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This chapter provides an overview of economic statecraft and how it differs from “normal” commerce. It first challenges a common misconception in the field of international relations—that states conduct economic relations with each other—before discussing the relationship between economics and national security in the context of externalities. It then considers the specific microfoundations of economic statecraft as it is actually practiced in grand strategy, with particular emphasis on the element of state control—whether the state can control or direct the behavior of the commercial actors that are conducting the international economic activity. It also describes a framework for thinking about the relationship between the economic activities of commercial actors and the security of a nation-state.

This chapter examines the mainland's use of interest transformation as a strategy to alter Taiwan's definition of its own interests. It considers how China executed its strategy of interest transformation by focusing on the spring 2005 visit of Lien Chan, chairman of the Kuomintang Party (KMT), to the mainland and the subsequent elimination of tariffs on Taiwanese fruit. It shows how mainland authorities worked together with Taiwan's opposition parties and began to target Taiwan's fruit exports for further expansion as part of China's shift to an economic statecraft strategy based on interest transformation. It argues that the mainland's trade concessions to the support base of Taiwanese President Chen Shui-bian was part of a successful electoral effort to mitigate Taiwan's aspiration for independence.

This book examines how China uses economics as a tool of national power in the twenty-first century. More specifically, it assesses the conditions under which China is more successful or less successful in its pursuit of economic statecraft. It explores economic statecraft in the context of contemporary Chinese grand strategy to show how China uses firms to pursue its foreign policy and other strategic goals. It also considers economics as it relates to national security as well as China's global search for strategic raw materials such as oil, China's use of economic statecraft in its relations with Taiwan, and China's sovereign wealth funds as an avenue of state control. Finally, it explains why the Chinese state can or cannot control the behavior of commercial actors that play important roles in economic statecraft.

This book concludes by offering a few observations about economic statecraft in general and Chinese economic statecraft in particular. First, state control is an essential and often overlooked prerequisite of economic statecraft. Second, state unity is the most important of the five factors that determine when state control is more or less likely, whereas the balance of relative resources seemed to be the least significant. Another observation involves the so-called “king-making” capabilities of the state. By backing only those commercial actors that carry favor or prove amenable to advancing government agendas, the Chinese state is able to at least partially compensate for the problematic principal-agent challenges stemming from a fragmented market structure. The book also discusses the policy implications of its findings for China, particularly with regards to its political economy and its rise on the international stage, and the world.

This chapter examines China's attempts to coercively leverage Taiwan's growing economic dependence on the mainland. The evolution of the cross-strait economic relations and China's corresponding strategic use of economics can be usefully broken into two phases, each of which highlights a different strategic logic of economic statecraft. In the early days of the cross-strait economic ties, China was mainly focused on attracting Taiwanese capital investment and management expertise. As the cross-strait economic interaction expanded and deepened throughout the 1990s, China began to consider the possibility of using this economic interaction as a coercive lever of power. This chapter first provides an overview of cross-strait economic ties during the period 1979–1996 before discussing the mainland's shift to a coercive leverage strategy. It then considers Beijing's use of coercive leverage against prominent Taiwanese corporations with mainland operations in order to influence the outcome of Taiwan's presidential elections. It also evaluates the results of China's coercive approach.

This chapter examines the role of economics in China's grand strategy as it rises to great power status in the international system. A good deal of China's post-1978 foreign policy has been focused on facilitating the country's economic development. Increasingly, China finds itself in a position in which it may be able to leverage its growing economic power to advance its foreign policy goals. This chapter begins with an overview of grand strategy as an analytical concept in international relations. It then considers China as a strategic actor and the evolving role of economics in China's contemporary grand strategy, along with Deng Xiaoping's reassessment and strategic reorientation of China toward economic development. It also explains how much of China's modern foreign policy has been designed to serve the requirements of economic development and the international integration of a rising China. Finally, it discusses the utility of economic statecraft in pursuing China's grand strategy.

Resources have been essential inputs in the world economy and at the epicenter of technological developments. There are different theories of resource scarcity, but uninterrupted access to resources is vital to modern economies, especially since modern technological applications demand resource inputs from across the globe. Physical depletion and flow disruption, therefore, both pose a series of challenges for policymakers and industry. The examination of China’s use of economic statecraft in the case of the rare-earth crisis and the corresponding response of the European Union, the United States, and Japan provide a salient example of how resource dominance can spill over into global power politics.

This chapter examines an instrument of Chinese economic statecraft: the State Administration of Foreign Exchange (SAFE), the financial entity in charge of managing China's foreign exchange reserves. More specifically, it considers one episode to show how the state was able to use SAFE to pursue its strategic foreign policy objectives: Costa Rica's 2007 derecognition of Taiwan. The chapter first provides an overview of SAFE before discussing SAFE's purchase of Costa Rican bonds in 2008 and 2009. It shows that SAFE's bond purchase was part of a larger pattern of economic inducements collectively designed to strengthen Costa Rica's ties to the mainland while severing its connection to Taiwan. The SAFE–Costa Rica episode illustrates how China's sovereign wealth funds can be used to achieve a foreign policy goal.

