In July 2016, in response to North Korea’s rising nuclear threat, the US and South Korea announced their decision to deploy the Terminal High Altitude Area Defense (THAAD), an antimissile battery built to intercept short- and medium-range ballistic missiles. China quickly objected to THAAD on the grounds that it would weaken its nuclear deterrence capabilities and decrease Chinese influence in the region. To coerce South Korea to disable and remove THAAD, China launched a year-long campaign of economic retaliation, targeting the consumer goods, entertainment and tourism industries. Though it faded quickly and quietly, the THAAD dispute reveals much about the current limitations of China’s power, as well as its potential.

China specifically raised concerns that THAAD’s X-band radar, which monitors THAAD’s surroundings, had too large a scope and could gain information about China’s military actions further inland. However, US defense officials have pointed out that an existing, similar instrument deployed in Japan has a comparable, marginally smaller scope. While China’s claims were technically weak, they were understandable symbolically. Many Chinese found it concerning for the US to deploy a military weapon on neighboring South Korea’s territory – a neighbor who had been recently improving relations with China.

After over a year of tensions, in late October 2017, South Korea and China suddenly announced that they would work towards improving bilateral relations. South Korean media content started re-appearing on Chinese platforms that had previously stopped showing it, the consumer goods and tourism industries began to pick up their lost momentum, and the short-lived protests against the South Korean conglomerate Lotte Group had mostly ended.

Looking closer, the limited impact of its economic blows reveals the boundaries of Chinese power. The first retaliatory action to make headlines was limiting Chinese viewers’ ability to access and consume South Korean entertainment. Popular South Korean celebrities also cancelled or suspended public appearances in China. Even within the gaming industry, Beijing tightened regulations to make South Korean games’ entry into the market more difficult. These industries have felt some impact from the ban and experienced a decrease in the trade surplus of media content in the first nine months of 2017. Nevertheless, the entertainment industries were not significantly hurt by China’s ban, as they expanded their presence in other markets.

China also targeted certain South Korean consumer products, including food products, cosmetics, and automobiles. South Korean carmakers Hyundai and Kia both experienced the effects of the THAAD dispute and saw significant drops in Chinese sales. Although many companies have felt a negative impact, the decrease in some sales were compounded by other factors like boycotts from Chinese citizens and not necessarily strictly by Chinese policy. The South Korean cosmetic giant AmorePacific cited both stagnation of the domestic economy and the decrease in tourism after March 2017 as reasons for slowing sales growth and decreased operating profit.

As China was and still is the number one provider of tourists for South Korea, tourism was the industry that experienced the largest setback during the THAAD controversy. Chinese policy was partially responsible, as regional travel companies suddenly stopped selling package tours to South Korea, but other factors like concerns for safety and political tensions, anger at Lotte Group, and increased negative perceptions of South Korea also contributed to decreased tourism, one study showed. Overall, the number of tourists fell by 3.29 million in the first nine months of 2017 as compared to 2016, leading to a total $6.8 billion loss for the tourism industry.

The hardest hit by this economic dispute was Lotte Group, the South Korean conglomerate that sold the South Korean government the land it used to deploy THAAD. Before the conflict, Lotte owned more than 100 department stores and supermarkets in China, but since February 2017, the Chinese government closed more than 70 of them, citing safety concerns. Lotte Group closed the remaining stores after large protests at numerous storefronts. Recently, Lotte Group announced that it would sell all of its stores in China, abandoning its previous effort to expand its presence in the Chinese market.

Despite all of these negative impacts, the South Korean economy as a whole did not suffer significantly from Chinese retaliation. In fact, total Chinese exports increased in 2017; in the first eight months of that year, South Korean exports to China rose by 12 percent. Despite China’s economic might, many Chinese businesses rely on South Korean companies as part of their supply chains, which helps explain why only three main industries were hit.

Though it came out largely unscathed by China’s economic attacks, it would be difficult to argue that South Korea – and the US – definitively won this dispute. Granted, THAAD is still fully operational today. However, during reconciliation talks, Seoul assured Beijing that it would not seek additional THAAD deployments nor join a trilateral military alliance with the US and Japan. China may not have achieved its full desired outcome, but it did succeed in placing some boundaries on its neighbor’s future behavior. Meanwhile, the popularity of domestic boycotts bolstered the Communist Party of China’s (CCP) power at home.

More than anything, this dispute demonstrated the scope of China’s global clout. Its failure to effect THAAD’s removal revealed that its international influence remains limited by its integration into the global economy. In other words, China can only tolerate cutting off its corporations from foreign markets up to a point. Moreover, China clearly still faces bigger security questions surrounding North Korea. However, as China’s economic might continues to grow, it could become a more viable tool for asserting Chinese power globally, as well as garnering domestic support for the CCP.

