New Economic Statecraft

This book provides insights on the art of governing a state and managing its
external relations from a wealth-power logic. It looks at “economic statecraft”,
which consists of wealth production, wealth mobilization, and wealth-power
conversion by a state.
This book reconceptualizes what economic statecraft is and proposes a new
theory focused on wealth-power conversion. With a long historic perspective,
this book goes through the modern history of Western powers practicing
economic statecraft since 1500, and presents three case studies, the United
States, the European Union, and China, the three biggest users of economic
statecraft in the contemporary world.
The book serves as an ideal reference for policy makers, business people, and
researchers whose work touch upon either wealth creation, power projection,
or the combination of both.

Zhang Xiaotong is Professor of Institute of Belt and Road Initiative & Global
Governance, Fudan University, Shanghai, China. He is a Researcher at Wuhan
University Centre for Economic Diplomacy. He obtained a PhD in political
science from Université Libre de Bruxelles (ULB) in Belgium.
New Economic Statecraft
China, the United States
and the European Union

Zhang Xiaotong
Contents

Acknowledgement viii
List of Tables ix
List of Figures x

Introduction 1

1 Economic Sltatecraft – Concepts and Theories 9

1.1 Economic Statecraft as a Concept 9
1.1.1 The Origin of Economic Statecraft as a Concept 9
1.1.2 “Economic Statecraft” Versus “Economic
Diplomacy” 11
1.1.3 Analysis and Critique of the Concept of Economic
Statecraft 13
1.1.4 Reconstruction of the Concept of Economic
Statecraft 14
1.2 The Theoretical Construct of Economic Statecraft 17
1.2.1 Theoretical Assumptions 17
1.2.2 The Main Actor of Economic Statecarft 19
1.2.3 Steps and Methods of Implementing Economic
Statecraft 19
1.2.4 Academic and Theoretical Standing of Economic
Statecraft 24

2 Paradigm Shifts in Economic Statecraft Over Time 28

2.1 The Age of Classical Mercantilism (15th–18th
Centuries) 29
2.2 The Age of Classical Liberalism (1846–1870) 36
2.3 The Age of Imperialism (1870–1914) 38
2.4 Marxism 41
vi Contents

3 America’s Economic Statecraft 44

3.1 American Economic Statecraft in the Context of British
Hegemony (1775–1898) 47
3.1.1 Founding of the United States of America 47
3.1.2 Continental Empire (1815–1850s) 51
3.1.3 Civil War and Overseas Empire
(1860/65–1898) 52
3.2 American Economic Statecraft in the Context of
U.S. Hegemony 53
3.2.1 Rise to U.S. Hegemony (1898–1913) 54
3.2.2 Triumph of U.S. Hegemony (1914–1945) 57
3.2.3 Maturing of U.S. Hegemony (1945–1967/73) 63
3.2.4 Decline of U.S. Hegemony (1967/73–2001/08) 65
3.3 U.S. Economic Statecraft in the Context of the Rise of
Other Great Powers (2008–2020) 67
3.3.1 U.S. Economic Statecraft Under President Obama
(2008–2016) 69
3.3.2 U.S. Economic Statecraft Under President Trump
(2016–2020) 69
3.4 Paradigm Shift in U.S. Economic Statecraft: Pendulum
Between Liberalism and Mercantilism 71
3.4.1 The Dilemma of De-globalization 73
3.4.2 The Dilemma of the U.S. Hegemony 74
3.4.3 The Dilemma of U.S. Domestic Politics 74

4 The EU’s Economic Statecraft 79

4.1 Inherent Defciencies in the EU’s Implementation
of Economic Statecraft and the EU’s Innovative
Solutions 81
4.2 Updating the EU’s Economic Statecraft “Toolbox” Since
2020 85
4.2.1 Promote the Further Instrumentalization of
Military and Economic Power to Create a “Europa
Geopolitica” 85
4.2.2 Promote a “Sovereign Europe” and Protect the
“Economic Sovereignty” of Europe 86
4.2.3 Promote the “Geoeconomic Europe” Agenda by
Vigorously Implementing Economic Diplomacy 87
4.2.4 Economic Coercion Is an Increasingly Important
Tool in the EU’s Economic Statecraft 87
 Contents vii

