evaluating issues such as intellectual property law, data rights, underselling or underbidding, or into the capital markets arena through investments, acquisitions, or joint ventures. While these issues are critically important to nations, there must be careful consideration to address any and all potential national security issues contained therein with precision – not through broad national security determinations on trade policy issues.

It is a pillar of free and fair markets that competition bolsters productivity while promoting dynamic markets, innovation, and economic growth. Inhibiting or prohibiting the ability of certain businesses or countries to compete under these global standards will negatively impact the progress of not only developed nations, but also developing nations around the world. Nations must dispel the notion that global hegemony must be maintained as the world embarks on this new challenge to pursue a vision of globalization that will be a catalyst to economic diplomacy in this new multipolar world.

Perhaps the most important question one must ask today is: Do we have the courage to simultaneously address justified criticisms of China while also seeking the economic competition necessary for progress?

About the Author:

John Lash, PhD is the founder of Darkhorse Global. He is a geo-economic and national security strategist focusing on global capital markets. His research on evaluating national security, trade policy, and economics is grounded in a mosaic grand strategy at the convergence of collaboration, competition, and pure-conflict game theory. He has advised on national security strategy, integration, and enforcement for M&A assignments totaling over USD 100 billion in transaction value. Dr. Lash earned his PhD from Robert Morris University, with his dissertation entitled: The Feasibility of Game Theory Approaches: An Investigative Study of Threats to U.S. National Security from Foreign Investment

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