Executive summary

Across the Indo-Pacific strategic competition has accelerated in recent years. As states in the region continue to adapt to contemporary challenges, their vulnerability to economic coercion has increased. Economic coercion can be defined as the strategic use of economic tools to accomplish geopolitical goals, whereby an economic relationship is exploited in pursuit of a political objective to pressure a country or deter them from undertaking a particular action.[1] This has been exacerbated by asymmetrical interdependence between nations and the growing economic dominance of China. Globalisation has facilitated interdependence between states whilst also creating avenues for economic relationships to be used as channels for powerful states to utilise pressure and coercion for political objectives.

The strategic use of geoeconomics poses a hybrid threat to the region as it can distort trade and coerce the actions of other states. The Indo-Pacific is yet to develop the regional architecture or organisational capacity to address this emerging security challenge collaboratively, creating greater strategic imbalance in an already tense global political climate. As such, strengthening the capacity of states to resist economic coercion is crucial and should be facilitated through regional groupings, and via commitments from key governments in the region such as Australia and Japan.

Key findings

• The growing influence and economic dominance of China has enabled the weaponisation of economic tools for political gain.
• China’s strategic use of economic measures is fuelling instability in some states in the Indo-Pacific region.
• Australia has the capacity to play a key role in collaborating with other Indo-Pacific states to address the rising geoeconomic threat of weaponising trade, investment and foreign policy regulations.

Introduction

The nature of interdependence between states has evolved rapidly, with economic reliance in particular becoming a heightened characteristic of our contemporary global context. The economic interdependence of states across the Indo-Pacific has long been a strength for the region, fostering the flows of trade, investment, and people.[2] However, the economic dependence established between nations has also given rise to economic tools being used as instruments of coercion. Consider two countries where one country is heavily reliant on a second nation, but the second nation is much less dependent on the first nation; this situation leaves the first nation heavily exposed to economic coercion. It’s utilisation in statecraft has been facilitated by globalisation, with the usefulness and effectiveness of economic coercion often being underestimated by policymakers.[3] Asymmetrical interdependence is pervasive in the Indo-Pacific region and has underpinned the utilisation of economic coercion by some states. The differing stages of economic development of states means the region’s strategic landscape is particularly dynamic. This has been further compounded by China’s rise which has accelerated shifts in the relative economic and strategic weighting of Indo-Pacific states.[4] In recent years, China has utilised economic coercion to pressure other states to comply with its political agenda, by signalling that punitive action will be taken if nations attempt to pursue actions that conflict with its political or economic goals.

China’s use of economic coercion

China has a record of using unilateral coercive measures as a means of pressuring other states to instigate policy changes or compliance with its political agenda. Despite China officially opposing the use of coercion through economic means, the nation has utilised an array of economic tools that strongly align with the political objectives of Beijing.[5] Its methods include, but are not limited to, export restrictions, loan lending, travel bans and means that have been used both openly and covertly against other states.

Maintaining deniability is a key enabling factor that has aided the continuation of economic coercion. China’s execution of strategies has at times been subtle and covert, hampering the ability of target countries to prove that coercive intentions are fuelling them. Beijing is also selective about how it employs these measures, by choosing to target states it does not depend heavily on as an export market or as a crucial source of imports.[6] This ensures the economic repercussions felt by China are minimised, making it a relatively low-cost strategy to combat the actions of nations and firms that resist Beijing’s foreign policy intentions. As China’s dominance in the region expands, the economic relationships it has with regional states have become increasingly asymmetric. This is of greater consequence in recent years as the Belt and Road Initiative (BRI) has heightened the reach of China’s influence, facilitating the flow of Chinese investment across international borders which has led to greater economic dependence upon Beijing.[7] Beijing’s coercive actions have become more aggressive as its dominance has grown, particularly in retaliation to interests that diverge with the United States and its allies.

