Geoeconomics and Statecraft: Is China Outdoing the United States?

DEVIN STEWART: Hi. I'm Devin Stewart here at the Carnegie Council in New York City.

Today I'm speaking with Jennifer Harris. Jennifer is a senior fellow at the Council on Foreign Relations in New York City. She is also a former State Department official, and she is the author of the book called War by Other Means: Geoeconomics and Statecraft, written with her co-author Robert Blackwill.

Jennifer, thank you so much for coming to speak with us.

JENNIFER HARRIS: It's so good to be here.

DEVIN STEWART: Thanks for speaking to us about so many timely topics. It seems like geoeconomics has been a major theme of your career in the U.S. government and outside. First of all, what is geoeconomics?

JENNIFER HARRIS: Geoeconomics is not new. I do think it's newly important. The term—you're absolutely right—has been around for a while. What we did was really give it a new definition that certainly I thought had not yet really been captured—it's certainly a lot of what I saw on the ground at the State Department—and that's just simply the use of economic instruments to achieve specific geopolitical results.

We often think about trade, investment, development aid, monetary policy, various parts of energy and commodity policy, as certainly having a nexus to foreign policy, but often that precise relationship is a bit fuzzy and the ends can very quickly get conflated into economic tools for economic ends. We really wanted to be rigorous and clarify for our minds how exactly we see states using these instruments for foreign policy means.

DEVIN STEWART: Your regional specialty is China, among other things, and it sounds like in the book that you're saying that the United States is failing compared to how China is doing in the world of economic statecraft. How is the United States doing now? Is it doing any better, and how so?

JENNIFER HARRIS: It still seems like it's a pretty slow learning curve. It's ironic because this is actually something we once did quite well, if you think back to the Marshall Plan, probably the high-water mark for what we're describing as U.S. geoeconomic policy. But somewhere along the way I think things changed.

I have a specific story that I tell dating that to right around the latter part of Vietnam. I have various reasons for why I think the United States turned away from geoeconomics. I think it's pretty clear that, after 15 years of war, more or less, the United States has come into a certain muscle memory of reaching first for military solutions for our problems that don't seem to be lending themselves all that well to military power.

DEVIN STEWART: How would you say China is outdoing the United States in this realm? Is there anything that the United States can learn from looking at China's use of economic statecraft?

JENNIFER HARRIS: This seems like where China goes instinctively, and it makes some sense. The United States, at least for the foreseeable future, maintains asymmetric dominance in the military realm. If you are Xi Jinping and you have a few billion dollars to put to punctuating your position on the South and East China Seas, where are you best left to invest that money?

Paying for another installment of an aircraft carrier when the United States already has several of those is not necessarily your best investment when you could, say, short a nation's housing recovery—Fannie Mae and Freddie Mac are the U.S. government-sponsored enterprises (GSEs)—and potentially put a hurting on the U.S. economy of a far greater magnitude than trying to play catch-up in the military realm.

I think there's a certain logic to why China is so reflexively comfortable with using geoeconomic power. But the United States and China are also quite different. A lot of what China is doing in this realm the United States, just sort of by our political DNA, will not do. But that still leaves a whole lot on the table that we could—and should, I think—be doing a lot more of.

DEVIN STEWART: Is China's One Belt, One Road Initiative an example of the type of thing that you are looking at?

JENNIFER HARRIS: Exactly. It seems that rail infrastructure is China's newest export to its region. I think it's an area where the Chinese are actually refreshingly candid, saying, "Absolutely this is a strategic project." I was just there in June of last year, and it was the first time that I really had heard the Chinese put voice to it in unabashed terms. That is perhaps something new.

Increasingly there is an economic logic to One Belt, One Road. As the Chinese economy is hitting some headwinds, they are kind of sitting on top of this pile of non-performing loans, and the easiest way to balance out a portfolio of non-performing loans is to put some good debt in there as well, and put in some good investments. I think that's part of the rationale for them reaching outside of their immediate domestic market.

DEVIN STEWART: But they're going to invest in extremely corrupt and opaque countries. Are you confident that's going to be any better than the ones that they currently have?

JENNIFER HARRIS: There is at least a chance. When you're talking about a domestic real estate market in China that is so saturated with over-investment, there's just very little domestically that they can invest in. It is not necessarily great odds or the kind of moderate risk tolerance that a lot of Western investors might prefer for a lot of the projects within One Belt, One Road, but I think the odds are still better than the Chinese domestic market.

