解析中美關係之「經濟」支配力：現實中經濟脅迫之不同理論 - 政大學術集成

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(1)International Master’s Program in International Studies National Chengchi University 國⽴政治⼤學國際研究英語碩⼠學位學程. 立. 政治大. ‧ 國. 學. Revealing the True Power of Economics in the China-United States Relationship:. ‧. Separating Theory from Reality in Economic Coercive Potential. n. al. er. io. sit. y. Nat. 解析中美關係之「經濟」支配力：現實中經濟脅迫之不同理論. Ch. engchi. Grant Nordby Advisor: 薛健吾 April 2016. i n U. v.

(2) 1. Abstract. Economic asymmetric interdependence can lead to tensions in a geopolitical relationship, and as China’s economic strength continues to rise the academic and policy circles have analyzed the possibility of tensions boiling over. However, such discussions have often over estimated Chinese economic prowess or over-emphasized United States incumbent economic and geopolitical advantage. This research aims to systematically analyze the economic realities utilizing Kirshner’s tools for economic coercion, and applying them to their respective economic sectors. Chapter one introduces the research questions and aims, chapter two explains Kirshner’s tools for economic coercion as well as lays the groundwork for this research’s methodological framework. Chapter three aims to provide an objective overview of the economic realities between the United States and China. Finally, chapter four and five provide two case studies that test the hypothesizes derived from the analysis of Kirshner’s limitations on economic coercive potential and the Chinese-United States economic realities as explored in chapters two and three.. 立. 政治大. ‧. ‧ 國. 學. 國與國之間經濟互賴的失衡足以導致地緣政治衝突風險的升高，因此隨著中國經濟實力的持續增長，學界及政界皆開始注意到中美衝突加劇的可能性。然而，持此種風險論者經常過分高估中國的經濟實力，抑或過度強調美國的經濟與地緣政治優勢。本研究旨在系統性地分析中美經濟實力現況，並將採用 Kirshner 提出的若干經濟施壓工具套用至兩國各自的經濟情勢。本研究的第一章即點明研究問題與目標。第二章將闡述 Kirshner 提出的若干經濟施壓工具，並以此建構本文的理論架構。第三章將客觀地呈現中美兩國的經濟實力概況。第四及第五章將分別呈現兩個個案研究，以此檢驗 kirshner 所提出的假設分析經濟高壓手段的限制，以及二、三章所論述之中美兩國經濟情勢。. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v.

(3) 2. Table of Contents Chapter One: Introduction ............................................................................................................................ 3 1.1 Introduction ........................................................................................................................................ 3 1.2 Research Questions ............................................................................................................................ 5 1.3 Paper Structure ................................................................................................................................... 8 Chapter Two: Theoretical Analysis and Methodological Framework ......................................................... 10 2.1 Broad Theoretical Groundwork and Implications ............................................................................. 11 2.2 Economics as a Form of Power: Kirshner’s Tools for Economic Statecraft....................................... 19 2.3 Dangers in Dependence: Framework for Further Study ................................................................... 25. 政治大 3.1 Monetary Power ............................................................................................................................... 29 立 3.2 Financial Power ................................................................................................................................. 37. Chapter Three: Economic Realities ............................................................................................................. 29. ‧ 國. 學. 3.3 Trade ................................................................................................................................................. 42 4.4 Conclusion ......................................................................................................................................... 49. ‧. Chapter Four: China’s Monetary Policy After 2014 a Case of Monetary Power ........................................ 53 4.1 Introduction ...................................................................................................................................... 53. Nat. sit. y. 4.2 An Argument the 2014-2015 Renminbi Evaluation Changes as a Case Study .................................. 54 4.3 Chinese Grand Strategy .................................................................................................................... 56. io. al. er. 4.4 China’s Monetary Policy after 2014 .................................................................................................. 62. n. iv n C Chapter Five: United States Steel Protectionism 2010 Case U h eafter i Study in Economic Coercion Potential 77 h n c g 5.1 Introduction ...................................................................................................................................... 77 4.5 Rivaling Explanations and conclusions .............................................................................................. 72. 5.2 An Argument for Public Law 112-99 As A Case Study....................................................................... 79 5.3 United States vs. China Steel Trade Dispute and the Resulting WTO Proceedings .......................... 84 5.4 Rivaling explanations and conclusions.............................................................................................. 97 Conclusion ................................................................................................................................................. 101 References ................................................................................................................................................ 106.

(4) 3. Chapter One: Introduction 1.1 Introduction Tom Clancy recently published a new book titled, “The Bear and The Dragon” in which tensions between China and the United States boil over. Tom Clancy has been praised before for his ability to accurately gage and predict future conflicts and in this book Clancy writes about how human rights violations, control over information and greed by People’s Communist Party in China sparks war (Groll, 2013). Though the book is very entertaining, the conflict is largely one-sided and the United States. 政治大 the World. While this is just fantasy literature, it has parallels to the way in which today’s scholars, 立. dominates China because of old assumptions about the two countries economic and political standing in. ‧ 國. 學. economists and politicians actually look at the strategic relationship. Proponent’s on both side, utilize economic statistics on trade flows and capital holdings to argue that that one side has the leverage. ‧. necessary to influence the others behavior. This research makes use of the same economic data in an. sit. y. Nat. effort to study the economic relationship more holistically, and in doing so reveal the true potential for. io. er. economic coercion each country has. This research moves beyond fantasy, and shows that, in reality, the complex economic relationship between China and the United States can hardly be used by either. n. al. Ch. party in a grand effort to cripple or control the other.. engchi. i n U. v. While much is uncertain about the future of both trade and geopolitics both will most likely be greatly influenced by the nature of Chinese-United States relations. Both President Obama and President Xi have, on numerous occasions, voiced this sentiment. In 2013, President Xi said, “A sound China-U.S. cooperation can serve as the ballast for global stability and the propeller for world peace" (Ministry of Foreign Affairs, 2013) in a joint press conference with Obama in California. But as both countries navigate a new, less friendly Trump administration their choice to work with or against each other will shape every global issue from nuclear.

(5) 4. weapons and terrorism, to trade and technology. This is the first great confrontation between great powers with profoundly different world views since the Cold War, and increasingly economics is being pushed to the forefront of the discourse between the two countries. We have already seen how the complex relationship between the U.S. and China has shaped the internal economic workings of the two countries. It is estimated that China now employs nearly one million Americans, and it is likely that America employs many more Chinese; furthermore, investment and foreign capital flows benefit both economies (Obama &. 政治大. Xi, 2015). Domestically, the impact of trade with China has been thoroughly studied and. 立. remains a contentious issue, making its benefits and drawbacks well understood. However, as the. ‧ 國. 學. relationship develops and China’s new economic power begins to take shape, how the U.S.Chinese economic relationship will shape regional and world trade in the future is less certain.. ‧. Likewise, China and the United States’ shaping of issues from nuclear proliferation to climate. Nat. sit. y. change has greatly benefited the study of great power politics; furthermore, their cooperation and. al. er. io. conflict in international organizations such as the United Nations and World Trade Organization. n. iv n C h e nin these power politics. Much like the progress made i Ustudying Chinese-United States g c hareas,. has progressed critical thinking about the intersection between liberal institutionalism and great. economic and trade relationship, can help advance our understanding of the interplay between International Political Economy and great power relationships. To that end, the unique ChineseUnited States relationship necessitates a detailed study exploring if either country has exposed itself to the possibility of economic coercion or what can be expected should conflict arise between the two countries..