4.3 The History of EU Foreign Policy From the Perspective of

Economic Statecraft 89
4.3.1 The Foundation of European Power
(1950–1967) 90
4.3.2 The “Upward Spiral” of European Power
(1967–2008) 90
4.3.3 Decline of European Power (Since 2008) 92

5 China’s Economic Statecraft Under Xi Jinping 99

5.1 What Was President Xi’s Economic Statecraft in His First
Term (2012–2017)? 100
5.2 What Was President Xi’s Economic Statecraft in His
Second Term (2017–2022)? 104
5.3 Conclusion and Future Scenarios 108

6 Competing Economic Statecrafts 114

6.1 The Change of “The Spirit of the Times” 114
6.2 The Manifestations of Competing Economic Statecrafts
and Consequences 116
6.3 Competing Thoughts Behind Competing Economic
Statecrafts 119

Index 128
Acknowledgement

I wrote this book in 2022. The people I met in the course of 2011–2022 are
the main sources of inspiration for this book.
I would, frst of all, thank David Baldwin. In his classic book Economic
Statecraft published in 1985, he single-handedly constructed a theoretical
framework around this concept. My meeting with him at Princeton University
gave me a lot of inspiration.
I would also thank David Lampton and Pieter Bottelier, who kindly hosted
me at the School of Advanced International Studies, Johns Hopkins Univer-
sity, during my sabbatical stay in 2014–2015. This visit signifcantly deepened
my understanding of economic statecraft.
I would thank Alexander Lennon, Editor-in-Chief of the Washington
Quarterly, who published my article “From Wealth to Power: China’s New
Economic Statecraft” in 2017, which I coauthored with Ambassador James
Keith. Jim has great insight about China and US-China relations.
I would also give my thanks to European colleagues, including Sir Nicho-
las Bayne, Stephen Woolcock and Maaike Okano-Heijmans, who are leading
experts on economic diplomacy. Sir Nicholas Bayne is indeed a model who
passed on his practitioner’s experience as an economic diplomat to future gen-
erations through teaching and writing.
I would equally thank my Chinese colleagues. Together, we established the
Chinese Society of Economic Diplomacy Research. My thanks go to Wuhan Uni-
versity, where I built a research center for economic diplomacy and gave courses
on economic diplomacy and statecraft from 2012 to 2020. I equally appreciate
my intellectual exchanges with my colleagues at Fudan University in 2020–2022,
where we had a lot of interesting discussions about statecraft and geopolitics.
I would thank Routledge editors, including Yong Ling Lam, Kendrick Loo
and Payal Bharti. Their passion, enthusiasm and professionalism gave me tre-
mendous positive energy.
Finally, I give my deepest thanks to my family – my parents, my wife and
my two adorable daughters. This book is for them. They give me love and
unreserved support.
Zhang Xiaotong
Pudong, Shanghai
February 7, 2023
Tables

2.1 The Economic Statecraft of Western Hegemonies and

Catching-up Counterparts since Modern Times 30
3.1 Evolution of US Economic Statecraft from the Perspective
of the Long World Economic Wave Coupled with the
Hegemonic Cycles 45
4.1 Stages of EU Integration and Its Foreign Policy from the
Perspective of Economic Statecraft 89
6.1 China’s Economic Statecraft from Mao to Xi 121
6.2 The Competing Wealth-Power System and Strategies among
the United States, the EU, and China since 2018 123
Figures