Effectiveness of economic coercion

The overall effectiveness of economic coercion is widely contested, with China’s methods proving to have limited success in forcing a change in the policy of some targeted nations. However, the deterrent effect that these actions have had are far more consequential. Coercive actions have been effective at discouraging foreign states and companies alike from undertaking actions that may hurt Chinese interests.[8] This also gives some explanation as to why China has evolved from a previously reactive posture to one that is more pre-emptive, in order to benefit from disincentivising undesirable foreign actions. Smaller island states such as the Philippines have adopted more Chinese-friendly foreign policy in the wake of economic retaliation from Beijing, with other Indo-Pacific states following suit. The relationship between the Philippines and China has been strained following the South China Sea territorial disputes, despite the Philippines’s President Rodrigo Duterte’s recent attempts to pacify Beijing.[9] As a strong military power in the region, China considers armed conflict in reaction to its tactics as minimal, particularly with regional nations that cannot individually compete with it.[10]

Methods of coercion

Export restrictions

China’s most utilised coercive economic tool has been export sanctions and restrictions, employed primarily as punitive political measures. This involves limitations or bans on goods exported by specific trading nations. China has previously implemented both sanctions restricting all exports from a country, as well as goods-specific bans, such as its restrictions on the imports of Australian barley, wine and seafood and the imposition of tariffs amid supposed price concerns. Beijing also pursued subtle means of distorting trade flows between the two nations by insisting on investigations into the quality of Australia’s wine and seafood, claiming producers were attempting to dump their exports into Chinese markets.[11]

In 2010, Japanese maritime authorities detained Chinese fishermen near the disputed Senkaku/Diaoyu Islands, to which China responded by blocking the exportation of rare earth minerals that are critical to Japanese industries.[12] A similar tactic was used two years later against the Philippines who are heavily reliant on China as the main destination of its exports and imports. Ongoing disputes between the two countries have positioned the Philippines at a distinct disadvantage, rendering it unable to assert certain strategic actions without retaliation from China, particularly in relation to the ongoing dispute surrounding territorial claims in the South China Sea.[13] Beijing has previously used its trade flows with the country to punish Manila for maritime disputes in 2012 when it restricted the import of bananas–the main export of the Philippines–impacting the livelihood of approximately 35,000 farmers.[14] The statement made by China was direct: aggressive action in the South China Sea will be met with economic retaliation. This coercion hampered the Philippines’ political activity and ensures the nation is prevented from any foreign policy action that is not compliant with China’s own objectives.

Since 2019, Beijing has attempted to reform its image in the Philippines, promising to strengthen Chinese soft power in the country to recast China as a benevolent economic partner.[15] China’s economic manipulation has been effective, with Filipino President Rodrigo Duterte opting not to address South China Sea disputes through international law in 2021, so as to avoid inciting any further economic sanctions from Beijing.[16] The nation’s acquiescence to China may provide the Philippines with a short-term feeling of economic security, yet disputes at sea continue to plague the island nation and fuel growing anti-Chinese sentiment.

Trade wars

A repeated back-and-forward of trade restrictions by China with other nations has resulted in contentious trade wars with both the US and Australia in recent years. These coercive tactics by China have been alarming for the Indo-Pacific, as it has witnessed Australia, which once embraced the rise of China, being on the receiving end of numerous strategic economic sanctions by Beijing. The rapid decline in bilateral relations was hastened when the Morrison Government requested an investigation into the origins of the COVID-19 pandemic in 2020, in the wake of its emergence from Wuhan, China.[17] Beijing quickly retaliated with a list of demands for Australia, in the wake of a heightened trade war that saw relations between our key export partner deteriorate in the matter of months. Export industries suffered heavy losses as key sectors such as education and tourism continued to struggle in the wake of the pandemic. However, Australia’s iron ore exports remained untouched by any trade sanctions from Beijing, likely as its importance for China’s infrastructure development was too crucial for the nation compromise. Public opinion of the Chinese government plummeted in Australia, as Canberra remained steadfast in resisting Beijing’s influence, with relations continuing to remain tense.[18]

By engaging in a trade war China intended to hit individual Australian producers hard, with the hope that the afflicted sectors will pressure the Australian government to re-evaluate its foreign policy stance.[19] The trade war has also underpinned a push for the Australian economy to diversify in the hope of reducing its vulnerability to ongoing and future economic coercion. Australia has thus far remained resilient; being able to weather China’s actions by redirecting trade to new markets and with some experts insisting that China’s coercive attempts have thus far been relatively futile.[20] However, the political implications of Beijing’s actions remain more difficult to address. Previously, the two countries attempted to separate their economic ties and their political differences, however the exploitation of Australia’s trade relations with China has fuelled concerns over the future overall trajectory of the relationship.