DEVIN STEWART: Are there any downside risks for China in this use of spreading this money around to make friends?

JENNIFER HARRIS: Actually it seems that it has paid off more often than not. Is it perfect? No. But I think that's one of my frustrations with how a lot of American foreign policymakers approach geoeconomics. There are some double standards. It's not as if we would look at a military-diplomatic venture and see it in binary terms—did it fail or did it succeed? It's always going to be somewhere in the middle. I think geoeconomics is no different. Certainly, in terms of just sheer return on investment, a lot of these plays are cheap compared to military escalation, for instance. Thus far China has been rewarded.

Often I think the most successful geoeconomics plays from Beijing are the ones that are more subtle. It's when their economic leverage is implied rather than exercised outright.

DEVIN STEWART: Can you give me a specific example?

JENNIFER HARRIS: I think you saw during the initial escalations around the South and East China Seas that the Chinese would embark on some kind of geoeconomic coercion—for instance, the rare earths export embargo in the case of Japan, or with the Philippines allowing Philippine bananas to rot on Chinese docks as a way of sending a message. They only had to do that once in order to impress upon their counterparties the asymmetric clout that China enjoys in a lot of these bilateral trade relationships.

I think the great puzzle in the case of the Filipino UN tribunal this summer around the maritime disputes was why, when these are disputes that embroil some dozen countries or so, you only had one claimant. It's a story of self-censoring, by and large. Even there you saw the force of that UN victory for the Philippines actually hollowed out by the Filipino president himself, offering to "shut up" about the ruling if the price was right, if the Chinese came in with the necessary infrastructure investment on the back end.

DEVIN STEWART: Doesn't that sound like blackmail? Can't that backfire?

JENNIFER HARRIS: It absolutely sounds like blackmail. It is blackmail.

DEVIN STEWART: That doesn't sound sustainable as an approach; coercion through payments, blackmail, or even corruption. It sounds risky to me. What do you think?

JENNIFER: HARRIS: There is a lot about foreign policy that's risky. I look at certainly the United States' track record in the past 15 years. The Chinese do it their own way. Often I think they defy market physics in the case of the Chinese development model. It's not clear to me that this won't continue to work for a long while—again, compared to the sums that they're investing, which are quite cheap in relation to military spending, for instance.

DEVIN STEWART: You've written about the incoming Trump administration. The Trump administration is making geoeconomics probably a bigger priority compared to the previous years. Of course, "investment" and "jobs" and "America First" are slogans that we've been hearing about, and also looking more critically at our trade relations, particularly with China and Japan and others.

Do you think the Trump administration is going in the right direction in terms of our economic relations with countries in East Asia?

JENNIFER HARRIS: The verdict is out, I think, on the Trump administration. They made some interesting moves initially, and I'm curious to see where they take them.

Taking the One-China policy, for instance, agreeing to put that on the table—if there was a concerted, deliberate strategy that came behind that, I would have wanted to see where that played out. It did not seem that there was much "there" there, and I think we saw that transpire this past week.

I think in other cases you've seen Trump's instincts run exactly 180 degrees in the opposite direction of geoeconomics. As you mentioned, with a lot of our treaty allies in Asia, Trump is demanding more economic concessions for U.S. military protection, using U.S. military leverage to extract economic concessions rather than the reverse. I think he has said both things. I think personnel is absolutely policy. If you look at the way the administration is staffing its upper ranks, it's a lot of military brass.

I come from a very large field artillery base in the middle of the country, and it's precisely because I know firsthand the costs that we ask of our men and women in uniform that I'm looking for other tools. But thus far I have not seen evidence of seriousness on the Trump administration's part about actually finding or creating those new tools.

DEVIN STEWART: You mentioned basically asking for payment for our military support from our allies. What could go wrong? That's a bit of a sarcastic question.

JENNIFER HARRIS: When you begin denominating U.S. security guarantees in dollars and cents, you open this up to becoming an economic negotiation. The kicker of it is that China has very, very deep coffers. When you own the tectonics of production in the way that the Chinese state still does, and you have the kind of state-owned banks with the capitalization that these banks have, and the state-owned enterprises, it means that you can deploy a lot of economic resources toward whatever end you want, be they security, geopolitical, or more economic. I fear that if this is a road that we're going down it's not one that we can win, unless we too begin playing this way, and that still, to my mind, runs contrary to some of the founding principles upon which this country was established.

