The United States and China – Economic Nationalism and Power Transition

Jakob Schein, advised by Dr. Nicholas Seltzer

Abstract

This research paper intends to analyze the relationship between China and the U.S. as affected by economic nationalism. Economic nationalism has played a key role in the U.S. – Chinese relationship, shaping the power transition. The economic nationalism between the U.S. and China is symptomatic of a deeper political struggle between a rising power and an existing world power. In recent years both countries have seen a rise in economic nationalism. Both countries have conducted economic nationalism, by breaking trade deals, violating international trade law, and military expansion to protect their economic interests. The following study intends to link economic nationalism to the Thucydides Trap by analyzing economic data and current global political events. This paper will review the following IR theories: the Thucydides Trap, Power Transition Theory, and the Theory of Interdependence. These theories are often applied to the U.S. – China relationship. This paper attempts to integrate economic nationalism into that field of research, analyzing how it has shaped the power transition.

1 Introduction

In the field of international affairs, the U.S. and China’s political relationship is frequently discussed. This relationship is also compared to a concept called the Thucydides Trap. This idea, written in the book “History of the Peloponnesian War,” discusses the relationship between Athens and Sparta. (Thucydides, 1998). It theorizes that as Sparta rose in power, Athens began to fear their rival’s power, leading Athens to attack Sparta. The relationship of the rising power challenging the existing power is the Thucydides Trap. Organski expanded on this in his book World Politics. He detailed power transition theory, stating that as two countries grow closer in power war is more likely (Organski, 1968) [18]. He believes times of peace are most common in times of hegemony. This theory was applied to the U.S. China relationship by Graham Allison. Graham Allison writes about this in “Destined for War” (Allison, 2018), arguing that the two China and the U.S. are destined for war. The Thucydides Trap is one of multiple Power Transition Theories that political scientists apply to the U.S. and China [2]. Other theories include the theory of Complex Interdependence and Nuclear Deterrence. All of these theories attempt to make sense of the U.S. – China relationship. A major flaw is that these theories most commonly analyze the military side of the relationship, leaving out economics. The following research ties in economic nationalism as a component of the U.S. – China relationship.

∗Author: speaker@asun.unr.edu.

2 Economic Nationalism

Economic nationalism is a set of economic policies that nations often commit, typically through policies that benefit their country and the expense of other countries. For the purpose of this paper, economic nationalism will refer to unilateral economic policies, one sided agreement, pulling out of trade agreements, and unfair tariffs placed on rivals. The definition comes from an article published with the Global Policy Journal Global Policy Journal, “Economic nationalism should be considered as a set of practices designed to create, bolster and protect national economies in the context of world markets. The practice is not necessarily antithetical to external economic activity, but it is opposed to allowing a nation’s fortunes to be determined by world markets alone” (Pryke, 2012) [19]. Both China and the U.S. commit economic nationalism. A paper done by the Peterson Institute for International Economics found that China and the U.S. both rated highly for economic nationalism (Bolle, Zettelmeyer, 2019) [3]. They found that under the recent Trump administration this has risen, both by leaving trade agreements and creating new tariffs. Compared to the U.S, China was ranked higher in the degree that they conducted economic nationalism. It is clear that both countries commit economic nationalism, it is rooted in their history.

3 Power Transition Theory

As mentioned in the introduction, the Thucydides Trap is one of several Power Transition Theories. These theo- ries started in ancient Athens with the Thucydides Trap. Power Transition Theory was furthered under Organski who argued that as powers become more equal in power war is more likely. All of these theories argue that war is likely to happen. Some scholars have denied this though, by creating the following theories. The first theory is called Complex Interdependence. Complex interdepen- dence was a theory started by Robert Keohane and Joseph Nye in their early works (Keohane, Nye, 2012) [15]. This has only been further developed as liberalism and IGO’s have developed over the world. The theory states that countries are reliant on each other economically, so war is extremely unlikely, especially among rivals (Keohane, Nye, 2012) [15]. Additionally, there is the idea of mutu- ally assured destruction; this term was coined by Donald Brennan in 1962, talking about how two nuclear powers in an escalatory war would mean destruction for both sides (Deudney, 1983) [9]. If one power is losing, they will deploy nuclear weapons on the other, and vice versa. This makes up the two sets of theories. The Power Transition works of Organski and Thucydides argue that war will occur. The other theorists think war is less likely due to deterrents. Most current research on China and the US apply these theories, attempting to make light of their relationship. This paper intends to draw on these works for inspiration, while keeping the focus on economic nationalism as a form of economic warfare.

