IAN HALL |

China’s hold over large enterprises allows it to manipulate Chinese companies to align with state interests. It gives China the rare ability to use economic power as an instrument of statecraft, and Australia and others must learn to respond effectively.

It is well established that the Beijing not only believes that economic power is an integral part of what Chinese theorists call ‘‘comprehensive national power’, but also that it can and should be used as an instrument of statecraft.

The People’s Republic is not alone in thinking this way. States have long tried to use commercial and financial parties to pursue foreign policy objectives, with variable results. Economic statecraft—the manipulation of those parties to further state interests—is difficult to practice because of the principal-agent problem it generates. The interests of governments and firms do not always align, making it hard to get private actors, in particular, to do what political leaders would like them to do.

In China’s case, however, some argue that the nature of the party-state and the existence of large and powerful state-owned enterprises in key industries, make it easier for Beijing to get around the principal-agent problem. In this way, Chinese state capitalism is begetting new and stronger forms of economic statecraft.

To be sure, Beijing is using large aid packages, loans, investment deals, infrastructure projects and commercial contracts, as well as market access, to pursue its foreign and security policy objectives. It is also deploying considerable resources to public relations, seeking to sell these deals to foreign publics as examples of what can be achieved when their governments, corporations, universities and other actors engage with China.

The Belt and Road Initiative (BRI) is the greatest example of this turn to PR, gathering up many already existing projects with extravagant promises of further benefits to be delivered if states agree to a win-win cooperation with Beijing. It downplays the considerable risks for vulnerable states in engaging in large-scale borrowing from Chinese banks for schemes overwhelmingly to the benefit of Chinese firms and labour.

Economic statecraft is not, in any case, just about carrots. It also involves the wielding of sticks to dissuade states and other actors from doing things one does not want, or to punish them when they stray. These might take the form of punitive tariffs or regulatory burdens, but they can also involve arms-length sanctions, like carefully orchestrated, supposedly spontaneous consumer boycotts. And they can have big effects, as James Reilly notes, studies have shown that just hosting a meeting with the Dalai Lama can lead to a big drop in trade with China.

Read the full “Should Australia push back against China’s economic statecraft?” article in the Australian Outlook by Griffith Asia Institute member, Professor Ian Hall.