3.1 The Evolution of the Kondratief Cycle and

Hegemonic Cycle 48
Introduction

Economic statecraft is the practical study of how a country can grow its econ-
omy and leverage its economic strengths to become a strong nation and main-
tain that status in international politics.
In recent years, economic statecraft has become a prominent subject, par-
ticularly in the United States, and major US think tanks and universities have
launched related research programs and initiatives. For example, the Atlantic
Council of the United States launched the Economic Statecraft Research Ini-
tiative on December 1, 2021.1 The Bush School of Government and Public
Service at Texas A&M University launched the Economic Statecraft Program
in late 2021.2 The Center for Naval Analysis (CNA) started the China and
Indo-Pacifc Economic Statecraft Initiative,3 and the Center for a New Ameri-
can Security (CNAS) initiated the Energy, Economics, and Security (EES)
Program (which also focuses on economic statecraft).4 The United States
attaches such high importance to the study of economic statecraft for two
main reasons: frst, to revive the US economy and maintain its global leader-
ship; and second, to use America’s economic might and advanced economic
and fnancial apparatus to serve its diplomatic and military purposes.
Since 2020, economic statecraft has attracted more attention within the
European Union (EU). For example, the European Council on Foreign Rela-
tions (ECFR) has launched a research program on the topic.5 The EU’s emerg-
ing interest in economic statecraft is driven by its growing awareness of the
disconnect between its trade, foreign, and security policies. Such awareness has
become more acute in the context of the COVID-19 pandemic, the Russia-
Ukraine confict, and intensifying geopolitical rivalries, and has motivated the
EU to strengthen the alignment and connection between its economic, for-
eign, and security policy tools.
In China, economic statecraft remains a novel concept, and systematic
study at the theoretical level has not yet begun. However, China has been rec-
ognized as an accomplished player in economic statecraft since ancient times
and is well grounded in the practice thereof. The research on economic state-
craft conducted by Chinese scholars since the start of reform and opening-up
in 1978 can be summarized as a three-stage journey of development econom-
ics, economic diplomacy, and economic statecraft.

DOI: 10.4324/9781003351382-1
This chapter has been made available under a CC-BY-NC-ND license.
2 Introduction

The frst stage in this journey was the research and practice of develop-
ment economics. Development economics has gained popularity in China in
the four decades following the start of reform and opening-up, with the main
purpose of providing a roadmap for China’s economic and social progress. A
parallel, but somewhat later, development is the study known as economic
diplomacy, which aims to examine the interactions between economic devel-
opment and diplomacy. From the 1990s (when Chinese economic diplomacy
research began to emerge) to 2013 (when the national China Society of Eco-
nomic Diplomacy was established), a large body of excellent research fnd-
ings and a number of top-notch, well-trained scholars emerged. Around 2012,
there was a new shift in Chinese economic diplomacy research. Some scholars,
seeing the paradox of “China’s rising economic power versus diminishing dip-
lomatic capital”, defned economic diplomacy as “the transformation of wealth
and power”.6 They began to study the strategies, tactics, and transformative
mechanisms of economic power. This group of scholars either consciously or
unconsciously expanded the realm of China’s economic diplomacy research.
They extended the reach of economic diplomacy from mere diplomacy to all
aspects of statecraft and governance focused on the generation of and interac-
tions between a nation’s wealth and power. They also examined the relation-
ship between the supply of wealth and the rise and fall of great powers from
the broader historical perspective. This pivot to economic statecraft extends
and complements traditional economic diplomacy research.
The study of the “transformation of wealth and power” stems from the
new domestic and international landscape China has faced since 2013–2014.
Starting in 2014, scholars in China began to express concerns about “strategic
overdraft”7 and “strategic indiscretions”.8 Indeed, there is always a contradic-
tion between wealth and power. As a great power rises, its demand for power is
strong, so wealth generation must feed into the appetite for power. But wealth
is, after all, a scarce resource, and when there is a “strategic overdraft”, the rise
of a nation will likely be stunted. The key here is to ensure the sustainable sup-
ply of wealth. Therefore, compared to the United States, Chinese economic
statecraft prioritizes sustainable economic development in the transforma-
tion of wealth to power, in contrast to the subject of US economic statecraft
research. Current research in the United States focuses on the pathway and
avenues of transforming wealth into power, largely thanks to highly developed
US legal instruments such as economic sanctions, export controls, and foreign
investment reviews.
Why is it particularly important to strengthen research on economic state-
craft now and going forward? This is necessitated by the urgent need to keep
up with developments throughout the world. Economic statecraft is not the
exclusive property of one country, nor is it a type of high-brow “luxury good”
for study by a group of scholars cloistered in ivory towers; rather, it is an impera-
tive study that countries around the world have no choice but to pursue in the
face of an increasingly congested international landscape. After 2016, great
changes accelerated: Brexit, the Trump presidency, the start of the China-US
 Introduction 3

