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  The Chinese aversion to sanctions has given way to an open debate about the utility of unilateral sanctions and of leveraging market access in China to achieve national goals. In the wake of an American sale of new military equipment to Taiwan in 2009, Chinese officials threatened to sanction all American companies doing business in China. A Chinese official was reputed to have said that the Chinese had learned how to use such sanctions from watching the United States. No sanctions followed, but the Chinese had sent the message: they were now willing to restrict access to their markets to achieve a geopolitical goal.

  Moreover, Russia has used its critical oil and natural gas supplies to both fill the Kremlin’s coffers and exert political pressure. In 2006 and again in 2009, Russia shut off natural gas supplies to Europe through Ukrainian pipelines as part of an ongoing price and diversion dispute. The Russian government and Gazprom used Europe’s dependence on Russian natural gas, which constitutes about 25 percent of all EU supplies, to extract concessions from Ukraine. The Russian government repeated this pattern with Georgia to pressure the Saakashvili government, cutting off all gas supplies and 25 percent of Georgia’s electricity during the winter of 2006.5 There is now speculation that Russia—through Gazprom—intends to purchase the Greek natural gas company DEPA as Greece conducts a fire sale of its public companies. DEPA is an important player in the Italy-Greece-Turkey Interconnector (IGTI), an alternate natural gas pipeline intended to circumvent Russian supplies into Europe.6 This purchase would follow the same pattern by which Gazprom has acquired interests in the Balkans and Poland as a means of “plugging the holes” of alternate channels of supply in Europe. The Russians have never been shy about their desire to use their economic power for broader national interests. In 2007, Russian President Vladimir Putin stated that the Russian intelligence services “must be able to swiftly and adequately evaluate changes in the international economic situation, understand the consequences for the domestic economy and . . . more actively protect the economic interests of our companies abroad.”7

  The United States and its companies, by contrast, remain reluctant to meld political and economic interests directly abroad. This is seen not only in the passive policies of the United States in Iraq and Afghanistan, but also in flaccid trade and investment policies that lack strategic purpose. Secretary of State Clinton showed an awareness of this broad deficiency in US policy and the global dynamic in a speech at the US Global Leadership Coalition Conference:

  The simple truth is if we don’t seize the opportunities available today, other countries will. Other countries will fight for their companies while ours fend for themselves. Other countries will promote their own models and serve their own interests instead of opening markets, reinforcing the rule of law, and creating widespread inclusive growth. Other countries will create the jobs that should be created here, and even claim the mantle of global leadership. None of us want to see that happen, and I don’t believe most of the people around the world do either.8

  This timid trade policy of the United States reflects a long-standing structural divide between national security policies and the role of the US private sector in the international commercial and financial system. US economic reach and influence have been taken for granted as a function of the free trade paradigm that the United States helped to establish and the competitive advantages of US companies. This economic advantage and the international influence it provides are now in jeopardy. In a more competitive global environment, a passive policy that fails to connect national security and economic influence dooms the United States to diminishing influence internationally.

  Any recognition of China’s economic success must be balanced against a clear-eyed understanding of China’s inherent vulnerabilities and interests. China confronts a host of internal political, environmental, and demographic problems that will complicate its transition from a poor to a middle-income country, let alone its pursuit of international economic influence or dominance. Recent protests against official corruption and for labor rights have rocked the sense of stability in China and slowed the continued march toward mass urbanization. The slowing Chinese economy has Chinese leaders worried about the sustainability of its economic model. In December 2011, China’s vice finance minister, Zhu Guangyao, publicly claimed that the current economic “crisis” was “grimmer and more challenging than the global financial crisis triggered by the Lehman Brothers bankruptcy in 2008.”9 In the summer of 2012, after China’s growth fell to a three-year low of 7.6 percent, observers began to debate the inherent challenges and limitations of the Chinese economic model, with many, including environmentalists, questioning the sustainability of China’s industrial and manufacturing-led growth.

  China also is beginning to see the reactions to its growing power, as countries search for ways to counter Chinese influence in their respective regions. From Vietnam and Burma to Japan and South Korea, Asian countries are chafing at Chinese attempts to exert power in the South China Sea through their economic influence. Over time, as China accrues power, it will accumulate responsibility for complex geopolitical problems in Iran, Pakistan, Afghanistan, and North Korea, which fester along its borders.

  China’s success is also predicated in part on the prevailing global economic order, and it has few incentives in the short and medium term to challenge that order. The economic ties between China and the United States bind the two countries and make direct confrontation less likely. Trade between the two economic powers reached $503 billion in 2011, with both sides benefiting.10 Chinese investment in US Treasuries by 2011 reached $1.15 trillion, 23 percent of the total foreign investment in US government bonds. China’s economic ties to the United States—and deep investments in US Treasuries—make it less willing to attack the credibility of the dollar and the US economy.

