Economic coercion PRC-style

The great fear that seems to pervade official circles in New Zealand (bureaucratic and political) is “what could China do to us if ever our government upset Beijing”, whether that involved speaking out forcefully against PRC military expansionism, doing something about Jian Yang, meeting highly-respected pro-democracy leaders from Hong Kong, pushing back against PRC control over local Chinese-language media, or whatever.

No one supposes any threat is military in nature.  What seems to worry people is the possible economic cost.      Governments led by both major parties have retailed (and perhaps believe) the nonsense that somehow New Zealand was “saved” by the PRC in the last recession, or that our alleged prosperity (no productivity growth in the last five years, and the shrinking relative size of our export sector) owes much to the good graces of the butchers of Beijing  If Xi Jinping should once avert his glance, our economy would be imperilled.   It is never openly stated quite that explicitly, and perhaps even the more thoughtful believers would use more-moderate language, but you get the gist.

All self-respect is long gone by this point.  Generally, if you find yourself over-exposed to someone else (some person, some business, some country), and especially one of questionable character, the prudent thing to do is to gradually reduce your exposure, diversify your risks, and regain your (perceived) freedom to act in accord with your values.    But when it comes to the PRC, prevailing opinion –  ministerial speeches, taxpayer-funded lobby groups, and so on –  seems to be that we should double-down, increasing our exposure to a country that they know to be an international thug and bully.  Thus, for example, our commitment to the geopolitical vision represented in the PRC Belt and Road Initiative, a scheme now being actively promoted with your own taxpayer dollars.

This mental model ignores a whole bunch of relevant points:

  • mostly, individual countries make their own success and their medium-term prosperity does not depend on the fortunes or favours of a single other country, no matter how large.   We (and Australia for that matter) were rich –  further up international league tables –  when China was mired in its own self-destructive behaviours,
  • the share of New Zealand GDP represented by trade with the PRC isn’t especially large by international standards, and
  • much of what we do sell is relatively homogeneous products traded on world markets.

(None of which is to downplay the risks to the world economy and New Zealand if something were to go seriously wrong in the PRC economy –  something I wrote about several years ago when still at the Reserve Bank ( Discussion note 2014 what if China slowed sharply ) most of which still seems valid – but that is a different issue, where the New Zealand government’s political stance towards the PRC is largely irrelevant.)

I’m also not attempting to minimise the PRC’s willingness or ability to play the bully-boy and attempt to exert coercion over New Zealand should our government ever find within itself a modicum of courage and self-respect.   These are people who play rough: with tens of millions of their own people dead at the regime’s hands, a whole province these days functioning much as an open air concentration camp, why stop at the odd sovereign independent country?  They haven’t.

Earlier this week, a US think-tank, the Centre for a New American Security, released a fascinating study on China’s Use of Coercive Economic Measures. The think-tank appears to be quite well-regarded, and has among its senior figures various people who served in the Obama administration.   The study appears to be a pretty careful description and assessment of the way the PRC has attempted to use economic coercion on a serious of democracies over the last decade, and to draw some lessons from those experiences.

They looked at seven such episodes:

  • a 2010-2012 episode in which the PRC halted rare earth exports to Japan (at the time, China accounted for 97 per cent of world production) over a specific incident related to the Japan/PRC dispute over the Senkaku islands,
  • the PRC’s measures against Norway (concentrated on salmon exports) over 2010-2016 after the (private) Nobel Committee awarded the Peace Prize to dissident Liu Xiaobo,
  • the PRC’s use of additional quarantine controls on the Philippines from 2012 to 2016, throttling agricultural exports (especially bananas), over the Philippines defence of its South China Seas claims, including those later upheld under the Law of the Sea by an international tribunal,
  • PRC attempts to coerce South Korea in 2016/17, with the intent of encouraging South Korea to reverse permission for deployment of the THAAD anti-missile system,
  • the PRC’s attempt to punish Mongolia for hosting a 2016 visit by the Dalai Lama,
  • pressure around the 2016 Taiwan elections, in which the PRC objected to the winning party and acted to cut back tourist numbers, and
  • the current pressure being exerted on Australia, via warnings to overseas students (and, although this study doesn’t mention them, delays in clearance of eg wine imports from Australia).

This isn’t the sort of thing normal countries do.

(The study also touches on the PRC pressure on Iran and North Korea, episodes which, while interesting, are a bit different from those involving democracies.)

 

There are other examples, including direct coercion on companies, and some telling snippets about the general approach

During the Hu Jintao era [when, as a whole, the PRC was less assertive than it has become under Xi Jinping], meetings between a head of state or head of government and the Dalai Lama led, on average, to a reduction of exports to China of between 8.1 percent and 16.9 percent. Trade subsequently recovered during the second year after the visit.

