On January 27, 2021, the China Program at Shorenstein APARC hosted Professor Hau L. Lee, The Thoma Professor of Operations, Information & Technology at the Stanford Graduate School of Business for the virtual program “The Pandemic, U.S-China Tensions and Redesigning the Global Supply Chain.” Professor Jean Oi, William Haas Professor of Chinese Politics and director of the APARC China Program, moderated the event.

Professor Lee focused on an important question that has only become more pressing due to the COVID-19 pandemic: How, if at all, should businesses redesign their supply chains? Since the beginning of the pandemic, explains Lee, there has been an increase in calls for “redundancy” in supply chains in order to protect them from the problems they faced early in the pandemic, when China was first hit by shut downs and slowed productivity. Advice has been varied, ranging from the “China Plus One” strategy in which businesses simply add a secondary production location, to completely domesticating supply chains.

Lee warns, however, of the perils of overreaction. There are numerous risks that come along with a fully domestic supply chain, not least the danger of “having all of your eggs in one basket.” Instead, says Lee, businesses should move cautiously and, instead of fully divesting from China, should use the country intelligently. 

Professor Lee’s “In and Out Design” encourages businesses to work from the inside out, securing and strengthening their supply chains by starting at home. Companies must first build “internal supply chain excellence,” after which they can move on to making sure their strategic partners are equally strong and can work to their advantage. Eventually, companies can move on to strengthening the extended value chain and, ultimately, their entire ecosystem. Using strategies like dual response, leveraging “lubricants,” and bolstering capacity-building capabilities, businesses can create a more stable future. 

The session concluded with a fruitful Q&A between Professor Lee and the audience, moderated by Professor Oi.

A video recording of this program is available upon request. Please contact Callista Wells, China Program Coordinator at cvwells@stanford.edu with any inquiries.

This op-ed by Kiyoteru Tsutsui and Charles Crabtree was originally published in The Hill.

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Any power transition produces policy casualties. In the United States, this might be particularly true as an incoming administration often differentiates itself from the incumbent by quickly announcing new policies and the abandonment of old ones. This is easier to do regarding domestic policy than foreign policy, where some continuity must be secured, even if serious disagreements exist between the incoming and outgoing administrations. Despite the tendency for administrations to make smaller changes in the realm of foreign policy, it seems that one casualty of the Biden administration will be the concept of a “Free and Open Indo-Pacific.” The administration should learn more about the genealogy of this policy and reassert its commitment to the “free and open” part of the idea.

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The phrase “Free and Open Indo-Pacific” (FOIP) originates from the administration of Japan’s former prime minister, Shinzo Abe. In response to China’s Belt and Road Initiative, a global infrastructure development strategy that reflects China’s expansionist ambitions, Abe and his government weaved together some ideas from prior Liberal Democratic Party governments and labeled them the Free and Open Indo-Pacific strategy in 2016.

With an emphasis on coalition-building to check and balance China’s influence, this strategy had strong security undertones, which made Association of Southeast Asian Nations (ASEAN) countries nervous. Fully aware of the need to get ASEAN countries on board, the Abe government softened the edges of the strategy by renaming it a “vision,” shifting away from the emphasis on security components and offering a more friendly tone to the Belt and Road Initiative. Backed up by Japan’s supportive engagement with Belt and Road activities, this softer version became a hit in Southeast Asia, with various countries claiming authorship for it — and even China did not register a strong objection to it.

The 2018 FOIP vision has three pillars: promotion of rule of law, freedom of navigation, and free trade; economic prosperity, and peace and stability. The first pillar is particularly important, as it distinguishes FOIP from China’s competing strategy.

Abe promoted FOIP not only in Asia but also in the U.S. Leveraging the warm personal relationship with his American counterpart, Abe tried to sell the strategy to the Trump administration as an effective way to moderate if not fully counter Belt and Road. Trump’s foreign policy team adopted this concept, using it to slow China’s expansion in the Pacific, Asia  and even East Africa. Eventually, the U.S. government began using the FOIP language frequently and placed it at the center of its anti-China foreign policy.

