China's Foreign Policy and "Soft Power" in South America, Asia, and Africa
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COMMITTEE PRINT " ! 110TH CONGRESS 2d Session S. PRT.
2008
110–46
CHINA’S FOREIGN POLICY AND ‘‘SOFT POWER’’ IN SOUTH AMERICA, ASIA, AND AFRICA
A STUDY
PREPARED FOR THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
BY THE
CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS
APRIL 2008
Printed for the use of the Committee on Foreign Relations
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COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, JR., Delaware, Chairman CHRISTOPHER J. DODD, Connecticut JOHN F. KERRY, Massachusetts RUSSELL D. FEINGOLD, Wisconsin BARBARA BOXER, California BILL NELSON, Florida BARACK OBAMA, Illinois ROBERT MENENDEZ, New Jersey BENJAMIN L. CARDIN, Maryland ROBERT P. CASEY, JR., Pennsylvania JIM WEBB, Virginia
RICHARD G. LUGAR, Indiana CHUCK HAGEL, Nebraska NORM COLEMAN, Minnesota BOB CORKER, Tennessee GEORGE V. VOINOVICH, Ohio LISA MURKOWSKI, Alaska JIM DEMINT, South Carolina JOHNNY ISAKSON, Georgia DAVID VITTER, Louisiana JOHN BARRASSO, Wyoming ANTONY J. BLINKEN, Staff Director KENNETH A. MYERS, JR., Republican Staff Director
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C O N T E N T S
Page
CHINA’S FOREIGN POLICY AND ‘‘SOFT POWER’’ IN SOUTH AMERICA, ASIA, AND AFRICA
Letter of Submittal .................................................................................................. v Letter of Transmittal ............................................................................................... vii China’s ‘‘Soft Power:’’ Overview and U.S. Policy Challenges ............................... 1 Definitions of Soft Power ................................................................................. 2 Presumed PRC Foreign Policy Goals .............................................................. 4 Competitive Advantages of PRC ‘‘Soft Power’’ ............................................... 9 Limitations on PRC ‘‘Soft Power’’ .................................................................... 10 Implications for U.S. Interests ........................................................................ 12 Options .............................................................................................................. 13 Latin America and the Caribbean .......................................................................... 16 Overview ............................................................................................................ 16 Diplomacy .......................................................................................................... 16 Economic Ties ................................................................................................... 20 Foreign Assistance ............................................................................................ 26 Implications for U.S. Policy in Latin America and the Caribbean ............... 28 The Southwest Pacific ............................................................................................. 32 Overview ............................................................................................................ 32 Diplomacy .......................................................................................................... 33 Trade and Investment ...................................................................................... 36 Foreign Aid ....................................................................................................... 37 Pacific Views Toward China ............................................................................ 38 Implications for U.S. Policy in the Region ..................................................... 40 Japan and South Korea ........................................................................................... 42 Overview ............................................................................................................ 42 International Trade Flows ............................................................................... 42 Investment, Financial, Aid, and Cultural Flows ........................................... 45 China’s Relations With Japan ......................................................................... 51 China’s Relations With South Korea .............................................................. 54 Regional Trade Arrangements ......................................................................... 58 Implications for U.S. Policy in the Region ..................................................... 63 Central Asia ............................................................................................................. 65 Overview ............................................................................................................ 65 Bilateral and Multilateral Diplomacy ............................................................. 66 Economic Ties ................................................................................................... 71 Foreign Assistance ............................................................................................ 78 Implications for Central Asia .......................................................................... 79 Implications for U.S. Interests ........................................................................ 83 Southeast Asia ......................................................................................................... 88 Overview ............................................................................................................ 88 Diplomacy .......................................................................................................... 89
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Southeast Asia —Continued A Comparison of U.S. and Chinese Economic Relations With ASEAN ....... 91 Foreign Aid ....................................................................................................... 97 U.S. Policy Implications ................................................................................... 101 Sub-Saharan Africa ................................................................................................. 105 Overview ............................................................................................................ 105 China’s Current Africa Policy .......................................................................... 107 PRC ‘‘Aid’’ and Trade Finance in Africa ......................................................... 113 China-Africa Trade and Investment ............................................................... 119 Sino-African Engagement: Implications ......................................................... 125
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LETTER OF SUBMITTAL
April 15, 2008. Hon. JOSEPH R. BIDEN, JR., Chairman, Committee on Foreign Relations, United States Senate, Washington, DC 20510. DEAR MR. CHAIRMAN: In response to your request, I am submit- ting a comprehensive memorandum examining the People’s Repub- lic of China’s (PRC’s) activities and ‘‘soft power’’ projection in Asia, Africa, and Latin America. The work was prepared by members of CRS’s Foreign Affairs, Defense, and Trade Division. My under- standing is that you may distribute the memorandum as a com- mittee print. The study addresses the questions you posed when you first asked us to prepare a lengthy study of the topic: How much is China really doing in these regions, and how much do we know about its motivations? What do these widespread PRC activities mean for the United States and for U.S. global influence: are the implications necessarily bad and therefore a demonstrable threat to U.S. interests across the board, or might the implications be benign or in some instances even positive for U.S. interests? How has this increasing engagement affected China’s own policies? Finally, what are the economic and political costs and benefits to China of such international engagement, and are they likely to be influences for greater pragmatism and nuance in PRC policies or serve instead to reinforce more hardline and nationalistic sentiments? The study opens with an overview section discussing China’s pre- sumed foreign policy goals, the attractions and limitations of Chi- na’s ‘‘soft power,’’ and the implications and options for the United States. The memorandum proceeds to an analysis of China’s rela- tions with countries in Latin America and the Caribbean, the Southwest Pacific, Japan and South Korea, Central Asia, Southeast Asia, and Sub-Saharan Africa. Kerry Dumbaugh, CRS Specialist in Asian Affairs, coordinated the study, developing its framework, overseeing the work of the eight other contributors, and writing the overview section. Spe- cialist in Asian Affairs Thomas Lum assisted in overseeing the project. Other authors were CRS analysts Nicolas Cook, Wayne Morrison, Dick Nanto, Jim Nichol, Mark Sullivan, and Bruce Vaughn. Information research specialist Susan Chesser provided assistance obtaining data. Asian affairs analysts Shirley Kan and Michael Martin provided in-depth peer review. Jared Nagel, of CRS’s support staff, provided invaluable administrative assistance. Sincerely, DANIEL P. MULHOLLAN, Director.
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LETTER OF TRANSMITTAL
UNITED STATES SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC, April 29, 2008. DEAR COLLEAGUE: China’s emergence as a global power has pro- found implications for the security and economic interests of the United States. The pace and scale of China’s development is un- precedented, and poses a host of issues that have made China the image of globalization in the minds of the American public. Yet for all of the attention being paid to China’s rise and its attendant eco- nomic, environmental, security, and political consequences, the United States still has a very imperfect understanding of China’s power and motivations or how the rest of the world is responding to China’s integration. The debate in our country over how best to respond to China can quickly become polarized between those who view China principally as a threat and those who see China’s rise as essentially benign. The truth is that China’s rise presents both challenges and opportunities for the United States. Last year I asked the Congressional Research Service to prepare a comprehensive report examining China’s growing ‘‘soft power’’ in Asia, Africa, and Latin America. Harvard professor Joseph S. Nye, Jr. first argued in 1990 that the United States must wisely deploy its soft power—the non-military tools of our foreign and national security policies—to complement its ‘‘hard power,’’ or military force, if it is to advance its interests in the era of globalization. He and others have since refined this original concept and have testified before the Committee on Foreign Relations on the application of ‘‘smart power’’ to address the challenges confronting the United States in the 21st Century. My objective in requesting this study was to provide the Congress with a better factual understanding of China’s use of soft power, including: international trade and invest- ment, development assistance, cultural influence, humanitarian aid, travel and tourism. CRS has produced an analysis that not only takes stock of China’s soft power, but also illuminates the op- tions open to the United States to respond to China’s ‘‘invigorated activities around the world.’’ Pulling together a distinguished group of China specialists and other regional and functional analysts, CRS delved deeply into Chi- na’s foreign policy and soft power, examining both the strengths and weaknesses of China’s approach to the world, and the benefits and drawbacks for those countries most closely integrated with China’s growing economy. On the plus side, CRS reports that Chi- na’s involvement in Africa is spurring investment, ‘‘ . . . in infra- structure and the financial services, manufacturing . . . and mar-
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ket niches that non-Chinese foreign investors have generally long ignored.’’ China provides the developing world access to cheap cred- it and inexpensive consumer goods, and many countries are enjoy- ing rapidly rising revenues due to Chinese demand for their ex- ports. On the other hand, China’s manufacturing strength makes it difficult for industries in the developing world to gain a competi- tive advantage, putting some out of business. And China’s invest- ment in developing economies, particularly in natural resource ex- traction, sometimes undermines international efforts to link aid and investment to measurable progress by recipient countries in combating corruption, improving transparency, and respecting human rights. In Uzbekistan, for example, CRS reports that U.S. criticism of human rights conditions may have spurred Uzbekistan to re-evaluate its ties with the United States and to improve its ties with China. China has attempted to exploit its ‘‘no strings attached’’ foreign aid stance and its ability to deploy state-owned assets to reap soft- power advantages. But CRS finds that China’s success has been mixed and its influence remains modest. Contrary to some projec- tions of China’s ability to displace American influence through the use of soft power, the CRS report indicates that China must grap- ple with many limitations on its influence. As China has become more engaged in world affairs, it has also discovered that its for- eign entanglements may not always be popular at home or abroad. In some cases, Chinese economic engagement has become the sub- ject of intense, xenophobic political debate, as in the Zambian elec- tion of 2006, when the main opposition candidate incited his fol- lowers with vitriolic anti-Chinese rhetoric. And CRS found that China’s cumulative stock of foreign direct investment (FDI) world- wide amounted to just $73.3 billion at the end of 2006—0.58% of global FDI. Moreover, CRS found that China’s soft power achieve- ments are built on a very narrow base, confined to non-controver- sial issues where all sides are most likely to agree. And even in those areas—such as disaster relief—China’s level of effort and its accomplishments pale beside those of the United States. Finally, while China’s state-owned assets may be obedient to state author- ity, CRS found that America’s private sector leaves a ‘‘substantial global footprint,’’ sometimes overlooked by those comparing only government directed overseas initiatives. It is my hope that this study will inform debate about China and help point the way toward policies that will not only respond to those Chinese actions that are at odds with U.S. interests, but will also build on the many common interests created by China’s en- hanced integration with the international community. In the weeks ahead, the committee will conduct hearings examining U.S.-China relations, China’s use of soft power, and the opportunities for the United States to reinvigorate its own ‘‘smart power’’ by engaging China to work with us to advance our common interests. Sincerely, JOSEPH R. BIDEN, JR., Chairman.
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1 Prepared by Kerry Dumbaugh, Specialist in Asian Affairs, Foreign Affairs, Defense, and Trade Division, Congressional Research Service.
China’s Foreign Policy and ‘‘Soft Power’’ in South America, Asia, and Africa
CHINA’S ‘‘SOFT POWER:’’ OVERVIEW AND U.S. POLICY CHALLENGES1
We begin this memo with several caveats about the limits on a decisive analysis of the extent and implications of China’s inter- national ‘‘reach’’—its soft power, a phrase we define below. First, there is little consensus within the U.S. and global China-watching communities on China’s foreign policy goals or on what motivates and informs China’s decisions—either decisions made in general terms or with regard to specific regions or countries. Does China’s international engagement have a pragmatic, overarching strategy, or is it a series of marginally related tactical moves to seek normal economic and political advantages? Is Beijing interested in sup- planting the United States as a global power or focused mainly on its own national development? Does the PRC feel strong and con- fident internationally or weak and uncertain? No one is sure. Many have written on China’s foreign policy decision-making. Al- though China’s foreign policymaking has become more regularized in recent years, few claim to be certain about how China’s foreign policy decisions are made, about who makes them, or about what long-term goals Chinese policies seek to attain. Some profess cer- tainty: however, they have not been able to demonstrate that their convictions lead to any sort of consistency in analyzing or pre- dicting China’s foreign policy decisions. In the aftermath of inci- dents of Sino-U.S. tension or confrontation—such as the case in 2001 when a Chinese fighter jet collided with a U.S. EP-3 recon- naissance plane, or the case in 2007 when the PRC suddenly de- nied Hong Kong port visits to a series of U.S. ships—U.S. officials have remained largely in the dark about the PRC’s crisis manage- ment processes and about why and how PRC leaders reached their decisions. The number of unknown variables that still animate Chi- na’s foreign policy goals and decision-making processes is simply too great. There appears to be no ‘‘magic bullet’’ then—no indi- vidual or group with proven answers—that definitively can inform U.S. views or prepare U.S. government and congressional actors on how best to prepare for the challenge China could pose to U.S. global interests. Relatedly, a study of PRC international influence is hampered by a lack of reliable data on Chinese foreign aid and by lack of trans- parency on whether and how the PRC makes and implements large, high-profile investment agreements. PRC assistance to other countries comes from multiple government agencies with little or
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2 See CRS Report RL34310, China’s ‘‘Soft Power’’ in Southeast Asia, by Thomas Lum, Wayne Morrison, and Bruce Vaughn. 3 ‘‘Whither China: From Membership to Responsibility?’’ Speech by Deputy Secretary of State Robert B. Zoellick to the National Committee on U.S.-China Relations, September 21, 2005.
no apparent oversight; it does not appear to be tracked or mon- itored by one single government entity. Many forms of PRC foreign assistance—loans, debt forgiveness, the building of large public fa- cilities, and trade and investment agreements—do not meet the traditional definition of ‘‘development assistance,’’ which is how most of the world’s donor countries provide aid. Furthermore, PRC assistance is not provided in regularized annual allotments, but ap- pears to follow a funding schedule determined by Beijing’s diplo- matic priorities. Beijing reportedly also is reluctant officially to re- veal the totals of its foreign assistance for a variety of reasons— including out of fear of domestic objection that Beijing is not spend- ing its money at home rather than abroad.2 In sum, the extent of PRC foreign assistance to other countries cannot be determined ac- curately. Finally, although U.S. Administrations for decades have pursued consistent engagement with China, periodic questions arise about whether the U.S. approach is based on a well-articulated and co- herent strategy or is simply an approach of convenience that should be reassessed in the face of China’s rise. Outside the Ad- ministration, the U.S. policy debate continues to be characterized by the strident dynamics that arose in the mid-1990s, in which American hard-liners (self-described as the ‘‘Blue Team’’) are pitted against those advising cooperation and engagement with China (pejoratively labeled as the ‘‘Red Team’’ by the opposing group). Thus, there is little agreement about the degree of threat or chal- lenge China poses to the United States. In the vocal minority are those who view China as a growing military menace with malign intent. These hardliners have been perceived sometimes by others as agitators whose counsel to treat China as a major threat to U.S. interests is designed to justify huge U.S. military budgets and is more likely to bring about con- flict with China than to deter it. The view that has been pursued more openly by U.S. Administrations is one that counsels coopera- tion and engagement with China as the best way to integrate China into the prevailing global system as a ‘‘responsible stake- holder’’—a nation that has ‘‘a responsibility to strengthen the inter- national system that has enabled its success.’’ 3 But opponents of this approach typically paint these as the views of ‘‘panda-huggers’’ who, seduced by the potential of the China market, are oblivious to PRC hostile intent, cave in to PRC wishes and demands unnec- essarily, and thereby squander U.S. strategic leverage and com- promise U.S. interests. The confrontational and highly-charged dy- namic between these two polar views continues to make elusive the kind of pragmatic and reasoned policy discourse that could create greater American consensus on how the United States should posi- tion itself to meet the challenges China poses.
DEFINITIONS OF SOFT POWER
As requested, this study focuses on China’s ‘‘soft power’’ projec- tion in the specified regions. The term ‘‘soft power’’ originally was
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4 Nye, Jr., Joseph S., ‘‘Soft Power: The Means to Success in World Politics,’’ Public Affairs, NY, 2004, p. XI. 5 Nye, Jr., Joseph S., p. 5, p. X. 6 Conversation with former Ambassador Charles W. Freeman, Jr., 2007. 7 Kurlantzick, Joshua, ‘‘The Decline of American Soft Power,’’ in Current History, December 2005, p. 419. 8 Nye, Joseph S., ‘‘The Decline of America’s Soft Power: Why Washington Should Worry,’’ in Foreign Affairs, May/June 2004, p. 16.
conceived in 1990 by Harvard Professor Joseph S. Nye, Jr.. Nye ar- gued that the United States had reserves of power and influence that were separate from ‘‘hard power,’’ or military force projection. He expanded greatly on this concept in his book, Soft Power: The Means to Success in World Politics—partly, he said, from the frus- tration of watching ‘‘some policy makers ignore the importance of our soft power and make us all pay the price by unnecessarily squandering it.’’ 4 According to Nye, soft power is crucially impor- tant in today’s world politics and is significantly more than just the trappings of American culture: Soft power rests on the ability to shape the preferences of others . . . . [It] is the ability to get what you want through attraction rather than coer- cion or payments. It arises from the attractiveness of a country’s culture, political ideals, and policies. When our policies are seen as legitimate in the eyes of others, our soft power is enhanced. America has long had a great deal of soft power . . . .5 More broadly speaking, the components of soft power also are de- fined as including international trade, overseas investments, devel- opment assistance, diplomatic initiatives, cultural influence, hu- manitarian aid and disaster relief, education, and travel and tour- ism. Although American soft power remains formidable, by some of these measures it is seen to have declined in the 21 century. In ab- solute terms, some believe this perceived decline is the result of the United States’ own policies and actions. One former U.S. Govern- ment official speculates that although America has massive re- maining reserves of soft power, they have become a ‘‘non-renewable resource’’ given current U.S. policies.6 Others point to multiple global survey results on international views of the United States, saying ‘‘the downward trend is unmistakable.’’ 7 As Nye himself puts it: Anti-Americanism has increased in recent years and the United States’ soft power . . . is in decline as a result . . . . A Eurobarometer poll found that a majority of Europeans believes that Washington has hindered efforts to fight global poverty, protect the environment, and maintain peace. Such attitudes undercut soft power, reducing the ability of the United States to achieve its goals . . . . 8 Others have attributed the perceived decline in American soft power as relative—largely a comparative decline based on the rise of other powers—in particular the rapid emergence of China as a U.S. ‘‘peer competitor’’ and a growing source of international influ- ence, investment, and political and economic power. China is seen to be trying to project soft power by portraying its own system as an alternative model for economic development, one based on au- thoritarian governance and elite rule without the restrictions and demands that come with political liberalization. Furthermore, ac- cording to this view, ‘‘soft power’’ is ephemeral; the United States has recovered from loss of prestige and influence before (such as oc- curred with the Vietnam War), and it will again. China’s apparent soft power gains, then, should not be blown out of proportion.
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It is clear that China’s foreign policy today has changed fun- damentally in the years since Chairman Mao Zedong’s policy of ‘‘self-reliance’’ greatly constrained the country’s foreign contacts and when the country’s foreign policy goals centered on promoting Maoist revolutionary parties around the world. Under reform poli- cies begun in 1978, China in the past 30 years has openly sought and received substantial foreign investment, technology, and exper- tise; has become an international export powerhouse; has expanded its membership and participation in international organizations; and increasingly has appeared willing to embrace many norms and rules of the global economic system of which the United States is the chief architect and dominant player. Since 2000 in particular, there has been a steady increase in the PRC’s courting of foreign governments, including high-level diplomatic exchanges, trade ini- tiatives, investment agreements, and tourism and cultural under- standings. Having progressed on a steady path in the last three decades on multiple global economic and political endeavors, China’s robust international engagement since 2000 has caught many by surprise and has prompted growing American disagreement and debate over PRC motivations and objectives. The fact that much of this inter- national engagement has expanded while the United States has been preoccupied with its military involvement in Iraq and Afghan- istan also is causing a growing degree of American introspection. Moreover, many fear that China’s growing international economic engagement is going hand-in-hand with expanding political influ- ence. Although some believe that PRC officials appear more com- fortable working with undemocratic or authoritarian governments, PRC outreach also has extended to key U.S. allies or to regions where U.S. dominance to date has been unparalleled and unques- tioned, leading some to conclude that Beijing ultimately intends a direct challenge to U.S. global power.