DEVIN STEWART: Do you get a sense of an emerging China policy in the Trump administration, and what would that look like?

JENNIFER HARRIS: I haven't seen it yet. I think with China, as perhaps with any major power that's not also a treaty ally, you need three things, and traditionally, even in the most strained of times between the United States and China, we've had them:

• One, you need to be clear about your intentions and you need to make sure the other side knows when you're serious.
  
• Two, you need to be able to allow the other side room to help you.
• Three, you need credibility.

To my mind, what the Trump administration's One-China policy and the backing out from that did was turn that into some kind of threefold dilemma—not all three conditions could obtain. Trump essentially put himself into a corner where as long as he had the position that he did on the One-China policy, Xi Jinping was not going to talk to him directly unless he backed down unilaterally, at which point he was not going to be credible. That is exactly what happened, because he picked a fight on an issue that he really left the other side no room to help him on.

Hopefully there is a lot to be learned from that. It remains to be seen whether the administration is in a posture of wanting to learn.

DEVIN STEWART: So you are questioning Trump as an "amazing negotiator"?

JENNIFER HARRIS: I haven't seen it yet. Hope springs eternal, I guess.

DEVIN STEWART: Do you get a sense of how Trump and the United States generally are seen in China these days?

JENNIFER HARRIS: It's interesting. Again, when I was there just five months or so before the election, I was struck by how smitten the Chinese were with Trump. I saw some polling—I can't speak exactly to validity of it—that suggested that it was actually among under-30, college-educated types, the rising elite, that he was most popular. This is kind of hard to get my head around, given a lot of the more exotic things that he had said around our China policy.

I think that there is some buyer's remorse on that. I think the Chinese probably had a little bit more faith in the depth of U.S. institutions to wrap a bureaucracy around him. There was just a basic admiration of a strong man that was doing most of the work there. I think that is quickly falling away.

DEVIN STEWART: What would be your biggest advice for the Trump administration in dealing with China?

JENNIFER HARRIS: I think being willing students. There is a lot to commend bringing in different skillsets, not someone who thinks that you have to be a professional foreign policy expert in order to step into some of these roles. At the same time, you need to have some modesty about what you don't know and what you need to learn. That's the part that I fall down on in terms of what I've seen thus far.

It is kind of walking softly and carrying a big stick, and it seems like they are doing exactly the opposite and issuing a lot of what sound like threats that I'm not sure that the American people, at least, are willing to stand behind.

DEVIN STEWART: So we're walking loudly and carrying a small stick?

JENNIFER HARRIS: There is a growing risk of that, yes.

DEVIN STEWART: Speaking of risks, let's end this great discussion on what risks should anyone look out for when trying to understand U.S.-China relations over the next few months, or even years. What things worry you the most?

JENNIFER HARRIS: North Korea. Numbers one through five on my list are North Korea. I am actually moving out to the Bay Area soon. Morbidly if there is anything that is going to puncture the real estate bubble in San Francisco, I'm wondering if it's Kim Jong-un with an intercontinental ballistic missile that is capable of reaching the lower 48, which it seems that he is fast closing in on.

DEVIN STEWART: Would that be delivered on a submarine or launched from land?

JENNIFER HARRIS: I believe it's from land. I'm not the one you should talk to about these things.

It is clear that this is looking a whole lot like the crisis that we had with the Iranian nuclear program. I don't actually see a lot of differences on paper justifying what remains a huge difference in the United States' posture toward handling both of these situations. I fear that sooner than later we will need to confront the possibility of looking at secondary financial sanctions on China.

Look at how those played out with Iran. Iran as a test case was instructive. But this was not a systemically integrated economy into the global financial system in the way that China is.

I think all minds need to be concentrated on getting to "yes" on a set of sanctions that we feel would be constructive without allowing what we don't know, because we will never be in a situation of perfect information. Just like any kind of planning scenario, military or sanctions-related, we can't allow what we don't know to veto possible scenarios that we may need to look at pretty hard. I think that the one piece that we've not yet mastered when it comes to geoeconomics is really understanding what our risk appetite should be.

DEVIN STEWART: Jennifer Harris, senior fellow at the Council on Foreign Relations, thank you so much for talking with us.

JENNIFER HARRIS: Thank you.