  Nevertheless, China’s aggressive, state-led, mercantilist approach challenges US industry, relative power, and global influence. So, too, does it distort the international commercial system, with economically powerful nation-states engaged in commercial investment and economic planning usually reserved for the private sector.11 This model was further strengthened as Western governments intervened to “bail out” traditionally private industries. As declared by The Economist at the time, the state went “back into business.”12

  This new brand of authoritarian capitalism opens the door to a more aggressive blending of economic and political interests. In the Chinese model, economic power and reach is enmeshed directly and intentionally with geopolitical influence and national security strength.13 As noted by Elizabeth C. Economy, director of Asia Studies at the Council on Foreign Relations, China has realized that “ensuring their supply lines for natural resources requires not only a well-organized trade and development agenda but also an expansive military strategy.”14

  This new model also draws upon the resource pool and investment reach of sovereign wealth funds. Chinese sovereign wealth fund investment was worth $200 billion in 2007, and the Chinese government could add liquidity to the fund at any time and without constraint. Similar investment parastatals (quasi-state entities) have converted national resource wealth into national investment strategies. The Qatar Investment Authority, for example, purchased a 20 percent stake in the London stock exchange in 2007. The power of these funds is such that Wall Street firms, including Merrill Lynch, Morgan Stanley, and Blackstone, were forced to turn to them for over $40 billion in capital infusions during the recent economic crisis.15 And the size and reach of these government-sponsored entities, or so-called state champions, is growing. Government-owned or -controlled enterprises now make up 20 percent of the global stock market value.16 From 2004 to the beginning of 2008, over one hundred new state-owned companies joined the Forbes Global 2000 list of the largest companies by “sales, profits, assets and market value.”17

  The appeal of the state champion model is reflected in the fact that Western countries have begun to dip their toes into the deep end of sovereign wealth funds. For exampl
e, in November 2008, France established the Fonds Strategique d’Investissement (FSI)—a “strategic investment fund” run by the “armed wing” of the French Treasury, the Caisse des Dépôts et Consignations (Deposits and Consignments Fund)—in order to help French companies navigate the global financial crisis and protect French industry from predatory foreign investments. In 2009, Britain created a strategic investment fund of 750 million pounds to invest in domestic industrial capacities such as low-carbon technologies, high-speed broadband infrastructure, renewable chemicals, and export promotions. More recently, Japan, which has the second largest pool of foreign reserves behind China (approximately $1.2 trillion), has considered establishing a sovereign wealth fund in order to erode the strength of the yen and pull itself out of two decades of economic stagnation. This would involve renovating the publicly funded Japan Bank for International Cooperation to make strategic investments in emerging markets. If Japan made such a move, it would likely diversify its assets by moving out of low-yield US Treasury bonds.

  Such investment funds, and the ability of nation-states to control purse strings that are relevant to other nations’ assets, raise the specter of new forms of geopolitical influence—tacitly or directly. Consider also the case of government export financing. Whereas the US provides financing for the customers of US companies in foreign markets only in very narrow circumstances (e.g., where it is needed to close an export sale), foreign state capitalists use financing to gain access to natural resources and widespread influence. In so doing, they subvert the semblance of a level playing field by ignoring international transparency standards laid out by the Organisation for Economic Co-operation and Development (OECD). As Fred P. Hochberg, chair of the US Export-Import Bank, recently argued, there “is a vast and growing pool of unregulated government export finance that threatens to undercut US companies around the word. The market increasingly resembles the wild west, where rules are followed loosely, if at all.”18

  Again, China is perhaps the most aggressive player in this game. With an undervalued renminbi, subsidy and investment policies (such as mandatory joint ventures and licensing deals) that benefit Chinese firms, and the transfer of Western technology to Chinese industries, Chinese firms are advantaged not only in China but also in the global marketplace.19 This advantage is seen in industries from solar panel production and wind turbines to high-speed rail and aircraft manufacturing. In these cases, early partnerships with Western firms have resulted in indigenous manufacturing capabilities that are beginning to compete with Western firms and put Chinese firms at the center of these global markets. The Chinese government imposed a 70 percent local content requirement on both wind turbines and high-speed rail projects, and it limits foreign ownership of new high-speed rail companies to 49 percent.20 The policies have increasingly marginalized multinational companies while Chinese companies and national champions gained market share. Chinese solar panel companies’ share of global production has gone from 9 percent to 48 percent, increasing fiftyfold from 2005 to 2010.21 China’s foreign exchange reserves were $2.85 trillion at the end of 2010.22 China’s Export-Import Bank and Development Bank have used these reserves to lend to the developing world, lending more than $110 billion in long-term loans to other developing countries in 2009 and 2010, thus exceeding World Bank lending for the same period.23

  China has not only wielded the influence of its markets to advantage its own companies, with stringent investment requirements such as domestic partnership or licensing deals, but has also begun to use a process similar to that of the interagency Committee on Foreign Investment in the United States (CFIUS) to vet investments in certain sensitive industries and areas of the Chinese economy.24 Finally, analysts have noted that China has begun to use its investment and commercial weight to embed itself in Taiwan and to influence the debate about unification with China.25 In June 2012, the Bank of China established a bank branch in Taipei, marking the first time a mainland Chinese bank was granted a license for expansion into Taiwan. The governor of the bank estimated that it would be able to lend 220 yuan, approximately $35 billion, to Taiwanese businesses over the course of the next three years.

