Maintaining leadership

The US Secretary of State’s budget-request speech before the Senate Foreign Relations Committee in March was, as might have been expected, tedious and slow going.

Her remarks on funding for climate-change programmes, therefore, were calculated (42 minutes in) to straighten her audience’s back and command its attention:

We have a lot of support in the Pacific Ocean region. A lot of those small countries have voted with us in the United Nations.

They are stalwart American allies. They embrace our values… [and] we are in a competition for influence with China.

I’ll just be — let’s put aside the moral, humanitarian, do-good side of what we believe in, and let’s just talk, you know, straight Realpolitik.

We are in a competition with China.

Take Papua New Guinea, huge energy find, to go to one of Senator Lugar’s very strong points. ExxonMobil is producing it [LNG]. China is in there every day in every way trying to figure out how it’s going to come in behind us, come in under us.

They’re supporting the dictatorial regime that unfortunately is now in charge of Fiji.

They have brought all of the leaders of these small Pacific nations to Beijing, wined them and dined them.

I mean, if anybody thinks that our retreating on these issues is somehow going to be irrelevant to the maintenance of our leadership in a world where we are competing with China that is a mistaken notion.

With the obvious proviso that no public pronouncement, whatever the official’s apparent candour, can be taken as a straightforward expression of private opinions and strategic priorities — as though arcana imperii were artlessly disclosed without heed to audience or consequences — here some conclusions may safely be drawn.

Washington is indeed disturbed by Beijing’s ability to exert political influence, and meet other objectives, through the offer of credit and provision of funds to states in the southwest Pacific and elsewhere.

Take the US diplomatic cable dated 19 June 2009, sent out of Beijing, and titled ‘PRC/SOUTH PACIFIC: INTERNATIONAL ISOLATION OF REGIME IN FIJI AN OPPORTUNITY FOR CHINA’.

A Fijian embassy official in Beijing, the State Department contact Filipe Alifereti, confided that Chinese economic and development assistance (both ‘project assistance’ and cash grants, including one of 10 million RMB) had won it a degree of influence among the Fijian elite.

Beijing, he claimed, ‘valued Fiji as a useful transit point and for its proximity to important shipping lanes’:

Beijing was privately candid about linking development assistance and economic engagement with “guaranteed” political support on issues of interest to China…

Alifereti asserted that there was little need for the Chinese to push directly for political support from Fiji on issues of Chinese interest, because such support was “guaranteed” and China’s interests were well-understood by Suva.  He indicated that such political support was a simple consequence of the enormous economic influence China had on the island.

In addition to assistance, trade and investment ties, the Chinese government was providing Fijian government officials with training on a range of skills in China, Alifereti reported. This included training military officials, a practice that began after the 2006 coup, he added.

The influence in regional capitals of China’s foreign ministry and Navy — and investment abroad by its companies acquiring productive assets in strategic industries — has grown sharply in recent years.

This blog has shown previously the disquiet this has prompted in the chancelleries of Washington, Canberra and elsewhere, provoking figures charged with strategic policymaking, and alarming media commentators and academic theorists.

While vexation is commonly voiced, a quick glance at a map does not show obvious reason for their unease. The US Navy retains unchallenged dominance of regional sealanes, its Pacific fleet graciously accommodated in ports from Okinawa to New Zealand. The US Treasury and State Department’s influence over local authorities is, likewise, seemingly boundless.

Yet recent regime change in Timor-Leste, military intervention in the Solomon Islands and attempted isolation of the Fijian leadership has not succeeded in maintaining the existing power balance in the southwest Pacific, responsibility for which had been delegated by Washington to the Australian deputy sheriff.

Thus, newspapers have reported that the Dili government’s dispute with Australian firm Woodside Petroleum over the Sunrise natural-gas processing plant could see the international treaty governing development of the offshore field overturned before development ever begins.

At the July 2009 ASEAN summit, one month after the above diplomatic cable was sent to Washington, Canberra and Wellington, Secretary Clinton declared that ‘the United States is back’ in the East Asia-Pacific region.

This return has been accompanied by a characteristic mode of public-diplomatic presentation, repeated faithfully in the newspapers.

As Clinton’s Senate testimony makes clear, officials denounce what they see (or affect to see) as the Beijing elite’s search for a Platz an der Sonne (often described in these very words), including naval expansion and quest for secure energy supplies.

This, the US and their allies tremble, will inevitably lead the Chinese leadership to naked aggression, just as it did for Wilhelmine Germany at the dawn of the twentieth century.

The historical comparison is regularly made.

