How China loses

An interview with Luke Patey

Dear fellow China watchers,

Over the last decade or so the China shelf at your local bookshop has been dominated by authors declaring that China has already won. Recently, however, a new message has started to spread – that China might not be on the verge of total global victory after all.

Perhaps the best of these recent tomes is by the Canadian academic Luke Patey. How China Loses is a detailed description of many of the challenges that Beijing faces in its international push. Today I publish an interview with Luke.

We cover a lot of ground, including:

  • Whether China’s political and economic policies are sabotaging each other.

  • Is debt trap diplomacy a thing?

  • Is China ready to defend its interests militarily yet?

  • Does China’s economic coercion work?

  • What role does the UK play in standing up to China – or not?

  • Can the US mount a credible opposition to China’s growing international power?

  • And – how would he advise Xi Jinping to stop the global pushback against China?

Not all of you will agree with Luke’s assessments, but in the least they provide a useful counterpoint to the inevitability-of-China message.

When you’ve finished reading the interview, please do write a comment about whether or not you agree with him. It’s good to debate these things!

As always please feel free to like and share too. Many thanks for reading.

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Sam Olsen: You have an example about Chinese arms being used in South Sudan to wound and kill Chinese peacekeepers – to what degree is this representative of Chinese policies around the world actually damaging each other?

Luke Patey: Firstly, Sudan and South Sudan were a pioneering case for China’s engagement in conflict affected countries- it will be a first look for what China’s engagement might be in the future in Afghanistan, Myanmar, and elsewhere that’s experiencing conflict. I don’t think it’s a one-off and China has not learnt all of the lessons it should have, but it has learnt some.

South Sudan demonstrates no major power has a magic solution to build stability in conflict affected countries. The fact that China couldn’t protect its oil investments from stagnating under the instability in South Sudan shows China couldn’t control events on the ground and stabilize domestic politics. Despite having major investments in Sudan and South Sudan, it didn’t turn out well for those investments.

It also shows, similar to other major powers, China’s interests upset one another. For instance, China legally sells arms to East Africa, but those arms get recycled in the conflict; they end up in the hands of rebels and are used to target China’s oil investments and UN peacekeepers.

Basically, China can’t control the situation, its more that the conflict controls it. This upsets Chinese interests and pits them against each other.

Pakistan is another case where Chinese interests run afoul of local politics and security troubles. There are separatist groups in Balochistan, through which the China-Pakistan economic corridor runs. They have targeted Chinese interests and nationals on many occasions, even though Beijing has been reaching out and offering financial incentives to do otherwise. In a similar way to what happens in South Sudan, China pays one group off, but then another attacks.

We’re starting to see if China will learn lessons from the past or not. China is narrowly focused on its interests in a country, protecting its infrastructure projects for instance, but are not focused on settling any wider conflicts. So they may solve their problem in the short-term, but it will come back to haunt them if the conflict isn’t settled.

SO: The amount of money that China has spread around the world in aid and investment is staggering, everywhere from Argentina to Indonesia. Its critics say that it is guilty of debt-trap diplomacy – is this fact or fiction?

LP: It depends how you define debt-trap diplomacy.

If you see it as an intentional move to flood a financially risk-prone country with new loans to capture a strategic asset, it is very hard to prove the intention is there. I don’t see many examples of this deliberate intention being proved. I think it’s more fiction than fact if you take it as a deliberately set trap.

That said, even if the intention isn’t there, the debt offered by China to countries like Sri-Lanka and Malaysia affords Beijing more influence there. In addition, China has been able to gain strategic assets through engagement with these countries, and so we can’t dismiss it as genuinely developmentally focused. 

That’s nothing unique about getting influence in return for lending, and China has just started to play the game.

Overall, it’s important to view this debate with nuance. There’s a stark academic division. One side says that it’s debt-trap diplomacy, and others say it’s simply business and commercial interests from China. Both are incorrect, and in fact it’s somewhere in between.

Beijing has increased its loans dramatically over the past couple of decades, and it has become a significant new actor in offering finance overseas, but it’s not necessarily surpassing everyone else. Japan still provides more infrastructure finance than the Chinese in Southeast Asia. The World Bank and other multilateral organisations are giving more to Latin America than Chinese policy banks. The World Bank is matching China in Africa as well. In other words, there are not many regions where China has a dominating position.

The majority of developing countries want to diversify their loans and keep trading and economic opportunities open. The BRI [Belt & Road Initiative] is not overtaking everyone else, but it is another important initiative. But we have seen in recent years it has slowed down quite significantly and facing headwinds.