4 China – Economic Nationalism

Beginning with China, most current research has linked economic nationalism to the rise in China’s power in the 21st century (D’Costa, 2012) [5]. In their past, China was often held back by political instability and domestic poverty issues. They’ve overcome this in the last few decades, beginning to invest in neighboring countries. In the 2000’s they invested in foreign energy reserves, such as oil (D’Costa, 2012), they attempted to secure energy related resources for their future, as well as secure rare resources (Scissors, 2020) [5] [20]. In the last ten years they have shifted to building infrastructure in other countries through the Belt and Road initiative (Lu, Rohr, Hafner, Knack, 2018) [16]. They invest in developing countries, offering loans to their governments. They then will help build the infrastructure, making the country indebted to China. This new infrastructure also builds a way for China to export to more countries (Lu, Rohr, Hafner, and Knack, 2018) [16]. These policies are designed to hide China’s real intentions. China makes it look like they are helping their neighbors, while they are really practicing economic nationalism. The loans are set up to encourage reliance on China, as well as increase China’s exporting options. China has also been creating new IGO’s like the Asian Infrastructure Investment Bank. They also are gaining more leadership roles in groups like the UN and World Health Organization. These practices don’t look like economic nationalism on the surface, but a deeper analysis shows a different story. The economic practices often are designed to hurt other countries, placing China in a place of power over them. It creates a China-centric world in Asia, with China’s economy at the center of it (Huang, 2016) [14]. An example of this is Sri Lanka.

5 Sri Lanka Hambantota Port

In 2017 China and Syria signed an agreement that allowed China’s Merchant Port Holdings company to develop the Hambantota Port (Carrai, 2019) [7]. Sri Lanka made this deal with the interest of advancing their own trade goals. China’s currently one of Sri Lanka’s biggest trade partners (Carrai, 2019) [7]. This deal allows their trade to expand. It does serve a threat to Sri Lanka’s national security though. One of their largest ports is being controlled by a foreign nation. Although the deal is mutually beneficial, it is an example of China pursuing economic nationalism through their Belt and Road Initiative. Sri Lanka is not a unique case. Similar fears for national security have been echoed by other nations including Japan, Australia, the Philippines, and others (Lu, Rohr, Hafner, Knack, 2018) [16].

6 United States – Economic Nationalism

To understand American economic nationalism, one must go to the beginning of the country. The Revolutionary War with the Boston tea party. This was essentially a “buy American” scheme (Frank, 2005) [12]. In more recent years, there has been a large rise of economically nationalist rhetoric. The ideas of “bringing back American jobs” and “buy American products” are both rhetorical terms that started under President Reagan (Tassinari, 2018) [22]. In recent years these have come back under President Trump. Moving into the 2000’s, with the nation under President Bush, there was another rise in economic nationalism. His unilateral wars in the Middle East are closely tied to a U.S. desire for oil (Monten, 2005) [17]. During his term the U.S. was reliant on oil from the middle east. While this was not the only reason for war, economic nationalism was a driving factor. These wars led a lot of the world to be skeptical of the U.S. internationally. This subsided a little bit under Obama, who encouraged global involvement. It has only gotten worse under the Trump administration though (Brubaker, 2017) [4]. Nationalism was central to his rhetoric when he ran, expanding into much of his foreign policy.

7 Economic Conflict

It’s already established that the U.S. and China practice economic nationalism. They often direct it at each other, such as the Trans-Pacific Partnership, a trade deal created by the U.S. The TPP included almost every country in Asia, except China. After the TPP ended, China created the Regional Comprehensive Economic Partnership (RCEP). This deal was similar to the TPP, although This deal included many of the same countries, although importantly the U.S. was excluded. This represents a power transition in Asia, with the U.S losing economic power while China gains it.

The U.S. and China are competing to be the preferred trading partner of these smaller countries (Wilson, 2014). This can be seen with the trade relationships with Japan, the Philippines, and South Korea. All these countries have strong political and economic ties with the U.S. but in recent years their trade has been transitioning towards China. This points towards some sort of power transition. All this data was gathered from the World Bank WITS tool. Interpreting this data, two major trends are shown.

Fig. 1: This table shows data on Japanese Trade Relations
in Billions

First, there are differences between the two economies. The U.S. is a net importer, and they typically run a deficit with the countries, importing more than they export. In 2018 Japan exported 57.1 Billion dollars more in product than the U.S. did (WITS). The Chinese economic model has grown to be a mass exporter. If you follow from 1990 to 2018, they grow from a balanced trade deficit to a more export focused deficit.

Fig. 2: This table shows data on Philippines Trade Relations
in Billions
Fig. 3: This table shows data on South Korean Trade
Relations in Billions

They exported 29.4 Billion dollars more to Japan in 2018 (WITS). The data shows the relationship that both countries have to the area. The U.S. provides a market for these countries to sell their products to. On the other hand, China provides a market for these countries to buy products from. In all three countries, Chinese trade gradually overcame U.S. trade, typically around 2006-2010. This shows that China is challenging the economic power of the US throughout Southeast Asia. This isn’t necessarily an intentional or offensive challenge. They are just a growing economic power in the region. This affects the US – China relationship in a few ways. It gives credence to the idea of a Thucydides Trap. Using this data you can see that China is rising in power, challenging the U.S. in the economic arena. Economic motivators can also lead to more direct conflict. An example of this is the South China Sea conflict.

