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With China’s growing economic (and political) clout, economic diplomacy has become an important tool in Chinese foreign policy. Beijing has provided extensive inducements in the form of aid and investment to many developing countries in Southeast Asia, Africa, and Latin America, including its much-vaunted One Belt One Road (OBOR) initiative. At times, it has also enacted episodes of trade sanctions toward countries such as Japan and the Philippines, over territorial disputes. As the notion of China exercising economic statecraft and throwing around its hegemonic clout has prompted much debate, speculation, and even alarm among foreign observers, there remains relatively little analysis on the motivations, conditions, and effectiveness of such purported statecraft. In reviewing and discussing a number of Chinese-language sources on economic diplomacy, this article sheds light on the debates within China regarding the concept of economic diplomacy, how it has evolved over time, the formulation and implementation process, how this fits into broader frameworks of Chinese foreign policy, and challenges and expectations for the future.

While there is no direct equivalent term in Chinese for the phrase “economic statecraft,” the closest term is “economic diplomacy” (jingji waijiao 经济外交).¹ Economic diplomacy has been used by Chinese scholars to mean two things: first, the use of diplomacy to achieve economic goals and benefits; and second (more directly related to the notion of statecraft), the use of economic means in pursuit of political objectives.² Here, I focus on the latter definition, more in line with conventional notions of statecraft. In discussing the balance between the two approaches, Zhou Yongsheng, now a professor at China Foreign Affairs University (affiliated with the Chinese Foreign Ministry), in fact advocates shifting away from the conventional emphasis on the political dimension of economic diplomacy, so as to more cohesively promote the country’s economic growth and development.³

Economic diplomacy can involve instruments of trade, investment, finance, and currency; cover various economic realms, of which issues such as energy and environment are the most linked to China’s economic security and development; entail modes of aid, cooperation, or sanctions; and occur at the global, regional, and bilateral levels.⁴ Under the OBOR framework, China seeks to promote infrastructure development and technical and industrial cooperation, as well as to finance integration.⁵ While foreign aid can also be considered part of economic statecraft (and is an important area of research), here I focus on the state-market nexus that is emphasized in the Chinese discourse.

Some writers see the concept of economic diplomacy as relatively underdeveloped in Western scholarly work, which (in their view) tends to relegate the role of economics to merely one of many means to pursue national security and political interests.⁶ Others attribute it to the fact that economic interests are an inherent component of US (and Western) foreign policy, given its commercial and capitalist nature, thus reducing the need for specific conceptualization of distinct economic diplomacy.⁷ Of course, there is considerable English-language literature on economic statecraft and particularly sanctions,⁸ but less so on the mechanisms of positive inducements, which are often emphasized in China as a unique aspect of Chinese economic diplomacy.

Historical Evolution of China’s Economic Diplomacy

China has often used economic statecraft in its foreign policy, not least during the Cold War.⁹ Writers often cite China’s use of economic inducements to peel away Japanese and European support for sanctions after the 1989 Tiananmen Square incident, as well as China’s aid toward countries such as North Korea, Mongolia, and Albania during the Cold War (although the latter comes under criticism for pursuing geopolitics at the expense of the country’s own economic development and citizen wellbeing).¹⁰

Li and Sun identify four main stages in the evolution of China’s economic diplomacy. First, the era of reform and opening up in the 1970s and 1980s marked China’s initial “engagement,” building links with the international economic system and its fundamental principles. Next, China entered an “integration” phase from the 1990s, establishing economic cooperation with Japan, European nations, and eventually the United States as a means to counter international sanctions after the Tiananmen incident. China also became part of international and regional dialogues. Subsequently, China began its “participatory” economic diplomacy, actively promoting global economic governance as well as free trade zones at the regional level. Finally, since the 2008 financial crisis and after China became the world’s second largest economy in 2010, it has launched its “leadership” economic diplomacy, pushing its own economic initiatives, taking leadership roles in international organizations, and setting forth new principles.