trade war in 2018, the outbreak of the COVID-19 pandemic in 2020, and
the Russia-Ukraine war in 2022. These changes have led to increased ten-
sions between countries, rising economic nationalism and antiglobalization
sentiment, and heightened risks of “decoupling”, a “new cold war”, and even
nuclear war. The competition between major powers has increasingly spilled
over beyond the traditional security feld to trade, the high-tech sector, stand-
ards, and governance. In this context, competition among countries concern-
ing wealth and power is increasingly aggressive.
Within a country, the tension between the supply of wealth and the demand
for power is growing; a lack of wealth has led the major powers to increas-
ingly expand overseas by means of power, thus triggering geopolitical game-
play among the great powers. Following the outbreak of COVID-19 and the
Russia-Ukraine war, the world economy has gradually moved towards a major
recession, and the tension between wealth and power has largely become a
global phenomenon, exerting unprecedented pressure on every government.
The centerpiece of the competition among major powers has shifted to com-
petition on governance models. Therefore, it is essential that a new research
subject and research agenda of “economic statecraft” be proposed to study the
relationship between wealth and power in a systematic, comprehensive, and
dialectical manner and to place it in the historical perspective.
Although some scholars and think-tank experts have begun preliminary stud-
ies on economic statecraft, current research is still largely based on the specifc
circumstances of a country. Furthermore, there is a tendency among govern-
ments and think tanks to highly instrumentalize such study, with an associated
lack of academic theories and historical research on economic statecraft. This
book is intended to fll this gap by answering the following questions.
First, what is economic statecraft? “Economic statecraft” is the practi-
cal study of how a country can grow its economy and leverage its economic
strengths to become and remain a great power. At its core is the conversion
between a nation’s wealth and power. Economic statecraft seeks to align a
nation’s economic, political, and diplomatic strategies and to provide a unifed
and integrated strategic management of economic and power resources. At
present, the most familiar economic statecraft is a series of strategies, tactics,
and tools for translating wealth into power. In terms of strategy, the Marshall
Plan (implemented by the United States to bail out Europe after World War
II) and the Belt and Road Initiative (promoted by China since 2013) are both
strategy-level economic statecraft. In terms of tactics, the so-called “linkage
strategy”, which links economic issues with political, human rights, and ideo-
logical issues, is tactic-level economic statecraft. Examples include the EU’s
incorporation of human rights and labor provisions in its foreign aid policies
and free trade agreements, the Trump administration’s trade war with China,
and China’s countermeasures. In terms of tools, economic sanctions and the
anti-economic coercive mechanisms established by the United States and the
EU are all forms of economic statecraft tools. China has also gradually devel-
oped its own anti-economic coercive mechanisms.
4 Introduction

Second, what is the process of economic statecraft? The implementation

of economic statecraft has three steps: wealth generation, wealth extraction,
and wealth-power transformation. Wealth generation pertains to a nation’s
economic growth and sustainable development. Wealth extraction refers to
the collection and expenditure of government revenue, as well as the govern-
ment’s role and behavior in economic intervention. Wealth-power transfor-
mation refers to the transformation of wealth into global infuence, military
power, or coercion. The transformation of wealth into power can take a variety
of forms, with countries adopting diferent tools and methodologies at difer-
ent times in history. For example, during World War I, the UK embargoed
Germany, declared the North Sea a war zone, supervised the commerce of
neutral countries, and imposed a “commercial starvation blockade”, among
other means of transforming wealth into power.9 To a large extent, the power
wrestling among great powers is actually a contest of economic statecraft, in
which the key is innovation in strategies, tactics, tools, and methodologies of
converting wealth into power.
Third, who is the main actor in economic statecraft? The main actor of eco-
nomic statecraft is the state. However, authority within a country’s government
is often fragmented and siloed, with diferent departments sometimes working at
cross purposes – without view of the bigger picture or coordinated actions due
to functional constraints. Only national leaders, superseding coordinating bodies
and senior policy advisors, can have a holistic vision and connect the dots. The
ideal actor to implement economic statecraft is a leader who can coordinate with
the big picture in mind, frst, the head of state and government, and second, the
fnance minister, economic minister, trade minister, interior minister, etc.
Fourth, what are the main paradigms of economic statecraft? Since
modern times, four paradigms of economic statecraft have emerged in the
Western world, namely, mercantilism, liberalism, imperialism, and Marxism.
Each paradigm has its own variants. For example, under the liberalism para-
digm, liberal institutionalism developed in the United States after World War I,
and neoliberalism was proposed in the 1980s. After World War II, the new
liberal approach to economic statecraft developed in Europe, which achieved
European reconciliation through the establishment of the European Coal and
Steel Community. This approach creatively and successfully found an insti-
tutional framework for solving the problem with Germany under a bipolar
system.10 The practice of European integration is a creative liberal approach to
economic statecraft within the framework of the liberalism paradigm. China’s
economic statecraft, following the launch of its reform and opening-up pro-
cess, is largely original and difers greatly from the Soviet Union’s Stalinist-
period directive command economy. To date, it is difcult to attribute Chinese
economic statecraft defnitively to an established paradigm. It is likely that
China is creating an entirely new paradigm of economic statecraft, but for the
foreseeable future, it appears that China is merging the classical paradigms of
mercantilism, liberalism, and Marxism into a new developmentalist model of
economic statecraft.
 Introduction 5

