US must push for economic liberalization in China

Conflict is looming in the South China Sea. China’s behavior there in recent years, like the infamous 9 dash line, has been a cynical manipulation of important and longstanding norms of international law. The U.S.’s “freedom of navigation” operation, which sent the USS Lassen within 12 nautical miles of the Subi Reef, was an important step for demonstrating our commitment to an open and secure Pacific ocean. China’s claims to the South China Sea are part of an aggressive foreign policy that seeks to overturn the existing international order and should not be accepted by the West.

What tools do the U.S. and its allies have to shift China towards a peaceful rise? Security policy will be essential, but alone cannot achieve our objectives: a peaceful military solution does not appear likely given current conditions. Equally important to American and global interests is the success of China’s domestic economic reforms.

{mosads}Thus, supporting Chinese economic liberalization—opening of its markets to foreign firms, reducing the role of state-owned enterprises, and bolstering the rule of law—should be front and center of American strategy in bilateral diplomacy and international organizations. Any military response to the South China Sea should be coupled to an economics-first approach. 

At first glance, the South China Sea seems only distantly connected to economic concerns. But understanding China’s motivations there shows that the two are deeply intertwined. The South China Sea is a central highway for Asia’s commerce with the world: over $5 trillion of goods including over $1 trillion in U.S. trade passes through it each year, according to the Council on Foreign Relations. China’s interest in the South China Sea is also motivated, to some extent, by the energy resources its state-owned Chinese National Offshore Oil Company stands to acquire if it had full control of the seabed beneath the man-made Spratly Islands.

If there are economic benefits for China to control the South China Sea, there is also economic risk: outright conflict would represent an unprecedented shock to the Chinese—and global—economy at a time when both can scarcely afford it. Already, the sabre-rattling has scared away energy companies from exploring for oil, which may be a deliberate stratagem to deter Western oil firms’ from employing their existing exploration rights.

What can the U.S. do? The process of economic liberalization in China must be a long-term Western strategy that will shift Chinese attitudes towards the international order. If successful, it can reduce the chance of conflict.

We can start by ratifying the Transpacific Partnership (TPP) and signaling that China would be welcomed into the trade pact if it reforms its business practices and allows for fair competition. Second, we should find constructive ways to promote further opening of the Chinese economy through our bilateral relations, including supporting renminbi internationalization in exchange for greater American business operation in China. Finally, we can and should ensure that our allies in Europe and Japan are unified in demanding Chinese liberalization; the recent public divergence between the U.S. and Europe over the Asian Investment and Infrastructure Bank (AIIB) should not be repeated.

The economic rationale for domestic liberalization in China is clear, as it promotes more sustainable growth over the long-term. But the politics of liberalization are no less important. For a case study in liberalization gone awry, one need look no further than Vladimir Putin’s Russia.

The seeds of today’s Russian foreign policy were planted in the aftermath of the fall of the Soviet Union, when “liberalization” became nothing more than privatization and state assets were handed over to politically connected elites. Although this created “markets” in name, true economic liberalism and the rule of law never arrived; instead, oligarchy, corruption, and excess did, helping to produce the conditions for Putin’s regime, and now, security dilemmas that we must grapple with in Ukraine and Syria.

Though China’s economic reforms are not nearly as dramatic as the Soviet Union’s were, the parallel is illuminating. It demonstrates the geopolitical ramifications of small, incremental liberalization of domestic economies. The U.S. and its allies should not wait until an aggressive and belligerent foreign policy becomes an attractive option for China, and instead act now.   

Yaghoubi is a Ph.D. candidate in Politics at Princeton University. He was previously an associate at the Atlantic Council’s Global Business and Economics Program. @ardevanyaghoubi