PRESUMED PRC FOREIGN POLICY GOALS
Within the ongoing international debate about what China’s ulti- mate intentions may be for its growing global achievements, it is possible to point to some fundamental objectives that appear to be at least partial motivations for Beijing’s current international out- reach. Adding to the uncertainty about PRC policies, these pre- sumed objectives at times are in contradiction, suggesting either a lack of coherence or that they reflect internal Chinese disagree- ments and compromise. China’s policy direction is that much hard- er to predict when some of these key policy objectives are seen to clash, and experience tells us that abrupt shifts in policy, shifts which remain unexplained in many cases, still occur with a fair de- gree of regularity in the PRC system.
Enhancing Sustainable Economic Growth Strong economic development continues to be seen as the core primary objective for the PRC leadership for a host of reasons—not the least of which are to raise the living standards of its enormous population, to dampen social disaffection about economic and other inequities, and to sustain regime legitimacy after the demise of communist ideology as an acceptable organizing principle. China’s
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9 Xie Fuzhan, Commissioner, National Bureau of Statistics of China, ‘‘The National Economy Maintained a Steady and Fast Growth in 2007,’’ January 24, 2008. 10 ‘‘China’s Energy Production and Consumption,’’ Energy Information Administration (EIA); Official Energy Statistics from the U.S. Government. www.eia.doe.gov/emeu/cabs/china/ part2.html 11 Sutter, Robert, Chinese Foreign Relations, Rowman & Littlefield Publishers Inc., 2008, p. 82.
annual economic growth rates routinely are in the double digits; in 2007, they reached an annual rate of 11.4 percent—the highest since 1994.9 This rapid and sustained economic growth has created voracious domestic appetites for resources, capital, and technology, as well as for markets for Chinese goods, and these appetites have served as powerful drivers of China’s international trade and in- vestment agreements. In energy sources alone, for example, China became a net im- porter in 1995—it became a net importer of oil in 1993—and its en- ergy demands are expected to continue increasing at an annual rate of 4–5 percent through at least 2015, compared to an annual rate of about 1 percent in industrialized countries.10 China steadily and successfully has sought trade agreements, oil and gas con- tracts, scientific and technological cooperation, and de-facto multi- lateral security arrangements with countries both around its pe- riphery and around the world. In all three of the regions discussed in this memo where China is most active, access to energy re- sources and raw commodities to fuel China’s domestic growth plays a dominant role in Beijing’s activities. China has oil and gas explo- ration contracts with Brazil, Ecuador, Bolivia, Colombia, Ven- ezuela, and Cuba; oil contracts and pipeline deals are a major part of China’s activities in its relations with Central Asian states such as Uzbekistan and Turkmenistan, and China’s oil exploration inter- ests extend to Burma, Vietnam, and Malaysia. Imports of crude oil constitute the bulk of China’s imports from African states. In pursuit of sustainable economic development, China also is seen to have placed a priority in keeping stable and relatively ten- sion-free relations with its primary export market, the United States. Some analysts suggest that this priority is behind Beijing’s decision in 2003 to tone down its anti-U.S. rhetoric and criticism and instead to emphasize China’s ‘‘peaceful rise’’ on the world stage.11 According to this view, Beijing calculates that even the ap- pearance of a more overt pursuit of its regional and global interests could prompt the United States to strengthen its alliances and form other groupings to counterbalance and deter China’s inter- national outreach. Such a development could fetter China’s eco- nomic growth.
Squeezing Taiwan’s International Space In addition to economic and resource-related imperatives, China’s outreach into Latin America and the Caribbean, Africa, and the Pa- cific incorporates the political dynamic of trying to separate Taiwan from its remaining diplomatic relationships. China claims that Tai- wan is part of its sovereign territory, and for decades has tried to make acknowledgment of this ‘‘one China’’ policy a condition for re- ceiving Chinese investment and assistance. All but one of Taiwan’s remaining 23 official relationships are in the three regions that are the focus of this memo. With China’s dynamic economic growth in
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12 This particular statement was made by defense attache Sun Yifan on August 1, 2007, speaking in Cuba on the 80th anniversary of the founding of the PLA. Xinhua, Aug. 2, 2007, but other PRC officials similarly have stressed China’s resolve on the matter of Taiwan.
recent decades, it effectively has been able to ‘‘outbid’’ Taiwan in courting a number of these governments. Taiwan lost four of its diplomatic relationships to this competition in the last three years, including the loss of official relations with Malawi on January 14, 2008. The Taiwan factor is not uniformly significant in China’s rela- tionships with the regions under discussion. While the Taiwan issue is important in China’s African relationships, it is not impor- tant in China’s relations with Central Asian countries, where Tai- wan has no official diplomatic relations. It is a negligible factor in China’s relationships with Southeast Asian countries, where Tai- wan has significant economic interests but again no diplomatic ties. And Taiwan is a very important factor—even perhaps the only one—in China’s courtship of the 6 tiny Pacific Island nations that still have official relations with Taiwan. But Taiwan-PRC competi- tion looms large in China’s relationships in Latin America and the Caribbean. Not only is this where Taiwan maintains most of its re- maining official diplomatic ties, but the region’s proximity to the U.S. mainland allows Taiwan’s president and senior leaders to ask for controversial but symbolically meaningful transit stops in the United States when making official visits to these western hemi- sphere countries. A significant reduction, or even the disappear- ance, of Taiwan’s Latin America and Caribbean relationships great- ly could impair this convenient Taiwan-U.S. connection. On an entirely different level, Taiwan also is a potentially impor- tant factor in China’s activities with U.S. allies in Asia—Japan and Australia, especially, but also Korea and the Philippines. While all of these countries recognize the PRC and not Taiwan, as U.S. allies they potentially could become a factor in any U.S.-China conflict over Taiwan. In 2005, for instance, the United States and Japan declared for the first time that Taiwan is a mutual security con- cern, implying a new Japanese willingness to confront China over Taiwan. It is in China’s interests, then, to use its diplomatic and economic activities to exert quiet pressure on these U.S. allies to stay out of any possible conflict over Taiwan. Maneuvering against Taiwan—and ultimately ‘‘recovering’’ it— provides one of the key contradictions in China’s foreign policy ob- jectives as it is an issue that appears to be able to trump other key policy goals. Chinese officials have said, for instance, that they will ‘‘pay any price’’ to prevent Taiwan independence, although this would jeopardize the otherwise key imperative of assuring strong economic growth, not to mention risking armed confrontation with the United States.12
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13 Goldstein, Avery, Rising to the Challenge: China’s Grand Strategy and International Secu- rity, Stanford University Press, 2005. 14 The program is under the auspices of The Office of Chinese Language Council International. 15 This from the Chinese Embassy in Washington D.C., January 2008.
Table 1. Taiwan’s 23 Official Relationships*
Latin America and the Caribbean (12) Belize, Dominican Republic, El Salvador, Guatemala, Haiti, Hon- duras, Nicaragua, Panama, Paraguay, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines Africa (4) Burkina Faso, Gambia, Sao Tome and Principe, and Swaziland The Pacific (6) Kiribati, the Marshall Islands, Nauru, Palau, the Solomon Is- lands, and Tuvalu Europe (1) The Vatican
* As of February 2008
Increasing Its International Stature and Competing With U.S. Su- premacy After decades of international isolation, PRC leaders are pre- sumed also to place a high priority now on expanding and improv- ing China’s global stature and influence and, where they can, on limiting or constraining the ability of the United States to interfere with or adversely affect PRC interests. Having come late to the global economic development party, China is seeking multiple international partnerships and groupings that make it, if not an in- dispensable player in the global system, then at least one whose in- terests must regularly be taken into account.13 Having embraced the international system, Beijing is seen to be maneuvering deftly for space and opportunities not already taken up by the United States—opportunities where it can have greater freedom of action. Lacking a formal system of alliances like those of the United States, the PRC has devised numerous other frameworks. These in- clude efforts to act: Through Bilateral Initiatives. —On a bilateral basis throughout Latin America, Asia, and Africa, PRC leaders have established Strategic Partnership Agreements, Friendship and Cooperative Partnership Agreements, Friendship Associations, and Free Trade Agreements, among other vehicles, to reinforce the notion that spe- cial economic relationships exist between China and the recipient countries. ‘‘Chinese Friendship Associations’’ abound all over the world, including with individual U.S. states. In 2004, PRC leaders created the ‘‘Confucius Institute’’—a non-profit program to teach Chinese language and promote Chinese culture around the world.14 Beijing opened its first Confucius Institute in Seoul, Korea, in No- vember 2004; by the end of 2007, the PRC had 203 Confucius Insti- tutes around the world, including 40 in the United States.15 China also has expanded the use of Approved Destination Status (ADS)— a bilateral tourism arrangement with other countries that facili- tates Chinese tourism in groups. Through Existing Multilateral Organizations.—In addition to bi- lateral initiatives, China increasingly has grown more active in international multilateral organizations that it formerly viewed with suspicion as U.S.-dominated institutions that would try to constrain and exploit PRC interests. China now participates more
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16 Sutter, p. 62. 17 First established in 1967, ASEAN in 2005 includes Brunei-Darassalam, Cambodia, Indo- nesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand, and Vietnam. The United States maintains military alliances with the Philippines and Thailand, and has sig- nificant naval and air base arrangements with Singapore. 18 See CRS Report RL33242, East Asia Summit (EAS): Issues for Congress, by Bruce Vaughn. 19 The SCO is a more recent expansion of the ‘‘Shanghai Five’’ formed in 1997. SCO members include China, Russia, Uzbekistan, Kazakhstan, Kyrgyzstan, and Tajikistan.
confidently in the United Nations, the World Bank, and other enti- ties, even seeking to employ what one specialist calls a ‘‘Gulliver Strategy’’ that tries to tie down the United States giant in con- straining international agreements.16 China also has successfully sought entry in one form or another to existing regional groupings in Asia and Latin America and the Caribbean. These include: • Asia Pacific Economic Cooperation (APEC) forum, where China has been a full member since 1991 (the United States is also a member) • ASEAN Regional Forum (ARF)—established in 1994, where China is increasing its participation (the United States has been criticized in recent years when President Bush and Sec- retary of State Condoleezza Rice skipped some ARF meetings, instead sending lower-level officials) • Forum for East Asia and Latin American Cooperation (FOCALAE)—established in 2001, where China is a full mem- ber (the United States is not a member) • Organization of American States (OAS)—where China was in- vited to be a permanent observer in 2004 (the United States is a full member) Through New Multilateral Institutions.—Finally, China has sought to devise new multilateral organizations to support its own interests and expand its international influence. Beijing has not in- vited the United States to join these new institutions. • East Asia Summit (EAS). In 2005, for instance, China took part in the first East Asia Summit (EAS), a fledgling grouping of 16 Asian and Pacific powers including China, the ten mem- bers of the Association of Southeast Asian Nations (ASEAN), Japan, South Korea, India, Australia, and New Zealand, but excluding the United States.17 Russia’s President Putin at- tended as an invited observer.18 • Shanghai Cooperation Organization (SCO). With the Central Asian countries of the former Soviet Union, including Russia, China has pursued both economic and security arrangements through the Shanghai Cooperation Organization another new organization founded in 2001 exclusive of U.S. participation.19 Within the SCO context, China has cooperated on border en- forcement, signed pipeline and rail link agreements, and con- ducted joint military maneuvers. • Forum on China-Africa Cooperation Forum (FOCAC). In 2000, China and African countries formed the China-Africa Coopera- tion Forum proposing that the FOCAC meet every three years to seek mutual economic development and cooperation. Rep- resentatives from 45 of Africa’s 55 countries attended the FOCAC’s first Ministerial Conference in October of that same
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20 Senegal President Abdoulaye Wade, in ‘‘Time for the west to practise what it preaches,’’ Fi- nancial Times, Jan. 24, 2008, p. 6.
year; the third FOCAC meeting was in Beijing in early Novem- ber 2006. The United States is not a member of the FOCAC.
COMPETITIVE ADVANTAGES OF PRC ‘‘SOFT POWER’’
Whether one is reading press accounts and scholarly treatises or traveling through the regions under discussion, the PRC seems to be everywhere. It is tempting to begin to think in alarmist terms, thereby magnifying presumed PRC strengths as well as perceived U.S. weaknesses. Many concerned observers focus on the competi- tive strengths that PRC soft power has in relation to the United States, pointing out that the PRC international approach is par- ticularly strong in areas where the U.S. political system and U.S. values make it less competitive. Some suggest that these PRC strengths have a brighter future in today’s global economy, mean- ing that China will have increasing economic and political soft power clout internationally at the expense of the United States. Still, a closer look at some of the PRC’s presumed assets suggests that they may have downsides as well.
No Strings The recipient governments of PRC trade and investment are par- ticularly attracted to the fact that Chinese money generally comes with none of the pesky human rights conditions, good governance requirements, approved-project restrictions, and environmental quality regulations that characterize U.S. and other Western gov- ernment investments. With an authoritarian government that has few if any democratic imperatives, China has capitalized on its willingness to make such ‘‘unrestricted’’ international investments as part of its ‘‘win-win’’ international strategy. In response to the December 2006 military coup in Fiji, for in- stance, Beijing promised to continue its aid programs on the grounds that the coup was Fiji’s ‘‘internal’’ affair. (PRC leaders do not appear to define the recipient country’s adoption of the ‘‘one- China’’ policy as such a restriction.) China markets this capacity internationally as a key competitive advantage to Western cap- ital—one that is both more efficient and less intrusive for the re- cipients. And the unrestricted nature of PRC investments resonates with many foreign governments. According to one African leader, for instance: . . . I have found that a contract that would take five years to discuss, negotiate and sign with the World Bank takes three months when we have dealt with Chinese authorities. I am a firm believer in good governance and the rule of law. But when bureaucracy and senseless red tape impede our ability to act—and when poverty persists while international functionaries drag their feet—African leaders have an obligation to opt for swifter solu- tions.20 The World Bank and the U.S. and other Western governments may be able to increase the efficiency of their international invest- ment processes and reduce attending red tape to compete with these PRC advantages. But Beijing’s willingness to make unre- stricted investments while holding the recipients to no standards implicitly validates the policies of the recipient (and often authori-
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tarian) governments. Such a ‘‘hands-off’’ approach could have nega- tive longer-term implications for how the PRC is viewed within the countries in which it is investing. Over the longer term, then, Chi- na’s approach has potential negative consequences that could coun- terbalance any soft power advantages.
The Advantage of State-Owned Assets The PRC also is thought to reap soft-power advantages by having much of its foreign investment carried out by its strong state- owned sector. These state corporations lack transparency, have deep pockets backed by government assets, and operate without the constraints that come with having to issue a corporate annual report. Unlike U.S. corporations investing overseas, who lack this close government patronage and in addition must answer to their shareholders, PRC state-owned companies have the luxury of being able to take a longer-term, strategic view—one more closely inte- grated with national priorities—without having to demonstrate im- mediate profits. But again, there are negative consequences; there is a certain discipline in having to adhere to the bottom line. PRC state-owned companies, lacking this built-in discipline, sometimes are seen to have paid above-market prices for their oil and gas con- tracts and to have entered into unprofitable initial arrangements in order to improve bilateral relations and facilitate future con- tracts.
LIMITATIONS ON PRC ‘‘SOFT POWER’’
Even if its international outreach is entirely benign and centered on economic growth, the PRC’s potential to expand quickly to con- sumption and production levels comparable to those of the United States presents profound challenges to American and global inter- ests. But more alarmist projections tend to minimize or overlook other limitations and complications that confront China’s overseas activities. Recognition of these and other limitations of PRC influ- ence may help shape a more effective U.S. response.
Lack of Success For one thing, PRC actions in a given country do not always lead to Beijing’s desired objective. Haiti in 2008 continues to have diplo- matic relations with Taiwan, for instance, despite PRC efforts in 2005 to make severing Haiti’s relations with Taiwan a condition of Beijing’s support for renewing the U.N. peacekeeping mission there. In another example, the PRC’s efforts to extend its influence in Central Asia through formation of the Shanghai Cooperation Or- ganization did not prevent individual SCO member countries from hosting U.S. military forces after the September 11 terrorist at- tacks in the United States. Moreover, PRC foreign policy success in sometimes constrained by the fact that the countries Beijing is courting have other, more complex foreign policy interests. Accord- ing to one study of U.N. voting records, for example, a country’s in- creased dependence on trade with China does not appear to affect
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21 The study, an examination of U.N. voting records from 1991—2003, conducted in 2006 by the Inter-American Dialogue, is discussed more fully in the Latin America section of this memo. 22 Xing Zhigang, ‘‘China pledges to increase humanitarian aid,’’ China Daily, January 19, 2006. Cited also in Sutter, p. 108. 23 Prime Minister Tony Blair, ‘‘Doctrine of the International Community,’’ in a speech before the Chicago Economic Club, April 22, 1999.The Complications of an International Presence. Even with a ‘‘win-win’’ strategy, acquiring and maintaining an enhanced international presence brings with it certain complications. Among other things, it provides almost innumerable oppor- tunities for international misunderstanding, resentment, cultural backlash, kidnappings, hard feelings, murders, and other assorted repercussions. Cultural backlash and resentment may be heightened by the style that PRC overseas investments and construction projects have pursued to date—involving the import of Chinese workers instead of using the local population. Chinese overseas operations already have begun to experience fallout from their activities: PRC oil drill- ing sites and well-workers have been attacked, kidnapped, or killed in Sudan, Somalia, Nigeria, and elsewhere in Africa. Some Central Asia countries have grown concerned about the level of energy assets that China has been accruing within their borders and have moved to limit such acquisitions. In some Asian countries with high ethnic Chinese populations, there has been push-back against perceived ‘‘Chinese’’ businesses and other interests. As China’s international activities expand, confrontations along these lines are likely to increase, possibly garnering un- favorable publicity for the PRC and putting stress on the ‘‘win-win’’ approach.
its willingness to vote against PRC interests in the United Na- tions.21
The Narrow Base of PRC Achievements In general, China’s new ‘‘win-win’’ approach to international interactions is based on a self-interested approach that focuses only on those issues on which all sides supposedly can agree. Easy things are taken care of first, while inconvenient and difficult things are postponed, possibly indefinitely. Racking up trade and investment agreements in this way, while creating symbolically sig- nificant headlines, nevertheless leaves a lack of depth in China’s overall relationships. Moreover, as already mentioned, China’s lam- entable lack of transparency raises consistent doubts about wheth- er the levels of aid and investment triumphantly announced are the levels of aid and investment actually provided. To cite only one example, China initially reported that it pledged $63 million in assistance to Indonesia after the 2004 tsunami, a fig- ure dwarfed by the $405 million pledged by the United States. A later article in a PRC publication, however, put the actual amount of PRC Indonesian assistance at $22.6 million.22 PRC foreign policy achievements will be constrained if Beijing continues to short- change its intended recipient governments in this way. U.S. observ- ers need to be cautious, then, about the initial headlines of PRC involvement and more mindful of the degree of follow-through. Moreover, a ‘‘win-win’’ strategy is a slender reed for maximizing comprehensive soft power. The soft power potential that the PRC can hope to gain from such a strategy pales next to the national capacity and willingness of the United States to take on costly and forlorn global tasks such as international disaster aid—to dem- onstrate a willingness, in the words of Tony Blair, ‘‘to be the recipi- ent of every demand, to be called upon in every crisis, to be ex- pected always and everywhere to do what needs to be done.’’ 23 Nothing in Beijing’s current soft power approach suggests it is will- ing to embrace such altruism. Foreign entanglements also could raise political problems at home for PRC policymakers. The increasing availability of Internet and cell phone use assures that growing numbers of Chinese citi- zens have more access to information, including information about China’s international activities. Confirmation that China is invest-
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ing millions of dollars in overseas projects, while at home unem- ployment soars and infrastructure development lags, may prove ob- jectionable to the hundreds of millions of PRC citizens still living below the poverty line—much the way many Americans sometimes react to U.S. overseas investment.
The ‘‘Private Sector’’ Calculation As noted above, Beijing is seen to have advantages over the United States in that its overseas activities and investments are conducted by strong, well-funded state-owned companies. These large PRC government activities attract much international atten- tion and give a ‘‘hard’’ edge to PRC soft power. The United States has little to match such centrally directed initiatives, particularly in the wake of years of U.S. budget cutbacks in—and in the case of the U.S. Information Agency, the termination of—high-profile U.S. international public diplomacy programs. But comparing only government-directed and funded activities overlooks the huge ad- vantage the United States has in the extent of its substantial glob- al private-sector presence. In addition to U.S. business interests, American products, schools, newspapers, journals, banks, movies, TV programs, novels, rock stars, medical institutions, politicians, Chambers of Commerce, state governments, culture, religious groups, ideas, NGOs, and other American institutions and values are liberally scattered over the global map. While this U.S. pres- ence is diverse, uncoordinated, not centrally directed, and at times triggers anti-American feelings, it nevertheless leaves a substantial global footprint.