Fifth, what is the key to the rise of a great power? Throughout history,
the rise of a great power has depended on four components. First, the rein-
vention of a wealth strategy in economic statecraft. The fundamental driv-
ing force of the paradigm shift of economic statecraft is productivity gains, the
progress of science and technology, and industrial revolution. A great power
that eventually rises to prominence must have reinvented its wealth strategy,
that is, the acquisition of new sources of productivity, a signifcant gain in
production efciency, and the ability to extract and mobilize economic power
more efectively. Mercantilism, as opposed to the medieval feudal system, was
a new way of generating and extracting wealth. Liberalism, in turn, eventually
replaced mercantilism because of the advances in science and the industrial
revolution that began to build momentum in the late 17th century. The feudal
dynasties, in general, paid little attention to the strategy of wealth renewal and
to keeping with the times, thus being unable to support the political ambi-
tions of the empire. The current strategic competition between China and the
United States, for example, is essentially a competition of wealth strategies,
and the central tenet is to achieve productivity gains and more resilient supply
chains, value chains, and innovation chains.
Let’s look at the economic statecraft of three hegemons in modern times:
Dutch hegemony in the mid-seventeenth century, British hegemony in the
mid-nineteenth century, and US hegemony in the mid-twentieth century.
According to the world-system analysis, such hegemonies encompass domi-
nance in economic, political, and ideological spheres of activity, but they are
frmly based upon the development of economic supremacy. This has involved
three stages. First, the hegemonic state gained primacy in production ef-
ciency over its rivals. Second, this enabled its merchants to build a commercial
advantage. Third, the bankers of the state were able to achieve fnancial domi-
nance of the world economy.11
The second component is the reinvention of a power strategy in eco-
nomic statecraft. A successful rising power must have adopted a new type of
power strategy, that is, innovations in the ways, strategies, and processes of
converting wealth to power, thus substantially improving the efciency and
outcomes of the conversion. For example, the British constantly sought the
least efortful way of pursuing their interests in every part of the world.12 In the
post-World War II era, the United States frst established a multilateral political
and economic order at the global level through liberal institutionalism, and
then won the Cold War through neoliberalism, promoting the Washington
Consensus on a global scale. After World War II, Europe rapidly engaged
in integration, created the European Economic Community, and mobilized
nonmilitary “civilian power” and “normative power”. In so doing, the EU
rapidly emerged as one pole of the world and achieved peace within its terri-
tory. However, the EU is not as efcient in transforming wealth into power as
individual nations due to internal attrition and constraints.
The third component is the smooth and efcient transformation
between wealth and power. Fareed Zakaria once posed a question – why
6 Introduction