“The Next Empire”, a 2010 article in The Atlantic, described Chinese outward investment in copper mines and railways in Zambia, the Democratic Republic of Congo and other parts of southern Africa:

The truest intellectual forerunner of China’s strategy seems to be a plan once pursued by Germany. Before its defeat in World War I, Germany’s leaders had dreamed of a continental empire, a Mittelafrika stitched together by railways stretching from Dar es Salaam to the Atlantic Ocean…

Germany’s railway schemes were driven by intense competition with Britain. Although China may claim to be a new kind of power, its plans, too, have always had a strategic component, including rivalry with the West, and lately a desire to circumvent the regional economic powerhouse, South Africa, and ultimately control the markets for key African minerals.

But the comparison is not apt.

What is described both by Clinton, in her Senate testimony, in The Atlantic article, and in a April 2011 report by the Lowy Institute on loans to Pacific countries, is Chinese export of funds and the acquisition of stocks of foreign productive assets, which then allows Beijing to exert political influence and meet strategic objectives.

This practice of net capital export is only open to countries, such as China and Germany, that persistently export more commodities than they import and run a surplus on the current account.

But this prerequisite was not met by the Kaiser’s Germany, which had balance of payments difficulties. It was because the gaining of influence through capital export was closed as a policy option that genteel figures like Bethmann Hollweg resorted to aggression and the seizure of territory.

In the decades before the First World War, Imperial Germany sought to add Angola and Mozambique to its existing territorial holdings in Rwanda, Burundi, Tanzania, Namibia, Kamerun and Togoland.

At the time Angola and Mozambique were Portuguese possessions. But the Portuguese government was massively in debt. In order to secure loans from foreign creditors, it was willing to put up its African colonies as security.

The deepest capital markets in those days were in London and Paris. In 1898 and again after 1911, Whitehall and the Wilhelmstrasse secretly negotiated to partition Portugal’s African possessions between themselves in the event of a default. (More recently the crippled Portuguese state has been bailed out in return for agreeing to privatize state assets.)

But in the first event Lisbon’s finances recovered, and in the second case agreement could not be reached.

Germany was left empty-handed, powerless to act alone (the British Foreign Office had understandably been less eager to conclude a deal).

To the east, as well, stakes in the Ottoman Public Debt were mostly held by French and British creditors, granting the Quai d’Orsay and Whitehall strategic influence.

Thus the Ottoman Finance Minister reported to the German Ambassador that ‘Germany could not expect to be treated the same as France. The latter had, through the granting of the loan, saved Turkey from a desperate situation while Germany, the power on which Turkey had placed all her hopes, had failed her completely, not only financially but also politically.’

Ultimately, access to Persian, Mesopotamian and Caucasian oil rested on this.

Before the Great War broke out, Deutsche Bank and the construction firm Philipp Holzmann AG had reported an ‘unavoidable breakdown of negotiations’ in extending the existing Berlin-Constantinople railway to Baghdad.

The outline concession for the project had been granted in 1899, and in 1903 a supplementary agreement allowed construction to extend to Basra, with the German firms granted authority to make exploratory bores for oil, and given options on confirmed discoveries around Mosul. The line was to be built in separate 200 kilometre sections.

But by 1913 Germany’s financial resources were such that it could not support completion of this project while also pursuing Ottoman-Balkan deals to supply arms, develop civilian and military port facilities, etc. The steel and armaments firm Krupp could not raise a loan for a planned Ottoman-Bulgarian arms deal on the Berlin market while Deutsche Bank refinanced its work on the Mesopotamian railway.

Britain and France, with their more liquid money markets, were able to produce funds for loans, German influence thereby losing out irretrievably.

Thus, in the years before war broke out, Turkish battleships were built in British shipyards by firms such as Vickers (two super-dreadnoughts, due for delivery in August 1914, were famously confiscated by the First Lord of the Admiralty). Meanwhile British leverage over the Porte’s public finances assisted the rise of the Anglo-Persian Oil Company, which together with part-British firm Royal Dutch/Shell secured control over Persian and Mesopotamian oil.

The same was true for achieving Rathenau’s strategic goal of a Mitteleuropa, set out as war aims in the September programme: Belgium ceding to Germany a coastal strip on the North Sea, the Netherlands annexed, France subordinated (with the Longwy-Briey iron-ore basin seized) and Russia’s European territory turned over.

This subordination of the European economy to German strategic imperatives (which has since been achieved peacefully) could not, at the time, be accomplished except by force.

So in general there seems to be an inverse relation between capital export and naked aggression. The latter is the policy resorted to when economic influence wanes or is no longer sufficient to keep out competitors.

Today, as Clinton’s opening remark makes clear, this describes the condition of the United States, which has become a net borrower, unable to pay for its imports with matching exports. Its political leadership, and the propertied classes that control it, must therefore rely on coercive means to preserve their international position relative to rival firms and territorial states.