As the Biden administration takes over, it is understandable that its experienced foreign policy team, with a focus on returning to multilateral engagements and moderating anti-China rhetoric, would hesitate to quickly adopt FOIP, which may have acquired strong anti-China connotations in American foreign policy circles. In line with this, President-elect Biden so far has preferred the phrase “a secure and prosperous Indo-Pacific region” instead. This has deepened existing concerns in Asia, particularly in Japan, that Biden will be soft on China.

Correspondingly, Japan’s Suga administration, which came to power in mid-September, has faced criticism that it is softer on China than the Abe administration. This concern came to the fore in November, as the Suga administration routinely started using the language “secure and prosperous Indo-Pacific.” Another precipitating event was a recent press conference in which Foreign Minister Toshimitsu Motegi did not immediately counter Chinese Foreign Minister Wang Yi’s prickly comments about the Senkaku islands.

Foreign policy experts, led by Yuichi Hosoya at Keio University, have argued vigorously that this language change signals a weaker commitment to the core principles of FOIP. If “free and open” is replaced by “secure and prosperous,” they contend, the whole vision becomes meaningless — and this shift will be remembered as a moment when Japan abandoned its commitment to the international order, undergirded by democracy and freedom, in favor of China’s vision of a “secure and prosperous” region that prioritizes development and stability.

Realizing the potential impact of this shift, the Suga administration quickly backtracked and resumed using “Free and Open Indo-Pacific.” FOIP is back in Japan, which signals Japan’s continuing resolve to promote the international liberal order.

The Biden administration also should consider readopting “Free and Open Indo-Pacific.” It’s understandable that Biden would want to move away from a strategic frame used by the Trump administration. There are certainly many of President Trump’s phrases that the Biden administration should drop, such as “America First” and “China virus.” But FOIP was not a vision created by anyone in the Trump administration. It was launched by Japan’s Abe administration and, after some modification, accepted by many Asian countries, arguably even by China.

Biden’s foreign policy likely will place greater emphasis on human rights and democracy than did Trump’s. Vis-à-vis China, this would mean that the U.S. will more vocally criticize human rights violations in Hong Kong, Xinjiang and elsewhere, and that trade negotiations will proceed with more civility. Given this, it would be inconsistent for the Biden administration to replace “free and open” with “secure and prosperous” in talking about the Indo-Pacific region. 

While there is some ambiguity about the concrete policies that accompany the admittedly underspecified FOIP vision, the Biden foreign policy team would be wise to readopt FOIP, bearing in mind an important fact: It was not Trump’s idea. If the next U.S. administration drops “free and open,” it will send the wrong message to the world, placing undue weight on Japan’s shoulders as the only major torch-bearer for liberal values in the region, and potentially straining the U.S.-Japan security relationship that must be in lockstep to moderate China’s ambitions.

This op-ed by Oriana Skylar Mastro and Zack Cooper originally appeared in Australian Financial Review.

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Australia’s trials are not the first time Beijing has used economic coercion against another country.

It has become so common that we are becoming desensitised to it. Some notable examples include Beijing’s limitations on rare earth exports to Japan in 2010, Norwegian fish exports in 2010, Philippine tropic fruit exports in 2012, Vietnam’s tourist industry in 2014, Mongolian commodities trade in 2016, and South Korean businesses in 2017. In each case, Beijing sought to achieve a political objective by imposing economic penalties.

This case is different. Beijing has typically been ambiguous about the purpose or nature of its coercive economic statecraft. Despite evidence otherwise, it blamed the Japanese ban on meeting a yearly quota, the Philippine ban on pesticide exposure, the tourism drop to Vietnam on changing Chinese preferences, and the closure of South Korean stores on fire code violations. In Australia’s case, though, Beijing is doing away with these pretenses.

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China has not been shy this time about connecting its punitive actions to its unhappiness with Australian policies. The Chinese foreign ministry has listed a “series of wrong moves” by Australia for the disruption in relations. Beijing’s embassy in Canberra then gave a list of 14 “mistakes” to the Australian press.