I haven’t got space to go into all these episodes in detail (all the material is there on pages 42 to 49 of the report), but there are a number of interesting points that emerge:

  • the clever targeting of politically salient sectors.  The coercive measures were rarely applied to sectors directly related to the issue that was directly bothering the PRC, but rather where they thought they could get leverage  (the Norwegian example was an extreme case, given that the initial “offence” wasn’t even done by the government,
  • coercive measures are rarely officially announced, allowing plausible deniability, and also calibration of any escalation and de-escalation,
  • measures are rarely applied in sectors where coercion could directly hurt PRC entities themselves.   As the authors note of the Korea example, there were 43 retaliatory measures taken by the PRC, estimated to have knocked 0.4 per cent off Korean GDP last year, but “Beijing made sure not to target Korean sectors where economic retaliation might harm China’s own supply chain” (thus, China still imports 65 per cent of its semiconductors),
  • where possible, the coercive measures involve restrictions not amenable to complaints to the WTO (where the PRC loses such complaints it has altered its behaviour to comply).  Tourism has been an obvious example, and perhaps the foreign students case in Australia.  More generally, “China typically imposes
    economic costs through informal measures such as selective implementation of domestic regulations, including stepped-up customs inspections or sanitary checks,
    and uses extralegal measures such as employing state media to encourage popular boycotts and having government officials directly put informal pressure on specific
    companies.”
  • in many cases –  but not always –  China wins (at least in the short-term) and the targeted countries adjust, often in a rather craven way.   Those that yielded did so in the face of rather limited overall economic costs (but large concentrated costs in a few sectors).

As an example of the victories, here is the report on Norway

Finally, China has achieved symbolic victories even when the practical impacts of coercive economic measures appear to be limited. For example, after the Norwegian Nobel Committee awarded Chinese dissident Liu Xiaobo the Nobel Peace Prize in 2010, China retaliated by banning imports of Norwegian salmon. The import ban appears to have had little real-world impact, as Norway found alternative markets and appears to have routed fish to China via third countries.  Yet, as part of restoring normal relations with Beijing in 2016, Norway nonetheless issued a public statement acknowledging China’s “sovereignty” and “core interests” while Beijing hoped that Oslo had “deeply reflected” on how it had harmed mutual trust.

There were limits even then

Initially, China also requested a secret “nonpaper” with a more strongly worded apology, but then-Prime Minister Jens Stoltenberg denied the request as at odds with Norwegian foreign policy.

But reality was craven enough

In its rapprochement with Norway, China achieved both its deterrent and public apology objectives. In 2014, Norwegian officials declined to meet the Dalai Lama. When the two countries normalized relations in 2016, China obtained a formal, public apology. Norway acknowledged China’s “sovereignty” and “core interests,” while Beijing hoped that Oslo had “deeply reflected” on how it had harmed mutual trust.  The salmon trade resumed. Upon Liu’s death in July 2017, Norway’s more muted statement compared to its European neighbors’, could be viewed as a sign of the continuing deterrent value of the Chinese policy A few weeks later, the countries revealed progress in their free-trade agreement negotiations.

Between coercion and inducements (stick and carrot), the Philippines government greatly softened its stance around the South China Sea.

Of Mongolia –  84 per cent of whose exports went to the PRC –  the authors note

After initially standing up to Chinese coercive measures, Mongolian leaders eventually relented. As part of the rapprochement between Ulaanbaatar and Beijing, Mongolian leaders, like Norway, offered a public apology.  They expressed regret for the invitation and emphasized that they would no longer host the Dalai Lama during the government’s term. Chinese leaders said they hoped that Mongolia had taken the lesson of not interfering in China’s “core interests” to heart.

South Korea went ahead with the THAAD deployment, and any concessions seem to have been modest and face-saving more than substantive.

South Korea eventually relented to Chinese pressure in October 2017 by issuing a list of assurances, the “three no’s,” on further missile deployment and military alliance with the United States. Korea officials argued that these assurances were a reiteration of long-standing policy, suggesting the advantages China can gain from informal measures that give it flexible off-ramps from economic pressure rather than tying it to specific—and falsifiable— results.  Additionally, though China did welcome the development, it still urged Korea to “follow through” on its statement and did not lift the pressure as quickly as it has in other cases of coercion. As of February 2018, more than four months after the rapprochement, tourism was still 42 percent lower than the previous year and Lotte still had not received relief from the regulatory pressure.