The latter, on the other hand, can go on achieving export surpluses, with a corresponding buildup of overseas assets and supplicant borrowers, granting them ‘guaranteed political support on issues of interest.’

This does take a peculiar form.

Since many US and European manufacturers have shifted production to low-wage China, and the material form taken by the Chinese export surplus is primarily consumer goods, Chinese capital cannot be exported to the US or Europe productively, i.e. as intermediate or capital goods.

And US firms (e.g. Walmart) and their subsidiaries do own foreign assets in China. They may own plant outright, or hold controlling shares in plant, employ workers in Chinese factories, hire equipment, etc. But the stock of buildings and machinery for these factories hasn’t been manufactured in the US then shipped over. It has, by and large, been produced in China, as have the consumer goods that make up the real wage of the workers employed in these factories.

And, because the US runs a net trade deficit, the local currency necessary to purchase these assets is not obtained from the Yuan receipts of US firms exporting to China. Instead it is converted from dollars which are taken on as IOUs by the Chinese central bank, with these holdings then converted into US government assets, financing the arms expenditure of the Pentagon.

Chinese capital export to the US and Europe thus takes the unproductive form of credit, financing public spending and funding household loans to allow purchases of Chinese consumer-good exports. (Due to this, and to the advent of funded pension schemes, US financial markets remain by far the world’s largest and most liquid).

But there is export of productive capital assets, too. Aside from high-profile cases like Lenovo’s takeover of IBM’s PC division, this has been concentrated in strategic raw materials, and thus towards acquisition of assets in countries like Kazakhstan, Iran, Sudan, Zambia, Australia, Indonesia, Venezuela and (following Sinopec’s purchase of Addax Petroleum) Nigeria.

In short, Chinese firms can finance their railways and mines in southern Africa, and Beijing can afford infrastructure projects in Timor-Leste and the ‘wining and dining’ of people like Frank Bainimarama, in ways that the German Empire could not.

Washington, on the other hand — to ‘maintain its leadership’ and prevent its rivals ‘coming in behind and under’ it — must rely on force.

In the First World War, as now, the grand strategic prizes did not lay in the deserts of the Kalahari, the swamplands of the Caprivi, or even the more mineral-rich territory of southern Africa.

They dwelt in Persian Khuzestan (where in recent years the Chinese National Petroleum Company and Sinopec have negotiated production licences with the Tehran government), the oilfields around Basra (where the largest fields are allocated to ExxonMobil, BP, Shell and CNPC, remaining stakes are divided between mostly British, Dutch and US firms, but where more importantly the US has 50 000 troops, in addition to its various garrisons dotted around the Arabian peninsula), and the Caucasus and Caspian Basin (where the discovery of Tenghiz and Kashagan has raised the stakes, where NATO has recently intruded, which region is subject more generally to Russian-US strategic manoeuvring, e.g. in Georgia and Chechnya, and where, finally, the Shanghai Cooperation Organisation is something to watch).

It is in these territories that the State Department and the Pentagon have been most eager to plant occupation forces, establish large bases and overthrow governments.

Before this brazen and lawless Drang nach Osten, Beijing’s reliance on dollar diplomacy and penetration through loans and capital export can seem strategically unshrewd and hopelessly effete, much as the British and French political class and military High Commands once appeared mysteriously deferential and transfixed, during the first half of the twentieth century, by the expansionism, spiked helmets, and Nietzschean grandeur of their counterparts in the German Reich.

By extending hundreds of billions of dollars in credit, while the Pentagon undertakes its wars and ‘limited kinetic actions’ throughout the geostrategic Heartland of the World-Island, aren’t the Bank of China, the Chinese state and the Chinese capitalist class merely funding their own strategic encirclement?

Yes, but the overriding aim for the moment seems to be obtaining technical know-how through compulsory technology transfer.

The key concern here, it seems, is in developing a domestic industrial base to allow production of Beijing’s own aircraft carriers (the nearly-complete Shi Lang is a refitted Russian purchase), carrier-based fighter aircraft (the new J-15), and ballistic-missile submarines (of which the PLAN still has limited numbers). Today this level of naval development (i.e. being able domestically to build fleets of capital ships from which expeditionary air power can be projected) is a necessary attribute of a first-rate imperial power.

Only once this capacity is achieved, presumably, will the strategic middlegame be over, a prospect, properly considered, which ought to inspire dread.

Tags: Berlin-Baghdad railway, Cablegate, China, Fiji, First World War, Germany, imperialism, Ottoman Empire, Portuguese Empire, scramble for Africa, United States, WikiLeaks