China’s New Economic Diplomacy and Goals

China’s internal circumstances have changed and so has its economic diplomacy. New thinking in China on economic diplomacy is a reflection of the country’s economic development and newfound material power. Whereas economics had to serve foreign policy interests during the Cold War, and foreign policy served economic interests during the era of reform and opening up, in today’s context, economic and diplomatic interests have become more intertwined and complex, requiring a foreign policy strategy that pursues both simultaneously. Thus, economic diplomacy now needs to be more proactive in breaking new ground, in contrast to its previously conservative approach.¹¹

This new, transition phase of economic diplomacy is also seen as a necessary product of changing external circumstances. While the 2008 financial crisis increased Beijing’s confidence and influence in economic leadership relative to the West, specialists point to the US rebalance to Asia, seen as a renewed effort to counter Chinese influence, as the cause of a worsening and increasingly securitized regional environment as well as the subsequent failures of China’s economic diplomacy. This marked a change from the (largely unelaborated) successes of China’s “using economics to promote politics” strategy after the 1997 Asian financial crisis. Thus, a new form of economic diplomacy is essential in breaking this stalemate and transforming the contentious, zero-sum regional environment into an inclusive and cooperative one.¹²

In particular, the OBOR initiative, currently China’s main thrust in economic diplomacy, is meant to reorient regional discourse from security to economics, maintain an open and inclusive regional order that prevents the emergence of a US-led alliance system to contain China’s development.¹³ Song Guoyou lists five strategic objectives: to stabilize relations with neighboring countries; to respond to the US rebalance to Asia; to promote linkages on the Eurasian continent; to enhance cooperation with major or rising powers such as Russia, India, and Indonesia; and to defend and develop Chinese strategic interests on both land and water.¹⁴ Economic benefits aside, spearheading regional economic agreements such as the ASEAN-led Regional Comprehensive Economic Partnership is framed as a way to enhance Chinese leadership and counter US attempts to exclude China.¹⁵

The Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund are cited as examples of Chinese innovation in economic diplomacy, particularly to provide additional sources of financing and to promote regional economic integration.¹⁶ While the AIIB is a multilateral institution providing development financing more generally, the Silk Road Fund is targeted for OBOR projects and funded from China’s foreign exchange reserves. How the two operate in tandem and a comparison of the types of projects and destinations they fund will be interesting to observe in the future.

Strategies in Economic Diplomacy

Gao Cheng proposes a number of strategic recommendations for China’s economic diplomacy. First, China should deemphasize the political dimensions of OBOR—including refuting comparisons with the Marshall Plan—so as to minimize fears of Chinese economic coercion. Second, China should increase the independence of East Asian production networks, particularly by developing final destination consumer markets in the region, as opposed to relying on Western consumer demand. Third, bilateral agreements are important nodes of broader economic diplomacy, and China should first focus on promoting cooperation with countries where the “conditions are ripe.” Fourth, economic diplomacy should adopt a multi-level and differentiated strategy, as it will be more politically effective in countries that may be worried or hedging but not those that have traditional security disputes with China. Thus, Beijing should focus its efforts on “friendly” and “neutral” countries, with the aim of preventing the United States from constraining China’s growing power in the region.¹⁷

Increasingly, Beijing appears to be adopting a more differentiated, targeted economic diplomacy. This represents a departure from the 2000s, when China was mostly handing out inducements to its neighbors, expecting a corresponding payoff in political influence. My interviews in Beijing during the summers of 2015 and 2016 also reflect this shift in thinking. In particular, Beijing is refocusing its efforts on more neutral states that present greater potential for persuasion, such as in Central and South Asia. Multiple scholars point to South Korea, Thailand, and Australia as important “neutral” states with which China can bolster economic diplomacy. Vietnam is also seen to have greater potential than the Philippines and Japan because of its more cautious attitude toward both greater powers.¹⁸

Gao further identifies countries that serve as “strategic fulcrums” for China, based on their political or economic value; dependence on the United States (which affects feasibility); and beneficial implications for OBOR. First, deepening cooperation with and support from Russia as a great power is important for Chinese initiatives in Central Asia and energy security. Second, targeting countries such as Indonesia and South Korea has a strong “demonstration effect” for “neutralizing” the US alliance system in Asia and particularly in China’s geographic periphery. These two countries seek positive ties with China alongside the United States, do not have fundamental conflicts with Beijing, and are strategically valuable partners–as a major ASEAN leader and a US ally, respectively. This would bolster China’s efforts to keep countries neutral rather than getting politically closer to Washington. Thailand represents another case in point. Finally, China should continue supporting its traditionally close friends and supporters, namely Pakistan, Laos, and Cambodia. Without overtly playing them as “strategic fulcrums,” providing economic inducements, and respecting their needs will reward these countries for their loyalty and promote a positive image for China in the developing world.¹⁹