In the coming weeks, the remnants of this heated dispute will fade as the region turns its attention to the 2018 Pyeongchang Olympics. With North and South Korea planning to march under a united flag and create a joint women’s ice hockey team, there are modest signs of peace and hope. But even as the world comes together for 17 days of symbolic unity, the underlying distrust in the region caused by this conflict cannot be swept aside with colorful flags and cheerful processions. While nations applaud each others’ athletic accomplishments, the THAAD battery lies a mere 125 miles away, casting an uneasy shadow over the celebrations.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff, editors or governors.

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On October 1 of this year China celebrated a “historic milestone” as the International Monetary Fund added the renminbi (RMB) to its elite basket of reserve currencies, joining the dollar, the pound, the euro and the yen. This codification of its currency is but one of China’s many milestones in recent years as it entrenches itself in the global economy. Given the country’s standing as the world’s second-largest economy with a growth rate that evokes jealously among developed nations, few question China’s rise as a preeminent economic power. Far from merely expanding its own proportion of the proverbial pie, however, China’s economic activities have assumed a fundamentally integrated character.  As the US prepares for a new president and China poised to overtake the US economy within a decade, China’s regional and global integration presents numerous challenges and opportunities that policymakers would do well to address now.

An Interdependent, Integrated China

The internationalization of the RMB has long been a stated goal of the Chinese government. Although its past policy of weakening its currency has rendered the RMB a lightning rod for political criticism, the rhetoric has largely softened. This month, IMF Managing Director Christine Lagarde praised China’s strides in “liberalizing and improving the infrastructure of its financial markets.” In the Treasury Department’s latest report to Congress on Foreign Exchange Policies of Trading Partners, it assumed a markedly tamer position on China. It found that China made progress on allowing the RMB to appreciate and reining in its current account surplus; two contributing factors to the renminbi’s adoption as a global reserve currency.

Alongside advancing the wide use of China’s currency, 2016 provided another platform for Chinese economic collaboration and integration. For the first time, China held the presidency for the G20 Summit, which elevated Xi Jinping as the mouthpiece of the world’s collective twenty most advanced economies throughout the year. He further selected the summit’s theme: “an innovative, invigorated, interconnected and inclusive world economy” with China assuming a leading role in “advancing international economic cooperation,” according to Xi’s welcome message.

Perhaps China’s boldest incursion into the integrated economy was the establishment of the Asian Infrastructure Investment Bank in 2015 and its opening this year. Seen as the eastern analogue to the west’s World Bank, the AIIB has confounded US policymakers who cannot decide whether to jeer it or join it. Meanwhile, China has spent the past year assiduously promoting infrastructure projects to its regional neighbors though the One Belt, One Road initiative. To date, the AIIB boasts 57 members—including many of the US’s closest allies—a capital stock of $100 billion, and four inaugural projects.

These developments demonstrate that China is not operating as an independent actor on the economic stage, but rather a profoundly interdependent one whose rise now relies on cooperation and collaboration. As the election season tends to intensify rhetoric and force a dichotomous “good versus bad” view on China, one may reasonably worry about what this portends for the future. Realistically, China as a driver of integration is not inherently bad, but such a paradigm shift risks normalizing its significant internal challenges that the US can and should assume a leadership role to remedy before welcoming China as a major interconnected player.

First Challenge: Overproduction and Underconsumption

China produced more cement in just three years, 2011-2013, than did the US in the entire twentieth century; 60% of China’s aluminum production has a negative cash flow, and China produces more than double the amount of steel as the world’s next top four producers combined. The EU Chamber of Commerce in China identified eight industries that are “severely affected” by overcapacity in which 20–35% of production is never used. China’s history of central planning haunts it today in the form of inefficient state-owned enterprises that accumulate such massive inventories, they begin to spill over into international markets. The US Trade Representative reports that overproduction in Chinese heavy industry distorts global markets and harms US workers, as well as other G20 members and developing markets. Last year, China produced 300 million tons of steel in excess of demand. Consequently, the steel flooded markets at artificially low prices, prompting the US, EU and Japan to impose a 450% anti-dumping duty this summer. Chinese industrial dumping depresses production in other domestic economies, applies downward pressure on wages, and triggers producer price deflation.

Many global financial leaders reportedly criticized China for its overproduction at October’s IMF and World Bank meetings. China, for its part, has called the steel tariff “irrational” and dismissed concerns about overcapacity as “hype.” Even so, China has announced a plan to eliminate 100–150 million tonnes of crude steel production, and it has begun paying companies to exit the chemical industry, another sector plagued by overproduction. In September the G20 proposed the formation of a global forum to coordinate reductions in steel overcapacity, but China must champion these production cuts given its wildly disproportionate market share. The US, meanwhile, can use its global influence to withhold market status for China and maintain the pressure of anti-dumping duties until it makes meaningful progress on restructuring its production and allows the so-called “zombie industries” to fail.