Dept trap diplomacy

A more unorthodox economic tool used by China is the concept of ‘debt trap diplomacy’: a coercive strategy where undue influence is used to orchestrate financial agreements, which place a nation in a position that can be leveraged for future political advantage. This strategy establishes a level of dependency on China to such an extent, that future coercive threats can ultimately evolve into viable recommendations, which the indebted nation state has little choice other than to comply. However, the use of this coercive tool is hotly contested, with debate ongoing about whether dept trap diplomacy is in fact a myth. Such controversy arises as to whether the supposed dept trap created by loan agreements should instead be attributed to a weaknesses of a nation state’s own decision-making, rather than actions of malicious intent by China. As stated by scholar Shahar Hameiri, “Never attribute to malice what can be explained by incompetence”.[21]

Sri Lanka’s overhasty investment in infrastructure using Chinese funds has fuelled an unsustainable debt burden, partly from projects in relation to China’s BRI.[22] With high loan repayment rates and its economy still struggling due to pandemic-afflicted sectors, Sri Lanka has high exposure to economic manipulation by China. Sri Lanka currently has a total foreign debt value of about $50 billion, with $3.38 billion coming from Chinese loans, and interest payments of $7 billion due in 2022.[23]

The full extent to which Sri Lanka’s borrowings from China became unsustainable was realised in the wake of the pandemic, as the economy took on heavy losses to its tourism industry from international border closures. In mid-April, the Sri Lankan government announced all payments to lenders and bondholders were suspended until a debt restructure occurs to ensure depleted foreign reserves are preserved for crucial impots of fuel and food.[24] The nation requested China to restructure its debt in January 2022 before eventually turning to the International Monetary Fund (IMF) to address payments on a $1billion international payment due in July 2022.[25] On a regional level however, Beijing has been able to capitalise on Colombo’s economic crisis to situate itself in a highly advantageous position, whereby Sri Lanka is now dependent on economic rescue from international lenders including China.

However, heavy criticism of the huge Chinese loans undertaken by the Rajapaksa government has not been solely responsible for Sri Lanka’s economic woes and has placed doubt on the validity of dept trap diplomacy claims. Poor economic decision-making by Sri Lanka’s government has been cited as the main reason responsible for the nation’s current financial situation, as opposed to any coercive strategic pursuits of China. As such, debates around whether dept trap diplomacy can be classified as a coercive economic tool remain will continue to develop.

Travel restrictions on Chinese tourism

China’s threat of economic coercion by restricting travel is particularly potent against Indo-Pacific states, as many are heavily dependent on the movement of people for tourism and revenue. Taiwan has been a prime target of China’s economic manipulation, with tensions escalating amid attempts to pressure the island into unification with mainland China. This included a ban on individual travel permits to Taiwan in 2019, reducing mainland Chinese tourists to the island by 57% from the previous year.[26] China has also attempted to isolate the nation as punishment for its resistance by pressuring other countries from signing free trade agreements with Taiwan and advocated for the island’s exclusion from regional trading blocs.[27]

Unreliable Entity List regime

The Unreliable Entity List, proposed in 2019 by the Chinese Ministry of Commerce came into effect in 2020, and specifies foreign states and firms which, for non-commercial reasons, have cut-off or boycotted Chinese suppliers in a manner that harms Chinese companies.[28] The list is intended to be a mechanism by which China can identify a foreign nation or firm which has infringed upon its security or development interests, or has economically discriminated against a Chinese entity. Therefore, the Chinese government can pursue measures such as a fine or place a restriction on trade, investment or travel. Essentially, Beijing has equipped itself with a tool by which it can identify those who take unfavourable economic action against China and readily retaliate with an economically coercive response. Entities face a grace period during which time they can address their behaviour that is perceived as harmful by Beijing, effectively displaying China’s system of successfully bringing uncooperative countries into line with its foreign policy agenda.[29] The tool is likely to help perpetuate a deterrent effect for other firms and nations alike, especially those who depend heavily upon China’s economic ties and are less equipped to direct trade flows to alternative markets.