These grievances include Australia’s foreign interference legislation, foreign investment reviews, funding for Australian think tanks, and unfriendly media reporting. Some of these criticisms are particularly ironic coming from Beijing, which often objects to foreign interference in other countries’ domestic affairs.

A core component of China’s strategy is a disinformation and propaganda effort designed to paint its moves as merely defensive, a proportionate and legitimate response to actions taken by the other side.

Australia has done nothing ‘wrong’

Let’s be clear: Australia has done nothing “wrong” in promoting and protecting its democratic institutions at home. It should not censor its media, obstruct analysis by outside experts, or shy away from safeguarding its democratic processes.

This time, the current trade restrictions are about more than making an example of Australia or showing smaller powers that they’ll pay if they have something to say about how the Chinese Communist Party governs at home. Beijing’s aims have taken on new proportions. Party leaders are now willing to punish democracies simply for upholding basic democratic principles within their own countries.

The message is clear: curtail some of your democratic principles or pay the price.

The US needs to work with like-minded states around the world to address this new threat. Free countries need to speak out together in Australia’s defence. If democracies do not hang together, they will hang separately. We should articulate that China’s actions are more than a violation of international law; they threaten the health of our democracies at home. Such a reframing would show Beijing that economic coercion will no longer be treated as a low-stakes tactic.

But words are not enough. We need coordinated action. US alliances are designed primarily to deter and defend against military attacks. Chinese actions make clear, however, that there are alternative methods for undermining peace, prosperity and freedom that our alliances do not adequately address. New alliance consultations to protect against economic attack would enhance our deterrence against China.

Washington should also launch a series of discussions with its allies to determine what new institutional mechanisms, commitments, and structures are needed to defend against economic attacks, not just military ones.

We should ensure the ability to take joint reciprocal action against Beijing in the economic realm, particularly to defend smaller countries. China engages in economic coercion because it is effective and relatively risk-free. But if instead like-minded countries responded together when one was attacked economically, this would go a long way in discouraging Beijing from employing such tactics.

Using all the tools of power

A critical first step is mapping dependencies on China and investigating how to limit over-dependence that open democracies to unacceptable economic vulnerability. As in the military realm, we need to enhance our resiliency against attack by avoiding over-dependence on any single import, export, or supply chain decency. This is a task that the so-called D10 (G7 plus Australia, India, and South Korea) should take up early next year.

The good news is a collective response to Chinese economic coercion will be more feasible under a Biden administration. President-elect Joe Biden and his senior advisers have articulated a preference for multilateral responses to Chinese aggression.

And while President Donald Trump relied mainly on military moves to warn and punish Beijing, Biden’s team prefers to make use of all tools of power. For these reasons, there has even been talk of rejuvenating past efforts like TPP. US allies and partners are also likely to see Biden as more reliable, making them more willing to undertake the risky venture of joining forces against Beijing.

The United States, Australia, and other allies and partners tried to welcome China into the international community. This was the right move. It has been good economically for many advanced economies, including Australia and the United States. But there is a flip side to every coin.

Australia has become too vulnerable to the whims of Beijing. And the US has few options to protect against such economic pressure. The incoming Biden administration needs to fundamentally rethink the nature of alliances so that countries like Australia have a third option the next time Beijing forces a choice between freedom and prosperity.

The China Program at Shorenstein APARC had the pleasure of hosting Professor Min Ye of Boston University’s Pardee School of Global Studies on October 14, 2020. Her program, moderated by China Program Director Jean Oi, focused on the much-discussed but poorly-understood Belt and Road Initiative (BRI), announced in 2013 by President Xi Jinping. While it is not widely known exactly what the BRI is or what Beijing hopes it will accomplish, it has been described as something of a modern silk road, connecting China to dozens of other countries through trade and extensive infrastructure projects. Based on research conducted for her recently published book, The Belt Road and Beyond: State-Mobilized Globalization in China: 1998-2018, Professor Ye enlightened the audience on a surprisingly critical element of this global program: the domestic component.