IMPLICATIONS FOR U.S. INTERESTS
Certainly a case can be made for considering the motivations be- hind the PRC’s international activities to be what Beijing claims them to be—a country’s natural and legitimate pursuit of peaceful global opportunities for economic growth. Moreover, PRC interests appear to have benefited more substantially by operating within the current global system, of which the United States is the chief architect, than by challenging it. The United States would be served, then, by encouraging China’s further integration into the global system. Even so, it is clear that China’s growing inter- national muscle, even if natural and benign, by definition increas- ingly must compete with and even limit U.S. freedom to pursue American global interests relatively unencumbered. But it also is possible to support skepticism concerning the ‘‘be- nign rise’’ notion by pointing to historical examples in the 19th and 20th centuries of confrontation and outright warfare between reign- ing powers such as the United States and rising powers such as the PRC. Through this more skeptical lens, the PRC presence in Latin America and the Caribbean has particularly worrisome implica- tions. It could help strengthen anti-democratic and anti-U.S. polit- ical leaders and actors in some countries; moreover, in the event of a possible U.S. military conflict with China, PRC human and commercial infrastructure in Latin America would be well placed to disrupt and distract the United States in the hemisphere and to
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24 R. Evan Ellis, ‘‘The Military-Strategic Dimensions of Chinese Initiatives in Latin America,’’ China-Latin America Task Force, Center for Hemispheric Policy, University of Miami, February 16, 2007.
collect intelligence data against U.S. forces operating in the re- gion.24 Whichever of the above policy directions the PRC is traveling and whatever its ultimate intentions, its international engagement and growing economic clout pose demanding challenges and questions for U.S. policymakers. Some of these include: • How will the United States deal with increasing competition by China for leverage and influence, not only in terms of new eco- nomic and political international relationships, but for current U.S. relationships with allies and other countries where U.S. influence to date has been dominant? • How can the United States hedge against possible PRC hege- monic ambitions in Asia without creating a self-fulfilling prophecy? • How detrimental is PRC ‘‘unrestricted’’ investment and assist- ance for U.S. efforts to promote good governance around the world and to limit corruption? How detrimental are the PRC’s perceived advantages to the ability of U.S. companies to com- pete for international business, and what policies and agree- ments should the United States put in place to mitigate these effects? • What are the implications for U.S. global objectives and for in- stitutions that are seen to espouse Western values, such as the IMF and the World Bank, if the PRC increasingly begins to compete directly as an international lender offering less en- cumbered assistance? • As the PRC increasingly expands its ‘‘hard power’’ assets— naval and military power—to protect its growing international interests, how much greater are the prospects for Sino-U.S. military confrontation, either deliberate or accidental, and how should the U.S. prepare for and deal with these prospects? • What policies should the United States adopt to prepare for in- creasingly robust U.S.-China competition for energy resources, international commodities, and space exploration? • What will it mean for the United States and U.S. interests should Taiwan lose its remaining diplomatic relationships around the world? Should the United States seek to play a more active role in seeking to improve Taiwan’s international position—perhaps by reassessing current U.S. policy toward Taiwan in light of China’s rise? • How should the United States respond, if at all, to any global perceptions of U.S. disengagement around the world?
OPTIONS
Should U.S. policymakers decide that the status quo is sufficient protection for U.S. interests, then little if any action need be taken. The status quo presumes that U.S. soft power, complex and multi- faceted as it is, will be dominant globally far into the future and sufficiently resilient to weather temporary ups and downs; that the
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capacity for PRC global soft power will remain limited, both by Bei- jing’s own policy predilections and by other countries’ self-interests; and that the PRC will remain too pre-occupied with resolving its own significant domestic economic inequities, infrastructure prob- lems, political transformation pressures, and social instabilities to focus significant effort on its global presence. Should U.S. policymakers decide that the PRC’s invigorated ac- tivities around the world require a U.S. response to offset or better compete with China, there are innumerable policy options that might be considered, in both the ‘‘hardline’’ and ‘‘stakeholder’’ cat- egories. Each of these possibilities involves policy trade-offs. These, discussed in more complete detail throughout this memo, are brief- ly summarized below. They include: • Reinvigorate U.S. engagement around the world to counter PRC soft power, including the expansion of U.S. public diplo- macy. In Asia, this could include active participation in build- ing the emerging economic and political/security architecture of the region. In Africa, it could include increased and more effi- cient U.S. bilateral cooperation, trade, and military relations, including the prospect of directly involving the PRC and Afri- can governments in bilateral and multilateral dialogue with the aim of defining goals, issues, and agendas of mutual inter- est. U.S. policymakers also could work to achieve greater effi- ciency and to cut red tape in U.S. and multilateral institution assistance and investment in the regions. • Seek to counter PRC efforts to isolate Taiwan by making sup- port for Taiwan’s greater international participation a condi- tion of U.S. assistance and economic interaction with other countries. • Seek observer status within the SCO and the EAS, and urge China and African countries to create an observational status within the Forum on China-Africa Cooperation, enabling the United States and other countries to learn about the policy pri- orities of these groups and to participate in consultations on time-sensitive, urgent challenges in these regions, including armed conflicts, humanitarian crises, and security threats to Chinese and U.S. businesses. • Urge China to support an equitable, rule-based global legal and business environment and help to develop the rule of law in the regions in which it is investing by signing up to public- private sector good governance initiative and agreements. • Maintain and publicize an accurate calculus of actual PRC as- sistance and investment that is delivered, as opposed to that which is merely announced. • Encourage China to join in multilateral and country-level donor foreign assistance dialogues and related efforts to prioritize key goals related to African development and coordi- nate aid efforts in order to create synergies, avoid duplication, and maximize each donor’s strengths—including infrastructure construction in the case of China. • Offer to work collaboratively with China to help it to design, coordinate, and increase the efficiency of its nascent institu-
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tional foreign aid structure, including with respect to more clearly differentiating its official grant-based aid from its sub- sidization of trade and commerce credit; monitoring the effec- tiveness of its aid strategies; harmonizing aid reporting with other donor governments; and developing best practices in sup- port of transparency and accountability. • Focus on an assertive U.S. role in solving regional problems, including health care to address HIV/AIDS, malaria and other diseases; providing drugs, and building clinics; alternative en- ergy sources; improvements in agricultural development capac- ities and providing increased education and human resource training. • Emphasize cooperation among Russia, China, the EU, and other outside powers in assisting fragile states to develop their independence and security. • Work harder to ensure that U.S. democratization and human rights values are not seen by other countries as encumbrances and prohibitions placed in the way of, but instead as things that ultimately will improve, their economic progress. • Re-think the current U.S. ‘‘gold standard’’ in regional and bi- lateral Free Trade Agreements, especially when such a stand- ard requires substantial changes in domestic laws. • Reinvigorate the Asia-Pacific Economic Cooperation Forum (APEC) as a vehicle for U.S. soft power influence in Asia.
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25 Prepared by Mark P. Sullivan, Specialist in Latin American Affairs. This memo draws from CRS Report RS22119, China’s Growing Interest in Latin America, April 20, 2005, by Kerry Dumbaugh and Mark P. Sullivan.
LATIN AMERICA AND THE CARIBBEAN25
OVERVIEW
China’s growing interest in Latin America and the Caribbean is a fairly new phenomenon that has developed over the past several years. Beginning in April 2001 with President Jiang Zemin’s 13- day tour of Latin America, a succession of senior Chinese officials have visited Latin American countries to court regional govern- ments, while Latin American leaders also have been frequent visi- tors in Beijing. China’s primary interest in the region appears to be to gain greater access to needed resources—such as various ores, soybeans, copper, iron and steel, and oil—through increased trade and investment. It is also likely that Beijing’s additional goal is to isolate Taiwan by luring the 12 Latin American and Caribbean na- tions still maintaining diplomatic relations with Taiwan to shift their diplomatic recognition to China. While China’s economic link- ages with Latin America have grown, the U.S. advantage of geo- graphical proximity means that the PRC presence is likely to re- main dwarfed by U.S. trade with and investment in the region. Moreover, although many Latin American countries welcome Chi- nese investment, some have viewed China as an economic threat, and are concerned that both their domestic industries and their U.S. export markets will be overwhelmed by Chinese competition. Nevertheless, some analysts maintain that Beijing’s growing role in the region may have longer-term implications for U.S. regional in- terests and influence.
DIPLOMACY
Bilateral Relations and Competition With Taiwan Of the 33 independent countries in the Latin America and Carib- bean region, China currently has official diplomatic relations with 21, while the remaining 12 nations maintain relations with Taiwan (see Table 1). For ideological reasons, Communist Cuba was the first nation in the region to recognize China back in 1960, while Chile under Socialist President Salvador Allende was the second in 1970. Mexico established relations with China in 1972, and most South America nations did so in the 1970s and 1980s, including Ar- gentina and Brazil, which were run by military dictatorships at the time. In addition to Cuba, nine other Caribbean nations have diplo- matic relations with the PRC, five of which have had relations since the 1970s. Over the years, China has signed a variety of bilateral partner- ship agreements with several countries in the region in order to strengthen relations. The most politically significant of these are known as ‘‘strategic partnership agreements.’’ To date, China has signed such agreements with Brazil (1993), Venezuela (2001), Mex- ico (2003), and Argentina (2004). Additional ‘‘cooperative partner- ship’’ or ‘‘friendly and cooperative partnership’’ agreements have been signed with Bolivia, Chile, Colombia, Cuba, Ecuador, Ja-
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26 Jorge Dominguez, ‘‘China’s Relations with Latin America: Shared Gains, Asymmetric Hopes,’’ Inter-American Dialogue, Working Paper, June 2006, p. 23; Derek J. Mitchell, ‘‘China and the Developing World,’’ pp. 126–127, paper prepared for May 2007 conference, The China Balance Sheet in 2007 and Beyond, sponsored by the Center for Strategic and International Studies; and ‘‘China’s Quest for Regional Influence: A Balance,’’ Latinnews.com, Southcom Stra- tegic Paper, September 2006, p. 3. 27 Dominguez, p. 22. 28 ‘‘Dominica severs ties with Taiwan,’’ BBC Caribbean, March 29, 2004.
maica, and Peru.26 In the 1980s, China began to augment its ex- pertise on Latin America through agreements for Chinese officials to travel to the region to study Spanish, and through the develop- ment of think tanks such as the Institute of Latin American Stud- ies of the Chinese Academy of Social Sciences (CASS) and the De- partment of Studies about Latin America of the Chinese Com- munist Party.27 For many of the region’s nations, particularly in the Caribbean and Central America, there has been a political dynamic in China’s expanding economic linkages and foreign assistance. China, with some success, has been trying to woo countries away from recog- nizing Taiwan. Taiwan’s official relations in the region now include five Central American countries, six in the Caribbean, and one in South America. For decades, Taiwan was a consistent provider of financial assist- ance and investment in Latin America and the Caribbean in order to nurture its remaining official relationships, a policy often re- ferred to as checkbook or dollar diplomacy. But Taipei now is hard- pressed to compete against the growing economic and diplomatic clout of China, which in recent years has stepped up its own version of checkbook diplomacy. Since 2004, three countries in the region have switched their diplomatic recognition from Taiwan to the PRC: Dominica in March 2004, Grenada in January 2005, and most recently, Costa Rica in June 2007. Dominica severed relations with Taiwan in 2004 after Beijing trumped Taiwan’s $9 million in assistance with a pledge of $122 million in assistance to the tiny country over six years.28
Table 2. China vs. Taiwan: Diplomatic Recognition in Latin America and the Caribbean
Countries Recognizing China (PRC) Countries Recognizing the Republic of China, or ROC (Taiwan)
Mexico
CENTRAL AMERICA: Costa Rica El Salvador, Guatemala, Honduras, Nicaragua, Panama
CARIBBEAN: Antigua and Barbuda, Bahamas, Barbados, Cuba, Dominica, Grenada, Guyana, Ja- maica, Suriname, Trinidad and Tobago
Belize, Dominican Republic, Haiti, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines
SOUTH AMERICA: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, Venezuela Paraguay
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Grenada switched its recognition to China in the aftermath of Hurricane Ivan that devastated the island in September 2004 and destroyed a new cricket stadium that Taiwan had helped build. Disappointed about Taiwan’s response after the hurricane, Grenadian Prime Minister visited China and received support for the rebuilding of the cricket stadium, with workers supplied by China, as well as other grants, support for the agricultural sector, and scholarships. Most recently, Costa Rica under President Oscar Arias switched diplomatic recognition to China in June 2007 in large part because of growing trade relations in recent years and the prospect for in- creased Chinese trade and investment. China is now Costa Rica’s second largest trading partner, after the United States, and the two countries are considering a free trade agreement. China’s overtures in the Caribbean experienced a setback in May 2007 when St. Lucia switched its diplomatic recognition back to Taiwan after ten years of recognizing the PRC. The diplomatic switch was related to the ouster of Prime Minister Kenny Antho- ny’s St. Lucia Labour Party (SLP) from power in December 2006, and the election of a new government led by the United Workers Party (UWP). (In 1997, the ruling SLP government under Anthony had orchestrated a diplomatic switch from Taiwan to China.) Tai- wan’s promises of assistance to the new UWP government in 2007 includes support for public health, education (including the provi- sion of computers and scholarships), and development of the agri- cultural sector.
Regional Organizations Despite the setback with St. Lucia, the PRC’s ability to develop and expand contacts with Taiwan’s friends in the region has been facilitated by a decision by the Organization of American States (OAS) in May 2004 to accept China as a formal permanent ob- server in the OAS. The OAS has 35 members, including the United States and all 12 of the region’s countries currently conferring dip- lomatic relations on Taiwan. Some 60 countries worldwide are OAS permanent observers, but Beijing has strongly objected to Taiwan’s efforts to seek observer status. In addition to the OAS, China has participated in several other regional organizations. Dating back to 1975, China has often sent its observers to the annual meetings of the Agency for the Prohibi- tion of Nuclear Weapons in Latin America and the Caribbean (OPANAL), the organization set up in the aftermath of the 1967 signing of the Tlatelolco Treaty prohibiting nuclear weapons in the region. The PRC has been an observer since 1994 to the Latin American Integration Association (ALADI), a 12-member regional organization focusing on trade integration and the goal of a com- mon market. China is a member of the East Asia-Latin American Cooperation Forum (FOCALAE), an organization first established in 2001 that brings together ministers and officials from 33 coun- tries from the two regions for strengthening cooperation in such areas as education, science and technology, and culture. The PRC also is a member of the Asia Pacific Economic Cooperation (APEC) forum that annually brings together leaders of 21 Pacific rim na-
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29 Rowan Scarborough, ‘‘China Seen Averse to Haiti-Taiwan Ties; Blocks Extension of UN Mis- sion,’’ Washington Times, June 8, 2005; and ‘‘Haiti: Extending Minustah’s Mandate,’’ Latin American Caribbean and Central American Report, August 16, 2007. 30 Central America: Daniel P. Erikson and Janice Chen, ‘‘China, Taiwan, and the Battle for Latin America,’’ The Fletcher Forum of World Affairs, Vol. 31:2 Summer 2007.
tions (including Taiwan as ‘‘Chinese Taipei’’) as well as the Latin American nations of Chile, Mexico, and Peru. More recently, in March 2007, China signed an agreement with the Inter-American Development Bank (IDB) to formalize talks on the PRC’s request to become an IDB member. The bank has launched an internal discussion on whether to accept China as a member. If accepted, China would join Japan and Korea to become the third Asian country to join the IDB. China is already a member of the Caribbean Development Bank based in Barbados. China has also helped support UN peacekeeping operations in the region through its contribution of a ‘‘special police’’ peace- keeping contingent of 125 personnel as part of the United Nations Stabilization Mission in Haiti (MINUSTAH) that began in 2004. This marked Beijing’s first deployment of forces ever in the West- ern Hemisphere. MINUSTAH’s mission, which was due to expire in mid-October 20007, was extended for another year until October 2008. In 2005, China reportedly put pressure on Haiti to switch its diplomatic recognition from Taiwan to the PRC as a condition for supporting the renewal of the UN peacekeeping mission, but Haiti has retained its relations with Taiwan.29
Analysis For now, it appears that China and Taiwan will continue to bat- tle for diplomatic recognition, using the prospect of increased aid, trade, and investment to sway the decisions of the remaining dozen nations recognizing Taiwan. Some observers maintain that key countries to watch include the Central American countries of Nica- ragua and Panama, the Caribbean nation of the Dominican Repub- lic, and Paraguay, the sole South American nation that continues to recognize Taiwan.30 In the aftermath of Costa Rica’s June 2007 decision to switch diplomatic partners, Chinese officials predicted a domino effect in which other countries would switch their rec- ognition to China, but Taiwan launched an initiative in the region in order to counter China’s attempts to tempt additional countries to switch sides that appears to have been successful in the short term. Nevertheless, over the long run, China’s sheer economic size and power bodes well for its ability to entice Taiwan’s remaining 12 allies in Latin America and the Caribbean to switch diplomatic sides. Beyond competition with Taiwan, China’s diplomatic efforts in the larger countries of the region appear to be geared at strength- ening relations and expanding cooperation with nations that have potential resources and investment opportunities that could help feed China’s resource needs and expanding economy. These diplo- matic overtures in Latin America also satisfy China’s efforts to fos- ter relations with other developing countries worldwide and its pro- motion of South-South cooperation. A 2006 study by the Inter-American Dialogue examined the 1991—2003 UN voting records of several major Latin American
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31 Dominguez, pp. 12–18. 32 ‘‘China Seen Edging Taiwan in LatAm Diplomacy,’’ Agence France Presse, May 29, 2007. 33 Trade statistics are from the World Trade Atlas, which uses official Chinese government data.
countries—Argentina, Brazil, Chile, Mexico, and Venezuela—and concluded that the increased Chinese trade with the region in re- cent years has had no discernable effect on the voting behavior of these nations. The study also looked at several countries having diplomatic relations with Taiwan—Costa Rica (before it switched diplomatic relations to the PRC), Panama, and Paraguay—and found little difference in voting coincidence with China between countries that recognize China and those that recognize Taiwan. Cuba, for political reasons, stands out as the Latin American coun- try with a high voting coincidence with China, although increases in economic linkages do not appear to have had an impact on Cuba’s voting behavior.31 While countries in the region that recognize Taiwan often speak out in favor of its inclusion at the UN and its various agencies, this is not always the case. During a vote in 2007 on Taiwan’s member- ship in the World Health Organization (WHO), Panama and Nica- ragua both abstained, while Costa Rica, which recognized Taiwan at the time, voted against its membership.32
ECONOMIC TIES
Trade Much of China’s interest in Latin America—especially in South America—is economically motivated, with Beijing eager for access to such commodities as iron and other ores, soybeans, copper, iron and steel, integrated circuits and other electrical machinery, and oil in order to meet the demands of China’s booming economy. Total trade between China and the Latin America and Caribbean region rose from $8.2 billion in 1999 to almost $70 billion in 2006 (see Figure 1). During this period, China’s trade with the region as a percentage of its world trade increased from 2.3% in 1999 to 4% in 2006. For many countries in the regions, China has become a major trading partner and ranks as one of the top four export and import markets. China signed a free trade agreement (FTA) with Chile in 2005, and in October 2007 China and Costa Rica an- nounced that they would explore the feasibility of an FTA. China’s imports from the region grew from almost $3 billion in 1999 to almost $34 billion in 2006, more than an eleven-fold in- crease in seven years.33 Because of this growth in imports, China has run a trade deficit with the region for three out of the past four years. While imports from Latin America are just a small percent- age of China’s overall imports, they grew from 1.8% of total Chi- nese imports in 1999 to 4.3% in 2006. China’s top five import sources in Latin America in 2006 were Brazil ($12.9 billion), Chile ($5.7 billion), Argentina ($3.7 billion), Peru ($2.9 billion), and Ven- ezuela ($2.7 billion). Major imports from the region in 2006 in- cluded: iron, copper, lead and other ores (30%); soybeans (14%); oil and other mineral fuel (14%); copper (7.5%); and electrical machin- ery (largely integrated circuits) 8.3%. For most countries in the re-
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gion, one or two commodities dominate their exports to China. (See Table 3.) China’s exports to Latin America have also grown considerably in the last seven years, from $5.3 billion in 1999 to $35.8 billion in 2006. Major exports have included electrical machinery; home, office, and other appliances, including computers; woven and knit apparel; footwear; and organic chemicals. During this period, the overall share of China’s exports to the region as a percentage of its worldwide exports, although small, increased slightly from 2.7% in 1999 to 3.7% in 2006. China’s top five export destinations in Latin America in 2006 were Mexico ($8.8 billion), Brazil ($7.4 billion), Panama ($3.9 billion), Chile ($3.1 billion), and Argentina ($2 bil- lion).