Second Challenge: Theft of Intellectual Property

General Keith Alexander has asserted that IP theft amounts to the “greatest transfer of wealth in history,” and it so happens that China accounts for the world’s largest source of IP theft. Cyber-enabled IP theft does devastating harm to the US economy, costing about $300 billion annually—a figure comparable to US exports to all of Asia each year. The US Trade Representative estimates that if Chinese piracy were reduced by 50%, legitimate software sales from the US to China would increase by $4 billion. These are just bilateral figures; projected to the world stage, China’s IP theft eviscerates the incentives to innovate, deprives entrepreneurs of hard-earned revenues and eliminates employment at businesses of all sizes.

Fortunately, there are already policies in place for the US to counteract Chinese IP theft. Section 337 of the Tariff Act of 1930 gives the International Trade Commission broad authority to sequester traded goods that contain or benefit from stolen IP. The Obama Administration issued Executive Order 13694 in 2015 declaring cyber-enabled IP theft a national security and economic emergency. The order, along with Section 1637 of the 2015 National Defense Authorization Act, provides for the unilateral use of targeted sanctions against foreign agents and entities that engage in IP theft or cyber espionage. These statutes provide powerful tools to combat China’s malicious activities before they spill over into the international economy, but they are currently grievously underutilized. The 2013 IP Commission Report co-chaired by Jon Huntsman and Dennis Blair offers over twenty specific policy recommendations to combat IP theft, including creating a civil cause of action for victims of cybercrimes. Policymakers should partner with American companies to deny Chinese hackers access to US markets and vigorously defend intellectual property rights and the hundreds of billions of dollars it contributes to the economy.

Third Challenge: Low Standards, High Ambitions

A primary reason for the US’s refusal to join the AIIB is China’s notoriously low and inadequate standards. The White House National Security Council has repeatedly questioned China’s ability to meet high international standards on its array of initiatives including the AIIB and the Regional Comprehensive Economic Partnership trade deal. Standards in this context refer to more than just physical quality; they also connote governance, transparency, accountability, protection of rights, and social and environmental safeguards. Xi Jinping’s unprecedented anti-graft campaign, China’s repressive stance against labor rights and the mainland’s irredeemably polluted air are evidence of the country’s significant struggles on these fronts.

From a policy perspective, the best way to effect change is from the inside. The US has mastered and championed the west’s idea of high standards and embedded them in negotiations with its Pacific Rim partners in the Trans-Pacific Partnership. The US should move to ratify the trade deal immediately, notwithstanding the ardent and economically illiterate anti-trade election rhetoric. Aside from its demonstrable economic and strategic benefits, the TPP embodies and would enact the “highest-standard trade deal ever negotiated,” with provisions that directly address good governance, state-owned enterprises, environmental protection, human rights, intellectual property and labor standards.

China’s RCEP by contrast covers none of these areas except intellectual property rights—which, for reasons discussed above, is not China’s strong suit. The US and its eleven partners concluded negotiation of the TPP, which excludes China, in November 2015. China and its fifteen partners met most recently in Laos for the 14th negotiation round of RCEP, which excludes the US. TPP encompasses $28 trillion in GDP; RCEP, $21 trillion. Seven members of each trade deal are members of both trade deals. The US and China are essentially engineering trade blocs in direct competition with one another, and it is incumbent upon the US, having concluded and signed the higher quality deal, to ratify it and admit the many nations that have since expressed interest in joining.

Failing to follow through, the US and global economy will find itself not so well served by the result. The world will follow someone’s example if not the TPP’s. China’s trade deal would prevail, and the Indo-Pacific—the world’s most robust economic and population center—would be held to the lowest of international standards. In game theory, this provides a prime example of a coordination failure. Under a ratified and enacted TPP, RCEP would likely collapse under its own weight, and the US could use the leverage of its regional partners to induce China to assent to the TPP’s standards and join the deal. Game theory would call this the optimal equilibrium, and indeed the world would be better for it.

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As China’s own GDP growth rate begins to diminish, the country has clearly raised its gaze to the international arena. Many of its initiatives have garnered great success, from the internationalization of its currency to its successful hosting of the G20 Summit to its largescale infrastructural undertakings. In entrenching itself into an increasingly integrated world economy, China has discovered its niche for continued influence and growth. In so doing, however, it exposes the world to its own extensive economic ailments. There are many more than those discussed here, but each of these dimensions illustrates how the US and China, even on ostensibly bilateral issues, are operating on an international level with global ramifications. As the world’s largest, most interconnected and influential economic power, the US should not hesitate to prosecute its powerful tools of economic statecraft to chart a course for Chinese integration held to the highest standards.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff, editors or governors.

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