did the United States, the world’s most powerful industrialized nation
since the beginning of the 1870s, hew to a relatively isolationist line, with
few exceptions, until the 1890s – a highly unusual gap between power
and interests, for it lasted some 30 years.13 Zakaria’s puzzle is essential for
economic statecraft studies. Here, the key questions are: What is the rela-
tionship between wealth and power? What are the factors that restrain the
translation from economic strength to power? Under what circumstances
can wealth be translated into power in an efcient way? Zakaria developed
an analytical framework which he called “state-centered realism”, a variation
on classical realism.14 He recognizes that state structure limits the avail-
ability of national power. In the frst 80 years throughout the 19th century,
the US presidents and their secretaries of state tried repeatedly to convert
the nation’s rising power into infuence abroad, but they presided over a
federal state structure and a tiny bureaucracy that could not get men or
money from the state governments or from society at large. America was
an unusual great power – a strong nation but a weak state. This situation
did not change until the 1880s and 1890s, which marked the beginnings
of the modern American state, emerging primarily to cope with the domes-
tic pressures generated by industrialization. The exigencies of the growing
national economy and the collapse of the congressional bid for supremacy
gave the federal government a more centralized, less political, and rational
structure.15 The United States’ unusual rise to its role as a world power
demonstrates that a strong state is the precondition of transformation from
wealth to power.
Compared to Western democracies, China has an institutional advantage in
making decisions on economic statecraft, as the top-down decision system can
prove more efcient.
In terms of decision efciency, the EU might be a worst case as it is not
one sovereign state. However, in practice, the EU has developed a series of
economic statecraft tools that can still transform wealth into power. What mat-
ters here is that the EU has developed a sophisticated internal coordination
mechanism through decades of integration, making it rightfully a great power
in terms of economic statecraft.
The fourth component is a sustainable wealth-power strategy, that is,
whether the transformation between wealth and power can reach dynamic
equilibrium. When the equilibrium is lost, the demand of wealth will outstrip
supply, leading to “strategic overdraft” or “strategic adventurism”, similar to
the Japanese attack on Pearl Harbor. This in turn will lead to a failed attempt
at a nation’s rise, and the decline of the great power. Such phenomena have
occurred throughout history among Spain, Germany, Japan, and the Soviet
Union, while the UK and the United States have handled these situations com-
paratively well. Despite short-term overdrafts, the UK and the United States
have been able to reach a state of equilibrium in the medium and long term,
thus maintaining their supremacy. The supremacy of the British Empire lasted
160 years, starting in the late 18th century and ending after World War II.
 Introduction 7

US supremacy has already been more than 100 years in duration, since its
ascension in the late 19th century. During World War II, the United States
spent more than 40% of its GDP on defense. Instead of a strategic overdraft,
the United States overcame the Great Depression of the 1930s through the
“Arsenal of Democracy”, rising to become the new world superpower. Since
1946, US defense spending (as a share of GDP) has rapidly fallen back to
10%, and a great deal of military technology and capacity has been repur-
posed for civilian use. In doing so, the United States laid a solid economic
foundation and established its capacity for innovation, in contrast with the
Soviet Union.
From the perspective of economic statecraft, the main challenge with the
United States is not the decline of its supremacy, which is only a superfcial
phenomenon. The underlying problem lies with the wealth-power structure.
For many years, the United States has relied on power to supply wealth, but
this constitutes a wealth-power paradox, that is, as power fuels wealth, wealth
expands further, demanding more power, resulting in more military expan-
sion and aggression, which requires more wealth. The cycle repeats itself,
resulting in a fragile equilibrium of US supremacy, which, once broken, will
cause the supremacy to wane. This suggests that the key to economic state-
craft is moderation and the sustainable strategic management of wealth and
power.
Whether a rising power can become a world-class power depends on
whether it can develop a novel, advanced, and spirit-of-the-times form of eco-
nomic statecraft (including both wealth and power strategies) and whether or
not this new form of economic statecraft can achieve sustainable and dynamic
equilibrium between wealth and power for decades, or even centuries.
This book consists of six chapters.
Chapter 1 introduces the concepts and a new theory of economic statecraft.
Chapter 2 compares the historical practices of economic statecraft by great
powers, from modern times to World War II. The exploration expands from
the city-states of Italy to the Netherlands, Britain, Germany, Russia (later the
Soviet Union), Japan, and the United States. It also summarizes the four major
paradigms of economic statecraft since modern times, namely, mercantilism,
liberalism, imperialism, and Marxism.
Chapters 3, 4, and 5 deal with case studies on economic statecraft in the
United States, the EU, and China, respectively. Chapter 3 reviews US eco-
nomic statecraft since its founding. Chapter 4 provides a historical overview
on the research and practice of the EU’s economic statecraft. Chapter 5 exam-
ines the economic statecraft of the People’s Republic of China under President
Xi Jinping.
Chapter 6 reviews the competition in economic statecraft among the
United States, the EU, and China in recent years, attempting to show that
their strategic competitive relationships stem from the deterioration of the
spirit of the times, and the competing wealth-power systems and wealth-power
strategies of the United States, the EU, and China.
8 Introduction