What is also striking is that the US, India and others, who are worried about Chinese influence in developing countries, have been given a discursive gift by the term ‘dept-trap diplomacy”. It has been very effective in countering China’s narrative of BRI development. We saw Mohammed Mahathir [the former prime minister of Malaysia] use it in his successful election campaign against the incumbent government, saying that they were too close to China. He also raised it with President Duterte when he met the Philippines’ leader. It’s had a snowball effect in making other countries question the level of engagement they want with Chinese loans. We saw downsizing projects across the region, even in Pakistan on coal plants, and similarly with Myanmar on ports. The use of this term by the US and other countries has had a real impact against the BRI.

SO: As you well describe, China has aggressively defended its interests including through trade and tourist boycotts. How far will China go to protect the interests it has built up in recent years – is military action by Beijing more of a possibility today?

LP: We are getting there, and could very well be there soon depending on the hypothetical event that arises in the future. Let’s say China does have a project in Afghanistan and there is a kidnapping of Chinese workers, how China responds is a critical question.

I go back to a conversation with the Chinese special envoy to Africa, Liu Guijin. He had to deal with five Chinese oil workers being killed by kidnappers in Sudan in 2008. He met with President Bashir at the time, and the President told him they would handle it. But on the way back to the plane, Liu was called by the President’s office saying it was a botched mission and the workers were killed in the process. When I talked to him about this situation Liu said China has lacked the capability to protect its interests, which it didn’t in 2008 – but it does now.

If something like that took place today, China has enhanced military capabilities to work with. The Chinese would still like to avoid direct military intervention, even using special forces. If they ever did it, it would be with the consent of the host government. But they would firstly rely on such a situation not happening by supporting the host military and security forces, as we’ve seen in Pakistan. I think the Chinese will increasing explore possibilities in private security and ex-PLA officers are already getting involved in this. China’s military has a base in Djibouti which can serve purposes both in East Africa and the Middle East.  It’s not just there for peacekeeping and humanitarian purposes, but also for rescue operations.

SO: You only mention the UK briefly in your book – to what extent do you think London is a player in the world’s relations with China?

LP: I think it has a prominent role to play. It is necessary for the UK to get involved, not alone, but with other middle powers in Europe, Asia and elsewhere. Relations with France have been upset of late with AUKUS, but fostering ties with Asia’s middle powers, Australia, Japan, and India, offers much to the UK’s security and economic position in the world. Despite the relative decline of the UK economy, and its break with Europe, it is still an important power in the world. What is crucial is seeing Asia beyond just trade and investment with China alone, and that the Indo-Pacific is a strategic region where there are military interests for Europe despite most countries not having territories there.

Where the UK really plays a strong role as a trend-setter is its position on engagement, or lack thereof, with China on critical infrastructure, particularly the UK’s position on Huawei and telecommunication networks. The UK’s initial defence of working with Huawei was based on a long-term relationship with the Chinese company and British operators, but now these firms are tearing out Huawei equipment from their networks. This has set the tone for other countries in Europe, which maybe now suspect working with Chinese telecommunications companies on this new technology.

Despite many British politicians having a more assertive approach to Beijing, there is Chinese influence and there are Chinese interests in the UK: for example in the commercial and financial areas, and also in higher education. So, it is not necessarily a set path the UK is on with China. Domestic politics in the UK and how China approaches the country is going to influence the UK’s position as a trendsetter moving forward.

SO: Is the US in a credible position, following Afghanistan, to be the major player in bringing a middle power alliance together against China?

LP: We can’t be sure of which direction the US is headed. A middle power alliance may be necessary to protect against American intervention in one’s economy, and to push back against the US and make them follow the rules, some of which the Americans set up in the first place - such as on trade, and maintaining a strong WTO.

I also don’t think that the Fall of Kabul will dictate America’s ability to be an orchestrator of a middle power alliance. I think it’s more domestic politics and the domestic economy in the US that will dictate that. For Europe and Japan, America’s civil unrest and the Capitol Attack in January this year all amount to big concerns: can we trust the Americans in the long-run if there’s not domestic stability there? And how do we deal with this new American animal now?  That would be the determining factor. Middle powers need to consider what the US might do to upset their interests going forward. Obama’s ‘Pivot to Asia’ may have first manifested itself more fully under President Trump, and now continues to develop under Biden, and European powers may discover that the transatlantic relationship is no longer as central to US global ambitions as it once was.

SO: China’s economic coercion, is it a real thing and does it work?

LP: No, not yet. If you go through recent cases, from South Korea to Canada and Australia, you don’t see strong foreign and security policy shifts based on economic coercion. It’s principally for two reasons.

