Fortifying for War: XI's Economic Ambitions

In a recent article titled 'Xi Jinping's Pivot to the State,' Australia's ex-Prime Minister, Kevin Rudd, brilliantly outlines Chinese President Xi Jinping’s ambition to create a “dual circulation economy." In Rudd's words, this "seeks to reduce China's future dependency on export-driven growth, and instead have Chinese domestic consumer demand become the principal growth driver; thereby leveraging the enormous gravitational pull of the Chinese domestic economy on the rest of the global economy."

These three points constitute solid arguments from Rudd, who is clearly an expert in China's domestic and foreign policies. Rudd is a voice to be listened to in this domain. He does, however, overlook two potential driving forces in Xi’s economic ambitions. These forces are critical, and it would be remiss to ignore them, particularly in light of recent developments under Xi’s regime. Both forces revolve around Xi’s inarguably increasingly aggressive foreign policies.

By moving to a “dual circulation economy," Xi, in his words, is transforming the Chinese market into a "huge gravitational field attracting international commodity and factor resources" and in Rudd's words, "force the rest of the world to engage with China on Beijing's own terms or risk falling behind commercially." This measure by Xi would make the international community more reliant on China while reducing its own reliance on international markets due to stronger domestic wealth growth and consumer demand. This self-reliance could be further transformed into economic coercion as a component of Hybrid Warfare.

We are already seeing numerous examples of Chinese economic coercion, including China’s punishment of Australia by targeting its exports with trade barriers in retaliation for Australia pursuing an inquiry into the origins of Covid-19. Another example of economic coercion was China blocking market access to South Korean goods and services in various sectors in retaliation for South Korea’s decision to install the Terminal High Altitude Area Defence (THAAD) missile defense system in 2016. The further Xi decouples from the U.S. and reduces economic dependency on the international economy, the stronger his hand becomes in expanding economic coercion and increasing his power to utilize it as a component of Hybrid Warfare. The gravitational pull will, in turn, significantly impact the calculus of those nations responding to Beijing's increased assertiveness. If China is able to tighten the screws of economic coercion, this will affect corporations otherwise unaffected, which could easily translate into loss of employment and influence democratic decision-making. A democratic leader may face tougher choices than they previously faced when standing up to China, which could have greater impact at election time.

The second potential driving force overlooked by Rudd in Xi’s economic ambition to create a “dual circulation economy” is significantly more dire. Xi may be fortifying his economy in preparation for war against the U.S. and its allies. There are many alarming signs pointing to this, including increases in military expenditure, a major expansion of strategic missile silos to house Intercontinental Ballistic Missiles (ICBMs), the building of military bases on contested islands in the South China Sea, threats against Taiwan, threats to use nuclear weapons, armed skirmishes with India, persistent flights of military aircraft within Taiwan’s air defense identification zone and consistent rhetoric from Xi that promotes a war footing.

In the event that China attempts to “reunify” Taiwan by force and the U.S. and its allies intervene, the global economy would be severely impacted. Xi’s focus on domestic consumer demand as his primary growth driver and steps taken to achieve this could act to weather the impact of a global economic shut down on the Chinese economy while a major war is underway. The ambition to create a successful “dual circulation economy” on its own is easily explained by Rudd's three driving forces. However, when viewed in combination with Xi's aggressive actions and rhetoric, a different and more alarming story unfolds. This begs the question of how does the global community, particularly the U.S. and its allies, counter these two driving forces? The answer is deterrence and decoupling.     

The global community must diversify its international trade to reduce reliance on and decouple from China. This will prevent the so-called "gravitational field" from becoming a black hole from which there is no escape. While in the short term, this may result in higher financial costs, in the long term, it will reduce China's ability to utilize economic coercion as a component of a wider Hybrid Warfare campaign. Australia is a prime case study in this area. China has frequently utilized international trade as an implement to punish Australia when it speaks out against the wishes of the Communist regime. Only through reducing economic reliance on China can these bullying tactics be circumvented. Xi is the bully in the schoolyard. The more he thinks he can get away with, the more he will act aggressively. Economic decoupling will reduce China’s power and influence.

Xi must be deterred. While the U.S. must lead this charge, as it possesses the most powerful military and economy globally, it requires its allies to boost this deterrence power. Likeminded nations need to work together to effectively deter Xi. He must be made to understand that any aggression against key interests will be met with resounding resolve. The U.S. should ensure that Xi is aware that all options are on the table, including nuclear retaliation. The minute Xi doubts this resolve is the minute he may decide to push the envelope and take risks such as “reunifying” Taiwan by force. The new security partnership between the U.S., U.K. and Australia (AUKUS) is a step in the right direction. The fact that the U.S. and U.K. are willing to sell Australia something as valuable and sensitive as advanced nuclear attack submarines signals to Xi that the resolve to counter Chinese aggression is solid. Appropriate signaling such as this must continue, as any weakness will be exploited.

The current decade will continue to test the stability and resilience of the liberal international order. While some may cynically argue that this no longer exists, the truth is we can’t afford to turn our backs on it. Xi has shown his hand and illustrated his ambitions through aggression. His move to fortify his economy and create a Chinese economic “gravitational field” adds further weight to support the argument that his geopolitical ambitions are hostile. It’s not too late to prevent further aggression from leading to war. It’s time to face the threat with steadfast strength and mutual cooperation amongst allies.

Adam Cabot, has a Master's degree in International Relations and is currently researching nuclear strategy. He has vast experience in the International Security field.