Figure 1. China’s Trade with Latin America and the Caribbean (LAC)—1999–2006 (U.S. $millions)
Table 3. China’s Imports from Latin America and the Caribbean (LAC) in 2006: Top Ten Source Countries
Country Import Value (U.S. $ billions)
Percent of Total LAC Exports to China Country’s Major Exports to China
Brazil .......................................... 12.9 38.0 Iron Ore (44%) Soybeans (23%) Chile ........................................... 5.7 16.7 Copper Ore and Copper (79%) Argentina .................................... 3.7 10.9 Soybeans and Soybean Oil (61%) Peru ............................................ 2.9 8.5 Copper, Iron, and other Ores (53%) Venezuela ................................... 2.7 7.8 Oil (89%) Mexico ........................................ 2.6 7.7 Electrical Machinery and Machinery (57%) Costa Rica ................................. 1.7 5.1 Integrated Circuits (96%) Cuba ........................................... 0.5 1.6 Nickel (54%) Jamaica ...................................... 0.4 1.1 Aluminum Oxide (99%) Uruguay ...................................... 0.3 0.8 Soybeans (47%)
Source: World Trade Atlas, which uses Chinese Government statistics.
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34 Calculations derived from trade statistics presented in: International Monetary Fund, Direc- tion of Trade Statistics, 2007 Yearbook. 35 UNCTAD, ‘‘World Investment Report 2007,’’ October 2007. 36 He Li, ‘‘China’s Growing Interest in Latin America and Its Implications,’’ The Journal of Strategic Studies, Vol. 30, No. 4–5, August-October 2007, p. 845, utilizes statistics from China’s Ministry of Commerce.
In terms of China’s trade importance for the region, as noted above, China ranks as one of the top four export markets and im- port markets for many countries in the region. Looking at Latin America and the Caribbean as a whole, almost $26 billion or about 3.7% of the region’s exports worldwide in 2006 were destined for China while about $53 billion or about 8% of its imports were from China.34 Table 4 shows the relative significance of China as a trad- ing partner for several countries in the region in 2006.
Investment While China’s trade flows have increased dramatically, both glob- ally and with Latin America, Chinese foreign direct investment (FDI) abroad, while increasing, has not been as significant. China’s cumulative stock of FDI worldwide amounted to $73.3 billion at the end of 2006—just 0.58% of global FDI stock.35 Traditionally, a large majority of China’s investment abroad has been concentrated in Asia, largely Hong Kong, although in recent years, investment to Latin America and the Caribbean has been increasing. The cumulative stock of Chinese FDI in Latin American and Car- ibbean rose from $4.6 billion in 2003, accounting for almost 14% of China’s FDI stock worldwide, to $11.5 billion in 2005, accounting for 20% of China’s investment worldwide.36 Closer scrutiny of Chi- na’s FDI data for the region, however, shows that the overall level could be significantly overstated. An overwhelming majority of Chi- nese FDI to the region goes to three British dependencies—the Cayman Islands, the British Virgin Islands, and Bermuda—that are known as tax havens. In 2005, almost 96% of Chinese FDI in Latin America and the Caribbean went to these three nations. These three nations are also major sources of FDI into China, showing that the possible intention of China’s FDI into these juris- dictions could be so-called ‘‘round-tripping,’’ whereby Chinese inves- tors bring the capital back into the country as foreign capital in order to take advantage of preferences given to foreign firms.
Table 4. Importance of China as a Trading Partner for Selected Latin American Countries, 2006
Country Exports to China (U.S. $ millions) Percent of Country’s Exports Imports from China (U.S. $ millions) Percent of Country’s Imports
Argentina ........................................ 3,473 7.5 2,150 6.3 Brazil .............................................. 8,399 6.1 7,989 8.7 Chile ............................................... 4,934 8.8 3,487 10.0 Colombia ........................................ 1,066 1.9 5,250 8.5 Costa Rica ...................................... 558 6.6 543 4.3 Mexico ............................................. 1,688 0.7 24,438 9.5 Paraguay ........................................ 20 1.0 1,412 26.9 Peru ................................................ 2,267 9.7 1,586 10.4
Source: World Trade Atlas, utilizing data provided by Latin American governments.
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37 ‘‘China: Going Outside, Round-Tripping and Dollar Diplomacy: An Introduction to Chinese Outward Direct Investment,’’ Global Insight, January 25, 2006; ‘‘World: Chinese ODI in Latin America: A Convergence of Interests,’’ Global Insight, February 2, 2006. 38 He Li, p. 845, utilizing statistics from China’s Ministry of Commerce. 39 Marco Aquino, ‘‘China Miners Keenly Eyeing Peru Resources,’’ Reuters News, September 13, 2007. 40 He Li, p. 846.
China also could be using these tax-friendly jurisdictions to reg- ister companies and save money, with investment then actually flowing to Latin America.37 Non-financial Chinese investment in Latin America has focused on the extraction and production of national resources, but also has included investment in manufacturing assembly, telecommuni- cations, and textiles. Outside of the Caribbean tax haven jurisdic- tions, China’s FDI in the region in 2005 was concentrated in Mex- ico ($142 million), Peru ($129 million), Brazil ($81 million), Ven- ezuela ($43 million), Panama ($35 million), and Cuba ($34 mil- lion).38 Since the entry into force of the North American Free Trade Agreement (NAFTA) in 1994, China has viewed Mexico as an ac- cess point to the U.S. market, with a number of export assembly plants established in the country. In Peru, Chinese investment has been concentrated in mining (especially copper) and oil. In April 2007, China’s Zijin Mining Group agreed to buy a majority share of the UK-based Monterrico Metals that operates exclusively in Peru, and in July 2007, China’s Aluminum Corporation of China (Chinalco) purchased majority shares in Peru Copper, a Canadian mining company, which owns a property that could become one of Peru’s largest copper mines by 2012.39 In Brazil, Chinese invest- ment has been concentrated in wood processing, mining, and en- ergy. In 2007, China’s state-owned steel company, Baosteel, an- nounced that it would be a majority partner with Brazil’s large mining company, Companhia Vale do Rio Doce (CVRD), in building a steel plant in southern Brazil. The visit of Chinese President Hu Jintao to several Latin Amer- ican countries in November 2004 raised expectations of a substan- tial increase in Chinese investment in the region in coming years. During a speech to the Brazilian Congress, Hu stated that China would invest $100 billion in Latin America over the next 10 years. In Argentina alone, he said China would invest $20 billion in the next decade. Latin American nations welcomed the increase in for- eign capital that the Chinese were promising, especially since the region was experiencing a slump in attracting FDI. Among the in- vestment pledges highlighted in the press during President Hu’s trip to Latin America were: railway, oil exploration, and construc- tion projects in Argentina; a nickel plant and oil and gas explo- ration in Cuba; copper mining projects in Chile; a steel mill, rail- way, and oil exploration projects in Brazil; and oil and gas explo- ration projects in Ecuador, Bolivia, and Colombia. Chinese promises of such high levels of investment in the region have not yet materialized, and likely will total far less than the promised $100 billion by 2014. Many of the planned projects have not gone forward. At least one Chinese official specializing in Latin America maintains that the $100 billion referred to bilateral trade, not investment.40 According to some observers, China’s inexperi- ence in investment abroad, its lack of information about business
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41 Claudio Loser, ‘‘The Growing Economic Presence of China in Latin America,’’ China-Latin America Task Force, Center for Hemispheric Policy, University of Miami, December 15, 2006. 42 Derek Mitchell and Chietigj Bajpaee, ‘‘China and Latin America,’’ Background Paper, China Balance Sheet, Center for Strategic and International Studies, July 2006. 43 Energy Information Administration, ‘‘Venezuela, Country Analysis Brief,’’ October 2007; David Luhnow and Peter Millard, ‘‘How Chavez Aims to Weaken U.S.—China to Get Preference with Oil from Projects Now Under State Control,’’ Wall Street Journal, May 1, 2007. 44 Andy Webb-Vidal, ‘‘Chavez on Oil Export Mission in China, Financial Times, August 24, 2006.
in Latin America, and concerns about the risks of investing in the region all combined have limited China’s investment in the re- gion.41
Energy Energy concerns have played a role in China’s overtures toward Latin America, with the PRC either concluding or exploring various energy investments in Brazil, Ecuador, Bolivia, Peru, Colombia, and Venezuela, as well as offshore projects in Argentina and Cuba. The three major, state-owned Chinese energy corporations making Latin American investments are the China Petroleum and Chem- ical Corporation (Sinopec), China National Offshore Oil Corpora- tion (CNOOC), and China National Petroleum Corporation (CNPC). In April 2006, Sinopec signed an agreement with Brazil’s Petrobras to build a natural gas pipeline linking the northeast and southeast of Brazil. Petrobras and CNOOC also reportedly are studying the feasibility of joint operations in exploration, refining, and pipeline construction around the world. In Cuba, Sinopec has focused on on- shore oil extraction in Pinar del Rio province in western Cuba. In Venezuela, CNPC is partnered with Venezuela’s state-oil company, PdVSA (Petroleos de Venezuela, S.A.), for exploration in develop- ment of the Orinoco belt oil reserves. Despite these investments in oil production and assets, observers point out that China relies rel- atively little on Latin America for oil, which accounts for some 3% of China’s oil imports, and that while the percentage could rise a bit, it is unlikely to change significantly in the future.42 Some U.S. observers have been particularly concerned about Chi- na’s activities in Venezuela, and question the reliability of Ven- ezuela, which supplied over 11% of U.S. crude oil imports in 2006, as a major supplier of oil to the United States. They are concerned that Venezuela is looking to develop China as a replacement mar- ket, although Venezuelan officials maintain that they are only at- tempting to diversify Venezuela’s oil markets. Venezuela exported about 1.4 million barrels per day (bpd) of oil to the United States in 2006, almost 64% of its net oil exports of 2.2 million bpd. For comparison, Venezuela’s oil exports to China are far lower, al- though there is discrepancy about the actual level. The U.S. Energy Information Administration estimates that Venezuela’s oil exports to China were about 80,000 bpd in 2006, while figures most often cited in the press are that Venezuela exported 150,000 bpd of oil to China.43 Venezuela has vowed to increase its oil exports to China to 1 mil- lion bpd by 2011, although energy analysts maintain that there are two major difficulties with this ambition. First, China does not have the capability to refine Venezuela’s heavy crude oil, and sec- ond, freight costs are high because of the large distance between the two countries.44 Nevertheless, in 2006, PdVSA announced that
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45 He Li, p. 848. 46 Dominguez, p. 30. 47 Maurico Mesquita Moreira, ‘‘Fear of China: Is There a Future for Manufacturing in Latin America?’’ World Development, Vol. 35, No. 3, 2006.
it would buy 18 oil tankers from China that would help Venezuela increase its oil exports to Asia.
Tourism Over the past four years, China has designated 16 countries in Latin America and the Caribbean as approved destinations for Chi- nese citizens to travel as tourists. Such agreements allow the coun- tries to take advantage of the increase in Chinese tourist travel worldwide, which is expected to reach 100 million by 2020. Cuba was the first country in the region to receive ADS status in 2003. Since 2005, 15 more countries in the region have been designated: Mexico; the South American countries of Argentina, Brazil, Chile, Peru, and Venezuela; and the Caribbean nations of Antigua and Barbuda, the Bahamas, Barbados, Dominica, Grenada, Guyana, Ja- maica, Suriname, and Trinidad and Tobago. Costa Rica appears to be a likely ADS candidate since its 2007 switch in diplomatic rela- tions from Taiwan to the PRC. In November 2007, Costa Rica an- nounced that some 200 Chinese tour operators would visit the country over the next several months as a step toward increasing Chinese tourism in the Central American country. While Chinese tourism to Latin America to date has not been significant, this could change given the recent tourism agreements with the region as well as the marketing campaigns undertaken by various nations in the region to attract Chinese tourists.45
Analysis While many press accounts focus on Latin American countries welcoming Chinese trade and investment, this view is not shared by all countries in the region. Mexico and many Central American countries view China as a competitor, in terms of supplying assem- bled goods to the U.S. market. They fear losing their U.S. market share to China. Fear of competition from Chinese apparel and tex- tile exports was a major factor for Central American nations and the Dominican Republic in negotiating the DR-CAFTA agreement with the United States. There has also been fear in other Latin American countries about the impact of Chinese competition on do- mestic manufacturing sectors. For example, Brazilian manufactur- ers of footwear, toys, textiles, and consumer electronics have suf- fered from competition with China.46 Because of the large increase in Chinese imports, Brazil is poised to run a trade deficit with China in 2007, the first since 2000, which has raised considerable concern among Brazilian manufacturers. The specter of a flood of Chinese manufactured exports to Latin America has led some economists to question the future viability for manufacturing in Latin America.47 Other economists and observers contend, how- ever, that increased Chinese trade and investment can act as an engine of growth for Latin American economies and could serve as
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48 Economic Commission for Latin America and the Caribbean, ‘‘Latin America and the Carib- bean in the World Economy, 2004–2005 Trends,’’ p. 157; Javier Santiso, ‘‘Can China Change Latin America?’’ OECD Observer, July 2007; and He Li, p. 852. 49 U.S. trade statistics are from the Department of Commerce, as presented by World Trade Atlas. 50 Calculations derived from trade statistics presented in: International Monetary Fund, Direc- tion of Trade Statistics, 2007 Yearbook. 51 U.S. foreign investment statistics are from the ‘‘Survey of Current Business,’’ September 2007, Department of Commerce. 52 The 110th Congress is considering legislation that would make it easier to initiate counter- vailing duties against ‘‘Non-market economies.’’ Bills include: H.R. 708; H.R. 1229; H.R. 2942; S. 974; and S. 364. 53 ‘‘China: Going Outside, Round-Tripping and Dollar Diplomacy: An Introduction to Chinese Outward Direct Investment,’’ Global Insight, January 25, 2006; for information on congressional efforts to make it easier to initiate anti-dumping actions against non-market economies, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne Morrison. 54 Derek J. Mitchell, p. 117; Michael A. Glosny, ‘‘Meeting the Development Challenge in the 21st Century: American and Chinese Perspectives on Foreign Aid,’’ National Committee on United States-China Relations, August 2006, p. 15. 55 He Li, p. 847.
an impetus for reform in the region in order to increase the ability to compete with Chinese imports.48 As noted above, while China’s economic linkages with Latin America and the Caribbean have grown considerably in the past few years, they represent only a small percentage of the PRC’s eco- nomic linkages worldwide. Moreover, U.S. trade and investment with the region continues to dwarf that of China’s involvement. China’s overall trade with LAC grew to about $70 billion in 2006, representing just 4% of its overall trade. In comparison, U.S. trade with Latin America and the Caribbean amounted to almost $555 billion in 2006, accounting for about 19% of U.S. trade worldwide.49 Moreover, the United States is far more important as a trading partner for the Latin America and Caribbean region than China is. In 2006, almost 38% of the region’s exports were destined for the United States, compared to 3.7% destined for China; likewise, over 34% of the region’s imports were from the United States in 2006, compared to almost 8% from China.50 While China’s reported cu- mulative stock of FDI in the region amounted to $11.5 billion in 2005, the cumulative stock of U.S. FDI in the region amounted to $366 billion in 2005, and grew to $403 billion by 2006.51 Many ob- servers are also skeptical about the prospects of Venezuela signifi- cantly increasing its exports to China. An area in which China’s economic overtures toward Latin Amer- ica have been successful is in securing ‘‘market economy status,’’ a determination which makes it more difficult for a country to ini- tiate anti-dumping actions at the World Trade Organization.52 In recent years, the PRC has secured this designation from a number of Latin American countries, including Argentina, Brazil, Chile, Peru, and Venezuela.53
FOREIGN ASSISTANCE
The exact level of China’s foreign assistance to Latin America and the Caribbean is uncertain, but reportedly the region receives about 10% of China’s foreign aid worldwide, far behind assistance that China reportedly provides to Asia and Africa.54 Aid to the re- gion appears to focus on bilateral assistance rather than through regional or multilateral institutions, with the objectives of strengthening diplomatic relations and isolating Taiwan.55
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56 ‘‘China Cancels Debt Owed by Guyana,’’ BBC Monitoring Americas, July 11, 2007. 57 Paul Hubbard, ‘‘Aiding Transparency: What We Can Lean About China Exim Bank’s Concessional Loans,’’ Center for Global Development, Working Paper Number 126, September 2007. 58 ‘‘More Chinese Investment Coming,’’ BBC Caribbean, September 11, 2007. 59 ‘‘Venezuela, China Govts Create $6 Bln Joint Development Fund,’’ Dow Jones Newswires, November 6, 2007.
Particularly in the Caribbean and Central America, China has used assistance in recent years as part of its checkbook diplomacy to entice countries in the region to switch their diplomatic recogni- tion from Taiwan, while a number of countries in the region have been adept at playing the two countries against each other in order to maximize financial benefits. As noted above, Chinese assistance to Dominica and Grenada was instrumental in those countries de- ciding to switch diplomatic recognition. Costa Rica was also ru- mored to have been offered substantial assistance, although Costa Rican officials maintain the prospect of increase trade and invest- ment was the primary rationale for the switch. In preparation for the Cricket World Cup 2007 played in the Car- ibbean, China provided assistance and workers to build cricket sta- diums in Antigua and Barbuda, Grenada, Jamaica, and even St. Lucia, which subsequently switched its diplomatic recognition back to Taiwan. China also had built a cricket stadium in Dominica in 2004. China also has provided assistance for housing, education (in- cluding scholarships as well as the construction of schools), health (including the construction of hospitals), and other infrastructure such as railways and highways. In recent years, China also has provided additional types of as- sistance to the region, including disaster assistance, debt forgive- ness, and concessional loans. In the aftermath of such natural dis- asters as earthquakes, floods, and hurricanes, China often has re- sponded with assistance. For example, China provided hurricane reconstruction assistance to Grenada in the aftermath of Hurricane Ivan in 2004. In August 2007, China provided support to Peru in the aftermath of a devastating earthquake in the southern part of that country. While most of China’s debt forgiveness has been for low-income African countries, China announced in July 2007 that it would write off over $15 million in debt owed by Guyana, one of the poorest countries in the hemisphere.56 In terms of concessional loans, China’s Export-Import Bank provided a $12 million loan to Jamaica in the water sector in 2000. In addition to Jamaica, China has signed concessional loan framework agreements with three other countries in the region— Suriname, Venezuela, and Trinidad and Tobago.57 In September 2007, China announced that it would provide about $530 million in favorable loans over three years to Chinese companies investing in the Caribbean.58 In early November 2007, China and Venezuela agreed to estab- lish a joint development fund (with a $4 billion contribution from China and a $2 billion contribution from Venezuela) that would be used to finance loans for infrastructure, energy, and social projects in both nations.59 China also has increased student and educational exchanges with the region. In 2006, it established the first Confucius Institute
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60 Organization for Economic Cooperation and Development, Geographical Distribution of Fi- nancial Flow to Aid Recipients, 2001–2005, 2007, p. 260. 61 House International Relations Committee, Subcommittee on the Western Hemisphere, Hearing on ‘‘China’s Influence in the Western Hemisphere,’’ Serial No. 109–63, April 6, 2005.
