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37 showing the inherent difficulties that remain stubbornly present in the use of monetary power we can derive and test two hypothesis:
Hypothesis One: China can use monetary power to stabilize domestic market, meeting a limited but crucial aim of the Chinese government.
Hypothesis Two: The renminbi’s ties with the dollar make long term currency manipulation difficult, limiting monetary power’s utility.
These hypothesizes acknowledge China’s theoretical advantage, but also take into account the unruly nature of using economic coercion as a means to influence a foreign power as well as the vast inter-dependencies characteristic of the Chinese-United States relationship. as introduces the case study that will test their validity. This sub-section also proposes following the 2015
monetary policy changes and the time surrounding as a means to test the validity of the hypothesizes. The conclusion of this chapter further expounds on the importance of this time period and its usefulness in delineating between real and theoretical economic coercive power.
3.2 Financial Power
Exercising financial power is not as free in its workings as is monetary power, because the government doesn’t have sole power over the foreign direct investment. However, financial power and monetary power are somewhat related as both deal with the trading of currency based assets. In theoretical terms, financial power is more dependent on the wills of the public – in this case corporations – because they represent a significant subsidy on the cost of doing business in the country as well as significant return on investment as the country’s economy grows. If either the United States or China moved to limit financial ties with their counterpart there would be push back from investors and multinational corporations alike. Furthermore, much of the control
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38 the government had in terms of monetary power was derived from being the sole provider of its currency – in the case of this research the Renminbi or Dollar – but this is not the case in financial markets. While governments are most often the greatest foreign investor they are certainly not the only actor since any corporation will be investing and setting up business assets that can be exploited later as the target market develops. This is less true in China since much of the investment and setting up of business assets are conducted through state run banks and state owned enterprises; therefore, they conduct much more control over the financial sector than does the United States (Wang, 2007).
Coercive actions limiting foreign direct investment and finance are more public than monetary policy because they would require executive action in the short term or legislation in the longer-term. This not only alerts the target country of the intended action inviting defensive measures or retaliation, but it also exacerbates the potential for negative domestic feedback. To the exercise of financial power’s benefit, it is somewhat target specific. Financial coercive action would target investment flows which could impact many different parts of the economy and therefore be broad based, or it can target specific sectors. However, there is potential for circumvention in rerouting funds through other countries or other unaffected financial sectors thus circumventing agent-government control.
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39 For these reasons the utilization of financial power, while less efficient than monetary power, is still a potent tool of economic coercion. Finance, however, is an area in which China and the United States have high stakes in the success of the other.
China and the United States have both invested billions of dollars in an effort to take advantage of profits in the other country. As Figure 3.3: shows, The United States invested heavily in China up until the financial crises of 2008 during which flows turned negative “most likely reflecting a pullback of capital from China through intra-company channels” (Hanemann, Rosen,
& Gao, 2016, pp. 30-31). For this reason, financial flows can be volatile and therefore an unreliable tool for economic coercion.
Figure 3.3 Value of FDI flows U.S. to China. Illustrated in millions of Dollars. World Bank, 2016.
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40
Because both the United States and China have worked their way toward parity with each other in terms of year-on-year investments and the unique nature of foreign direct investment as a way in which one country, its enterprises, and citizens at large can directly benefit from the growth of markets abroad, the financial relationship between China and the United States seems to represent an interdependent relationship as it was imagined by Nye and Keohane. In so far as it is allowed, foreign direct investment benefits both countries creating more opportunities for growth for their respective multinational corporations as well as creating growth in investment opportunities.
As is always the case with interdependent relationships this does not mean that there isn’t the potential for conflict or competition. To the contrary, competition is largely a good thing as they race for greater economic gains in the two markets, fighting over profitable companies Figure 3.4 China’s FDI to U.S. as % of GDP. Rhodium Group, 2016.
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41 creating greater incentives for efficiency in both markets as well as providing more assets for more adventurous projects and enterprises (Davies, 2013). Conflict in this case is usually for greater investment opportunities. Some projects run into political trouble in both countries as they question the motivations of the investment, economic exploitation or security ramification (Montlake, 2013). Therefore, using FDI as a means of economic coercion is self-defeating as it might provoke retaliation undermining the original intent to gain greater financial access.
There are some areas of unbalance, but they are hard to exploit without significant backlash as well as significant risk. United States has been investing considerably longer than China and is therefore better positioned to cause overall harm to the Chinese economy. The
United States investment position – the cumulative foreign assets and liabilities in an economy – are over 70 billion dollars with China’s being only 14 billion.
Figure 3.5 U.S.-China Investment Positions. Illustrated in millions of Dollars. Rhodium Group, 2016.
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42 China is quickly making up ground, but this could run into political push back. Figure 3.5 shows the disparity. However, this can hardly be exploited since the government can do little to require the withdrawing of foreign assets short of creating massive disincentives which make it costly to hold foreign investments – such a move would be a debilitating tax on multinational corporations – or the US government could pass legislation requiring the withdraw of large portions of the Chinese economy. Neither would be a very efficient use of economic power since the absolute costs would almost certainly exceed the relative gains. When the absolute loses outweigh the relative gains as heavily as they do in this case there is no other choice but to conclude that the bilateral relationship is indicative of an interdependent union.
In this sub-section, it becomes clear that neither China nor the United States can gainfully utilize finance as a tool for economic coercion. Since this research focuses on cases of attempted economic coercion as a means to test theoretical potential versus practical application of
economic coercion, it is unnecessary to pick a case study for financial power. However, it provides a perfect example of the level of economic interdependence that the United States and China enjoy and what is at risk in the event of an economic or political fall-out.