Of course, all this harmonious rhetoric seems distant from Beijing’s actual treatment of South Korea and Australia, which have both been harshly berated by the Chinese government on issues such as deployment of THAAD and support for the arbitral ruling on the South China Sea, respectively. Interviews suggest that China may now be pursuing economics and security on two separate, parallel tracks, instead of in tandem–an approach in fact modeled after other Asia-Pacific countries in their attitudes toward China and the United States.²⁰

Actors in Economic Diplomacy: Going Below the Level of the State

While economic diplomacy (and OBOR) is presented as a grand, top-down scheme, Chinese specialists increasingly acknowledge the role of subnational actors, institutions, and mechanisms (and the corresponding challenges) in implementation. Wu discusses how the policy formulation process has to take into account the differing interests and voices of governmental agencies, the National People’s Congress, media, and even public opinion (including via the Internet). He further explains state-owned and private firms have been active in policymaking, proposing and disseminating ideas to the leadership on investment strategies, export subsidies, foreign aid and other initiatives. He also describes how China’ implementation of economic diplomacy has been improved by involving more government ministries and local governments.²¹

In another article, Song elaborates in greater depth on how China’s domestic institutions and bureaucratic mechanisms are limiting the strategic success of economic diplomacy. Poor coordination between diplomatic and economic agencies, including the limited voice of the foreign affairs department, means that economic policies often do not consider broader foreign and security goals. The presence of multiple economic agencies, such as the NDRC, Ministry of Commerce, and Ministry of Transportation, seeking to promote their bureaucratic interests also decreases efficiency. This has negative implications for the balance between “morals” and “interests” in relations with other countries. Song calls for the Party to play a greater role in big picture management of national security, economic, and development interests, by clearly institutionalizing and demarcating the roles and responsibilities of different subnational actors.²²

Furthermore, state-market interactions are an important component of economic diplomacy. China needs to reconcile the commercial goals of firms with broader strategic objectives of the government, including greater political oversight to ensure commercial actors respect local laws and cultures of recipient countries. Going a step further, Song highlights the differences between state-owned enterprises (SOEs) and private firms. While central as well as provincial SOEs have been critical actors in China’s economic diplomacy and major sources of investment, financing, and development for neighboring countries, Song argues that private enterprises are also an emerging force in China’s outward investment. Private firms can relieve longer-term bottlenecks in SOE investments, are more responsive and efficient, and operate in a greater diversity of production and service sectors that can bring better socioeconomic benefits to recipient countries (unlike SOEs that usually focus on energy resources and infrastructure development).²³ This represents an interesting twist to the common narrative of state-directed activities in China’s economic diplomacy, and suggests a complex mix of economic and political drivers in China’s overseas economic activities going forward.

Chinese Views on Sanctions

Most Chinese discussions of economic diplomacy focus on positive inducements, likely also a reflection of this dominant approach in Chinese statecraft. However, there is some attention in recent years to economic sanctions as a foreign policy tool. Some notable episodes acknowledged in China include cutting off aid to Vietnam as punishment for its invasion of Cambodia in the late 1970s, canceling Airbus contracts after French leaders met with the Dalai Lama, threatening to sanction US firms that sold arms to Taiwan in 2010, and temporarily restricting rare earth exports to Japan and the United States after tensions arose over the Senkaku/Diaoyu islands in 2010.²⁴

Chinese writers distinguish China’s limited use of sanctions from those by “other great powers,” describing Beijing’s approach as more restrained and reactive, focusing on changing a certain country’s provocative actions by targeting specific sectors or products, as opposed to proactively interfering in a country’s internal politics. Economic coercion is seen as a better alternative to military means. Although economic inducements are more commonly used, sanctions are seen as a complementary tool. Using both in tandem can signal to other countries the extent of their potential losses, thereby making China’s positive inducements more “precious”— as a Chinese saying goes, strength requires benevolence, but benevolence is displayed by showing strength.²⁵ Finally, any sanctions should have realistic demands—for instance, coercion on territorial disputes is unlikely to be successful. Successful sanctions should have a clearly defined goal that is communicated to the target state, be designed to exploit China’s market clout and focus on important economic or strategic sectors in the target state, and serve as a credible signal of China’s intentions.²⁶

Outlining the various possible objectives of sanctions, Yan argues that China’s policy of non-interference in domestic affairs means that it will likely employ sanctions to change the target’s foreign policy or send public signals of China’s disapproving stance, rather than to deter the target preemptively or constrict its economic and military development. In addition, sanctions will be less effective when the issue in question impinges on other countries’ core interests or national security and survival issues. Yan also praises Beijing’s strategy of keeping its specific intentions “vague,” as in the rare earths case when it justified its actions based on domestic production and consumption needs, so as to provide a legal basis for its policies and minimize violation of international rules.²⁷