(6) 5. 1.2 Research Questions There is still much to be learned about the changing nature of the economic relationship, pushed largely by the growing economic prowess of China, and also the growing populism and backlash against free trade that has taken root in the United States and other rich countries. China’s return to prominence as a world trade and economic power, has led to deeper consideration among scholars about what economic power means in terms of “real” or geopolitical power (Okano-Heijmans, 2012). While there are certainly considerable ties between. 政治大. economic strength, the military, and other traditional measures of geopolitical power, economic. 立. strength as its own form of power or leverage over other countries is less well understood. This. ‧ 國. 學. is ironic considering that this is perhaps the most important and interesting form of power in our new world characterized by globalization and interconnectedness. As China’s economy has. ‧. experienced unprecedented year on year growth the academic and political communities have. Nat. sit. y. been quick to question what this means for China’s place in the world and what the Chinese. n. al. er. io. government’s intentions are on the world scale. Most of this research and dialogue have been. i n U. v. centered around China’s investments in the South China Sea and military equipment and. Ch. engchi. infrastructure. While this body of research is important for an understanding of Chinese geopolitical intentions and priorities, these inquiries are certainly not all-encompassing and leave much unexplored about the nature of China’s economic strength, such as where that strength comes from as well as what vulnerabilities exist. For its vast size, the massive body of research surrounding China’s growing influence in the world still leaves many economic questions unanswered. Ironically, the very source of China’s newfound power is still enshrouded in mystery..

(7) 6. This is not unsurprising when considering the complexity of economic ties today and the preponderance of scholars who prefer to study the use of power after its acquisition as opposed to the means of acquisition or its origin. However, particularly in the case of China, it is an important consideration and one that warrants more study. As mentioned at the onset, it is generally accepted that China and the United States are the great powers that will have the heaviest hand in deciding the future, but appreciation for the complex interplay between the two economies doesn’t fit this understanding. In many ways it is this complex economic relationship. 政治大 China’s growing economic power and its sources be clearly understood. 立. and its management that will decide the future; therefore, in this circumstance it is important that. ‧ 國. 學. After a more thorough examination of Chinese economic growth this research better explains where this growth has come from as well as whether it translates into economic power. ‧. that can be used to influence the United States. This research to no surprise finds that China has. Nat. sit. y. benefitted more than any other country from international trade, racking up an astounding trade. al. er. io. surplus, mostly at the hands of the United States, which is where its rising power as has been. n. iv n C h etondependencies relationship; however, it has also given rise g c h i Uand tensions that call into the future studied elsewhere. China and the United States have both benefited from this economic. of the relationship. Further study is needed and is preliminarily undertaken in the following chapters to discover whether this co-dependent relationship is sustainable as well as if there are vulnerabilities in the Chinese growth model that limit their economic power as a means of economic coercion. As Stephen Roach explains “the countries (China, and the United States) were united in their fixation on growth and entered into a new and powerful collaboration aimed at achieving that objective. The United States provided China with something very important: the world’s largest base of external demand that could support China’s export-led production.

(8) 7. model” (Roach, 2014, p. 2). For the United States it was the continued growth of consumption, and to China is was a ticket to greater growth in the manufacturing sector and more foreign exchange holdings, a deal at the time that neither country could afford. However, today that agreement has gone farther than anyone at the time could have foreseen, leaving potentially crippling dependencies on both sides. Dependencies in International Relations are rarely a good thing because they leave a nation reliant on another for their continued way of life. Vulnerabilities such as this leave the. 政治大. state open to threats or coercion as a means to control the actions of the dependent nation. For. 立. this reason, dependency and coercive action have been important subject of study in international. ‧ 國. 學. relations, and within that realm, economic coercion has grown more prominence (Kirshner, 1995). However, because dependency is more likely larger states dominating smaller states (the. ‧. measure of size between states being used here is in terms of GDP) there has been relatively less. Nat. sit. y. research on the use of economic coercion among powerful states. The Chinese-United States. al. er. io. relationship is special case, as Roach continually reminds us, in that there have never been two. n. iv n C hen reasons, the Chinese-United States economic relationship g c h i isUa good study for furthering of our large economies that have allowed themselves to become so utterly intertwined. For these. understanding of economic coercion and its possibilities. It is also a necessary step toward better understanding of the economic realities that exist today and what they could mean for the future of both bilateral Chinese-United States relations as well as the world that relies on them. Lastly it also applies more broadly to the need to expand the scholarship surrounding what “power” is and why it matters where power comes from rather than just how power is used. Economic power has yet to get the focus it deserves. Perhaps showing the integral role that economics plays in the relationship between two of the great powers of the world as they vie for influence.

(9) 8. will change perceptions of economics both as a means of power but also as a form of power in its own right. As The United States and China confront each other on a wide range of issues, economics plays a part to varying degrees, therefore perhaps the biggest question is whether or not economic coercion is a viable tool for either country influence the other and achieve objectives. The answer to this question is reliant on many other factors, which will also need to be addressed such as: What is the nature of the Chinese-United States relationship, is it virtuous. 政治大. relationship marked by Keohane and Nye’s notion of complex interdependency (Keohane &. 立. Nye, 1987) or is it a relationship that Roach calls codependency (Roach, 2014), wherein the. ‧ 國. 學. many discernable dependencies that are in constant flux can lead to coercion or conflict aimed from one state to the other; Is the United States more dependent on China (or vice versa) or do. ‧. they exist largely at parity; where are each countries weakness/strengths and in what situations. Nat. sit. y. would they be important. These are the questions that will drive our understanding of the. n. al. er. io. Chinese-United States relationship and will help to reveal what may be coming in the future as. i n U. v. the countries and their cooperation (or lack thereof) come to define the future of international relations.. Ch. engchi. 1.3 Paper Structure The following chapters aim to answer these questions, and provide a framework for understanding the intertwined Chinese-United States economic relationship. Chapter two provides the theoretical background for understanding the current literature as well as where there are insufficiencies, and expounds on the nature of the Chinese-United States relationship. Chapter two also establishes the framework for studying the Chinese and United States.