While Ye began her research with the assumption that many hold about the BRI—that it is primarily a global, internationally-focused initiative—as she continued her research, she found that many, if not most, BRI projects are either entirely domestic or have strong ties to domestic programs. To this end, she posed three questions during her program: Why did Chinese leadership launch the BRI in 2013? How did the Chinese state and businesses implement the BRI? and, What are the internal and external outcomes of the BRI?

To answer these questions, Ye explained the theoretical frameworks she used to understand both the BRI and China's "state-mobilized globalization." Firstly, Ye's "Chinese-State Framework" breaks the Chinese governmental system into three parts: Party Leadership, State Bureaucracy, and Subnational Actors. Each of these elements affect the others, as well as policy surrounding the BRI. However, this division also creates fragmentation in authority and ideology. Secondly, her “State-Mobilized Globalization” framework explains the process surrounding Chinese national strategy. Ye posits that national strategies are generally prompted by crises faced at lower levels of government, particularly when a lack of efficiency or communication is causing “state paralysis.” Once the strategy is announced in order to coordinate efforts and solve the crisis, it enters a feedback loop in which plans are adjusted and changed according to ground-level conditions. These frameworks informed the empirical studies used to answer Ye’s research questions.

The drivers of the BRI, argues Ye, were threefold: strategic, diplomatic, and economic. It was believed by interested parties within China that such an international initiative could ease tensions related to the United States and maritime Asia, as well as generally improve diplomatic relations for the country. China’s industries were also facing problems related to overcapacity, and economic and financial groups wished to use their excess capital to invest abroad. Actors from several different levels in China, including national agencies, local governments, and private entrepreneurs, were involved in executing BRI projects intended to alleviate these tensions. Different cities saw different sides of this implementation: Chongqing, one of China’s largest cities, is heavily dominated by state capital, with its main BRI actors being State-Owned Enterprises (SOEs). Wenzhou, a port city in Zhejiang province, is by contrast dominated by private entrepreneurs.

With diverse implementation comes diverse outcomes. Ye argues that some BRI projects have been helpful in reforming cities’ structural economy, while others have helped upgrade industry. The BRI has managed to alleviate some of the tensions listed above, but at the same time, it has created its own problems. While there has been a massive internal mobilization effort for BRI projects, there exists a disconnect between the domestic situation and demands for transparency from outside actors.

Ye concluded her talk by tying her research to current developments related to COVID-19. While one might imagine that a global pandemic would be a significant inhibitor to an international trade and infrastructure project, Ye finds just the opposite. Because the BRI is, in fact, quite domestically focused, many BRI projects are continuing at a rapid pace, albeit with digital adjustments. Some projects, such as the New Infrastructure Plan, were actually fast-tracked in the wake of the pandemic outbreak. Ye predicts that as COVID-19 restrictions ease and the world returns to “normal,” these domestic and digital elements will be combined with the BRI’s original projects.

An audio recording of this program is available at the link below, and a video recording is available upon request. Please contact Callista Wells, China Program Coordinator at cvwells@stanford.edu with any inquiries.

Samsung is a veritable business empire. In 2017, it passed Apple as the most profitable tech company. But there is more to the company than flat screens and smartphones. In Korea, Samsung is ubiquitous not only as a leading electronics brand, but as a major shaper of culture and politics.

In the episode "The Republic of Samsung" from Business Insider's “Brought to You By . . .” podcast, APARC and Korea Program Director Gi-Wook Shin gives his perspectives on how Samsung transformed from a small family produce shop to become a core pillar of Korean identity. “Samsung really has become a very powerful group in Korea,” reflects Shin. “Their influence is everywhere, not only in business, but in politics, in education, and in culture.”

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This blurry intermingling of business interests, politics, and identity is both the key to Samsung’s success and the source of scandals over bribery, corruption, and nepotism that have rocked the company in recent years. For Shin, the longstanding Korean saying, “What is good for Samsung is good for South Korea,” has additional meaning in the present moment as both the company and the government of the ROK grapple with issues of systemic self-interest, erosion of accountability, and abuses of power that threaten the integrity and identity of each.