in the region, in Mexico City, with the goal of promoting Chinese language and culture. While the lack of data on Chinese foreign assistance going to the region makes it impossible to compare Chinese and U.S. assistance levels, it is safe to assume that U.S. assistance is far greater. Look- ing at 2005 statistics comparing foreign assistance levels from de- veloped countries to Latin America and the Caribbean, the United States was by far the single largest bilateral donor to the region, accounting for 29% of the $4.6 billion in bilateral assistance.60
IMPLICATIONS FOR U.S. POLICY IN LATIN AMERICA AND THE CARIBBEAN
China’s increasing linkages with Latin America and the Carib- bean prompted growing concerns in Congress about China’s inten- tions in the region beginning in 2005. House and Senate sub- committees held hearings that year on China’s role in Latin Amer- ica, while the U.S. China Economic and Security Review Commis- sion, established by Congress, held hearings on China’s global ex- pansion, including in the Western Hemisphere. A flurry of other re- search studies emerged on the issue, examining a range of issues related to China’s growing involvement in the region. In congressional testimony and other statements, Bush Adminis- tration officials have downplayed concerns about potential threats to the United States emanating from China’s engagement with Latin American nations, although they have maintained that the United States needs to be watchful of China’s actions in the hemi- sphere. In April 2005 testimony before the House Subcommittee on the Western Hemisphere, then Assistant Secretary of State for Western Hemisphere Affairs Roger Noriega stated that ‘‘China’s in- fluence in the region is minimal today,’’ and that while China’s presence in the hemisphere is growing, ‘‘it is safe to say the United States has been and will continue to be the long-term partner of preference.’’ 61 At the same hearing, then Deputy Assistant Secretary of Defense for Western Hemisphere Affairs Rogelio Pardo-Maurer testified that there was no ‘‘evidence that Chinese military activities in the Western Hemisphere, including arms sales, pose a direct conven- tional threat to the United States.’’ Nevertheless, both officials cau- tioned that the United States needed to be aware of China’s actions in the region. Noriega maintained that the United States would continue to monitor China’s outreach to Latin America, just as it monitors China’s outreach around the world. Pardo-Maurer main- tained that the United States needs ‘‘to be alert to rapidly advanc- ing Chinese capabilities, particularly in the field of intelligence, communications, and cyber warfare, and their possible application in the region.’’ U.S. officials have suggested that Chinese engagement with Latin America could lead to increased U.S.-Chinese cooperation. At a September 2005 Senate Foreign Relations Committee hearing, Principal Deputy Assistant Secretary of State for Western Hemi-
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62 Senate Foreign Relations Committee, Hearing on ‘‘Challenge or Opportunity: China’s Role in Latin America,’’ September 20, 2005. 63 Andres Oppenheimer, ‘‘China Likely to Calm U.S. Fears on Latin America,’’ Miami Herald, April 9, 2006. 64 Tim Johnson, ‘‘China: Our Goal is Economic; Despite Strengthening Trade Ties, China Said It Had No Plans to Expand Its Influence in Latin America,’’ Miami Herald, April 15, 2006. 65 He Li, pp. 854–858. 66 William Ratliff, ‘‘Beijing’s Pragmatism Meets Hugo Chavez,’’ Brown Journal of World Af- fairs, Winter/Spring 2006.
sphere Affairs Charles Shapiro maintained that China’s engage- ment with the region could ‘‘lead to increased cooperation between China, the United States, and other Latin American and Caribbean governments on matters affecting regional stability, especially ter- rorism, transnational crime, and counternarcotics.’’ 62 In April 2006, Assistant Secretary of State for Western Hemi- sphere Affairs Thomas Shannon visited Beijing as part of the first U.S. consultations with China on Latin America. Prior to the trip, Shannon acknowledged that China ‘‘is an increasingly important player’’ in Latin America, and that it was important for the two countries to ‘‘understand what each other is up to in the region.’’ He maintained that the United States sees ‘‘the region as having achieved a consensus about democracy, free markets and protecting the security of the democratic state,’’ and that the U.S. ‘‘interest is to make certain that China respects this larger consensus.’’ 63 Shannon described the consultations as constructive and positive, with China assuring the United States that it has no plans to seek greater influence in the region beyond expanding trade.64 After several years of increased Chinese engagement with Latin America, most observers have concluded that China’s economic in- volvement with the region has not posed a threat to U.S. policy or U.S. interests in the region. In terms of economic, political, and cul- tural linkages, the United States has remained predominant in the region. U.S. trade and investment in Latin America dwarfs that of China, while the future growth potential of such Chinese economic linkages with the region is constrained by the advantages conferred by U.S. geographic proximity to Latin America. Moreover, migra- tion patterns to the United States from the region give the United States greater cultural ties and longer-term economic importance to the region than China could ever have. For example, remittance flows from the United States to the region amounted to $60 billion in 2006—a sum greater than both foreign aid and portfolio invest- ment flows to the region, with remittances making a significant contribution to the economies of several Caribbean and Central American nations. In its policy toward Latin America, China has been careful not to antagonize the United States in the region, and appears to un- derstand that the United States is sensitive to involvement in its neighborhood. China has taken a low-key approach toward the re- gion, focusing on trade and investment opportunities that help con- tribute to its own economic development and managing to avoid public confrontation with the United States.65 Even Chinese rela- tions with Venezuela are focused on oil resources rather than ideo- logical rapport. China reportedly does not want to become a pawn in a dispute between Venezuela and the United States.66 Moreover, China reportedly has concerns that Venezuelan President Hugo Chavez’s efforts at spreading his populist agenda to other countries
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67 June Teufel Dreyer, ‘‘The China Connection,’’ China-Latin America Task Force, Center for Hemispheric Policy, University of Miami, November 8, 2006. 68 ‘‘Findings and Recommendations of the China—Latin America Task Force, March—June 2006,’’ Center for Hemispheric Policy, University of Miami. 69 R. Evan Ellis, ‘‘The Military-Strategic Dimensions of Chinese Initiatives in Latin America,’’ China-Latin America Task Force, Center for Hemispheric Policy, University of Miami, February 16, 2007.
in the region could unleash instability and ultimately be detri- mental to Chinese trade and investment interests in the region.67 Nevertheless, other observers contend that China poses a poten- tial threat to U.S. influence and interests in the region. First, some maintain that by presenting an alternative political and economic model—rapid economic growth and modernization alongside polit- ical authoritarianism—the PRC undermines the U.S. agenda to ad- vance political reform, human rights and free trade in the region.68 According to this view, the Chinese model could help strengthen anti-democratic and anti-U.S. political leaders and actors in some countries. Second, according to some analysts, China’s regional presence ultimately could have significant strategic implications for the United States in the event of a possible military conflict with China. In this scenario, China could use its human and commercial infrastructure in the region to disrupt and distract the United States in the hemisphere. According to this view, China’s increased presence in the region could also provide the country with new op- portunities to collect intelligence data against U.S. forces operating in the region.69
Figure 2. Map of Central America and the Caribbean Region
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Figure 3. Map of Latin America and the Caribbean
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70 Prepared by Thomas Lum, Foreign Affairs, Defense, & Trade Division, with the assistance of Susan Chesser, Knowledge Services Group FDT, November 2007. 71 The Freely Associated States are former districts of the United Nations Trust Territory of the Pacific, administered by the United States. Under the Compacts of Free Association (entered into by the United States and the Marshall Islands and Micronesia in 1986 and the United States and Palau in 1995), the FAS are sovereign nations but the United States is responsible for their security and economic well-being.
THE SOUTHWEST PACIFIC70
OVERVIEW
The People’s Republic of China (PRC) has become a growing po- litical and economic force in the Southwest Pacific. Some analysts argue that China has begun to fill a vacuum created by waning U.S. attention since the end of the Cold War, when USAID with- drew its aid missions. By comparison, Australia, Japan, and the EU have maintained strong regional presences. In order to garner political and economic influence for key objectives, as well as to ac- cess raw materials, China has expanded its diplomatic and com- mercial activities in the Pacific. By some accounts, the PRC has be- come the third-largest source of foreign aid to the South Pacific, which it largely provides without the kinds of conditions or per- formance criteria that have engendered resentment among some Pacific Island countries toward their major benefactor, Australia. Aid and investment from both China and Taiwan, which has diplo- matic relations with six Pacific Island nations, have generated both appreciation and resentment among peoples of the region. Although China’s influence currently is largely limited to diplomatic and eco- nomic ‘‘soft power,’’ some analysts worry about the PRC’s long-term strategic intentions. The Pacific Islands can be divided into four spheres of influence: American, Australian, New Zealander, and French. The American sphere extends through parts of Micronesia, in which lie two U.S. territories (Guam and the Commonwealth of the Northern Mariana Islands) and the Freely Associated States (The Republic of the Marshall Islands, the Federated States of Micronesia, and the Re- public of Palau), as well as Polynesia, including Hawaii and Amer- ican Samoa.71Guam and the Northern Mariana Islands (CNMI), along with the Freely Associated States (FAS), have been regarded as a security border of the United States, the defense of which is considered to be key to maintaining vital sea lanes in the Pacific. In addition to being home to the Reagan Ballistic Missile Defense Test Site at Kwajalein Atoll in the Marshall Islands, the FAS are located strategically between Hawaii and Guam. According to some military experts, the FAS provide a vast buffer zone for Guam, which serves as the ‘‘forward military bridgehead’’ from which to launch U.S. operations along the Asia-Pacific security arc stretch- ing from South Korea and Japan, through Thailand and the Phil- ippines, to Australia. Australia’s regional interests focus on the islands south of the equator, including the relatively large Melanesian nations of Papua New Guinea (PNG) and the Solomon Islands as well as Vanuatu. New Zealand has long standing ties with the territory of Tokelau, former colony Samoa (also known as Western Samoa), and two self- governing but ‘‘freely associated’’ states, the Cook Islands and Niue. New Zealand also has a large native Polynesian population
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72 Most U.S. assistance to the region is not development aid but rather economic grants pro- vided to the Freely Associated States pursuant to the Compacts of Free Association. 73 See Scott Whitney, ‘‘U.S. Pays Little Attention to Asia, Less to the Pacific,’’ Pacific Islands Report, July 2, 2003. For further information, see Henry S. Albinski, ‘‘External Power Engage- ment in Melanesia,’’ in Bruce Vaughn, ed. The Unraveling of Island Asia?: Governmental, Com- munal, and Regional Instability, Westport: Praeger, 2002. 74 Bertil Lintner, ‘‘China’s Third Wave, Part 2,’’ Asia Times Online, April 18, 2007 [www.atimes.com]. 75 China reportedly has more diplomats in the region than any other country. Nick Squires, ‘‘Pacific Persuasion,’’ South China Morning Post, July 21, 2005. 76 Taiwan (ROC) has diplomatic relations with the following Pacific Island nations: Kiribati, the Marshall Islands, Nauru, Palau, the Solomon Islands, and Tuvalu. China has diplomatic re- lations with Cook Islands, Fiji, Micronesia, Papua New Guinea, Samoa, Tonga, and Vanuatu.
of Maoris as well as large numbers of other more recently arrived Pacific Islanders. Australia and New Zealand often cooperate on re- gional security matters. France continues to administer French Polynesia and New Caledonia. Australia, Japan, New Zealand, the United Kingdom, and the United States are the major providers of official development assistance (ODA).72 Other than Australia and New Zealand, the only Oceanic nations with significant defense forces are Papua New Guinea and Fiji. Tonga and Vanuatu also have small forces. The United States is obligated by treaty agreement to defend the Freely Associated States. Several other Pacific states rely upon Australia and New Zealand for their external security. In the past several years, China has asserted increasing diplomatic and economic influence across the entire region, but it lacks a regional military role or ‘‘hard power.’’ 73 China’s military assistance to Pacific countries report- edly is modest—mostly training and logistical support rather than weaponry—but increasing.74
DIPLOMACY
The China-Taiwan Rivalry and ‘‘Dollar Diplomacy’’ Competition for friends among Pacific countries has spurred PRC and Taiwanese diplomatic and economic activity in the region. While the United States does not maintain an embassy in several Pacific Islands countries with which it has diplomatic relations, the PRC has opened diplomatic missions in all Pacific countries with which it has diplomatic relations and has provided bilateral assist- ance, embarked on high profile regional visits, and hosted lavish receptions in Beijing for Pacific Island leaders.75 Of the 23 coun- tries with which Taiwan (or ROC) has diplomatic ties, six are in the Pacific, of which two are Freely Associated States.76 China and Taiwan have become major sources of trade, investment, immigra- tion, and tourism in the region. The PRC and Taiwan both have begun to develop more coordi- nated diplomatic and economic strategies in the Pacific. In April 2006, PRC Premier Wen Jiabao held a summit in Fiji (China-Pa- cific Island Countries Economic Development and Cooperation Forum) with members of the principal regional organization, the Pacific Islands Forum (PIF). At the meeting, China and several PIF countries signed the China-Pacific Island Countries Economic De- velopment and Cooperation Guiding Framework. Wen reportedly pledged $375 million in development assistance and low interest loans as well as the establishment of preferential tariffs for Pacific Island goods. The PRC also has expressed interest in a free trade
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77 ‘‘Fiji to Seek Development Loan from China after Donors Threaten to Cut Funding,’’ Inter- national Herald Tribune, July 5, 2007. 78 Lawrence Cheng, ‘‘Chen Denies Chequebook Diplomacy,’’ South China Morning Post, Sep- tember 5, 2006; ‘‘Taiwan Allies Issue Palau Declaration,’’ PA CNE WS, September 6, 2006; Lilian Wu, ‘‘Too Early to Discuss Cost of Projects with Allies: MOFA,’’ Central News Agency English News, September 5, 2006. In addition to Taiwan, the six participants were: Palau, Mar- shall Islands, Kiribati, Nauru, Solomon Islands, and Tuvalu. 79 Robert Keith-Reid and Samisoni Pareti, ‘‘China Stirs the Pot of Divided Pacific Loyalties,’’ Pacific Islands Report, March 16, 2006.
agreement with the Pacific Island Nations. It was later reported that China had allocated $600 million for soft loans for develop- ment projects in the region.77 In September 2006, Taiwan President Chen Shui-bian held the country’s first summit with its Pacific allies, in which Taiwan signed agreements on cooperative projects including law enforce- ment, online government, tourism, public health, the environment, energy, agriculture and fisheries. Taiwan and the six summit par- ticipants (the six Pacific Island countries with which Taiwan has official relations) signed a ‘‘Palau Declaration,’’ recognizing Tai- wan’s achievements in political democratization and economic de- velopment and supporting Taiwan’s bid to join the United Nations, World Health Organization, and other major international organi- zations.78 In October 2007, President Chen visited the Marshall Is- lands for the 2nd Taiwan-Pacific Allies Summit, in a new conven- tion center financed by Taiwan. China and Taiwan receive direct diplomatic benefits from their exertion of soft power. In return for economic aid, Beijing and Tai- pei demand diplomatic recognition and support of diplomatic objec- tives. China insists that its diplomatic relations in the Pacific sup- port the ‘‘one-China’’ policy, cut off contacts with Taiwan, and op- pose resolutions in the United Nations (UN) that it feels would criticize unfairly China’s human rights record. Taiwan’s Pacific friends support its membership in international organizations, in- cluding the United Nations and the World Health Organization. Some experts argue that ‘‘dollar diplomacy’’—large amounts of unconditional aid in exchange for support on international issues— may exacerbate political instability and corruption in recipient countries while not leading to broad economic development. Accord- ing to many observers, financial and other benefits from Beijing and Taipei may exert undue influence over the behavior of Pacific Island leaders who preside over limited budgets, or undermine the aid, diplomatic, and political efforts of regional powers such as Aus- tralia. Some have accused the PRC and Taiwan of meddling in the domestic politics and elections of several Pacific Islands countries, including Fiji, Kiribati, Nauru, the Solomon Islands, and Vanuatu. Both Beijing and Taipei have denied using aid primarily to advance diplomatic or strategic agendas and have stressed the mutual bene- fits of their Pacific Island relationships. Taiwanese officials have stated that their aid programs also involve health, education, rural development, and culture. Many Pacific Island nations have welcomed the attention, aid, and economic support from the PRC and Taiwan. Several of these countries, such as Kiribati and Nauru, have switched diplomatic al- liances more than once reportedly in response to enticements of as- sistance by China and Taiwan.79 Some Pacific Island leaders argue that foreign assistance is not a ‘‘zero-sum game’’ and that increased
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80 ‘‘Chinese Aid Won’t Mean Chinese Influence: Sevele,’’ Tonga Now, May 22, 2007. 81 U.S. Government Accountability Office, ‘‘Compacts of Free Association: Development Pros- pects Remain Limited for Micronesia and the Marshall Islands,’’ June 2006. 82 Ibid. 83 ‘‘Sale of Biggest Marshalls Business Shows Increasing Taiwan Dominance,’’ PA CNE WS, October 18, 2005. 84 Jennings, Ralph, ‘‘Taiwan Patronage Buoys, Irks Ally Palau,’’ Reuters News, September 6, 2006.
aid, trade, and investment from the PRC and Taiwan neither ex- clude the influence of Australia and New Zealand nor preclude U.S. re-engagement in the region.80
China, Taiwan, and the Freely Associated States The FAS remain under strong U.S. economic and strategic influ- ence, despite growing economic assistance and investment from China and Taiwan. There appears to be little, if any, political pres- sure within the FAS to alter the economic and strategic underpinnings of their relationships with the United States. As in other Pacific Islands countries, some citizens in the Freely Associ- ated States have expressed concerns about the possible adverse ef- fects of PRC and Taiwanese influence. Despite the strength of the U.S.-FAS relationships, the former Trust Territory districts also have good relations with Japan, China, and Taiwan based largely upon foreign assistance and com- merce. The Compact does not restrict the countries with which the sovereign Freely Associated States may have diplomatic relations. Micronesia established diplomatic relations with China in 1989, while the Marshall Islands and Palau recognize Taiwan, for largely economic rather than ideological reasons. China is likely one of the largest providers of foreign assistance to the Republic of the Mar- shall Islands (RMI), after the United States and Japan, although amounts are difficult to determine.81 PRC assistance to Micronesia has included loans, grants, and the construction of government buildings and a sports center. China also maintains a large tuna fishing fleet in the country. The Marshall Islands switched recognition from the PRC to Tai- wan in 1998. According to the U.S. Government Accountability Of- fice, Taiwan is the second largest source of foreign aid to the Mar- shall Islands (about $10 million annually) after the United States (Japan is the third largest provider of assistance).82 Taiwan has pledged $40 million over 20 years for the Marshall Islands Trust Fund, which was established by the United States and the Mar- shall Islands as part of the amendments to the Compact of Free Association in 2004. A major portion—over 50%—of the large busi- nesses reportedly are owned by Taiwanese, many of whom are nat- uralized citizens of the RMI, which has caused some concern among the native business community.83 Taiwan, which has had diplomatic relations with Palau since 1999, reportedly ‘‘casts a huge shadow’’ over the country’s economy, with estimates of $100 million in cumulative aid and loans, causing some resentment among locals.84 Japan is also a major aid donor. In addition, Taiwan and Japan are Palau’s top source of tourists: Taiwan supplied 34,000 tourists or 42% of total foreign visitors to Palau, a nation of 20,000, in 2005.
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85 Kalinga Seneviratne, ‘‘South Pacific: China Seen As Alternative to Big-Brother Aussies,’’ Inter Press Service, April 17, 2006; Alphonse Muapi, ‘‘Investment Grows,’’ Business News, April 6, 2006. 86 ‘‘China’s Demand for Timber is Destroying Forests in Indonesia, PNG, Says Greenpeace,’’ Associated Press, April 17, 2007. 87 SPTO Press Release, ‘‘SPTO Identifies Significant Growth in Tourism from Chinese Arriv- als,’’ May 17, 2005.