(10) 9. economies for vulnerabilities by exploring Kishner’s four tools for economic coercion as well as their perspective limitations in parallel with the current literature on dependence and interdependence mainly through the work of Nye and Keohane. Chapter three undertakes the necessary preliminary research to dig deeper into the Chinese-United States economic relationship, and thereby revealing strengths and weakness both countries’ economies exhibit. In parsing through the economic data that is relevant to Kishner’s four tools for economic coercion for dependencies (mutual or asymmetrical) it becomes clear that power is split between the. 政治大 two case studies in which economic coercive action can be observed and used to confirm or 立. United States. The concluding chapter makes the argument for further study as well as provides. ‧ 國. 學. reject the claims laid out in chapter three.. However, to provide the fullest picture and further test the hypothesizes Chapters Four. ‧. and Five explore case studies. Chapter Four focuses on China’s potential for monetary power by. Nat. sit. y. looking at the time period surrounding Chinas shock revaluation of the renminbi in 2015 before. al. er. io. their ascension to world reserve currency status. Chapter Five follows the time period before and. n. iv n C h the followed. In looking at these case studies i U the difficulties that exist in the e nresearch g c hreveals after the passing of Public Law 112-99 and the World Trade Organization proceedings that. practical use of economic leverage even in two countries where theoretical advantages are a stark as those that exist between China and the United States..

(11) 10. Chapter Two: Theoretical Analysis and Methodological Framework Much of the research into growing Chinese influence in both Asia and the world explores economic growth as a means of power accumulation rather than its own tool for statecraft. In this chapter it becomes clear why this research, while useful, only tells a small part of the story while ignoring some major problems that have large implications for the Chinese-United States relationship. While not an outright repudiation of the current literature it complicates the notion of economic growth as an absolute indicator of growing power ignoring possible vulnerabilities that such economic growth can create.. 立. 政治大. Furthermore, instead of looking at the Chinese-United States economic relationship. ‧ 國. 學. retroactively through the two countries relative power positions, this chapter lays out a. ‧. framework to reveal the nature of the complex Chinese-United States relationship based on economic makeup first and foremost. This is achieved by looking at the literature on economic. y. Nat. er. io. sit. coercion and statecraft as well as the changing nature of “dependence” in an increasingly interdependent and interconnected world. Utilization of this literature both shows how the. n. al. Ch. i n U. v. economic leverage can be its own form of power, as well providing a framework that will be. engchi. used in the following chapters to dig deeper into the Chinese-United States economic relationship and make predictions that can be tested by looking at case studies. This Chapter first outlines the broad theoretical groundwork for this research as well as showcases its usefulness for policy makers and scholars, then it gives details on the economic coercion theories this paper uses to analyze the Chinese-United States economic relationship. Lastly, this chapter answers the first of the research questions regarding the nature of the Chinese-United States relationship by expounding on inter-dependency as outlined by Keohane.

(12) 11. and Nye and as developed by Roach and others. According to these measures this chapter provides the bases to call the relationship and co-dependent although somewhat uneasy relationship.. 2.1 Broad Theoretical Groundwork and Implications In addition to the practical uses of this research as provided in the introduction, there are more potential implications for the theoretical study of International Relations. From the Positivists perspective, Realism and Liberalism, can both gain from a better understanding of. 治政 how economic coercion’s viability or uses. Realists will have 大a better grasp on the economic 立 origins of power as well as examples of real economic coercive power and the real capabilities of ‧ 國. 學. both China and the United States. This has not been a part of Realist claims; however, the. ‧. analysis to this point focuses mostly on debt and credit holdings, rarely exploring other areas of monetary and economic power. In kind, this analysis will benefit from the research done in these. y. Nat. al. er. io. sit. same fields, although there are holes in the literature that our analysis will have to fill. Liberalist camps, for their part, can take away more from the study on codependency. n. iv n C and interconnectedness and how disputes mediated. Most beneficial to our analysis will be hare en gchi U. the utilization of game theory which helps us to make sense out of when economic coercion will be used, when threats will be issued and how they will be received. As the world becomes more globalized and trade comes under heavier strain the real examples of conflict and resolution will be particularly beneficially as liberalism makes a case for greater connectivity. Post-positivists theories are more varied and this analysis will not find use in all of them (nor vice versa). However, some ideas – such as decentralizing state actors as the only creditor or source of investment for foreign governments, or sole player in international trade – will be.

(13) 12. welcome contributions (Asian Development Bank, 2007). As well as careful analysis of the monetary, financial, and economic systems and how those systems both affect and are affected by power and the changes thereof (R. Cooper, 1975). Lastly, Constructionists and Critical Theorists might gain from this analysis’ use of political structure’s, monetary regimes, and interest groups to explain changes in state preferences. Although this analysis makes use of these structural and societal levels of analysis mainly as a vehicle to understand the pressures placed on the Chinese or United States governments to utilize and/or yield to tools of economic. 政治大 term. Understanding communication feedback loops as well as negotiation theory is an 立. coercion, they are an important aspects of understanding State objectives in the short and long. ‧ 國. signaling became an important decider in success.. 學. important part of this research especially during the case studies wherein, WTO mediation and. ‧. However, much of this delineation between Liberalism, Realism, and Constructivism, is. Nat. sit. y. arbitrary and mute for our analysis since the application of the ideas is more important than. al. er. io. where they come from. Although there are certainly opportunities for overlap and application of. n. iv n C U h e nthisgpaper the different International Relations Theories, a study in International c h iis primarily. this piece to wider range of International Relations, and it will necessarily draw on research from. Political Economy, and therefore relationships should be looked at differently. Furthermore, the lines between the theories blur too easily in our analysis to be of real use in a review of the existing literature on economic coercion. For this reason, both the positivist and post-positivist theoretical labels alike will be set aside for a more useful IPE categorization of perspectives commenting on International Relations. Such a system is outlined in “International Political Economy: Perspectives on Global Power and Wealth” – along with a short comparison and argument for its use over the use over the division as outline above. The authors make a.

(14) 13. compelling case that International Political Economies perspectives differences are more of a function of “relative weight” of importance as they are assigned to different set of causes. Although, “these perspectives can lead to widely different explanations of specific events and general processes within the international political economy” (Frieden, Lake, & Broz, 2010, p. 10) rather than being attributed to ideological differences are instead associated with differing opinions on what factors are being emphasized. These factors highlight IPE’s commitment to broadening understanding between politics and economics, and therefore are a better match for. 政治大. our focus on economic coercion and how it comes to bear on Great Power relations between the. 立. United States and China.. ‧ 國. 學. These perspectives or factors that are weighted differently are separated along two different dimensions: “the relationship between the international and domestic political. ‧. economies” and “the relationship between the state and social forces” (Frieden et al., 2010, p. 5).. Nat. sit. y. These two spectrums provide us with four unique perspectives based on their weighted view on. al. n. Domestic Societal.. er. io. each factors importance: International political, International economic, Domestic Institutional,. Ch. engchi. Political or Institutional. i n U. v. Societal or Economic. constraints. Constraints. International level of analysis. International Political. International Economic. Domestic level of analysis. Domestic Institutional. Domestic Societal. (or Institutionalism). (Or Societal). Figure 2.1.