Under the leadership of Samsung heir Lee Jae-yong, the company is working to refurbish its image. But these efforts are mired in ongoing legal setbacks and new allegations. “Samsung can’t continue in the way that they have in the past. It’s a different era. Now, people demand more transparency, more fairness, more justice,” Dr. Shin emphasizes. As a predominant force for shaping business, politics, and identity in South Korean, this counsel to Samsung may prove a litmus test for the wellbeing of the Republic of Korea’s future as a whole.

Listen above to hear more of Dr. Shin’s insights and learn the rest of the story.

The Stanford Center at Peking University (SCPKU), the Center on Democracy, Development and the Rule of Law (CDDRL), and the APARC China Program jointly hosted a workshop on China’s Belt and Road Initiative (BRI) in early March. The workshop, held on March 2 and 3, welcomed researchers from around the world with expertise in the Initiative. Unfortunately, because of the rapidly developing health emergency related to the coronavirus, participants from not only China, but also Japan, were prevented from attending. As described by Professor Jean Oi, founding director of SCPKU and the China Program, and Professor Francis Fukuyama, director of CDDRL and the Ford Dorsey Master's in International Policy, who co-chaired the workshop, the meeting aimed to provide a global perspective on the BRI, consolidate knowledge on this opaque topic, and determine the best method and resources for future research.  

The workshop began with presentations from several of the invited guests. Dr. Atif Ansar from the University of Oxford’s Saïd Business School kicked off the first day by describing not only the tremendous opportunity that the BRI presents to developing economies, but also the serious pitfalls that often accompany colossal infrastructure projects. Pointing out the poor returns on investment of mega infrastructure projects, Ansar examined the frequest cost and schedule overruns, random disasters, and environmental degradation that outweigh the minimal benefits that they generally yield. China’s own track record from domestic infrastructure projects does little to mitigate fear of these risks, Ansar claimed. In response, he urged professional management of BRI investments, institutional reforms, and intensified deployment of technology in BRI projects. Dr. Ansar was followed by Dr. Xue Gong of the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore. Dr. Gong’s analysis centered on the extent to which China’s geopolitical motivations influenced its outward foreign direct investments (OFDI). Although her research was still in the early stages, her empirical analysis of China’s OFDI inflows into fifty BRI recipient countries from 2007-2018 nevertheless revealed that geopolitical factors often outweigh economic factors when it comes to China’s OFDI destinations.

Participants then heard presentations from Amit Bhandari of Gateway House: Indian Council on Global Relations and Professor Cheng-Chwee Kuik of the National University of Malaysia. Mr. Bhandari’s talk focused on Chinese investments in India’s six neighboring countries, which tend to center more on energy rather than connectivity projects. He first found that the investments are generally not economical for the host countries because they come with high costs and high interest rates. Secondly, he argued that these projects often lacked a clear economic rationale, appearing instead to embed a geopolitical logic not always friendly to India. Professor Kuik, by contrast, provided a counterexample in his analysis of BRI projects in Southeast Asia. He described how, in Southeast Asia, host countries’ reception of the BRI has varied substantially; and how various stakeholders, including states, sub-states and other entities, have used their leverage to shape outcomes more or less favorable to themselves. Kuik’s analysis injected complexity into the often black-and-white characterizations of the BRI. He highlighted the multidimensional dynamics that play out among local and state-level players in pursuit of their goals, and in the process of BRI implementation.

Professor Curtis J. Milhaupt and Scholar-in-Residence Jeffrey Ball, both at Stanford Law School, followed with individual presentations on the role of State-Owned Enterprises (SOEs) in the BRI and the emissions impact of the BRI on climate change, respectively. Professor Milhaupt  characterized Chinese SOEs as both geopolitical and commercial actors, simultaneously charged with implementing Party policies and attaining corporate profits. Chinese SOEs are major undertakers of significant overseas BRI projects, acting not only as builders but also as investors, partners, and operators. This situation, Milhaupt asserted, carries significant risks for SOEs because these megaprojects often provide dismal returns, have high default rates, and can trigger political backlash in their localities. Milhaupt highlighted the importance of gathering firm-level data on businesses actually engaged in BRI projects to better infer geostrategic, financial, or other motivations. Jeffrey Ball turned the discussion to carbon emissions from BRI projects and presented preliminary findings from his four-country case studies. He concluded that, on aggregate, the emissions impact of the BRI is still “more brown than green.” Twenty-eight percent of global carbon emissions may be accounted for by BRI projects, Ball asserted, underscoring the importance of the BRI to the future of global climate change.