TRADE AND INVESTMENT
China is gaining upon the top countries and regions in terms of trade and investment in the Southwest Pacific (see Table 5). There reportedly are more than 3,000 Chinese state-owned and private enterprises (including energy production, garment factories, fishing and logging operations, plantations, hotels, restaurants, and gro- cery stores) in the Pacific, witha total value estimated at between $600 million and $1 billion.85 The governments of the largest Pa- cific Island countries—Papua New Guinea (PNG), Fiji, and the Sol- omon Islands—have welcomed investment from China or Taiwan as part of their ‘‘look north’’ foreign policies. Papua New Guinea (PNG) and the Solomon Islands, whose exports of wood to China grew by 26% and 29% respectively in 2006, run large trade sur- pluses with the PRC. PRC investments in PNG include the $1 bil- lion Ramu nickel mine, logging, gas production, and tuna proc- essing. Chinese demand for timber reportedly has fueled large-scale illegal logging in Indonesia and Papua New Guinea.86 China oper- ates a large tuna fishing fleet in Fijian waters and has agreed to help develop a hydro power plant in the country. The PRC government has designated seven western Pacific na- tions—those with which it has diplomatic relations—as ‘‘approved tourist destinations’’ and pledged to encourage Chinese tourists to visit the region, despite the relatively high costs for Chinese trav- elers to fly there. China is the only non-Pacific Island nation to be a member of the South Pacific Tourism Organization (SPTO). In 2005, the SPTO estimated that 45,000 Chinese tourists would visit the region by 2007.87
Table 5. Total Trade (Imports + Exports) Between Pacific Island Countries, the World, and Selected Countries, 2006 ($ Millions)
World Australia Japan EU-25 China New Zealand United States Taiwan
Fiji ............................... 2,200 467 101 210 69 281 206 13 Kiribati ........................ 70 21 5 2* 1 4 3 n/a PNG ............................. 6,270 3,011 656 570 518 113 132 57 Samoa ......................... 430 83 26 10 13 65 23 20 Solomon ...................... Islands .................... 460 62 41 20 130 14 9 0.5 Tonga .......................... 15011 9 20 4 37 20 1 Vanuatu ...................... 520 53 80 0 19 22 11 .5
Totals ...................... 10,100 3,708 918 832 754 536 404 92
Source: IMF, Direction of Trade Statistics Quarterly, 2007. * = 2005
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88 China’s conditions on aid are often international rather than domestic—requiring aid recipi- ents to support the ‘‘one-China’’ principle regarding Taiwan and China’s agenda in the United Nations. 89 Jane Perlez, ‘‘China Competes with West in Aid to its Neighbors,’’ The New York Times, September 18, 2006. 90 ‘‘U.S. Cuts Aid to Fiji Army,’’ Pacific Islands Report, December 20, 2006; U.S. Suspends $3M in Military Aid,’’ Fiji Times, December 21, 2006.
FOREIGN AID
According to some experts, the PRC has become the third-largest source of foreign aid to the South Pacific. In terms of official devel- opment assistance (ODA), the main form of assistance provided by the major donors in the region, China provides relatively little aid. (See Table 6.) However, the PRC administers a wider range of as- sistance that includes non-development aid, loans, and trade and investment agreements. According to some analysts, when these kinds of assistance are added, China becomes a major donor in the region. China’s foreign aid to the Southwest Pacific, like its aid to many other regions, is difficult to quantify due to a lack of data and to the unique characteristics of Chinese assistance. Furthermore, be- cause China offers assistance without the conditions that other do- nors frequently place on aid (i.e. democratic reform, market open- ing, and environmental protections), it often garners appreciation disproportionate to the size of its aid, and thus can have a large impact on recipient governments.88 China’s policy of ‘‘non-inter- ference in domestic affairs’’ often wins friends not only among Pa- cific governments but also by many peoples in the region because it is regarded as respectful of their countries’ sovereignty. Such aid, announced at lavish receptions with toasts to the recipient coun- tries, also carries great symbolic value.89 Many PRC aid projects, such as government buildings, public fa- cilities, and infrastructure, often built by Chinese companies, are high profile efforts that primarily benefit capital cities or the gov- ernments in power. Many foreign aid experts, non-governmental or- ganizations (NGOs), and local groups have criticized Chinese aid for not promoting widespread, sustainable development and for ex- acerbating official corruption. Recent Chinese aid and funding projects in the region include government buildings in Samoa, a sports stadium in the Cook Islands, infrastructure in Niue, and re- construction efforts in Tonga following the riots and destruction of 2006.
Aid to Fiji In response to the December 2006 military coup in Fiji, the United States and other powers in the region imposed sanctions. The United States suspended military aid to the country worth $729,000 in 2006 pursuant to Section 508 of the Foreign Oper- ations Appropriations Act.90 The Australian government suspended foreign assistance with the exception of health, education, and com- munity development programs and aid to the apparel and textile sectors. New Zealand suspended aid, defense ties, and sporting con- tacts.
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91 ‘‘Envoy Stresses Fiji Still Eligible for Chinese Aid,’’ BBC Monitoring Asia Pacific, August 20, 2007; ‘‘Fiji to Seek Development Loan from China after Donors Threaten to Cut Funding,’’ Associated Press Newswires, July 5, 2007. 92 Penny Spiller, ‘‘Riots Highlight Chinese Tensions,’’ BBC News, April 21, 2006 and ‘‘The Pa- cific Proxy: China vs. Taiwan,’’ PA CNE WS, February 9, 2007.
Table 6. Official Development Assistance to the Pacific
Population Major Official Development Assist- ance (ODA) Donors 1
Net Official Development Assistance (2005) $ million
Estimated Foreign Aid as Percent of Re- cipients’ GDP 2
U.S. foreign assistance (2006) $ million
Cook Islands ....... 21,000 Italy, New Zealand, Australia ........ 32.0* 7.0 — Fiji ...................... 906,000 EC, Australia, Japan ...................... 64.0 3.0 2.5 Kiribati ................ 105,400 Japan, Australia, EC ...................... 28.0 22.0 1.3 Marshall Islands 60,400 United States, Japan ...................... 57.0 35.0 31.0 Micronesia .......... 108,000 United States, Japan ...................... 106.0 37.0 70.0 Nauru .................. 13,287 Australia, Japan, New Zealand ...... 9.0 33.0 — Niue .................... 2,166 New Zealand, Australia .................. 21.0 26.0 — Palau .................. 20,579 United States, Japan ...................... 23.0 13.5 30.0 Papua New Guinea. 5,670,544 Australia, Japan ............................. 266.0 9.6 0.3
Samoa ................ 176,908 Japan, Australia ............................. 44.0 7.5 1.4 Solomon Islands 552,438 Australia, EC, New Zealand ........... 198.0 42.0 0.2 Tonga .................. 114,689 Australia, Japan, New Zealand ...... 32.0 7.7 1.7 Tuvalu ................. 11,810 Australia, EC, New Zealand ........... 9.0 85.0 — Vanuatu .............. 208,869 Australia, France, New Zealand ..... 39.0 11.0 2.2
Totals ............. 7,972,090 ................................................... 928.0 140.6
Sources: CIA, The World Factbook, 2007; Organization for Economic Cooperation and Development (OECD). * 2006 1 OECD members only. 2 Foreign Aid as a percentage of GDP based upon World Factbook ‘‘economic aid’’ figures (2004) and nominal GDP data. Note: China does not provide official data on foreign aid. According to some sources, Taiwan is a top provider of foreign assistance to the Marshall Islands while China is a major source of aid to Papua New Guinea. The EU suspended all non-humanitarian aid and threatened to suspend assistance for the Fijian sugar industry to offset the phase-out of EU price supports for imported Fijian sugar. However, Fiji reportedly has sought a loan of up to $600 million from China if other aid sources are cut. The PRC government promised that its aid programs in Fiji would continue despite the coup, stating that ‘‘the political situation is an internal matter for the country.’’ 91
PACIFIC VIEWS TOWARD CHINA
Pacific Chinese The ethnic Chinese population in the Pacific Island region is eco- nomically influential but remains relatively small numerically. Es- timates of the ethnic Chinese population in the Pacific (including French Polynesia and the U.S. territories), range from 80,000 to over 200,000, or between 1% and 3% of the total population. These estimates are based upon data that generally do not break down ethnic Chinese populations by place of origin.92 There reportedly has been an influx of Chinese in the two largest Pacific Island na- tions, Papua New Guinea and Fiji (with an estimated 20,000 Chi- nese in each country), along with reports of illegal immigration and ethnic Chinese involvement in organized criminal activity, includ- ing illegal drugs, gambling, prostitution, and money laundering. However, according to other experts, the PRC government has no systematic policy to populate the islands and ‘‘no real need’’ to bol-
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93 Lintner, op. cit. 94 ‘‘Not So Friendly—Tonga,’’ The Economist, November 25, 2006. 95 Pesi Fonua, ‘‘Tonga Gets Outside Help after Riots,’’ Associated Press, November 19, 2006; Dan Eaton, ‘‘Stop Backing Regime, Troops Told,’’ The Press (New Zealand), November 22, 2006; Peter Lewis, ‘‘Australian Troops Go ‘Softly Softly’,’’ Australian Broadcasting Corporation, No- vember 23, 2006.
ster its influence through such a policy. Rather, Chinese immi- grants in Pacific Island communities often complicate PRC rela- tions in the region by creating resentment among indigenous citi- zens toward Asians in general or Chinese in particular. Further- more, some argue, Chinese populations in the Pacific are not mono- lithic—they include ethnic Chinese from China, Hong Kong, Tai- wan, and elsewhere in Southeast Asia as well as Pacific Islanders of Chinese descent who have resided and intermarried in the Pa- cific region since the 19th century. Where these ethnic Chinese populations originally came from and how long they have been in their Pacific Island habitats generally are determining factors in how these ethnic populations view China and Taiwan.
Anti-Ethnic-Chinese Riots PRC and Taiwanese engagement in the region, coupled with the ethnic-Chinese economic presence, while often welcomed by Pacific Island Nation governments, has engendered some resentment among indigenous peoples. In some cases, public anger against the national government has spilled over into anti-ethnic-Chinese ac- tivity. In November 2006, riots broke out in Tonga’s capital, Nuku’alofa, in which at least eight people died and three-quarters of the commercial district were destroyed, including 30 Chinese- owned businesses. More than 70% of Nuku’alofa’s grocery stores are owned by newly-arrived migrants from China, according to one report.93 The riots were sparked by anger over the perceived slow pace of political reforms following the death in September 2006 of King Taufa’ahau Tupou IV, and reflected frustration over political and economic privileges enjoyed by the hereditary nobility, unem- ployment and the reduction of civil service jobs, and the growth of ethnic Chinese-owned businesses.94 Estimates of the ethnic Chi- nese population in Tonga, many of whom are Tongan citizens, range from 1,000 to 4,000 persons. Australia and New Zealand sent 85 and 70 troops and police, respectively, to help restore order and enforce martial law. Although stability was restored, Tongan oppo- sition groups criticized the foreign troops as backing an undemo- cratic government.95 Approximately 200 300 Chinese nationals re- turned to China on an airplane chartered by the PRC government. In April 2006, an estimated 1,000 political demonstrators, riot- ers, and looters clashed with police and set buildings on fire in the business district of Honiara, the capital of the Solomon Islands, where there is a concentration of ethnic Chinese-owned businesses. Among the demonstrators’ charges was that both the former and newly-appointed governments were corrupt and unduly influenced by local Chinese business interests and Taiwan government money or ‘‘assistance.’’ The ethnic Chinese community in the country is es- timated to total a few thousand,’’ with about 2,000 in Honiara. Most ethnic Chinese in the Solomon Islands reportedly are from Hong Kong, Singapore, Indonesia, and Malaysia or are naturalized
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96 Ashley Wickham, ‘‘Taiwan Payments Cloud Solomons Democracy,’’ Pacific Islands Report, May 19, 2006; Alfred Sasako, ‘‘Taiwan Fund Secrecy Dangerous for Solomons,’’ Pacific Islands Report, March 30, 2006. 97 The Regional Assistance Mission to the Solomon Islands (RAMSI). 98 The Pacific Islands Conference of Leaders (PICL) is a triennial meeting of Pacific states and territories sponsored by the East-West Center, an education and research organization estab- lished by the U.S. Congress in 1960 to strengthen relations and understanding among the peo- ples and nations of Asia, the Pacific, and the United States.
third or fourth generation Solomon Islanders, with no links to Tai- wan. Taiwan, which has diplomatic relations with the Solomon Is- lands, reportedly provides $11 million in annual assistance to the SI and has been accused of exacerbating corruption there.96 Tai- wanese officials denied that they had ‘‘bought’’ any influence in the election of Snyder Rini to be Prime Minister in 2006. The PRC evacuated 300 Chinese nationals during the upheaval. Australia and New Zealand, which together had approximately 300 military troops and police officers already stationed in the country, a legacy of the 2003 peace-keeping mission established to help quell ethnic violence, sent additional personnel.97
IMPLICATIONS FOR U.S. POLICY IN THE REGION
According to some experts, unconditional and unregulated for- eign aid and business investment from China and Taiwan—pro- vided without goals related to democracy, sustainable development, fair working conditions, and the environment—may exacerbate un- derlying political, economic, and social problems in the Southwest Pacific. Others argue that, on the whole, assistance from the PRC and Taiwan has benefited the region. Some specialists contend that China has devised a comprehensive strategy to gain strategic influ- ence in the Pacific within the context of U.S. neglect. However, oth- ers counter that China’s main objectives in the region are to check and reverse Taiwan’s diplomatic inroads and to garner influence but not replace the United States as the foremost military power. Many regional specialists argue that the United States should pay greater attention to or more directly engage Pacific Islands countries, many of which are plagued by weak political institutions, civil unrest, and persistent poverty. Some analysts argue that ad- dressing these issues would not only help promote political stability and economic development but also enhance U.S. security interests and counter possible adverse effects of China’s growing influence. In May 2007, the Bush Administration may have signaled a move toward greater or renewed involvement in the region when it de- clared 2007 the ‘‘Year of the Pacific’’ at the eighth Pacific Islands Conference of Leaders.98
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99 U.S. Department of State, ‘‘U.S. Engagement in the Pacific Islands Region: 2007 Pacific Is- lands Conference and Core Partners Meeting,’’ Fact Sheet (Revised), May 8, 2007.
Figure 4. Map of the Southwest Pacific
Source: Map Resources. Adapted by CRS. 06/07 The conference, held in Washington, D.C. for the first time, was attended by Secretary of State Condoleezza Rice. Among the main topics, aims, and initiatives under discussion were: expanding pub- lic diplomacy efforts through a new public affairs office in Fiji; strengthening the Joint Commercial Commission; Pacific fisheries management; the U.S. military expansion in Guam and its impact on the region; global warming and rising sea levels; and estab- lishing a regular U.S.-Pacific Islands dialogue. Other proposals in- cluded: enhancing educational and cultural exchanges; expanding foreign aid grants in the area of democracy-building; more fully uti- lizing the Generalized System of Preferences (GSP) program; and creating more welcoming business environments.99
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100 Prepared by Dick Nanto, Foreign Affairs, Defense, & Trade Division, November 2007.
JAPAN AND SOUTH KOREA100
OVERVIEW
In Northeast Asia, China’s rise and its soft power are causing fundamental changes in its relations with Japan and South Korea. Both of these countries have well-developed, democratic political systems, industrialized economies, export oriented businesses, a well-educated populace, and relatively high income levels. As such, they differ from certain developing nations that may not be as well prepared to cope with the growing influence of China and its use of soft power to pursue its national interests. Another difference with Japan and South Korea is that soft power relations are mutual, much as they are between the United States and China. While China’s economic reach is affecting poli- cies in Tokyo and Seoul, the economic and cultural influences of Japan and South Korea also are affecting policies in Beijing. As neighboring countries in Northeast Asia, Japan and South Korea’s relations with China after World War II and the Korean Conflict have developed from open warfare to a period of frigidity during the Cold War that was interrupted by occasional chinook winds that warmed temperatures temporarily. During the Cold War, bilateral security ties between the United States and Japan and also with South Korea established pathways for economic and cultural flows. Each of these countries came to rely heavily on the U.S. market and viewed the United States as its role model and provider of security in a hostile regional environment. Currently, Northeast Asia is undergoing a tectonic shift in rela- tions between China and both of its formerly hostile neighbors. The countries have entered into a new era in which the economic bene- fits of trade, tourism, investment, and cultural flows may be gradu- ally overcoming the inertia of long harbored feelings of enmity, even though ‘‘history issues’’ still pop up at times and pour cold water on warming relationships. Globalization is creating inter- dependence in Northeast Asia in which domestic and global affairs have become inseparably intertwined. Trade flows, in particular, have forged the way for rapproche- ment along political pathways. Japan and South Korea gradually are turning from the United States toward the Chinese economy for exports, imports, and for other interaction, but the United States still plays a key role in the region because of its military and economic might.
INTERNATIONAL TRADE FLOWS
Figure 5 shows Japan’s imports of merchandise (not adjusted for inflation) from China and the United States over the 1995–2006 period. Whereas in 1995, Japan’s imports from the United States were twice those from China, by 2006 nearly the opposite was the case. The shape of the lines in Figure 5 create an ‘‘ominous X’’ that illustrates the rise of China’s economic power and shift by Japan toward China and away from the United States as a source of im- ports. The intersection point for this ‘‘ominous X’’ occurred in 2002. The crossing of these lines may or may not portend future difficul-
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ties for the United States, but it may challenge long held assump- tions regarding the dependency of Japan on the United States.
Figure 5. Japan’s Merchandise Imports from the United States and China
Source: Data from Global Trade Atlas.
Figure 6. Japan’s Merchandise Exports to the United States and China
Source: Data from Global Trade Atlas.
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Figure 6 above compares Japan’s exports of merchandise (not ad- justed for inflation) to China with those to the United States. In Japan’s exports, the ‘‘ominous X’’ has not yet appeared, but the trends point toward a possible intersection point in the future. Ja- pan’s exports to China are rising faster than those to the United States. Whereas in 1995, Japan’s exports to the U.S. market were 450% more than those to China, by 2006 they were 57% more. The gap has been narrowing, and in the first eight months of 2007, Ja- pan’s exports to the United States were only 11% more than those to China. At this pace, the ‘‘ominous X’’ may occur in 2008 or soon thereafter. With South Korea, the story is similar. As shown in Figure 7, an ‘‘ominous X’’ appears as South Korean imports of merchandise from China exceeded those from the United States in 2004. Although Korean imports from the United States continue to increase, those from China have increased more rapidly. Korea now imports 30% more from China than it does from the U.S. market. For South Korean merchandise exports, the pattern is the same. As indicated in Figure 8, the intersection of the ‘‘ominous X’’ oc- curred in 2003. South Korean exports to the U.S. market continue to rise gradually, but those to China are rising faster. In 1995, South Korean exports to the United States were nearly double those to China. In 2006, South Korean exports to China were 60% greater than those to the United States, although some of those ex- ports were components and materials for manufacturing plants in China that export the finished products to the United States.
Figure 7. South Korea’s Merchandise Imports from the United States and China
Source: Data from Global Trade Atlas.
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Figure 8. South Korean Merchandise Exports to the United States and China
Source: Data from Global Trade Atlas. With respect to China’s overall export markets, Figure 9 shows China’s exports of merchandise (not adjusted for inflation) to the United States, Japan, South Korea, and to the Rest of the World. China’s exports overall are rising rapidly. As for the destination of those exports, China’s exports to the United States have been ris- ing as a share of total exports while the share going to Japan has been falling. China is becoming less dependent on exports to the Japanese market and more dependent on sales to the United States, even though Japan is becoming more dependent on China for its imports (Figure 9). This is an example of how soft power generates diverse results. China is becoming less dependent on Japan as an export market, but Japan is becoming more dependent on imports from China.
INVESTMENT, FINANCIAL, AID, AND CULTURAL FLOWS
Much of the trade between China and Japan and South Korea is related either to investments made in China by Japanese or South Korean companies or through a supply chain in which busi- ness transactions tend to be relational—conducted between buyers and suppliers with established business relationships. Foreign in- vested companies, moreover, account for more than half of China’s exports of manufactured goods. Foreign direct investment has con- tributed greatly to Chinese economic development and plays an im- portant role in drawing countries in Northeast Asia closer together.
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101 A considerable amount of the FDI in China flows through third parties such as Hong Kong and off-shore tax havens such as the Bahamas, Virgin Islands, Cayman Islands, Bermuda, and Western and Eastern Samoa. Also, some FDI may originate from companies abroad that are af- filiated with U.S. companies but not counted as such. 102 UN Trade and Development Agency. WID Country Profile: Japan.