8 South China Sea Conflict

Economic warfare and economic nationalism don’t typically lead to violent conflicts. Normally they are just countries competing for profit. This isn’t always true though. An example of a strategic conflict motivated by economic nationalism is the South China Sea conflict. In the last few years China has been aggressively claiming islands in the South China Sea. These islands are rich in oil and fishing resources, giving economic motivators for China (Buszynski, 2012) [6]. They also make up a major part of the BRI trade route, which is important to China’s economic strategy. The problem with this is that other countries are currently claiming these islands. Vietnam, the Philippines, Malaysia, and Japan all claim parts of the water and islands. International law laid down by the UN dictates that a state can claim a resource within 320 kilometers of their coast (Buszynski, 2012) [6]. By claiming these islands, China is claiming the 320 kilometers around them as an “exclusive economic zone.” China is attempting to claim these lands on the idea that they have a historic presence there. International courts have disputed this arguing a historic claim is trumped by the more modern law (Buszynski, 2012) [6]. China has unilaterally decided to settle these islands, placing military bases and research stations on them. In this sense, this conflict is economically motivated. These economic motivators have led to a strategic military conflict. These islands are also key locations for Chinese and U.S. military control. These islands serve as a forward base for China’s naval operations in the area (Albert, 2016) [11]. Ever since Japan’s defeat in World War 2, the U.S. has had a considerable naval presence in the area. A lot of this is intended to protect U.S. allies through deterrent. China’s expansion of military power is in response to this, attempting to push the U.S. out of the area. This serves as a more strategic conflict, with the two countries attempting to protect their strategic goals. China currently claims Taiwan to be a part of their sovereignty, so they want influence over it. This is backed by the expansion of Chinese missiles in the Taiwan Strait, as well as advancements in submarine technology (Albert, 2016) [11]. China is gearing up for potential conflict with Taiwan. The U.S. has responded to this by sending ships through China’s claimed territory and flying planes over their islands. This conflict shows very well how economic motivators can lead to, or coincide with strategic conflict.

9 Analysis

The data above and the conflict in the South China Sea give perspective on how economic nationalism can inspire conflict. The statistical analysis comparing economic trends shows that there is a lot of competition between the U.S. and China in South East Asia’s economy. China has been steadily gaining ground and surpassing U.S. trade in the area. There is also room to say this economic conflict can inspire actual conflict. Although it isn’t the only factor, economic nationalism is a major component in the South China Sea conflict. As China’s economic interests expand, they are using military forces to directly protect these interests. This is a step past economic nationalism, moving into a field of strategic conflict. As strategic power is essential to power transition, I believe this economic conflict is also a strong sign of power transition.

10 Counter Arguments

Not all scholars will agree that the U.S. and China are engaged in a power transition. There are many theories in this area, many of which if true discredit the ideas of this paper. When looking at the role a hegemon plays in the 21st century, the perspective also must shift. After World War II, the U.S. and Russia were clear world powers with many countries rallied around them. Today, the world is less clear cut, with the international scene looking much more diverse. When it comes to economic nationalism, the same idea applies. While there may be trends that correlate, such as China gaining power economically as well as strategically, this does not mean there is a causation. It is hard to prove China is developing their strategic power in the area to protect their economics, as most of this is unofficial Chinese policy. Finally, China isn’t really attempting to become a world hegemon. It seems that they may want more regional influence, but they are not building military bases around the world or anything of the sort. Instead they are competing in their local continental economy while strengthening their local position. This isn’t the sign of a hegemon challenging another world hegemon, as the Thucydides trap would assume.

11 Summary

The analysis above creates a compelling argument for the original hypothesis. There is good evidence for a power transition, motivated by both economic and strategic factors, resulting in conflicts like those in the South China Sea. Through this analysis, significant evidence has been gathered to affirm the hypothesis. There does seem to be a power transition happening between the U.S. and China. This is largely economic, shown with the tariff war, economic data presented in the charts, and the economic motivators for the territory expansion. That is to say, most of this is focused around local power, not overthrowing a global hegemon.

12 Call to Research

Further research should be done into the economic side of power transition theory. With the increase of deterrents to war, conflicts will become more and more economic. The trade war is a good example of this. There is an increasing number of deterrents that dissuade world powers from going into large wars, especially countries the size of the U.S. or China. This is a concept that should be further explored. It could be explored in the context of U.S. – Chinese relations, as well as historical power transitions. There were economic motivators in the conflict between the U.S. and the British. The power transition between the two after World War 1 was peaceful, with no large wars. This transition in power largely happened on an economic spectrum, with the British trade empire’s dissolution leading into American capitalist expansion. It would be pertinent to compare this power transition to the U.S. and China, as this may be the way hegemonic countries shift in power in modern times. War may have been a more valid option for Sparta and Athens, although that doesn’t seem to be the case anymore. Research on this could start by analyzing deterrents and moving into an analysis on how economic power transition would look. 

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