(15) 14. Each of these perspectives will be useful, and a good balance is the sign of a strong analysis that takes into consideration and equally weighs the benefits and drawback of each approach; therefore, review of the existing research is served well by having a good understanding of which level of understanding is being used. International Political’s view, which explores the constraints imposed on countries based of geopolitical and diplomatic realities within which they exist, is important in understanding Drezner’s Sanctions paradox which looms large over any research into the utility of economic. 政治大. coercion. To better understand when states would choose to utilize economic coercive tools and. 立. which tools will be used it is best to make use game theory and Drezner’s model which explains. ‧ 國. 學. “the behavior of senders (agents) and targets by taking into account their opportunity cost of deadlock and expectation of future conflict with each other” (D. Drezner, 1999, p. 4).. ‧. Therefore, two things (to Drezner) help determine if states will decide to engage in. y. Nat. sit. economic coercive action, whether there will be future conflicts, and what would be the political. n. al. er. io. and economic costs of a prolonged or deadlocked fight over sanctions, both of which are affected. i n U. v. by their standing in relation to each other, and in the context of the greater global hierarchy or. Ch. engchi. community. Perhaps this is best understood as a pivot away from the literature that came before which was mostly oriented around domestic societal understandings of why and when economic sanctions would be taken. These explanations are driven by pressures placed on agent states by their citizens, or that the domestic structural constraints or real costs of war are too great for the country to engage in war but the political leader must do something (or it is politically beneficial for him/her to do so) (Barber, 1979). Concessions are made when the citizenry of the population of the target country has significant power and demands it, or the ruling elite feels the pain of the economic restrictions themselves. However, this is an imperfect model that doesn’t provide any.

(16) 15. opportunity for prediction nor does it explain much outside of what can be gathered from an understanding of the prerequisites and limitations on economic coercion. Instead, Drezner’s model helps us to understand better how each country views their relationship and economic priorities and make predictions about whether or not economic coercion will be used and whether or not it will be successful. This is largely defined by how each country sees itself as Drezner’s model shows they are more likely to undertake coercive action against foes, but more likely to gain concessions from allies.. 政治大. In looking toward the United States and China’s situation, the possibility of an agent’s. 立. economic coercive actions succeeding would be greatly depending on how the international. ‧ 國. 學. community responded to the actions taken. As Kirshner puts it, “an awareness of the relative position of the players is vital for the evaluation of either utility or viability for any form of. ‧. coercion” (Kirshner, 1995, p. 21). Albeit, International Political focuses on more political. Nat. sit. y. constraints rather than economic constraints imposed on the country from the outside, but. al. er. io. political realities still play a part in the lobbying and formation of political groups that impose. n. iv n C h e ncoercive isolation can be an important part of economic i U as target states seek to g c hactions. sanctions or cut off flows of foreign direct investment. Furthermore, a countries geopolitical. circumnavigate the negative effects imposed by agent countries. In contrast to International Political’s view, International Economic puts more emphasis on social economic factors. This also has implications for Drezner’s paradox because the target country is concerned that if many conflicts are expected than concessions weaken their position long-term. As Drezner states:.

(17) 16. The target’s conflict expectation determines the magnitude of concessions. Facing an adversarial sender, the target will be worried about the long-run implications of acquiescing. Because it expects frequent conflicts, the target will be concerned about any concession in the present undercutting its bargaining position in future interactions. The sender might exploit the material or reputation effects from these concessions in later conflicts. (D. Drezner, 1999, p. 4) Furthermore, the interplay between how power shapes and is shaped by the economic. 政治大. system is a fundamental question of our analysis. The United States power has certainly shaped. 立. the modern world’s interconnectivity through organizations such as the World Trade. ‧ 國. 學. Organization and through its financial markets, as well as the predominant reserve currency. However, this economic system also gives back to the United States and provides more power to. ‧. uphold and set international norms. This power paradox has provided the United States strong. Nat. sit. y. insulation from Chinese threats to stop buying U.S. debt (Setser, 2008). However, it also. al. er. io. provides strong incentive for China to disrupt the economic system and increase even though. iv n C h e n g cfindings disruption” and according to Charles Kindleberger’s h i Uwhen studying the French situation n. there are possibly disastrous consequences for doing so. Such action is called “Systemic. in the 20th century, systemic disruption is most likely to be exercised by mid-sized states, who have sufficient power but not dominant stake in the current system (Kindleberger, 1985). While the agent country still retains some stake in the international monetary system it might see the opportunity of success as far exceeding environmental costs. However, systemic disruption does come at a high often unwieldy cost likely demonetizing the international economy, meaning that until an alternative payment system or preferred currency for exchange establishes itself trade would be difficult in most places and impossible in others (Kirshner, 1995). Upon these lines lay.

(18) 17. the answer to the first question regarding the nature of the Chinese United States relationship. While certainly isn’t a relationship that can be characterized as one of trust or unconditional support, but an unsettled, increasingly unequal co-dependence. This is especially true as the United States relative power wains after decades of hegemonic supremacy. Subversive systemic disruption is a very possible outcome if China perceives great benefits from challenging the dollar and the United States led financial and economic system and begins to dump its accumulated reserves.. 政治大. Ironically, understanding United States exposure to such actions and what China would. 立. gain (or lose) from destabilization of the financial system are both, in no small part, a study in. ‧ 國. 學. the domestic institutions and situations at play in each country. One of the best example of this Domestic Institutional view is Roach’s book “Unbalanced: The Codependency of America and. ‧. China”. Domestic Institutional perspectives focus on the importance of internal institutions and. sit. y. Nat. the State’s policy makers. This can be particularly helpful when studying intentions are. al. er. io. strategies (to the extent that they exist) at play in both China and the United States. This is a. n. iv n C h emonetary factor in their ability to successfully utilize h i Uto affect United States policy n g c power. large part of Chapter Four wherein Chinese intentions, goals, and institutions play an important. makers. Furthermore, this is a necessary level of analysis to understand the growing interdependence between the two countries and how these economic intersections will affect their continued cooperation or growing tensions. Roach explores exactly these issues in great detail, although he misses on opportunities to discuss how domestic institutions or policy makers would change or benefit from taking economic coercive action. Instead, he focuses on the aims of each country and how their relationship has become so interconnected and what that means for the policy makers and domestic institutions going forward (Roach, 2014)..

(19) 18. Lastly, Domestic Societal views emphasis, much like Domestic Institutional, the internal workings of a nation in the situation in which the state finds itself. Unlike Domestic Institutional though, the Domestic Societal approach emphasizes the economic and sociopolitical pressures that drive policy. “The determinants of national policy are the demands made by individuals, firms, groups rather than independent action by policy makers” (Frieden et al., 2010, p. 10). As economic coercive actions are taken the most effected are going to be the citizens of the target country and it will most likely be them that pressure their government’s with loss of power, or. 政治大 United States motivations for protecting steel as well as understanding the constraints in use of 立 instability that push for change. This is an important factor in Chapter Five in looking at the. ‧ 國. 學. trade as a coercive tool. Therefore, understanding the consequences of economic coercive action and the power of an aggressor country to wield it, is really a function of understanding the. sit. y. Nat. States.. ‧. internal economic situation and sociopolitical power that exists within both China and the United. al. er. io. These four perspectives combine to give us insight into the nuance of economic power. n. iv n C h inewhat economic coercion, can be successful and n gcircumstances. c h i U However, these perspectives and at the levels of analyses that will reveal whether the exercise thereof, the undertaking of. are only lenses through which to understand the process, levels of analysis which focus more or less on certain economic or sociological pressures, and national or international structures that provide constraints. Therefore, we will need to look deeper into economic coercion itself: where do countries derive their economic power; what constitutes economic coercion; and what forms does economic coercion take. For answers to these questions we can look to Kirshner’s book “Currency and Coercion”..