Figure 9. China’s Exports to the United States, Japan, South Korea and the Rest of the World
Source: Data from Global Trade Atlas. Figure 10 shows the stock of foreign direct investment (FDI) in China by the United States, Japan, and South Korea. In 1995, the United States and Japan each had about $18 billion in FDI in China. South Korea had about a third as much. By 2005 the amounts invested for the United States at $48 billion and for Japan at $47 billion had more than doubled and still were similar. South Korea’s FDI in China at $26 billion was smaller but had more than quadrupled. Chinese data provide a somewhat different picture of this investment. For 2005, China reported the stock of FDI from the United States to be less ($30.6 billion) than that in the UN database, but from Japan ($65.3 billion) and from South Korea ($51.7 billion) the Chinese figures are higher. The Chinese figures are for utilized FDI. According to Beijing, both Japan and South Korea have significantly more FDI in China than does the United States.101 By sector, Japan’s FDI in China is primarily in the manufacture of motor vehicles, machinery and equipment, and electronic equipment, as well as in wholesale and retail trade, con- struction, transportation, and finance.102
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Figure 10. Foreign Direct Investment in China by the United States, Japan, and South Korea
Source: Data from United Nations Trade and Development Agency. Chinese data from China Statistical Yearbook, 2006. In private financial flows, Japan has invested or loaned consider- able sums to Chinese entities. Figure 11 shows consolidated claims by Japanese banks on Chinese borrowers as well as portfolio in- vestments in Chinese securities by Japanese investors. In 2006, Japanese bank claims totaled $17.6 billion while portfolio invest- ments were $4.1 billion. (Comparable data for South Korea were not available.) In development assistance and other foreign aid, the flows in Northeast Asia go from Japan to China and not the other way around. China also does not provide official development assistance (ODA) to South Korea and vice versa. Japanese ODA to China began as a form of reparations to compensate for Japan’s actions in World War II. Japan’s ODA disbursements to China declined after China’s nuclear tests in 1993–94, rose in 1998 and 1999 then fell again before recovering by 2005.
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Figure 11. Japan’s Portfolio Investments in and Banking Claims (Loans) on China
Source: Data from Bank for International Settlements and the International Monetary Fund. Over the 2004–2005 period, Japan was the top donor of official development assistance to China with an average of $1.7 billion per year in gross ODA disbursements. This was more than four times that of the next larger donor, Germany ($470 million) and far more than that of France ($164 million). In total ODA, China tradition- ally has been the largest recipient of Japan’s foreign aid, but in re- cent years Iraq has taken the number one position with an average of $2.1 billion per year in 2004–2005. This arguably is a temporary exigent situation. Japan’s aid to India also is increasing as India has become another rising power. Figure 12 shows gross ODA disbursements by Japan to China along with Japan’s commitments by sector for the ODA it was pro- viding. Japan’s aid to China is noteworthy because it shows how soft power goes both ways. By sector, economic infrastructure, which dominated Japan’s aid in 1995, accounted for only a small proportion of ODA commitments in 2005. The major increase has been in aid for social infrastructure and services—70% of which went for water and sanitation projects.
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103 Organisation for Economic Cooperation and Development. Development Database (CRS). 104 Emily Parker. ‘‘Japan’s Development Aid to China: The Long-running Foreign Policy of Engagement.’’ Far Eastern Economic Review, June 2006, Vol. 169, pp. 55–56. 105 ‘‘Japan, China Discuss Cooperation on Aid for Africa.’’ BBC Monitoring Asia Pacific, Lon- don: September 18, 2007, pg. 1.
Figure 12. Japan Gross ODA Disbursements and ODA Commitments by Sector to China
Source: OECD, Development Database, Country Reporting System. Also increasing has been aid for multi-sector projects. These pri- marily have been for environmental protection, for support of orga- nizations with interest in Japan, and for training and education. Japan provides about 90% of its official aid to China in soft loans rather than grants or technical assistance.103 Japan has begun to use its aid to China to accomplish broader political and diplomatic goals. Following the 1989 Tiananmen Square incident in Beijing and the 1995 Chinese nuclear test, Japan temporarily cut off grant aid to China. In the past, Japanese aid has been tied to its exports, but as Figure 12 illustrates, social infrastructure and services now dominate recent ODA commit- ments. Japan funnels some of its aid funds to pro-Japanese non- governmental organizations in China. Some in Japan have been questioning the need for continued ODA to a country that now is an aid provider and who is seen by may Japanese as a regional eco- nomic and strategic competitor.104 One suggestion has been to cut off all aid to China in 2008 when Beijing hosts the Olympic games. In September 2007, Japan and China met to discuss China’s aid to African countries. Japan requested that China disclose more infor- mation about the aid it is providing to countries such as Sudan.105
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106 Pew Research Center.‘‘Publics of Asian Powers Hold Negative Views of One Another,’’ Sep- tember 21, 2006, and ‘‘Global Unease With Major World Powers,’’ June 27, 2007.
Figure 13. Tourist Visits: Japan, South Korea, and the United States with China
Source: China Statistical Yearbook/2006, Japan Tourism Marketing Co., U.S. Bureau of Economic Analysis.
In the cultural and social area, China also is drawing closer to Japan and South Korea. For example, as shown in Figure 13, there were about 3.5 million tourist visits to China by both Japanese and South Koreans in 2005—more than twice the 1.6 million visits by Americans. South Koreans, in particular, are traveling to China in record numbers. Tourist visits from China are less frequent, but are rising. In 2006, there were 811,000 Chinese tourist visits to Japan and 320,000 such visits to the United States. As with trade flows, tourist visits illustrate the growing soft power ties between China and northeast neighboring countries compared with such visits between the United States and China. Despite all the economic, cultural and political interaction in Northeast Asia, in 2007 China, Japan, and South Korea in 2007 still harbor overall negative attitudes toward each other. A 2007 Pew Research Center survey of global attitudes indicated that 67% of Japanese expressed an unfavorable view of China—comparable to but down from the 71% recorded in 2006. Among Chinese, 71% expressed an unfavorable view of Japan—little changed from the 70% in 2006.106 (See Figure 14) These were more negative than Chinese unfavorable views of the United States (57%) and consider- ably worse than the unfavorable views of South Korea. In both China and Japan, South Korea is viewed favorably by about 60% of those surveyed.
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Figure 14. Chinese, Japanese, and South Korean Attitudes Toward Each Other, 2007
Source: Pew Research Center. The Pew Global Attitudes Project. For China and Japan, each country still appears to have some distance to travel before underlying attitudes become favorable to- ward each other. In this sense, soft power by both nations appears to be changing underlying attitudes only very slowly as measured by survey research. By way of comparison, China views the United States more favorably than it does Japan. The same also holds of Japan’s views of the United States which were 61% favorable. De- spite the growing linkages between China and South Korea, the people in South Korea still indicated that they had a more favor- able view of the United States than of China.
CHINA’S RELATIONS WITH JAPAN
The bilateral relationship between China and Japan is shifting dramatically. As indicated above, there is growing and consistent interaction at the human and economic level shaded by bouts of po- litical friction and historic tension as well as occasional naval ten- sions. As depicted in Figure 15, beginning at the human and indi- vidual level, the temperature of interaction is mixed. Communica- tion and cultural exchanges tend to be warm, but historical dis- putes dating back before World War II have fanned nationalistic sentiments in China and riled the Chinese people. These disputes include Japan’s role in World War II atrocities such as the Nanking Massacre, as well as disputes over visits by certain Japa- nese politicians to the Yasukuni Shrine in which war dead, includ- ing some war criminals, are enshrined.
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107 Interviews by the author in Tokyo, January 2005.
Figure 15. Temperature, Strata of Interaction, and Influence in Relations Between the People’s Republic of China and Japan
Source: Congressional Research Service.
At the economic and financial level, however, relations are hot. These comprise the bulk of interaction, are self motivating, and take place without much official notice or fanfare. Japan’s economic recovery has been maintained partly by exports to China, and Ja- pan’s businesses have incorporated China as an important manu- facturing platform for their products. Japan now trades as much with China as it does with the United States. Statements by both Beijing and Tokyo indicate the desirability of mutually beneficial trade. The two nations also have been cooperating more in address- ing environmental and energy problems. At the diplomatic and political level, Sino-Japanese relations are tepid—not warm but not cold either. China is supplanting Japan as the leader in Asia, and Japan is having to cede diplomatic terri- tory to Beijing. Many in Tokyo are taken aback at what they con- sider to be high handed actions by Chinese leaders and their use of historical animosities that many in Japan feel are generated by the government-controlled Chinese press and educational sys- tem.107 The two countries had no visits by top leaders for five years after 2001 primarily because of China’s objections to visits to the Yasukuni Shrine by former Prime Minister Junichiro Koizumi. In October 2006, former Prime Minister Shinzo Abe began his admin- istration with a trip to China (and South Korea), and on December 27, 2007, Japan’s Prime Minister, Yasuo Fukuda, made his own visit to China in which the two sides pledged closer cooperation on trade, climate change, and other issues. To date, however, the
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108 ‘‘More on Japan, China Agree to Build Strategic Ties,’’ Kyodo News Service, Tokyo, April 11, 2007. 109 ‘‘Abe, Wen Agree on Ways to Realize Mutually Beneficial Ties,’’ Jiji Press English News Service, Tokyo, April 11, 2007. Also see: CRS Report RL33436, Japan-U.S. Relations: Issues for Congress, coordinated by Emma Chanlett-Avery. 110 U.S. Department of State. ‘‘Joint Statement of the U.S.-Japan Security Consultative Com- mittee,’’ Washington, DC, February 19, 2005. 111 Xinhua Daily Telegraph as cited in U.S. Department of State, INR, ‘‘Issue Focus: U.S.- Japan Joint Security Statement: Concerns over an ‘Emerging China.’ ’’ February 24, 2005. 112 U.S. Department of State. ‘‘Joint Statement of The U.S.-Japan Security Consultative Com- mittee.’’ May 1, 2007.
warming ties have not brought a change in China’s opposition to Japan’s bid for a permanent seat on the United Nations Security Council.108 Taiwan in Japan-China Relations.—The Japan-Taiwan-China triangle poses a vexing dilemma for both Beijing and Tokyo. Ja- pan’s relations with Taiwan have been close since Taiwan, then known as Formosa, was a Japanese colony for a half century until the end of World War II. In 2005, 1.4 million Taiwanese visited Japan, and 1.2 million Japanese visited Taiwan. Trade and invest- ment relations are also strong, but the two-way trade of $60 billion in 2006 is only about a third the size of Japan’s two-way trade with China. The October 2006 joint communique for former Prime Min- ister Abe’s visit to China did not mention the Taiwan issue. Beijing reportedly requested that the communique include the phrase that ‘‘Japan opposes Taiwan independence.’’ Japan, however, states that its policy is in line the 1972 Japan-China Joint Communique that recognizes Beijing as the only legitimate Chinese government. In a subsequent visit to Japan by China’s Premier Wen Jiabao in April 2007, Abe reportedly stated that ‘‘Japan does not support Taiwan independence.’’ 109 In 2005 in a joint statement on their common strategic objec- tives, the United States and Japan stated that a common strategic objective was to ‘‘encourage a peaceful resolution of issues con- cerning the Taiwan Strait through dialogue.’’ 110 This was a rare statement by Japan of its interest in stability across the Strait and was viewed in Beijing as ‘‘brazenly interfering in China’s internal affairs.’’ 111 In the May 2007 joint statement of the U.S.-Japan Se- curity Consultative Committee, however, there was no mention of Taiwan.112 Japan and China also share an interest in halting North Korea’s nuclear program and in maintaining stability in the region. Each participates in the various regional institutions and summits that have arisen in East Asia. These include the East Asia Summit, the ASEAN Regional Forum, ASEAN + 3, APEC, and the Six-Party Talks dealing with the North Korean nuclear program. At the military level, relations are cold as both countries seek to establish their claims to offshore islands and energy resources in neighboring seas. Japan is watching the Chinese military buildup with apprehension, and China fears that the U.S.-Japan alliance may bring Japan into any outbreak of hostilities that China may have with the United States over the status of Taiwan. A Japanese observer of major trends sees China as the single most formidable challenger to Japan. Although private economic re- lations are thriving, he sees rising friction at the government level.
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113 Tomohiko Taniguchi. ‘‘Major Trends in Japan.’’ Slide presentation, December 2004. 114 Ron Matthews. ‘‘Business Focus Turning Point for Japan,’’ Jane’s Defence Weekly, May 29, 1993.
The two countries maintain a type of ‘‘cold peace,’’ as China ma- tures and attempts to reclaim its position in the world.113 In Japan, economics and politics always have mixed. In many re- spects, the U.S. nuclear umbrella has allowed the country to pur- sue ‘‘checkbook diplomacy’’ by which Tokyo has used its trade, aid, and investments alongside of the strengthening of its military to develop what they have called comprehensive security. Japanese experience in the 1980s showed that while economic interdepend- ence may not deflect trade and political friction, it puts incentives in place to resolve disputes amicably. Economic and financial rela- tions formed a base from which Japan could approach diplomatic, political, and security relations with other states.114 For both Japan and China, one key question is to what extent the extensive economic interactions and diplomatic sensibilities will prevent political tension from escalating into outright hostility or even military conflict. Stronger economic, financial, and cultural ties between the two countries increase the potential costs of bilat- eral friction or of regional instability. In a sense, what is evolving is a type of economic realpolitik. Although each country uses its soft power to attempt to influence the other, in essence, each coun- try appears to have warmed toward the other because of practical and material factors. In short, economic interaction appears to have induced the two sides to keep the nationalist rhetoric to a manageable level and adroitly tiptoe around potential military clashes. Chinese influence in Japan is growing as China rises to be- come a major regional power. On the other hand, Japanese influ- ence in China also is growing as the Beijing leaders come to rely more on delivering growth and prosperity to underpin their claim to legitimacy.
CHINA’S RELATIONS WITH SOUTH KOREA
The relationship between China and South Korea (The Republic of Korea or ROK) provides a model for how deepening economic re- lations can bring two capitals together politically. Figure 16 out- lines the major strata of interaction, channels of influence, and the temperature of relations between the PRC and South Korea. Begin- ning at the bottom of the figure, as is the case with Japan, the major daily interaction is in communications and cultural inter- changes while disputes over historical issues occasionally cloud the relationship. At the human and individual level, the temperature of relations is mixed with rising warmth in cultural exchanges and communications but occasional cooling in nationalistic disputes. Cultural ties have also increased multifold: tourism in both direc- tions has increased markedly, and the number of South Korean students studying Mandarin has skyrocketed. Historical ties be- tween China and South Korea are not as fraught as those between China and Japan, but disputes still surface.
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115 Global Trade Atlas. Note that some South Korean exports to China are components for fin- ished products that are than exported to the United States.
Figure 16. Temperature, Strata of Interaction, and Influence in Relations Between the People’s Republic of China and South Korea
Source: Congressional Research Service.
The temperature of economic and financial relations has been hot as China has displaced the United States as South Korea’s major trading partner, and South Korean businesses have moved labor- intensive production processes to Chinese factories. Each economy has grown increasingly dependent on the other for trade and in- vestments. In 2006, South Korea exported $69.4 billion in goods to China, $43.2 billion to the United States, and $26.5 billion to Japan, while importing $51.9 billion from Japan, $48.6 billion from China, and $33.6 billion from the United States.115 At the diplomatic and political level, relations have generally been warm (cordial) since the normalization of ties in 1992, but dis- putes over treatment of North Korean refugees seeking passage through China and other issues have sometimes cooled relations. Frequent reciprocal visits by top officials have solidified the polit- ical relationship, and cooperation in attempting to resolve the North Korean nuclear crisis has gained Beijing further favor in Seoul. Korea’s history with China is not always viewed as a positive in- fluence on contemporary diplomatic and political relations. In 2004, in a move that diminished its ‘‘image’’ in South Korea, China sparked a major political dispute. The flap arose because of a PRC claim that the Koguryo Kingdom (37 B.C.–668 A. D.) was a part of Chinese territory and history, not, as Koreans claim, an inde- pendent Korean entity that produced many of Korea’s long-stand-
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116 Scott Snyder, ‘‘A Turning Point for China-Korea Relations?’’ Comparative Connections, 3rd Quarter 2004. 117 James A. Foley, ‘‘China Hedges Its Bets on North Korea,’’ Jane’s Intelligence Review, No- vember 1, 2004.
ing traditions. Angry reaction in South Korea came from many quarters, including the public, members of the National Assembly from both parties, and the Ministry of Foreign Affairs and Trade. Many claimed that the controversy exposed Beijing’s ‘‘hegemonic ambitions,’’ and erased an earlier impression of China as a benevo- lent economic partner.116 Officials on both sides scrambled to calm the controversy and Beijing dispatched Vice Minister Wu Dawei, former ambassador to South Korea, to negotiate a resolution. The resulting five-point agreement soothed Korean concerns at least temporarily. With the North Korea problem still at a sensitive stage, government officials were relieved to patch up the relation- ship. Still, the incident exposed strong underlying sentiment in both populations and could indicate a shift away from the cozy po- litical relationship the two capitals have enjoyed for over a decade since normalization. At the military and security level, relations are cool, but warm- ing. Despite China’s intervention in the Korean conflict (1950–53) and alliance with North Korea, security relationships between Seoul and Beijing are improving. In 1999, China and South Korea agreed to hold annual discussions on regional security issues.117 China holds a large wild card in the security relationship because of its influence with Pyongyang. Similar to Japan, however, South Korea also is concerned about the potential adverse behavior of China two or three decades into the future when it is expected to achieve major power status. South Korea also has turned a cau- tious eye toward China’s increasing trade with and investments in North Korea. While South Korean investment in North Korea have been confined to specific enclaves, China’s businesses are allowed to invest in existing enterprises. China’s companies seem to be viewed as less threatening to the North Korean socialism than those from South Korea or other nations with market-oriented economies. The threat of instability posed by the North Korean nuclear pro- gram has induced the major powers in the region to cooperate in bringing Pyongyang to the negotiating table. These Six-party Talks build on common security and economic interests and have brought the governments of China and South Korea into a loose partner- ship. Both countries oppose the development of a nuclear arms pro- gram by North Korea. Each fears the consequences of a collapsed Kim Jong-il regime in Pyongyang which could create instability on the peninsula and a flood of North Korean refugees. Because Japan generally has hewed closely to what (until 2007) had been a more hardline U.S. position, Seoul and Beijing found themselves advo- cating a similar approach of engagement and laying out in explicit terms what Pyongyang could gain if it abandoned its nuclear weap- ons program. Observers note the irony that with respect to the North Korean nuclear issue, China’s relations with the DPRK have become somewhat of a burden for Beijing while their ties with South Korea have become more economically beneficial.
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118 Norimitsu Onishi. ‘‘At swearing-in, Lee highlights U.S. ties He calls for pragmatism over ideology in dealings with North and Washington,’’ International Herald Tribune, Paris: February 26, 2008, pg. 1. 119 Sung-kyoo Ahn. ‘‘Security Aide Explains Vision of Balancer Role.’’ Seoul JoonAng Ilbo (Internet version). April 14, 2005. (Reported by Open Source Center) ‘‘Seoul Downgrading U.S. Alliance in Favor of Closer Military Ties with China, Russia.’’ East-Asia-Intel.com (subscription e-mail service), April 12, 2005. ‘‘ROK Presidential Committee Head Views ROK’s ‘Balancing Role’ in Northeast Asia.’’ Chosun Ilbo (Internet Version in Korean), April 12, 2005. (Translated by Open Source Center).