In the Japanese case, strong international support (EU and US) combined with WTO remedies meant the PRC didn’t win –  although domestic political imperatives may well have been served by stirring up anti-Japanese popular sentiment.

The specific pressure on Taiwan around the 2016 election doesn’t appear to have “worked” but is presumably still just part of the long-term PRC goal to isolate and weaken Taiwan, and exert pressure on firms (Taiwanese and international).

As for Australia, it is probably still early days (the article I linked to above appeared only yesterday).  Whatever the PRC has yet done –  plausible deniability and all –  is only a token of what they could yet do, if the Australian government continues to push back against PRC influence activities in Australia, and against PRC military expansionism.  For the moment there is no sign of the Australian government backing down, and bipartisan concern about PRC influence activities assists their position (as, presumably, does the coming election) but, equally, pressure from the sectors that are, or could yet be, targeted must be building.

The authors of the CNAS report are not optimistic that the PRC will become any less willing to use these coercive techniques; if anything, the continuing relative rise of China’s economic fortunes could increase the willingness, and perhaps ability, to exert pressure on individual firms, business and political leaders, and countries, blended perhaps with inducements (trade agreements) and other blandishments.

They offer a series of recommendations, many of which are quite US focused (and, as they note, for various reasons the US has not yet been subject to PRC coercive efforts yet).  Many of the recommendations focus on better understanding the issues and risks, at a detailed levels, raising awareness, and encouraging a forceful and supportive response to the PRC when other countries are targeted.  The advice for private sector companies is to take steps to ensure that they are not unduly reliant on PRC suppliers or the PRC market.   In the end, other countries (especially small countries) can’t stop the PRC attempting to act the bully-boy, but success (giving in) will only encourage the thug, and so there is something important about building resilience, reducing exposure, and being willing to take a stand alongside whoever the PRC picks off, rather than cowering in a corner, thankful that the bully has chosen someone else this time, and determining to be even more submissive next time the government engages with the PRC.

What does it all mean for New Zealand?

I hope our Ministry of Foreign Affairs and Trade has already been thinking hard about these case studies and about the lessons for New Zealand, and that in doing so their response is to advise the government on reducing exposure, not doubling down and living in the sort of fear of the battered wife –  too scared to leave, unable to resist.

But we don’t see any sign of that sort of approach, at least when our ministers and Prime Ministers (advised by officials) speak.  This is, after all, the regime that our government last year signed an agreement with, supposedly working towards a “fusion of civilisations”.

There is no point pretending there are no areas of vulnerability, if our government ever took a stand, even rather politely.  Quarantine and other related rules could be enforced rather more tightly.  I don’t suppose milk powder is a big risk –  the Chinese need it, and would only have to buy it from somewhere else if somehow trade with New Zealand was disrupted.  But higher-end lamb exports might be –  fresh product, not consumed by the mass Chinese market.  But I still reckon that the biggest, and most obvious, area of vulnerability is around export education and tourism, exports actually delivered here, rather than in China.  There are plenty of other places in the world for Chinese tourists to visit for a year or two, and other places –  often with better-rated universities –  for PRC students to study.   Put a ban on group tourism to New Zealand, or issue official warnings about safety here etc, or raise difficulties about landing rights and the numbers coming would be disrupted quite materially.  Being a small country –  and selling nothing critical to Chinese supply chains –  we might be a good case to try to “make an example of”

These sorts of threats aren’t some existential threat to our economic health and wellbeing –  recall the central bank estimate of a 0.4 per cent of GDP effect in Korea last year –  but they could be a big issue for some operators in the industries concerned.  As the Taiwanese example illustrates, tourism source markets can change, and can even do so relatively quickly (although perhaps as a long-haul destination the challenges are a bit greater here), especially if public money were put behind marketing campaigns.

In a way, the export education industry worries me more, especially the universities.  Last year, half all student visas were issued to Chinese students, and foreign students make up a huge share of university (and PTE, and some schools) income, in a system in which domestic fees are capped at (typically) below long-run average cost.   Universities and polytechs are government agencies, but ones with their own agendas to serve, and empires to preserve (Waikato, for example, has a degree-granting arrangements in China itself, presumably at risk of regulatory enforcement changes quietly implemented by the PRC, and several have Confucius Institute where they receive direct PRC funding).

A prudent industry would not have so many eggs in one basket, particular a basket controlled by a regime that has shown willing to act the international bully (one might have a quite different view if half the student visas were going to German students, Korea students, or Canadian students).  A prudent industry would be stress-testing itself (and its prime domestic funders and regulators would be insisting on such stress-testing) and adjusting its marketing accordingly.   But a rent-seeking one, knowing the feebleness of our governments, will continue to pull in the revenue from Chinese students knowing that (a) they can put a lot of pressure on governments to go along, and never upset Beijing about anything, and (b) even if things go wrong on that score, the financial risk will really lie with the government itself, not those who now run the universities (who would no doubt run an effective marketing and political campaign about how NZ students would suffer without a government bailout.