(20) 19. 2.2 Economics as a Form of Power: Kirshner’s Tools for Economic Statecraft The forms of economic coercive power are: Trade, Finance, and Monetary Power. And they are affected, in varying degrees, by their reliance on the existence of a “modern, somewhat integrated, international market economy” (Kirshner, 1995, p. 24). It is not altogether necessary here to go into detail about the differences in their perspective reliance’s on a global economy, suffice it to say: Trade and Finance both are moderately dependent since they both depend on a relatively common set or system of rules in order to exist and provide guarantees for assets. 政治大. although both could be undertaken in some form bilaterally; Monetary Power is most dependent. 立. on a global economy and the flow of currencies. Our global economic reality is characterized as. ‧ 國. 學. interconnected and globalized and there is little that could have the chance to undo that reality; therefore, this is only useful as it pertains to the effect of economic coercive action on the global. ‧. economy as a whole, and it is fair to say all would have profound effect on all countries. Nat. io. sit. y. connected to the globalized economy.. n. al. er. Besides the effect economic coercive action could have on the globalized economy, the. Ch. i n U. v. remaining two considerations that will drive our analysis of how economic power is create and. engchi. utilized are: the efficiency of each respective tool for economic coercion; and the limitations that each economic coercive form would face in implementation. There are three ways in which economic instruments of power can be limited in their effectiveness: Feedback, circumvention, and defense. First, feedback is largely a problem of perception, all the more so if the actions are highly publicized. From a domestic societal view, the question is how will the citizens and markets react to the actions taken, from a domestic institutional standing, what affect will this have on future conflicts – economic and otherwise – with the target country. Lastly, from international political view point will the international community respond positively to the use.

(21) 20. of economic powers by condoning or even taking part in the economic actions as part of a coalition, or will they respond negatively, either because of fear that they can also be targeted or because it is an abuse of economic power with the greater globalized system. Circumvention is simply the methods or actions a target country can take in an effort to escape the negative effects of the sanctions imposed by the agent country. Circumvention usually needs the cooperation of another country either by seeking new sources of finance or new markets for goods after trade sanctions. A country is rarely, if indeed ever, truly isolated. 政治大. today and therefore circumvention is always a part of the equation when applied to the use of. 立. economic coercive power.. ‧ 國. 學. Lastly, defensive actions are undertaken by target states in an effort to protect themselves from the potential use – or as a way to combat the further use – of sanctions. The most common. ‧. form of defensive action would be matching trade restrictions or tariffs on the importation of. y. Nat. sit. goods. It is notable that defensive measures are only really feasible if the target country. n. al. er. io. understands what is happening and who is doing it. Therefore, this is an important consideration. i n U. v. as it applies to the advertisement of economic coercive action as we will see below.. Ch. engchi. Efficiency, to Kirshner, “refers to the ability of the home state to wield the instrument skillfully and to direct specifically at the target government” (Kirshner, 1995, pp. 27-28). There are three ways in which efficiency can be determined: level of independence of the central government; the level of publicity surrounding the use of economic coercion; and how focused is coercive measure. Level of independence is important because states must be able to decisively take action without interference. Domestic or International factors could play a part in this consideration. For example, countries belonging to the World Trade Organization would have to.

(22) 21. show justification and abide by the WTO rules when applying sanctions or taking other economic measures against another country. Likewise, the tool needs to be in the hands of the government as we will see with the use of trade, the government can restrict trade by law or by increasing tariffs, but in practice trade is an action taken by people and businesses making the possibility of illegal trade or circumvention too high for effective use. Advertising the use of economic coercion can be a limitation and an opportunity. Some components of economic power are necessarily public and do not provide a choice and are. 政治大. therefore much more limited; however, where a choice can be made it is usually to the benefit of. 立. the agent country. There are two faces to publicizing economic coercive measures. First,. ‧ 國. 學. making the economic coercive measures known would increase the chances that an agent state can gather support for their effort from third parties; however, publicity can make the. ‧. compliance difficult and can actually strengthen rather than upset the security of the target. Nat. sit. y. government because it may inspire nationalism, strengthening the will of the target to resist or. al. er. io. boycott trade, as well as possible pushback internationally (Baldwin, 1985, p. 108).. n. iv n C h emore of defensive measures to be taken, and the i U the greater the chance of success. n gthatcishknown. Furthermore, if economic coercive actions are made public it provides the opportunity for the use. Ideally the agent country would be able to obtain enough economic pressure unilaterally or could construct an economic environment where opportunities of circumvention can be minimized or eliminated making the advertisement of their actions unnecessary. Some tools for economic coercion are necessarily public while others are private, however, since private components can be made public when it suits the agent country and public components do not have that freedom, private tools of economic coercion are generally more efficient..

(23) 22. The last consideration is: How focused is the coercion on the country or a specific industry being targeted. The goals of economic sanctions are most often met when they can contribute to the destabilization and overthrow of a recalcitrant government, followed by a new government that changes the offending policies (Hufbauer, Schott, & Elliott, 1990). This is a bit ambitious in the context of our analysis, but economic coercive actions that can put pressure on the government that can destabilize or threaten destabilization of the government or economic sector being targeted will have the greatest efficiency and chance for success. Furthermore,. 政治大 minimizing the chance of negative backlash. It is a good idea to analyze each economic 立. targeted attacks require less political and economic resources to achieve success along with. ‧ 國. 學. component – trade, finance, and monetary power – for their respective limitations and levels of efficiencies when applied to economic coercion:. ‧. 1. Trade is not very efficient. Although trade can be very focused in targeting countries. Nat. sit. y. and/or economic sectors, it is a very public form of economic coercion as they are. al. er. io. usually legislated and/or taken in the form of a coalition with other countries. Lastly,. n. iv n C h eoften power since trade decisions are by domestic concerns and private n gdominated chi U. the government is not totally independent or in control of trade as a form of economic. actors are often quick to find ways around restrictions. Trade also faces many limitations as feedback from domestic constituents makes it hard for economic sanctions to be sustained after the negatives of trade reduction are felt, and defensive measures are easily constructed and applied in the form of reciprocating tariffs or trade barriers, which can lead to a trade war. Trade is also easily circumvented. Even if a broad coalition of countries is found, goods will almost always be accepted elsewhere or a black market can be established..