First, there are times when defence and security and foreign policy choices trump economic interests. Even though China put pressure on South Korea to not deploy a THAAD missile defence system on its territory in 2016, Seoul still went ahead. Although all parties have now been released, the Canadians didn’t hand over Meng Wanzhou, the Huawei executive, back to China despite Beijing’s actions, including the arrest of the two Canadians [Michael Kovrig and Michael Spavor]. The Australians haven’t really shifted their foreign policy position since China’s trade embargo started last year, and in fact their tone has hardened.

The second reason economic coercion doesn’t work is that China pulls its punches. It’s not interested in upsetting its own economic growth, and so its economic actions tend to be light touch – nothing like what the US does to countries like Sudan and Iran. Australia is the most significant case where China has pushed hard, and it has placed trade measures on a long line of Australian exports, from coal and barley to lobster and wine. The reality is Australia has been able to sell its products elsewhere. Coal has been sold to India, Japan, and Taiwan. Barley has been sold to South-East Asia and the Middle East. The fact is the products China targets are fungible commodities, so if they’re not sold in one place, they’re sold in another. It is the same situation for Canada.

China needs the products that these countries produce, so when Covid-19 hit and there were food security concerns in China, suddenly they were quietly buying canola from the Canadians despite there being an embargo. China funnels products through third markets. Norwegian salmon, which was banned following a spat over the award of the Nobel Peace Prize to Chinese dissident Liu Xiaobo, continued to be sold in China via Vietnam.

Still, coercion matters. Even though it has a low material impact, it creates heavyweight but simplistic media stories of this huge economy putting its foot down on a smaller country and dictating their policy decisions, which can obviously be worrying for other nations. Few want to take the time to unpack the numbers, and so the myth itself continues to live on and can only be solved with research.

SO: How may Biden and the G7's Build Back Better World (B3W) Initiative affect the BRI and pushback to China?

LP: It’s hard to tell because it’s still only in the discursive realm, and there’s not a lot of substance on the ground. Where it can be affective is in its advisory role. For example, a few years ago the US sent economic advisors to Myanmar to discuss Chinese debt and the economic effectiveness of Beijing’s projects there. This free advisory and legal advice role can make a big difference in helping countries make more effective decisions for their economies. This doesn’t mean, however, that countries will or should say no to everything China offers. 

Regarding B3W, I do think that there is substance to build upon. But I don’t think the Americans should be leading this, it should be the Japanese. The Japanese do real infrastructure, particularly in Southeast Asia, where they outpace the Chinese. Japan should look at their existing projects and package that into the B3W Initiative. The EU, the US, and Japan are already doing so much, and should make it into a storyline, as China did with the BRI.

There are real gains for the United States to be made in technology if new avenues of finance can be opened up for companies such as Ericsson and Nokia to offer 4G and 5G networks in developing countries. They could for instance work closer with India and Vietnam in developing their own domestic networks. There is a lot of traction to be gained there; whilst Huawei wins market share in developing nations because it offers low prices and has comparable technology, Ericsson and Nokia can buy market share too. They have actually offered lower prices in European countries on 5G. If they get financial backing, like the Koreans already provide to Samsung, there can be real competition and traction for the B3W initiative.

We should throw aside the idea that we in the West doesn’t do industrial policy. The US and the EU, and India and Japan, all do industrial policy, but in different ways and levels, and with varying effectiveness. This idea that all Western markets are liberal is only partly true. In the US, much of the internet revolution stems from industrial policy. Just as China’s own economic growth is not just about state led initiatives, it’s also about the private sector, foreign investment, and Chinese entrepreneurs.

The B3W initiative has a lot of traction and potential, but the Americans and their partners need to put their money on the table.

SO: The pandemic has led to countries requesting Chinese loan restructuring. A few months on now, how do you think the pandemic has affected progress with the BRI?

LP: I think we’re still in this massive renegotiation period - dozens of countries are renegotiating with China on their loan agreements. Beijing hasn’t been forgiving debt much, but rather postponing payments to avoid giving up this strategic influence through the debt provision. Lots of countries, because of the pandemic, are in economic crises, so starting up many new projects is not on the cards at the moment. For China and for the borrowing countries in the BRI, it’s largely about consolidating what they have.

SO: If you were asked to advise Beijing, what would you suggest they do to stop the global pushback?

LP: Beijing needs to discover there’s a lot of diplomatic space between Wolf Warrior diplomacy and ‘hide and bide’. They don’t have to be not involved in global issues, but they don’t also have to be arguing vehemently on every minor issue that upsets their positions.

Both the decision to detain the two Canadians, and engaging in a border conflict with India, were largely done for domestic political purposes in China, and both were own goals on the foreign policy playing field. Just a few years ago both Canada and the Indian were striving for better relations with Beijing. Now both opportunities are gone. If Beijing had handled these problems differently, I think they would be a much better position vis-à-vis the Americans and global power competition.