We might be small, and thus vulnerable on that count.  On the other hand, we are a long way away –  New Zealand is just a great deal less important to China than, say, the issues around Korea, Mongolia, Japan, Taiwan, and the Philippines.   And in aggregate we just aren’t that exposed to specific Chinese markets (even allowing for the fact that the PRC is a large part of the world economy now).  Even a bad year or two is just that –  not the abandonment of all future prosperity.

But we’ve allowed a couple of industries –  one highly-subsidised, through the immigration connection –  to flourish, and politically salient sector risks to develop, which now depend on the New Zealand government cowering in the corner and never upsetting Beijing.    Neither industry is at the leading edge of productivity growth –  indeed, our services exports in total are smaller now as a share of GDP than they were 15 years ago – but the probable political clout is undeniable.  It should be a matter of priority for any self-respecting government to look to reduce those specific exposures, encouraging greater resilience in the respective industries, so that one day we could have the courage to stand for what we believe –  assuming that among the political classes, belief is still about something more than the last trade dollar, and the next political donation.   In time –  one hopes, in a day (decades hence) when freedom comes to China –  we should aim for a relationship of trust and mutual respect, not one of the battered wife cowering in the corner.

(But as I reflected on this issue, my admiration increases for successive New Zealand governments decades ago –  most notably that led the Prime Minister’s predecessor Norman Kirk –  who were willing to openly take on France over atmospheric nuclear tests in the Pacific.)

13 thoughts on “Economic coercion PRC-style

  1. Trust in the print and TV media has fallen from -38% to -42%
    Government Ministers – 43% to minus -24% [housing/immigration?]
    Churches aren’t trusted
    https://www.victoria.ac.nz/__data/assets/pdf_file/0007/1616380/IGPS-Trust-Presentation-June2018.pdf

    However, slightly fewer than half were positive about the influence of Asian cultures and traditions and only four in 10 were positive about the impact of immigration from Asia
    Asia NZ Foundation Report 2018

    On the plus side a 94% positive “strong mandate” to rename Wellington CBD.

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  2. Thank you for thoughts on the potential economic threat of China to NZ. Perhaps you could consider the benefits of reduced Chinese tourism and reduced Chinese student numbers ?
    For example – reduced Chinese tourism would mean less pollution with less money being spent on building infrastructures. A secondary benefit could be less crowding which would be a good marketing point to other tourists.
    Re decrease in Chinese students would hit the funding of universities, but may lift the standards and reputation of the tertiary sector which is becoming a ” pay for a guaranteed degree” market.
    Another benefit would be reduction in students staying on in NZ after using the education visa as a loophole to permanent residence.

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  3. “our services exports in total are smaller now as a share of GDP than they were 15 years ago”. The crackdown on Foreign Trusts in NZ has certainly dampened our export services sector or the decline is due to the GDP category being relabelled as Tourism export GDP.

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  4. ….yup, again, thought provoking.

    On latter, “people can’t go shopping with your values..” so said Bill to Jacinda. Different context but made me think about what NZ consumes from China – $11bn worth of stuff last year. Assuming a material amount is lowest cost to the consumer, does this reflect a broader trade off between ‘values’ and ‘dollars’? I for one am holding an imported phone in a glass house….and feeling guilty!

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    • Bear in mind that for, say, an iphone X it is estimated that about 5% of the value is added in China.
      https://www.japantimes.co.jp/news/2018/03/22/business/designed-california-made-china-iphone-skews-u-s-trade-deficit/#.WyRGrvZuLeI
      But I don’t have any particular problem importing/consuming stuff made in China. Such trade is typically a net positive for both sides, and for the sort of stuff we import there are unlikely to be any coercion opportunities. Exports that are tied to particular markets, and where coercion is an option/risk, are more problematic, but again I’m not suggesting banning them, but (a) being aware of the nature of the exposure, and (b) trying to reduce/diversify that risk, and (c) as far as possible ensure that the risk rests with the exporters, not with the public, so that our foreign policy – and indeed our own internal politics – aren’t skewed to the commercial interests of the exporters.

      (And, of course, over time we will import roughly as much as we export, but there is no good reason for that to be so bilaterally.)