(24) 23. 2. Finance is moderately efficient since the central government is somewhat more autonomous than with trade. The government is also the largest provider of finance internationally, and changes in government finance policy are less public than trade. Although, financial sanctions have the potential to cause a financial or general economic crises they are not necessarily as flexible in targeting of specific economic sectors. Economic coercive measures centered around finance are also moderately limited in. 政治大 do impose some cost on the agent countries mainly by forgoing economic 立. scope. Although, they are less limited by feedback from domestic constituents they. ‧ 國. 學. opportunities in the target country. Unlike trade in goods, financial trade must be done through formal and official channels therefore the creation of a black market is. ‧. exceedingly difficult; however, the formation of a coalition is more difficult as more. sit. y. Nat. countries will see greater opportunity from the exit of another country from the. io. al. er. market. Outside of circumvention, financial sanctions are difficult to defend against. The only tool available is the threat to default on loans if they exist.. n. iv n C The exercise of monetary power efficient. Since governments alone h eisnremarkably gchi U. 3.. can print money they exercise complete independence and control over the use of monetary power. Changes in monetary policy are also largely private. It might. become clear after a while that the country is manipulating its currency in an effort to harm another country, but for the large part it can be explained away and is very hard to prove. Monetary power is less focused than other forms of economic power, but when combined with other economic factors can be highly effective in destabilizing the currency of the target country..

(25) 24. Monetary Power is traditionally the least susceptible to problems of feedback since monetary power is usually a function of international currency reserves and savings which can affect the government’s wealth and spending, but be isolated from the private sector and citizens. Furthermore, circumvention is largely impossible short of totally readjustment of one’s currency which is costly and inefficient. Kirshner says, “such a strategy would be akin to committing (monetary) suicide in order to escape murder” (Kirshner, 1995, p. 27). Lastly, defense is difficult geopolitically as the best. 政治大 Assuming there is such a country it would trade currency vulnerability for outright 立. option requires the willingness of another country to intervene and play as a protector.. ‧ 國. 學. currency dependence.. It will be necessary to revisit these three components of economic power as we look more. ‧. closely at the economic realities that exist between China and the United States in the next. Nat. sit. y. chapter which shows real figures between the countries; however, this provides a good basis for. al. er. io. understanding what the prerequisites are for each tool and what limitations exist to their use as. n. iv n C h ewhen economic power alone cannot fully explain n geconomic c h i Ucoercive measures are taken.. we apply them to the case studies. The limitations and prerequisites of the components of. Wielding economic power is the exploitation of dependencies of another the target country; therefore, in order to understand when the United States or China can exercise their respective mechanisms for economic coercion it is also important to understand concepts such as Roach’s theory of Co-dependency as it is applied to the United States-Chinese relationship, and the advancement of Keohane and Nye’s theory of complex interdependence (Keohane & Nye, 1987; Roach, 2014). As the next chapter outlines and as the case studies in chapters four and five prove neither country has absolute power over the other and what little relative leverage exists it is hard.

(26) 25. to exploit. This is especially true because the United States – Chinese economic relationship is such that relative strength is split between the areas – Trade, Finance, and Monetary Power. As the next chapter shows, this leaves the countries fairly well match in terms of theoretical power as well as largely interdependent.. 2.3 Dangers in Dependence: Framework for Further Study. 政治大 dependency theory. Dependency theory mainly refers to the economic reliance of developing 立 Dependence for this research is much different that the dependency as it is a part of. ‧ 國. 學. countries on developed countries as a way to perpetuate power allowing for the economic exploitation against the will of the target state (Ghosh, 2001). This has the effect of locking the. ‧. target state into a long-term position of low economic growth. although there is most likely. sit. y. Nat. implication for that field as they understand economic manipulations as a way of perpetuating. io. al. er. power. Instead, dependence for this research refers to an economic vulnerability – the economic future of the target state is dependent on moves or conditions of the agent state. This. n. iv n C vulnerability can then be exploited by the politically to dominate the target states. hhome e n state gchi U The differentiation being that dependence is a power relationship where the target state can. technically gain, even relatively, in an economic sense (this is not true according to dependency theory). The threat of coercive action is only credible if the target state is reliant on the agent state to an extent that a disruption in the status quo would cause great harm to the target country. Dependency, however, is rarely that clear. Instead, disruption of the status quo is often damaging to both sides in absolute terms. This is more indicative of a co-dependent relationship as is outlined by Roach. Such a relationship has proven difficult to define, and even more.

(27) 26. difficult to navigate for countries that find themselves in such an arrangement. In the terms of economic coercion, action and concessions are going to be taken if the relative gains – that is the gains made in relative power position – outweigh the absolute economic loses. This can be difficult to foresee before the coercive action is taken and therefore, states are often unwilling to engage in coercive action unless there is a clear disparity in size of the two countries’ economies, and as is shown in the United States trade case study, this can be a problem in utilizing theoretical leverage. This is a rare occurrence since it is hard to conceive of a co-dependent. 政治大 true as economic coercive action in one area of the economy, such as trade, where one country 立. economic relationship in which large disparities in economic size would exist. This is especially. ‧ 國. 學. might have an advantage, can lead to retaliation in a separate sector, such as foreign direct investment. Therefore, it becomes almost true that economic coercive action in a co-dependent. ‧. economic relationship requires not only the significant relative gains compared to the absolute. y. sit. io. al. er. measures.. Nat. economic loses, but also that favored in every sector or are sufficiently insulated from defensive. n. iv n C once co-dependent do not have to remainhforever e n gco-dependent. c h i U Certainly, both countries in a Co-dependency has an additional, potentially volatile component being that countries. co-dependent relationship have the strategic incentive to regain independence of their economy and thereby better secure the continuation of a self-sustained economic future; however, in practice one country is likely to re-balance, forcing the other into an unfavorable and unequal dependence or a hard rebalancing of their own. As Roach demonstrates this can be an especially volatile transition. As one country begins to lose relative power they may panic and take economic coercive action while any power to do so still exists. There is little to lose in the perspective of the agent country because their economic future is already in jeopardy; however,.

(28) 27. Roach suggests an approach based on absolute gain as opposed to economic coercive action based on concerns over relative loses in power. This would require a re-balancing of the home economy for better self-sustaining growth (Roach, 2014). Lastly, interdependence, as defined by Keohane and Nye, is similar to co-dependence; however, it suggests that the relationship is much more stable and provides much more upside in terms of mutual, absolute economic gains as well as no relative loses. Any damage to such an arrangement would be counter to both countries interests. While Keohane and Nye explore. 政治大. interdependence along four different areas – “risks of nuclear escalation; resistance by people in. 立. poor or weak countries; uncertain and possibly negative effects on the achievement of economic. ‧ 國. 學. goals; and domestic opinion opposed to the human costs of the use of force” (Keohane & Nye, 1987, p. 727) – and mainly as it pertains to the use of physical force, overtime the theory of. ‧. interdependence has become central to definition of globalized world economy with definitive. Nat. sit. y. constraints for the use of economic power (Wagner, 1988). Keohane and Nye do allow for. al. er. io. “asymmetries in interdependence” that can be used as “a source of power” (Keohane & Nye,. iv n C codependency. Waheeda Rana explainsh that, e n“Interdependence g c h i U does not only mean peace and n. 1987, p. 728); however, they do not posit the volatility that is outlined in Roach’s take on. cooperation among actors, but a relationship between actors characterized by cooperation, dependence, and interaction in a number of different areas, and conflict as well” (Rana, 2015, p. 291). Although competition exists both countries, with an eye toward absolute gain, will seek the greatest benefit through cooperation. Complex Interdependence furthers this by complicating the lines that separate “high” and “low” politics by showing the many ways in our increasingly interconnected world that they can influence each other..