Challenges for China’s Economic Diplomacy

Likely in response to perceptions that China’s proffered inducements in the 2000s did not always translate into desired political outcomes, there is a growing expectation that political support from recipient countries should be commensurate with any benefits afforded to them by China’s economic diplomacy. Beijing needs to shift away from its previous “lie low and bide time” approach, in order to eliminate two misconceptions: that countries will be able to act as a “crying child to get more milk,” by exploiting China’s diplomatic efforts to provoke trouble and extort more benefits; and that countries will be able to use US security guarantees as a bargaining chip to pressure Beijing for more political or economic concessions.²⁸

On a more practical level, Song cautions that China must continue to ensure its own economic development and balance linkages with both developed countries and developing countries. In addition, he emphasizes the political instability and security risks among many of the countries included in OBOR. While recognizing that China’s outward investment has faced many economic problems and created political backlash in recipient countries, he interestingly does not emphasize the need for greater bilateral cooperation and social responsibility, but instead calls for more diplomatic, political, and military resources to protect China’s overseas interests. Finally, however, Song does highlight the need for OBOR to improve economic cooperation and provide more benefits for recipient countries, in order for China’s economic diplomacy to meet its foreign policy goals.²⁹ Similarly, Gao acknowledges the need to rein in the profit-driven motives of Chinese enterprises, increase collaboration between central and local governments, firms, and local populations, and work toward sustainable growth in recipient countries.³⁰

In countries such as Vietnam, people are increasingly skeptical about Chinese economic inducements. Chinese products are often seen as inferior, and the quality and efficiency of infrastructure investment projects have been suspect.³¹ As one interviewee put it, such “checkbook diplomacy” is an unsustainable “colonial” mentality that can only buy short-term success, not long-term interests.³² While sometimes acknowledging that OBOR must also receive the buy-in and support of neighboring countries, most discussions in China of OBOR and China’s economic diplomacy are ambiguous about how to gain the trust and goodwill of others beyond verbal reassurances. Nonetheless, there is a growing realization that the current Chinese approach to economic diplomacy focuses too much on “hardware” (such as infrastructure construction), is vulnerable to domestic political changes, and may not be effective in achieving long-term political benefits. Some suggest that developing rules-based frameworks such as the AIIB and cultivating “software” via human capital development and institutional reforms, as the United States has done, will be more effective in inducing longer-term political change.³³

In this vein, Song argues that China needs to make policy adjustments to “increase its soft power.” He suggests that inducements focus on local citizens and not just elites, move from “shallow” trade and investment incentives to “deeper” financial and currency arrangements, and operate in tandem with social, cultural, and educational exchanges. Moreover, economic inducements must go beyond the current emphasis on attaining specific benefits, to develop more systemic, institutionalized, and networked bilateral ties.³⁴

Conclusion

Despite the extensive discussions of China’s cooperative, win-win economic diplomacy, particularly in the context of the OBOR initiative, there is a lack of a roadmap detailing concrete projects, actors, and the implementation process. Thus far, OBOR remains more of a rhetorical device and grand idea. There are also few systematic evaluations of when initiatives have been effective. This is, perhaps, a reflection of how China’s economic diplomacy (and perhaps foreign policy more broadly) is still maturing and evolving. Some may also see this as a sign of irreconcilable goals, some of which are sacrificed for more favored priorities.

There are still further unresolved questions–does OBOR mean focusing on certain countries or regions at the expense of others? And will OBOR incorporate, complement, or operate in parallel to other bilateral and multilateral economic frameworks?³⁵ Should China’s economic diplomacy become more targeted and selective, we are unsure as to how it will operate in tandem with other types of statecraft, such as political and diplomatic means. Will Beijing focus on inducing specific changes in other countries’ political behavior as a foreign policy response, or how can it effectively create longer-term structural transformations? This feeds into the bigger question of how and under what conditions economic dominance can translate into political dominance, not just by overt coercion, but also by transforming the behavior and interests of the target state itself.

Audrye Wong is a Ph.D. Candidate in Security Studies at Princeton University’s Woodrow Wilson School of Public and International Affairs, and a National Science Foundation Graduate Research Fellow. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation. Contact: aywong@princeton.edu.