  In contrast to China’s aggressive play, on most economic playing fields America too often remains on the sidelines. In the race for resources around the world, especially the developing world, the Chinese have been willing to allow for loss-leading investments to secure necessary resources for their national security.

  In Iraq, the United States and its allies have spilled precious blood and spent billions of dollars to topple Saddam Hussein, reconstruct an Iraqi economy and polity, and build a cohesive security infrastructure. Iraq’s oil is also a source of investment opportunities and resource wealth for the private sector and global oil markets. US oil companies, however, are not taking advantage of the Iraqi oil market; nor have they profited, as had been predicted by much of the world. On the contrary, most American oil companies—other than ExxonMobil, in concert with Royal Dutch Shell and other partners—are not major players and do not have calls on Iraqi oil.26

  Chinese oil companies, in contrast, are poised to profit from the US investment in the country. For example, in a highly anticipated auction in 2009 for the rights to pump Iraqi oil—as US military helicopters hovered overhead—the Iraqi oil minister announced winning bids for Russian, Chinese, French, and British firms. None of the eleven contracts went to the United States. Chinese companies are also poised to take advantage of other sectors of the Iraqi economy, such as the construction (especially the cement industry) and infrastructure sectors.27 On July 17, 2012, a consortium led by LUKOIL—a Russian oil giant—signed a preliminary contract for the rights to explore oil fields in Iraq’s southern Block 10.

  In Afghanistan, the United States is unprepared to take advantage of nearly $1 trillion in unexplored mineral wealth—including valuable raw materials such as lithium, gold, copper, and cobalt. Beyond short-term profits, mining activity could become the “backbone of the Afghan economy,” laying the foundations for a new silk road and thereby tying the economies of the region to exploding markets in South and East Asia as well as Europe.28 Instead, China is investing heavily in this new industry and is willing to sustain initial losses for the sake of its long-term extraction and economic plan. The result is that Chinese state-owned mining companies are now exploiting copper reserves worth billions of dollars under NATO’s protection. As Robert Kaplan, senior fellow at the Center for a New American Security and correspondent for The Atlantic, has noted, “China has its eyes on some of the world’s last untapped deposits of copper, iron, gold, uranium, and precious gems, and is willing to take big risks in one of the most violent countries to secure them.”29

  Challenges to American Financial Power

  Aside from the challenge to American economic predominance, the current environment involves three significant trends that undercut America’s use of its financial power. The use of new currencies and technologies outside the formal financial system, through the Internet, and with less and less accountability and transparency undercuts the ability to track money flows with traditional means. At the same time, rogue actors are coalescing around a common goal of circumventing and undermining US financial pressure and using financial weapons themselves. Finally, the US dollar—and its predominance—is a target for competitors and those who bemoan the world’s reliance on the dollar as the accepted reserve and trading currency as the central element of US financial power. All of this is happening as the complexity of the global financial system increases, with more financial products and ways of investing and moving money that make tracking and controlling legitimate financial activity more difficult.

  The current environment—aided by the cloak of anonymity provided by the Internet and the complexity of a global financial system—allows nefarious actors to collude in their activities—quietly and surreptitiously. Iran, for example, is known to use terrorist and militia proxies, such as Hezbollah and Shia militias in Iraq, to extend
its influence. Russian intelligence is understood to have close ties to Russian and Eurasian organized crime. China is alleged to use legions of college-aged students as hackers to help drive the cyber-espionage attacking Western, Asian, and Indian systems.

  These actors have new digital tools at their disposal to elude the reach of anti-money-laundering and counter-terrorist-financing efforts. For example, bitcoin (BTC) is a digital currency transferred through peer-to-peer networks on the Internet. The software, an early implementation of the idea of “crypto-currency,” uses cryptography rather than central authorities to issue and transfer money. The result is that transactions are cheap, accounts cannot be frozen (unless users keep bitcoins in a separate third-party online wallet service), and there are no prerequisites or arbitrary limits for use. Payments are anonymous, identified only by users’ various chosen bitmap addresses. Transactions are irreversible and can be received at any time, even if the user’s computer is off. Bitcoin uses open-source software, so anybody can examine the codes of transactions and use the crypto-keys to ensure that no one pays for multiple transactions with the same money. An April 2012 FBI report evaluating bitcoin use and exchange rates (currently about $15 for one bitcoin) identified bitcoins as an increasingly attractive option for cyber-criminals and other illicit groups. The report concluded that criminals will increasingly exploit bitcoins, using malware to steal the digital currency, as well as botnets to generate new currency without preexisting value. The potential for illicit use of bitcoins will only increase as the currency grows in popularity and the exchange rate stabilizes.30