(29) 28. This research will necessarily draw on all three of these approaches as it attempts to postulate on the possibility and effectiveness of economic coercive action by either the United States or China against the other. First, the analysis will require an understanding of the background of the relationship as well as the intentions of both countries that can only be gained from a broad view taken from the four different perspectives on international political economy as outline above. In taking from each of the four different perspectives a more balanced understanding of the pressures on both agent and target states as they engage in economic. 政治大 other as well as their objectives (both economic and otherwise) and their priorities in achieving 立. coercion. Furthermore, this is a necessary step in understanding the two countries views of each. ‧ 國. 學. them, an important part of understanding the motivations for attempting economic coercion as well as possibility for concessions. Secondly, this analysis will make use of the existing. ‧. literature on the four types of economic coercive tools as well as the conditions for their use and. sit. y. Nat. their efficiency. Framing the analysis along these lines gives a systematic way of grading. io. al. er. whether the conditions are right in the United States – Chinese relationship for the use of economic coercion providing us with the opportunity to make projections and test those. n. iv n C projections against reality. Lastly, the most factor to the utilization of economic power h eimportant ngchi U is the exploitation of a vulnerability or dependency in the target country; therefore, the next. chapter looks at the realities as they exist in the United States – Chinese economic relationship and what vulnerabilities exist in either country if any..

(30) 29. Chapter Three: Economic Realities Detailing the economic relationship between the United States and China in an effort to reveal the vulnerabilities of both countries should they exist, requires a systematic approach based on Kirshner’s tools for economic coercion: Trade, Finance, and Monetary Power. This chapters more holistic approach provides a more comprehensive view of the complex economic relationship between China and the United States. By separating the three areas and creating a systematic analysis this research minimizes the tendency to declare one area or tool of economic. 政治大. statecraft as paramount to the others. The findings of the chapter are therefore mixed and show a. 立. more nuanced view of the economic realities between China and the United States that. ‧ 國. 學. complicates more simplistic narratives that one country holds absolute economic coercive power. The findings are thus that China holds relative strength in monetary power. The United States. ‧. has greater leverage in trade. And, finally, China and the United States have reached parity in. er. io. sit. y. Nat. terms of finance.. The structure of this section follows the tools as outlined by Kirshner starting first with. n. al. Ch. i n U. v. monetary power, following with financial power, and ending with trade. By analyzing the. engchi. current economic realities existing between the two countries this research finds that economic coercive potential is split between the two parties. This is true in so far as: China has economic coercive leverage in monetary power and the United States has economic coercive leverage in trade, but neither country has substantial leverage in financial power.. 3.1 Monetary Power It is prudent to start with monetary power, because it is the economic coercive tool with the least prerequisites to its use and of the greatest efficiency as posited by Kirshner who says,.

(31) 30. “given a reasonably integrated international market economy, monetary power, in theory, should be the most potent instrument of economic coercion available to states in a position to exercise it” (Kirshner, 1995, p. 31). Monetary Power has the lowest threshold to its use according to Kirshner’s measurements of efficiency: publicity of the coercive action, ability to target specific countries and government, and sufficient agent-government control.. This is because, assuming. there is a global economy and a relatively free flow of currencies, as is the case today, then there are few other constrains to its use. Monetary power can be undertaken with or without alerting. 政治大 results both to the benefit of the agent country. First, the public, having little knowledge of the 立 either the public of the agent country or the government of the target country. This has two. ‧ 國. 學. action taken, cannot protest its use or any adverse effects that might come from its use. Secondly, the target country will have little means to respond if the destabilization of their. ‧. currency has uncertain origins. For the first two prerequisites outlined by Kirshner – the. sit. y. Nat. domination of domestic politics and the publicity – both are largely a function of how transparent. io. er. the agent country wishes to be providing great freedom to their use of monetary power. The last requirement – focus of action – also has a low barrier for clearance because monetary power is. al. n. iv n C can be focused through the dumping of the currency or through the selling of their treasury h etarget ngchi U bonds (Kirshner, 1995). This chapter operates under these assumptions; however, the case study in chapter four complicates this notion as it moves beyond theory and into reality. Where does a countries monetary power come from? Monetary coercive power refers to the manipulation of actions that value, use, and stabilize the national currencies issued by states, in order to influence the preference or behavior of other states (Kirshner, 1995, p. 3). Therefore, any attempt of a country to change the valuation, uses, or to destabilize a currency is the utilization of monetary power. The main definitive way of understanding a countries monetary.

(32) 31. power capabilities is the measurement of their reserves. Knorr tells us that as agent countries take monetary coercive action to put a target currency under pressure “a weak reserve position will curtail a government’s capacity to engage in warfare at home or abroad” (Knorr, 1973, p. 88) as it pertains to hard power capabilities, so does it also apply to the ability of the target country to stabilize its own trade positions or engage in development projects at home. The vulnerabilities and capacity to use monetary power are intertwined. Theoretically, those with high foreign debts and low foreign currency reserves are vulnerable to monetary coercive action;. 政治大 greater position of power to utilize monetary power. 立. whereas, countries with low to no foreign debt as well as high foreign currency holdings are in a. ‧ 國. 學. The United States national debt is nearing twenty trillion dollars (US Debt Clock, 2017), furthermore the U.S. reserve assets total just over 110,000 million dollars (Treasury, 2016b).. ‧. This positions the United States assets and debts at definitive polar opposites of each other.. Nat. sit. y. Furthermore, the United States national debt represents 105 percent of GDP meaning that the. al. er. io. United States owes more than it can produce in a given year. This creates a distinct. n. iv n C position to exploit it. Although no clearh tracking data on Chinese debt are reported by e n gorcofficial hi U vulnerability, in traditional terms of monetary power. China also seems to be in quite the. the Chinese government, there are estimates between three trillion and six trillion dollars (National Debt of China, 2015). This represents a relatively low percentage of GDP at 66 percent. Both of these figures are dwarfed by the estimates of Chinese foreign currency reserves, which sits at just over 3 trillion dollars (BloombergMarkets, 2016). Even the great disparity, as is evident between the difference in debt and reserves of the countries, doesn’t provide the full picture of United States exposure. China also holds a vast amount of U.S. debt as Figure 1 shows China owns just shy of 1.2 trillion dollars of US. Debt..