Fuelling instability in the Indo-Pacific?

The weaponisation of economic tools for political means by China lack predictability and transparency, which adds to the uncertainty felt by regional states.[30] With an increasing portion of the Indo-Pacific economically reliant on China, the likelihood of region-wide instability has been heightened. China is striving to unseat the US as a regional hegemon and the coercive economic measures it employs are well-adapted at helping Beijing achieve its aims. Aware of its ability to economically overpower smaller neighbouring Indo-Pacific states, Beijing can align broader regional policies to its own agenda by employing tactics that nations have little ability to counter. This leaves political tensions in the region to simmer below the surface; overt military conflict is skirted while animosities intensify. Without pushback, China’s punitive methods will likely extend and further encroach on vulnerable Indo-Pacific nations. The most pressing consequence of economic coercion is the distortive impact on regional trade and the erosion of political trust between nations, exacerbating fragility across the Indo-Pacific.[31]

Policy recommendations

Australia’s role

China’s use of economic coercion is not restricted to the Indo-Pacific; something that has contributed strongly to the global shift in political focus towards Chinese tactics and its changing reputation in the international community.[32] A key challenge for Australian policymakers in past years has been balancing their alliance with the United States and an economic reliance on China.  Tensions between the US and China in the South China Sea have added further complexity, with Beijing’s assertive territorial claims and economic clout deterring pushback from some regional states. As a long-time US ally, Australia is caught between the competing interests of the two global powers and may face pressure from the US to adopt more active interventions beyond statements of support for the freedom of navigation.[33]

Regional unity

A key method that may restrict Beijing’s weaponisation of coercive economic tools is collective regional action. Given China’s unparalleled economic strength in the region, combatting Chinese economic coercion will require a greater unified approach. Broader awareness of Chinese tactics is crucial for ensuring the protection of Indo-Pacific states against economic coercion. Australia can, and should, play an instrumental part in collective action, as a consequence of its robust institutions and ability to take on a leadership role in the region. Australia should pursue a strategy of heightened engagement; rather than simply reducing its economic relationship with coercive states such as China, Australia should simultaneously deepen its relations with likeminded states. India has voiced its objections to China’s manipulative economic strategies in the past, presenting Australia with a partner to initiate a collective approach to economic coercion.[34] Negotiations for a Comprehensive Economic Cooperation Agreement (CECA) between India and Australia began in 2011 but were sidelined in 2015. However, 2020 saw Indian Prime Minister Modi and the Morrison Government resume their pursuits, committing to a CECA by the end of 2022, with an interim agreement put into place in early 2022.[35] Such moves signal that Australia is willing and able to expand its ties with other Indo-Pacific states, which is a positive sign for the region and counters other forms of instability.

Tool for anti-coercion

A possible useful tool for the region would be the implementation of an anti-coercion instrument to protect states. A similar concept was explored by Jonathan Hackenbroich for implementation in the European Union (EU) in order to strengthen protection from economic warfare.[36] The threat potential of Russia weaponising economic tools against members of the EU is particularly relevant in the wake of sanctions issued against Russia, by nations across the globe after its invasion of Ukraine.[37] The proposed anti-coercion instrument would facilitate countermeasures that respond to malicious use of economic coercion and strengthen alliances in the face of European political tensions. Such an idea could be adapted for use in the Indo-Pacific region, implemented as part of a trading bloc or integrated into FTAs as a mechanism for fending off attempts to weaponise trade.

Conclusion

In the Indo-Pacific region, interdependence between states that once facilitated rapid economic development has since evolved into a key vulnerability. The asymmetric growth of states has allowed economic tools to become strategic weapons, ranging from coercive trade and investment actions to overtly stringent policy regulations. China’s use of geoeconomic measures for political gain has fuelled this precarious political climate and highlighted the considerable exposure nations have to Beijing’s pervasive influence in the region. As China increasing exerts its economic and political power, nations will need to adopt a unified policy stance and come together to shore up stability in the Indo-Pacific. With the region swiftly becoming a focal point of the global community, Australia has the tools and capacity to take on a key role in addressing this issue. Unless collective action is taken by states, economic coercion by China will continue to be a thorn in the region’s side, undermining its development and esteemed interdependence.