The day concluded with presentations by  Michael Bennon, Managing Director at the Stanford Global Projects Center, and Professor David M. Lampton, Oksenberg-Rohlen Fellow at the Freeman Spogli Institute for International Studies. Bennon first presented findings from two empirical case studies of BRI projects and then went on to describe how the BRI is now practically the “only game in town” for infrastructure funding for developing countries. Lengthy environmental review processes at Western multilateral banks have turned the World Bank, for example, from a lending bank into a “knowledge bank,” he argued. He also highlighted that, in general, economic returns on BRI projects for China are very poor, even though recipient countries may accrue macroeconomic benefits from these projects. Finally, Professor Lampton turned the discussion back to Southeast Asia, where China is currently undertaking massive cross-border high-speed rail projects through eight ASEAN countries. He described how each host country had varying capacity to negotiate against its giant neighbor, and how the sequential implementation of these cross-border rail projects also had varying impacts on the negotiating positions of these host countries. BRI played out differently in each country, in other words, eliciting different reactions, push-backs and negotiated terms.

The second day of the workshop was dedicated to working toward a collaborative approach to future BRI research. The group discussed the key gaps in the existing research, including how to know what China’s true intentions are, how to measure those intentions, who the main players and their interests in both China and the host countries are, and even what the BRI is, exactly. Some cautioned that high-profile projects may not be representative of the whole. Participants brainstormed about existing and future sources of data, and stressed the importance of diversifying studies and seeking empirical evidence.

The signing of President Trump’s Phase One trade deal with China has rekindled speculations about the future of the world’s second-largest economy. Many analysts have cited trade frictions between the United States and China as a driving force behind the slowdown the Chinese economy has experienced in recent years. It is not a tariff crossfire, however, that explains the slowdown, argues Nicholas Lardy, a leading expert on the Chinese economy.

Lardy, the Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics, offered a different view on China’s slowing economy in a lecture presented at the China Program’s 2020 winter/spring colloquia series, which examines the past, present, and future of the PRC at 70. Using data and trends from the last forty years of China’s economic growth, Lardy presented the case that the slowing trend in the Chinese economy is directly related to changes in how the government lends credit and to what he terms “resource misallocation.”

According to Lardy, the Chinese economy is slowing from the inside. The government’s recent campaign to deleverage the amount of credit coming out of the shadow banking system was arguably justified, but it has nonetheless reduced the amount of credit available to businesses, particularly private companies. As a result, the credit-to-GDP ratio has plateaued in the last several years and is growing in-pace with the economy instead of ahead of it. 

Coupled with this is the observation that Xi Jinping’s government has actively sought to increase the size and scope of state-owned enterprises. Lardy’s research indicates that the assets of state-owned, non-financial companies in China are growing twice as fast as the overall GDP, a situation he feels is only possible if state companies are being allocated a disproportional share of credit and loans. Lardy shows that pre-2012, funding to private companies was at $3.6 trillion USD, but by 2016 it dropped to a mere $600 billion.

Taking these factors together, Lardy argues that the economic slowdown will continue if the Chinese government continues to aggressively emphasize party control and the importance of the state sector over private companies. While reporting on trade deals may dominate the media, “We will increasingly see friction not on tariffs, but on technology transfer and issues of technology,” he says. “The key thing to watch is whether or not Xi Jinping gets serious about reforming state-owned enterprises and having a financial system that allocates credit more efficiently.”

Listen to highlights from Lardy’s presentation above, also available on our SoundCloud channel. A transcript is available

nicholas_lardy_transcript_final.pdf

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