(33) 32. For our analysis this is a definitive demarcation of Chinese theoretical capacity for monetary power.. 立. 政治大. ‧. ‧ 國. 學. al. er. io. sit. y. Nat. Figure 3.1 Chinese Holdings of U.S. Debt. Illustrated in millions of dollars. (Treasury, 2016a). n. iv n C According to Setser, “never before as poor as china lent so much money to h ehasna gcountry chi U a country as rich as the United States. And never before has the United States relied so heavily on another country’s government for financing” (Setser, 2008, p. 17). By this traditional measurement, China has significant leverage over the United States in terms of monetary coercive power. Therefore, in the first case of economic coercion action which tracks monetary policy it would be prudent to test and see when China would choose to utilize their leverage, and to what extent China was successful in their attempt. By utilizing a case study, chapter four does exactly this..

(34) 33. These are the facts that many today point to when claiming that China has the capacity to influence the United States and guide policy make; however, it is noteworthy that looking at the gross accumulation of foreign debt is most useful when looking at smaller economies with more local, or less globalized, currencies. The United States is neither of these things. Although,. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. al. Figure 3.2 China’s Debt Holdings as a percent of GDP. (World Bank, 2016). n. iv n C many news reports, politicians, to do so,hcomparing Chinese e n g c h i Udebt holdings to the United States GDP can show the reliance relative to the United States annual output. The Chinese debt holdings looked at in this light tell a more telling story of the economic co-dependence of the two countries. The percentage of China holds of United States treasuries in terms of United States GDP is actually quite low comparative to 2007-2012. This is true for a number of reasons. First, United States treasuries is only one way in which China can buy United States debt. Therefore, Although Chinese treasury holdings usual argument for Chinese supremacy of the United States in monetary policy as a tool of economic coercion, it is not the.

(35) 34. only measure that should be taken into account. Purchasing power parity can also play a factor as well as private debt and private debt holdings. Brad Setser has explored some of these other options providing a more nuanced view of China’s debt holdings and their relative leverage. Second, China also has significant exposure since their United States treasuries holdings represent a comparatively higher percentage of their annual economic output making it a double edge sword as likely to hurt them. Indeed, as figure 3.2 shows there is a convergence of the two lines, indicative of an interdependent relationship. From this it is reasonable to assume that. 政治大. China’s ability to utilize their debt holdings will be constrained by the economic pressure that. 立. will create on their economic growth.. ‧ 國. 學. With this is mind, it is prudent to assess China’s goals in using their debt holdings to influence United States policy. According to Kirshner, there are three ways in which monetary. ‧. power can be utilized: currency manipulation, monetary dependence, and systemic disruption.. Nat. sit. y. In choosing the case study for testing the projection that China has relative strength in the. al. er. io. exercise of monetary power it is prudent to choose a realistic manifestation of their power.. n. iv n C U tied to the agent currency. No h e ncurrency currency zone or a system in which the target g c hisidirectly Monetary dependence is not an option in this case because it requires the setup of a special. such arrangement between the United States and China exists. Secondly, systemic disruption is an unlikely case since China still benefits greatly from the liberal trade order as it has been set up by the United States, and any disruption to that system would be uncontrollable and detrimental to the global economic recovery which China relies on for strong demand for their exports. It is realistic however that China will seek first to uncouple itself from this system or create and lead a parallel economic system. Therefore, systemic disruption or the unseating of the United States as the center for the global trade financial systems can be seen as a far off objective, but not as an.

(36) 35. observable phenomenon that can be put to the test. The remaining option is the possibility of currency manipulation which is a perfect test. Kirshner tells us that: Currency manipulation is the simplest instrument of monetary power, and has the widest number of applications. Currency manipulation can be used either for short-term coercive power, that is, to change a target state’s preferences or action over a specific issue, or to provide general long-term support for an ally. This instrument has a great degree of flexibility: it can be used with varying degrees of intensity, ranging from mild. 政治大. signaling to the destabilization of national regimes. (Kirshner, 1995, p. 8). 立. United States politicians have long made claims of Chinese currency manipulation all. ‧ 國. 學. over the campaign trail; however, for the selection of a case study to test the objectives and the utility of Chinese monetary power it is more prudent to select a specific time and purpose for. ‧. which China exercised its leverage. This fits with the understanding of economic statecraft that. y. Nat. sit. action is taken to have a relatively negative impact on another country to obtain definable. n. al. er. io. objectives. Just as China is likely to choose a limited and achievable goal in utilizing their. i n U. v. leverage in monetary power, this research should also aim to select a case in which China can. Ch. engchi. reasonably affect the U.S. dollar as small an impact as possible on U.S. debt holdings. As many have commented, China cannot dump large quantities of U.S. Treasuries without destroying the value of their remaining holdings. In other terms, in flooding the market with the asset they could destroy the dollar, but such an action would also dilute the effectiveness of the remaining holdings to have any effect on devaluing the dollar or in stabilizing their own currency (Dyer, 2009)..

(37) 36. Because China’s utilization of its leverage necessities calculations that take into account their considerably large U.S. debt holdings their relationship remains one of co-dependence. However, this is a noticeably volatile codependence as China sees its their debt holdings working against them they may move away from United States treasuries as a means of stable investment, shaking violently the United States growth model dependent on cheap international financing (Roach, 2014). Likewise picking a specific time period is necessary for any tracking of a currency. 政治大. overtime. As Figure 1 has shown buying of U.S. Treasuries increased significantly since 2000 –. 立. even in the midst of the 2008 financial crises; however, it is most prudent to look at the time after. ‧ 國. 學. the 2008 financial crises when the buying has more or less leveled off and even dropped. This is because, for the same reason that the United States’ politicians have continually made claims of. ‧. currency manipulation but come up short to take action, it is exceedingly difficult to prove. Nat. sit. y. currency manipulation over an extended time. Instead, tracking the Renminbi and Chinese sales. al. er. io. of U.S. Treasuries in the months after China’s shock devaluation in August 2015 and ahead of. n. iv n C h e n gin cmonetary provides the best option to test Chinese leverage h i Upower. This is because it is a. the promotion of the Renminbi to World Currency Reserve status in November of the same year. shorter time frame in which great fluctuations in the Renminbi were met with decisive action was taken to sell U.S. treasury assets for a definitive purpose: to gain entry into the elite group of world currencies. Given these figures and findings, this research can proceed on current reality that China has high theoretical leverage in utilizing monetary policy as a tool for economic coercion. However, given some of the difficulties provided in this subsection and in the previous chapter.

(38) 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.. 治政大 a foreign power as well as the unruly nature of using economic coercion as a means to influence 立 These hypothesizes acknowledge China’s theoretical advantage, but also take into account the. vast inter-dependencies characteristic of the Chinese-United States relationship. as introduces the. ‧ 國. 學. 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. y. Nat. n. al. er. io 3.2 Financial Power. sit. period and its usefulness in delineating between real and theoretical economic coercive power.. Ch. engchi. i n U. v. 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.