As in the case with Japan, the U.S.-South Korean military alli- ance weighs heavily on the growing ties between Beijing and Seoul. In essence, both have been able to deepen the economic relation- ship with full knowledge that the United States also seeks stability in Northeast Asia. China and South Korea’s cautious political alignment on the Six-party Talks has taken place, however, as cracks began to appear in the U.S.-South Korea alliance. However, both Washington and Seoul policymakers insist that the alliance is strong as evidenced by Korea’s support of the Iraq war and by statements by President Lee, Myung-bak in 2008 indi- cating that unlike the previous Roh administration, his would ‘‘work to develop and further strengthen traditional friendly rela- tions with the United States into a future-oriented partnership.’’ 118 Under former President Roh, Moo-hyun, South Korea did respond to Washington’s request to send troops to Iraq to perform humani- tarian work, but his administration attempted to pursue a geo- political strategy of seeking to play the role of a balancing force and transportation hub in Northeast Asia. Apparently, many in South Korea wanted the country to act as a stabilizer for peace and prosperity and to place exchanges with China at the same level as those with Japan or the United States—despite concerns that this strategy implied a shift toward China.119 The strategy stemmed partly from the increased economic traffic in the peripheral coun- tries around China, partly from the chronic tension between Seoul and Tokyo, and partly as an attempt by South Korea to define itself in a region that increasingly was becoming dominated by China. For some in South Korea, however, even though China looked like an appealing alternative when relations with the United States wavered, they did not have to search far into the past to see that China had a history of shifting alliances—not to mention its entry into the Korean War in 1950 that ultimately pre- served the division of the peninsula. Expert studies also point to the growing strength of the economic relationship in Chinese foreign policy. One expert concludes that since successful implementation of reform and open-door measures for China requires stability, Beijing has few options other than to pursue a pragmatic diplomatic policy rooted in economic benefits, although clearly China shows no intention of compromising or ne- gotiating over matters related to its sovereignty. In this respect, China regards peace and stability on the Korean peninsula as in- dispensable to its continued economic advancement. It seeks to pre- serve the Pyongyang regime while taking measures to resolve the North Korean nuclear problem. Also, the talk of reunification be- tween South and North Korea places pressure on Beijing to keep on the good side of South Korea to avoid the prospect of a nuclear- armed, unified Korea as an unfriendly neighbor. The PRC also would like to wean South Korea away from its close military alli-
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120 Kim, Taeho. The Rise of China and Korea’s Strategic Outlook. Korea Focus, 10 (3), May– June 2002, p. 79–81. 121 The Association of Southeast Asian Nations or ASEAN was established on August 8, 1967 in Bangkok by the five original member countries: Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined in 1984, Vietnam in 1995, Laos and Burma/Myanmar in 1997, and Cambodia in 1999.
ance with the United States in order to weaken what it views as an important link in the U.S. ‘‘encirclement’’ of China. Beijing, therefore, has placed great importance on its economic and trade relations with South Korea while maintaining its support of Pyongyang and expanding diplomatic and political contacts with Seoul.120
REGIONAL TRADE ARRANGEMENTS
In almost no other area is competition between China and Japan for soft power influence in Northeast Asia manifested more clearly than in the emerging economic architecture of the region. The two countries are in a type of tug-a-war over who will be the lead coun- try in Asia. During the 1980s, Japan claimed the lead based on its industrial prowess, export successes, and its democratic political in- stitutions. Japan, however, could rely on the United States to maintain security in the region. Now China is wresting the lead from Japan, and China’s new strength is being manifest in the manner in which various regional trade and political/security ar- rangements are evolving. The growing economic interaction and interdependency in North- east Asia are leading to a spate of preferential trading arrange- ments that also have spawned nascent regional economic and polit- ical arrangements. This process is being helped along by China’s increasing diplomatic prowess and a rush by Japan and South Korea to negotiate free-trade agreements of their own so as not to place their exporters at a competitive disadvantage. In an ironic twist, the rivalry between China and Japan for leadership in build- ing the new Asian economic and security architecture has enabled the Association of Southeast Asian Nations (ASEAN) to step for- ward and serve as the organizing hub and as the nucleus for the resultant trade and security structure.121 ASEAN is seen as a neu- tral party in the Sino-Japanese rivalry. In 1992, ASEAN created an ASEAN Free Trade Area among its member nations. This has become the base for a number of ar- rangements with the neighboring countries in Asia. In 2002, China signed an FTA (Framework Agreement) with ASEAN that would create a zero-tariff market for China and the six original ASEAN members by 2010 and in 2015 for the other four members. This in- cluded an early harvest program that eliminated tariffs on goods. Japan and South Korea followed with FTAs with ASEAN of their own. Each country also is negotiating bilateral FTAs with indi- vidual countries within A SEAN and with each other. In addition, each country either has concluded or is negotiating bilateral FTAs with numerous other countries both in Asia and around the world. Meanwhile, the United States has concluded a bilateral FTA with Singapore, has completed negotiations on the Korea-U.S. FTA, and is still negotiating a FTAs with Thailand and Malaysia.
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122 See, for example: Shen Qiang. ‘‘New Developments in Evolving Relationships among Major Powers,’’ International Strategic Studies, 3rd Issue, 2005, p. 54.
For the future regional architecture in East Asia, China, Japan, South Korea, ASEAN, and the United States each seem to have competing visions, national interests, and long-term strategies. Each is using its soft power to pursue its own goals. The under- lying questions with regard to the regional architecture include: (1) who takes the lead—China, Japan, the United States, or ASEAN; (2) should the Asian regional organizations be confined to East Asia, or should they include South Asia, Australasia, Russia, and even extend across the Pacific to include countries of the Americas; and 3) how deep should integration go? Is the ultimate goal some- thing akin to the European Community?
Competing Visions for East Asia China’s vision for East Asia appears to be to establish itself as the leading regional power and to attain a status in the world com- munity of nations commensurate with its position as one of the five permanent members of the United Nations Security Council, a nu- clear power, a successful explorer of outer space, and the country with the world’s largest population. China sees a U.S. decline as the corollary to its rise and seeks to displace Japan as the economic leader of East Asia.122 China’s strategy seems to be to foster favor- able conditions for continuing its modernization while also reducing the perception that its arrival as an industrial power and political force threatens the interests of others. China needs peace and sta- bility in the region while it grows and resolves numerous internal economic, political, and social problems. Beijing recognizes that the United States is perhaps the only power that can thwart its plans to bring Taiwan under its sovereign control or can impose a system of economic sanctions that could cripple its economic—and mili- tary—ascent. Beijing has preferred an exclusive East Asian re- gional organization that would enable it to take the lead and place the United States and Japan in secondary roles. Paramount in Chi- na’s vision is a region in which countries respect what it considers to be its territorial integrity, allow for flows of trade and invest- ment necessary to sustain its high rates of growth, and not inter- fere with what it considers to be its internal affairs. Japan’s vision for East Asia is one in which the United States continues to provide a nuclear umbrella for the region and in which Tokyo relies on its economic power and diplomatic skills to exercise leadership. It seeks to be a ‘‘normal’’ nation without vestiges of its defeat in World War II, particularly the self-maintained constraints on its military. Japan would like to bury its World War II history and be viewed as a peaceful nation and a force for betterment in Asia through economic progress. Prior to the resurgence of China, Japan characterized the countries of East Asia as flying in a wild geese migrating pattern with Japan playing the role of the lead bird. Tokyo recognizes now that Beijing is rapidly assuming the leadership role in East Asia and that the Chinese economy is be- coming the regional center of gravity for trade and investment ac- tivity. Japan, however, would like to maintain a position of leader- ship in Asia, accommodate China’s resurgence without tinges of
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123 See: CRS Report RL31038, Asia Pacific Economic Cooperation (APEC) and the 2007 Meet- ings in Sydney, Australia, by Michael F. Martin. 124 U.S. Treasury Department. ‘‘Major Foreign Holders of Treasury Securities,’’ December 2007. (Japan—$581.2 billion, China—$477.6 billion, South Korea—$39.2 billion) See also: CRS Report RL34319, Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal, by James K. Jackson and CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte.
vassalage, and continue to be at the forefront in economic and fi- nancial affairs. For South Korea, the vision for the region is one in which South Korea is a hub for transportation and economic activity. With a rel- atively small economy when compared with those of Japan and China and historical enmity against Japan, South Korea has been cultivating relations with China while seeking to strengthen its economic and security ties with the United States. South Korea claims Japan has not offered to open its agricultural market enough to continue negotiating a bilateral free trade agreement. South Korea also views North Korea, the other half of the Korean peninsula, as a possible partner in manufacturing and a unified North and South Korea as a bulwark against competition from China. South Korea also seeks a nuclear-free Korean peninsula. For the United States, the vision for the region begins with its preeminent position as a keeper of the peace, a wellspring for eco- nomic prosperity, an advocate for open markets, and a role model for social, cultural, and political values. Its goals in East Asia are to prevent any other single power from dominating Asia, to main- tain stability, to increase access to markets in the area, to encour- age development of democratic institutions, and to protect basic human rights. The United States shares leadership with other na- tions and institutions and does not need to have a seat at the table each time Asians meet. Washington, however, usually seeks a pres- ence when decisions are made affecting its vital interests in East Asia (but it sometimes is absent—as in the inaugural meeting of the East Asia Summit). The strategy of the United States in the region has been to continue its hub and spoke system with the United States being the hub and bilateral FTAs and security ar- rangements spoking out with Asian nations. The United States also has multilateral relationships with links to regional organizations or sets of countries such as APEC (the 21-nation Asia Pacific Eco- nomic Cooperation forum) and the proposed Free Trade Area of the Asia Pacific (FTAAP) that calls for an APEC-based trans-Pacific FTA.123 The United States also recognizes that cooperation with China, Japan, and South Korea are essential to resolving vital se- curity issues, such as the North Korean nuclear threat. Further- more, the United States would like a more balanced trading rela- tionship with Asian nations. In 2007 the United States incurred a merchandise trade deficit of $256 billion with China, $83 billion with Japan, and $13 billion with South Korea (43% of the total U.S. trade deficit of $816 billion). These three countries also hold more than a trillion dollars in U.S. Treasury securities.124
Shifting Regional Groupings These alternate visions are played out in attempts at use of soft power as a tactic to pursue strategic visions or goals by the coun- tries competing for traction in Asia. In regional trade, China has
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125 ‘‘Japan Aims to Launch East Asia FTA Talks in ‘08,’’ Jiji Press English News Service, Tokyo: April 4, 2006. 126 ‘‘S. Korea, China Snub Japan’s 16-nation FTA Plan,’’ Organisation of Asia-Pacific News Agencies, August 24, 2006. 127 ‘‘US Envoy Expresses Concern About Japan’s Idea of East Asia Free Trade Zone,’’ BBC Monitoring Asia Pacific, London: April 19, 2006. 128 Asia Pacific Economic Cooperation, ‘‘14th APEC Economic Leaders’ Meeting, Ha Noi Dec- laration.’’ Ha Noi, Viet Nam, 18–19 November 2006. For information on APEC, see: [http:// www.apec.org].
promoted the ASEAN + 3 arrangement in which the ASEAN-10 countries join with China, Japan, and South Korea in what could lead to an East Asian trading bloc that would exclude the United States. The ASEAN + 3 Unit has been organized and helps coordi- nate the activities of the group. It is located within the ASEAN Secretariat. The ASEAN + 3 group holds its annual summit imme- diately following the ASEAN summit. It has focused on trade facili- tation, establishing institutional structures for financial and mone- tary cooperation, and on being a forum for discussing political and security matters. Beijing apparently views ASEAN +3 as an insti- tution in which it can take the lead without competition from the United States or Europe or the dilution of East Asian interests by India or Australia. In 2006, Japan proposed a 16-nation East Asian Free Trade area to be coordinated by an organization similar to the Organization for Economic Cooperation and Development (OECD). The 16 nations would include the ten members of the Association of Southeast Asian Nations, Japan, China, South Korea, India, Australia, and New Zealand, identical to the membership of the East Asia Sum- mit.125 This larger grouping would dilute the influence of China in the proposed free trade area. Japan’s concept was welcomed by ASEAN and India, but China and South Korea indicated that their first priority would be the ASEAN + 3 FTA proposal.126 U.S. Ambassador to Japan Thomas Schieffer has expressed some concern about the proposed Asia FTA saying it could damage U.S. interests in the region. He said that the United States is uncomfortable ‘‘when people start talking about somehow trying to exclude the United States from Asia.’’ The United States has tremendous interests there and wants to be a part of Asia, he remarked.127 At the 2006 Leader’s Meeting of the Asia-Pacific Economic Co- operation forum the APEC members decided to study the possi- bility of a Free Trade Area of the Asia Pacific (FTAAP). This trans- Pacific FTA was promoted by the United States and would encom- pass the 21 APEC economies and include the ASEAN-6 plus Viet- nam, China, Chinese Taipei (Taiwan), Hong Kong, Japan, and South Korea in Asia; the United States, Canada, Mexico, Peru, and Chile in the Americas; Australia, New Zealand, and Papua New Guinea in the Pacific; and Russia.128 As a start, the United States has begun talks with the P4 (New Zealand, Singapore, Brunei, and Chile) to possibly join that FTA with the aim toward using that as a base for creating an FTA that spans the Pacific Ocean. These ac- tions reflect the U.S. strategy of creating a trans-Pacific trading bloc rather than one dominated by China or Japan. The FTAAP also addresses the U.S. concern that Taiwan not be shut out of any emerging Asian free trade area.
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129 Robert Sutter. ‘‘China’s Rise: Implications for U.S. Leadership in Asia,’’ East-West Center Washington, Policy Studies, Vol. 21, 2006. p. vii-ix.
One issue in Asia that differentiates the Chinese from the U.S. approach to FTAs is the U.S. insistence on a ‘‘gold standard’’ tem- plate that provides for elimination of all tariffs and addresses other barriers to economic interaction such as liberalizing investment flows, enforcing intellectual property rights, and increasing access for providers of services. The purpose of this ‘‘gold standard’’ is to eventually combine bilateral FTAs into regional FTAs that include the United States and to avoid what is being called the ‘‘spaghetti bowl’’ of intertwining and overlapping free trade agreements each with its own rules and special exceptions. This helps U.S. compa- nies to compete in this new world of disparate sets of trading rules that are not necessarily convergent. U.S. adherence to this ‘‘gold standard,’’ however, often creates ill will as the United States is perceived to be excessively intrusive in requiring reforms in FTAs. The Chinese approach is to sidestep controversial issues (such as imports of rice) and to maximize the good will aspects of FTAs. The Japanese approach is somewhere in between the two extremes with scrupulous avoidance of any opening of rice markets but amenable to most other types of market liberalization. Chinese recent economic and diplomatic successes, however, should not be over emphasized. The United States still is the world’s preeminent military and economic power, and while many global supply chains include China, they also include the United States—particularly in product design, technology, and marketing. Asian nations are seeking to broaden international options with major powers, and they engage in a continuing round of hedging and maneuvering for advantage and against possible Chinese domi- nance. In this process, they are seeking closer ties with each other and also with the United States.129
IMPLICATIONS FOR U.S. POLICY IN REGION
The extent to which China relies on soft power in Northeast Asia is different from that in either Southeast Asia or in Africa and Latin America. China, Japan, and South Korea tend to be peer competitors in trade and business relationships. Each is jockeying for position and using the tools of soft power in trying to influence each other and other countries in the region. With trade and in- vestments, though, international interaction cuts both ways. Japan and South Korea are clearly more dependent on China, but China also is more dependent on Japan and South Korea. A question is whether this economic interdependence combined with other inter- action is having an effect on political relationships, or whether the opposite is the case—whether increased political and diplomatic re- lations are affecting trade and investment flows. One economic study examines this question through use of an econometric technique to test causality in the relationship between trade and political conflict among China, Japan, and the United States. Conflict in the study is defined as an unfriendly or negative political action or stance of one country towards another (an index of cooperation minus conflict). The study found that in the 1990– 97 period, Japanese net cooperation towards China was positively
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130 Peter Drysdale and Shiro Armstrong, ‘‘The Effects of Politics on Trade and Trade on Poli- tics, Japan and China,’’ pg. 25. Paper presented at the Japan Economic Seminar, Washington, DC, November 16, 2007.
affected by Japan’s growing importance to China. In the 1998–2004 period, Japanese net cooperation towards China was negatively af- fected by China’s growing exports to Japan as China’s dominance grew and became more visible. The study also found that growing Chinese exports to Japan and to the United States were causing a rise in the measure of negative sentiment towards China, but for Japan the growth of exports to China seems to dampen this effect. The large imbalance in trade with the United States, however, was causing tensions to rise in the United States. The study concluded that the stable and rapidly growing economic relationship con- strained antagonistic political behavior between China and Japan. The authors of the study conclude, ‘‘The rising interdependence be- tween the nations and concomitant opportunity cost of serious con- flict has led to an easing of political tensions and even some move- ment towards increased cooperation. The structure of the political relationship appears likely, from this analysis, to be increasingly affected by the economic relationship.’’ 130 This study reinforces intuitive notions that increasing inter- dependence and interchange between nations leads to a lessening of tensions, unless the interdependence or interchange is viewed as being tilted in favor of the other party. This implies for China that its ‘‘charm offensive’’ and soft power are likely to improve political relations with a trading partner unless a large trade surplus in its favor appears. Then the increased economic interaction is likely to raise political conflict. In short, China may be gaining friends now, but those friendships could sour later if the economic interaction becomes unbalanced. By that time, however, structures and institu- tions could be in place that solidify a Chinese position of power. To many observers, the policy implications for the United States call for continued and reinvigorated U.S. engagement in East Asia to counter Chinese soft power and active participation in building the economic and political/security architecture of the region. With Japan and South Korea, much of Chinese soft power actually is being generated by Japanese and South Koreans, themselves, through trade and investment flows. Among these countries, soft power effects go both ways. Although unlikely at this time, an East Asian organization similar to the Chinese dominated Shanghai Co- operation Organization is clearly not in the U.S. interest. The cur- rent U.S. hub and spoke strategy of negotiating free trade agree- ments and security arrangements with individual countries in Asia is one way to ensure that the U.S. presence remains strong, but the U.S. insistence on ‘‘gold standard’’ provisions in its bilateral FTAs that require major changes in domestic laws has caused resent- ment when compared with China’s ‘‘non-interventionist’’ approach. Japanese and South Korean soft power in their dealings with China may work to the U.S. advantage in raising the costs of insta- bility and rash military actions (such as conflict over Taiwan) in East Asia. Despite the growing economic and financial interaction, however, considerable distrust (stemming from historical issues) still exists between China and Japan and between Japan and South Korea. Currently, the probability that a Northeast Asian
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trading bloc combining the economies of China, Japan, and South Korea seems small, since those countries have not made much progress on bilateral FTAs with each other. If such a trading bloc were to emerge, however, this could pose a significant challenge for the United States. Currently, the three countries account for 43% of the U.S. merchandise trade deficit and hold over a trillion dol- lars in U.S. Treasury securities in their foreign exchange reserves.
Figure 17. Mainland China, Japan, and South Korea in East Asia
Source: Adapted by CRS. Map Resources (11/07).
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131 Prepared by Jim Nichol, Specialist in Russian and Eurasian Affairs, Foreign Affairs, De- fense, and Trade Division. 132 As discussed here, Central Asia consists of the former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. 133 Ablat Khojaev, ‘‘China’s Central Asian Policy,’’ Central Asia and the Caucasus, No. 3 (2007), pp. 26–39. 134 Muratbek Imanaliev and Erlan Abdyldaev, ‘‘Globalization Challenges in Central Asia and Certain Aspects of China’s Central Asian Policies,’’ Central Asia and the Caucasus, No.3 (2007), pp. 88–98; Niklas Swanstrom, quoted by Jeremy Bransten, ‘‘Central Asia: China’s Mounting In- fluence,’’ Eurasia Insight, November 23, 2004.
CENTRAL ASIA131
OVERVIEW
After the Soviet breakup, China focused on establishing trade and other cooperative relations with the newly independent Central Asian states and encouraging their efforts to ensure regional and border security.132 The new geopolitical situation permitted China to largely demilitarize its borders with the new states, opened mar- kets for Chinese goods and investment, yielded better access to raw materials, provided economic opportunities for China’s Xinjiang Uighur Autonomous Region, and promised to reinstate Central Asia as a transit corridor (‘‘Silk Road’’) between China and Europe and between China and the Middle East. The Soviet collapse also confronted China with several security challenges, including grow- ing contacts between separatists in Xinjiang and their supporters in Central Asia, the growth of Islamic extremism in Central Asia, rising instability or even state failure in the region, the possibility of the development of ties between the Central Asian states and Taiwan, and Central Asian regional cooperation that excluded China.133 China’s relations with Central Asia slowly evolved during the 1990s and at first were largely limited to diplomacy and merchan- dise trade. Diplomacy included exhortations to the Central Asian states to crack down on support by citizens in their countries of separatism by Uighurs (a Turkic Muslim people) in Xinjiang, as well as negotiations over border demarcation in order to facilitate trade and reassure the regional states that China did not seek to annex them. During his early 1994 visit to Uzbekistan, Premier Li Peng highlighted China’s interest in friendship and peaceful coex- istence, mutually advantageous cooperation, non-interference in do- mestic affairs, and the promotion of regional stability. By the late 1990s, however, China had become increasingly concerned that the ‘‘three forces’’—international terrorism, religious extremism, and ethnic separatism—posed a growing threat to the security and sta- bility of both China and Central Asia. Also, domestic energy short- ages contributed to China placing relations with the region at a higher priority level. A stablesecurity situation in the region was viewed as necessary for building energy transport links to China and for improving Xinjiang’s economy.134 See Figure 18.
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135 Joseph S. Nye, Jr.,‘‘Bound to Lead: The Changing Nature of American Power,’’ New York: Basic Books, 1990; ‘‘Soft Power: The Means to Success in World Politics,’’ New York: Public Af- fairs, 2004. 136 Adil Kaukenov, ‘‘China’s Policy Within the Shanghai Cooperation Organization,’’ Central Asia and the Caucasus, No. 3 (2007), pp. 62–76.
Figure 18. Commonwealth of Independent Central Asian States