This introduction outlines the main features of the economic statecraft tradition, a form of historical writing which presented kings and queens as managers of a nation’s financial and commercial interests, and sought to assess the contribution they had made to national economic welfare. The significance of the tradition is then examined for (1) debates concerning the relationship between economic and political practice (as discussed by Hannah Arendt and J.G.A. Pocock) and (2) approaches to the history of economic policy. A concluding section summarises the organisation and content of the rest of the book.

This chapter examines the National Social Security Fund (NSSF) as a potential instrument of Chinese economic statecraft. More specifically, it considers the factors that make the NSSF unlikely to be a source of strategic concern by focusing on its institutional and structural characteristics as well as its investment activities. The chapter begins with a historical overview of the NSSF, followed by a discussion of the NSSF's financing sources and uses. It then reviews the NSSF's mandate and activities before evaluating how the theory applies to the case of the NSSF. It suggests that the NSSF has little potential as an effective tool of China's economic statecraft owing to its institutional structure.

This chapter examines the China Investment Corporation's (CIC) potential as an instrument of Chinese economic statecraft. The CIC is a sovereign wealth fund whose empirics indicate that it lies somewhere between the two extremes of the State Administration of Foreign Exchange (SAFE) and the National Social Security Fund (NSSF). In the early days of the CIC, there was little state control over it and its predecessors. As the 2008 fiancial crisis unfolded, the State Council (and the Ministry of Finance in particular) consolidated its control of the CIC. This consolidation marked the second phase of the CIC case. This chapter first provides an overview of the origins, structure, and leadership of the CIC before discussing the sources and uses of the CIC's financing as well as its direct investments. It then applies the theory to better understand the CIC case as an instrument of Chinese economic statecraft. It suggests that the CIC will not be an effective tool for achieving China's foreign policy interests.

This chapter looks back at our findings, measuring them against some of the analytic expectations established in our introduction in Chapter 1. It then asks two speculative questions. First, what if North Korea were to change? How might that affect the conclusions drawn here? Particular consideration is given to economic reform processes. Second, what if the major parties undertook different strategies with respect to North Korea? These questions permit us to engage in some comparisons with other relevant cases, most notably Iran, and to consider a new spate of diplomatic initiatives—including both sanctions and proposals for engagement—introduced in the wake of the fourth nuclear test in early 2016.

This chapter is concerned with the relationship between David Hume’s writing on political economy and his History of England (1754–61). Underpinning his analysis in these works, it is argued, was an attempt to give England's commercial and financial interests – interests which were in Hume's estimation of vital importance to government – a proper intellectual foundation. In performing this task, Hume developed a damning critique of the economic statecraft tradition; indeed, it was, in part, the misunderstandings of economic affairs committed by previous generations of historians that he sought to warn his readers against and correct. The chapter opens by looking at how these ideas shaped his essays of the 1740s and 1750s, before moving on to look in detail at the History.

This chapter reviews the theoretical literature on the effectiveness of sanctions and inducements, with a particular emphasis on the latter. It distinguishes between quid pro quo models of engagement and more transformative models. With respect to the former, the chapter walks through coordination and bargaining problems as well as how the effectiveness of sanctions is affected by characteristics of the target state. It also calls into question the logic of transformative engagement with respect to certain types of authoritarian regimes, and provides an historical review of diplomacy around the Korean peninsula since 1990.

This chapter examines the challenge of state control with regard to the China National Petroleum Corporation (CNPC). It considers how the state utilizes economic statecraft in the context of efforts to secure oil through the creation and subsequent “going out” of the Chinese national oil corporations, which were among the earliest Chinese commercial actors to venture abroad. The chapter begins with a historical background on China's petroleum industry and its relationship to the Chinese state before turning to a discussion of the CNPC's early efforts to venture abroad. In particular, it discusses the CNPC's activities in Sudan and the strategic difficulties caused by the state's “going out” policy. It also explains how Chinese authorities sought to re-establish control over the international activities of its commercial actors in the extractive resources sector through balance of relative resources and unity of the state.

This chapter explains the historical wellsprings and national interests that motivate China’s increasingly ambitious global policies including the Belt and Road Initiative. It discusses how Chinese security concerns, especially those related to Xinjiang, along with broader strategic aims lead Beijing to play a greater role in continental Eurasia. There China’s involvement tends to start with economic and trade relations, but in recent years (and especially under the leadership of President Xi Jinping), China has moved from “keeping a low profile” to “striving for achievement” in ways that stray from “non-interference.” To accomplish its global aims, China is developing new tools of economic statecraft, security, and diplomacy. These are described in detail, including the Asian Infrastructure Investment Bank, the China International Development Cooperation Agency, a modernized military with greater power projection capabilities, the port facility in Djibouti, private security contractors, the China Global Television Network, and new technologies for political repression.

This chapter examines Mexico’s effective use of diplomacy to achieve economic ends through the North American Free Trade Agreement (NAFTA) and the Pacific Alliance, a new free-trade pact comprising Chile, Colombia, Peru, and Mexico. The chapter relies on Robert Putnam’s two-level game theory as an analytical tool to explain the success of these regional negotiations. In both cases, the presidents involved played successful two-level games by leveraging their leadership to harness the political and bureaucratic apparatus and effectively address domestic and foreign interests. In addition, the presidents were able to turn what is theoretically a negotiation weakness—the strength of domestic constituencies—into a source of bargaining power.