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  5. Dear Mr. Reddell, I read your blog each day with interest. It is of course your blog, you put a lot of hours into it, and I am not going to question your right to opine and argue as you wish. I do, however, have a question. In today’s piece (15 June), which follows on from many others highlighting the threats arising from PRC influence in NZ, you use some quite inflammatory language: ‘butchers of Beijing’; ‘international thug and bully’. Fair enough. These phrases reflect your opinions, and I don’t doubt they are held with some justification. Nonetheless, I can’t help wondering:  why do I never read in your blog about the ‘butchers of Washington’ or the United States as ‘international thug and bully’? Having lived in Asia and the Middle East for several decades I have seen first-hand the direct results of American thuggery and butchery. New Zealand is, through its albeit increasingly tenuous intelligence relationship, actively cooperating with a country currently involved in its fourth illegal large-scale war and third genocide of the century. As I write this there are both kiwi and Australian ex-special forces mercenaries deployed with UAE forces attacking the Houthi food supply choke-point in Hodeidah; they are doubtless doing this with their former employers’ tacit approval, as is the case of ex-UK SAS personnel in the same theatre. They are operating in concert with US ground and air assets, which are heavily relied upon by the Saudis for target planning and acquisition. Whether kiwi intelligence assets are also involved is unclear, and they may well not be given the distance to theatre. However, in its cooperation (formal and informal) with the US, New Zealand is aligning itself with a hegemon guilty of far more international aggression and savagery than China. (And I haven’t here touched upon any of the other six countries in which the United States deploys lethal force on a daily basis, without the remotest justification in international law.) Looking at the behaviour of some of its states’ judicial systems and at the scope of the country’s prison-industrial complex, neither is the US any slouch when it comes to domestic thuggery. Indeed, given the way in which US democracy has been subverted by money and parts of its judiciary and regulatory systems (e.g., the NY federal court system, the Supreme Court, the SEC, etc.) have been captured by special interests, whatever might formerly have passed as shared values between our political and social structures are also rapidly eroding. I make no attempt to excuse China. I do, however, see benefit in the sole bullying, vicious, and increasingly rogue superpower being confronted over time by one (and hopefully more than one) challenger capable of keeping it in check. In other words, I see merit in balance. Perhaps politicians in New Zealand and other similarly placed third countries will also show balance by one day finding sufficient backbone to speak out against injustice and influence-peddling from all quarters. The same might be hoped-for from respected bloggers. Regards, Steve Holloway.

    15. Jun 2018 00:14 by comment-reply@wordpress.com :

    > > > Michael Reddell posted: “The great fear that seems to pervade official circles in New Zealand (bureaucratic and political) is “what could China do to us if ever our government upset Beijing”, whether that involved speaking out forcefully against PRC military expansionism, doing s” > > >

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    • Steve

      I think the actions of Saudi Arabia, supported by the US, in Yemen are inexcusable and reprehensible. The US has made some other very bad calls over the years, including the Iraq War.

      The issues around the PRC relate to its actions in our part of the world, including internally to NZ. Our govts have been more willing to criticise the US, or France, or Israel – when they do questionable things in other countries – than to say anything adverse about a regime which is orders of magnitude worse in character (including because less open to scrutiny and criticism), and which actually interferes in our own politics.

      Re balance, yes I like the idea but I’d rather it was say the balance of, say, other major Western countries (Japan, UK, France, Germany) in constructive tension with the US, than risking treating the PRC (or the Soviet Union in decades gone by) as some sort of rough moral equivalent to the West. For all the flaws of the West, and of course our own country, they just aren’t rough equivalents.

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  6. There is a fundamental difference between the Western/ USA/ / European nations and Communist / Chinese nations:: in Western democracies there is some freedom of speech & of protest but in the Communist regimes there is no freedom of speech and certainly no protest ability (unless approved by the Party ).

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  7. Expecting any MP or government official to have the best interests of NZ as a priority is laudable, but then so is the wish for world peace. The way they are all happy to kowtow to the PRC is offensive, the fact they are happy to take our money while they sell us out is worse. I do feel that part of the problem at this point in time is the presence of Trump on the scene. It is impossible to find anyone in these groups of power that would be prepared to show him any support at all. Not because he may sometimes deserve it, but because they are to scared of the outcry from the perpetually outraged. Re-election or continuation in the government service is priority number one.

    Because of this they are now caught in a position where they can not show any support for the US and therefore nor can they ask for help in any way. China fully understands this and is making use of the time to push hard on its agendas. Our so called leaders, as you point out, are unwilling to stand alone and push back. I may not have always agreed with the leaders I grew up with in my youth, but looking back, they at least had a spine and stood strong for what they believed was in the countries best interest.

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