Insuring Against Military-Civil Fusion Risks

As tensions across the Taiwan Strait escalate, so too does attention to China's playbook for  fighting at sea. Like much of Beijing's military strategy, that playbook fuses military and commercial. This risks undermining the long-standing dominance of the U.S. Navy. It also -- drawing as it does on China's shipping dominance -- asymmetrically implicates commercial players, globally, that might find themselves in the crosshairs of a conflict scenario and the regulatory sniping that seeks to prevent one. Commercial shipping has a role in China's operational approach, and commercial actors, including insurers, need to update as tensions rise.

China, of course, dominates the global shipping sector. China does so across the entire industry chain, from fleet ownership to shipping container production to overseas port investment, management, and data and IT services. Internationally, China messages its approach to the shipping industry as a commercial project and its champion players as commercial entities. However, the shipping sector is a core pillar of China’s approach to power projection – and military-relevant players figure prominently throughout China’s commercial shipping ecosystem. Take, for example, COSCO Shipping, a State-owned giant and one of the largest shipping fleets in the world, which in 2020 established a research hub in Qingdao’s Military-Civil Fusion Innovation Demonstration Zone[MUD2] .

On the one hand, China's fusion of military and civilian in the shipping industry underscores the international community's difficulty in responding to China's global offensive: This is an international industry oriented toward the private sector, and that depends on China. The private sector is ill-equipped to counter military threats, let alone those of military actors masquerading as commercial counterparts and emanating from the industry’s dominant market. On the other hand, the shipping industry also offers a ripe example of how existing tools and actors can craft an original response to military-civil fusion: how the private sector can be activated – based on its existing tendencies and instruments – to defend against the risks posed by China’s weaponization of cooperation.

Of course, it is not unusual for capital-intensive sectors, like shipping to feature state backing and overlap with the research and procurement activities of national defense communities. But the degree of military presence within China's industry and the degree to which it – like other elements of China’s commercial ecosystem – is intended to project power on behalf of the Chinese Communist Party is distinct. This creates unique risks across the commercial shipping sector. Beijing may, for example, use commercial shipping entities as conduits for weapons proliferation, illicit trade, and power projection that could escalate into kinetic conflict. Moreover, as democratic governments’ concerns over China’s military-civil fusion strategy rise, international financiers, insurers, freight forwarders, and customs agents risk finding themselves in the crossfire of a global regulatory battle, exposed to opaque sanctions and export controls regulations that they are ill-equipped to navigate.

At present, these international players – financiers, insurers, freight forwarders, and customs agents – disproportionately shoulder the risk created by China’s military-civil fusion strategy in the shipping industry. And these players may not yet be focused on mitigating the risk. That threatens the assumptions of transparency and the rule of law that undergird the international trading system. It also grants Beijing’s dominant players outsize influence and leverage.

Insurance and reinsurance enterprises are well aware of the risk of exposure to sanctioned finance and trade actors associated with threat vectors like North Korea and Iran. And legal and regulatory requirements have prompted shipping lines and relevant insurers to develop mitigation measures. However, with slight redirection, maritime insurance ecosystems might offer a unique means to address the negative consequences of China's military-civil fusion strategy.

Maritime insurance and reinsurance companies’ largest customers are likely to have direct and indirect ties to the Chinese military industry and concomitant sanctions, proliferation, and military conflict risks. These companies’ best practices for exposure to traditional sanctions threats like North Korea and Iran should be updated for the China case – especially as international recognition and sanctioning of China’s military sector expands. Indicators of association with China’s military-civil fusion ecosystem should be factored into contract clauses that structure and share risk between the complex web of counterparties that make global commerce work. And while Chinese military and even commercial ecosystems can be opaque, these indicators are not: They can be sourced from the definition of Chinese military-civil fusion contributor as presented in Section 1260H of the 2021 National Defense Authorization Act.

Identification of exposure to the Chinese military-civil fusion system and risks of proliferation, illicit trade, and military conflict should, in turn, be priced into insurance rates. More broadly, insurers can also turn to practices in anti-money laundering programs deployed by financial institutions to expand mitigation checks, like vetting for AIS location data manipulation, from best practices in assessing Iranian and DPRK exposure. If global insurers can successfully partner with other intermediaries throughout the shipping industry, they can set a precedent for other sectors as the globalized, fragmented, commercial ecosystem lurches its way toward playing defense against China’s military-civil fusion strategy. 

Beijing’s military modernization effort and approach to power projection benefit from the country's economic power and integration into global supply chains. Today, global private sector actors risk unwittingly underwriting Chinese military logistics and proliferation efforts – and shouldering the accompanying risks. Government action and diplomatic coordination can help the private sector recognize and respond to this threat, including with sticks like sanctions or seizures that create real incentives for risk mitigation. However, the private sector also needs to take the initiative. Private sector actors that facilitate trade and serve as counterparties to potential bad actors must proactively take up the mantle of defense. Doing so serves the global interest. It also serves their bottom line.

Nathan Picarsic and Emily de La Bruyere are co-founders of Horizon Advisory and Senior Fellows at the Foundation for Defense of Democracies.