Notes
1 Economic Statecraft Initiative, Atlantic Council, see www.atlanticcouncil.org/
programs/geoeconomics-center/economic-statecraft-initiative/
2 Economic Statecraft Program, see https://bush.tamu.edu/economic-statecraft/
what-is-economic-statecraft/
3 Centre for Naval Analyses. The China and Indo-pacifc Economic Statecraft
Initiative. See www.cna.org/centers-and-divisions/cna/cip/china-studies/cip-
economic-statecraft-initiative
4 Centre for a New American Security. Economic Statecraft. See www.cnas.org/
research/energy-economics-and-security/economic-statecraft
5 European Council on Foreign Relations. Economic Coercion. See https://ecfr.eu/
europeanpower/economic-coercion/
6 Zhang, X., et al. (2013). On the Use of China’s Economic Strength. Northeast Asia
Forum, 22(1), pp. 91–98.; Zhang, X. (2013). Theoretical Construction of Chi-
na’s Economic Diplomacy: A Preliminary Attempt. Foreign Afairs Review, 30(6),
p. 49; Zhao, K. (2014). What is the Strategic Goal of the Great Power Economic
Diplomacy? – US Economic Diplomacy and the Collapse of the British Empire.
Chinese Journal of European Studies, 32(4), pp. 63–75.; Zhang, X. (2014). China’s
Great Power Economic Diplomacy with Its Own Characteristics. Chinese Journal
of European Studies, 32(4), pp. 76–87.
7 Shi, Y. (2015). Traditional Chinese Experience and Contemporary Chinese Prac-
tice: Strategic Adjustment, Strategic Overdraft and Great Rejuvenation. Foreign
Afairs Review, 32(6), pp. 57–68.; Liu, F. (2017). Strategic Overdraft: A Concep-
tual Analysis. Journal of Strategy and Decision Making, 8(3), pp. 25–30.
8 Yan, X. (2017). China Should Clearly Prioritize Its National Interests and Guard
Against Strategic Indiscretions. World Peace Forum, 2017.
9 Helferich, K. (2019). Economic War and War Economy (G. Wang, Trans.) (in
Chinese). Beijing: Taihai Publishing House.
10 Monnet, J. (1989). Memoirs (H. Sun, Trans.) (in Chinese). Hongkong: World
Culture Books, pp. 294–295.
11 Flint, C., & Taylor, P. (2018). Political Geography: World-Economy, Nation-State
and Locality (7th edition). New York: Routledge, p. 53.
12 Darwin, J. (2012). Unfnished Empire: The Global Expansion of Britain. New York:
Bloomsbury Press, pp. 10–11.
13 Zakaria, F. (1998). From Wealth to Power: The Unusual Origins of America’s World
Role. Princeton, NJ: Princeton University Press, p. 4.
14 Zakaria, F. (1998). From Wealth to Power: The Unusual Origins of America’s World Role.
Princeton, NJ: Princeton University Press, p. 8.
15 Zakaria, F. (1998). From Wealth to Power: The Unusual Origins of America’s World
Role. Princeton, NJ: Princeton University Press, p. 10.
1 Economic Statecraft – Concepts
and Theories

1.1 Economic Statecraft as a Concept

1.1.1 The Origin of Economic Statecraft as a Concept

Economic statecraft has a long intellectual history. Based on a search on

Google Scholar, the frst appearance of economic statecraft was in Alfred
Marshall’s Principles of Economics. In the book, Marshall commented,
“Adam Smith’s criticisms on the Mercantilists of his own age may seem
harsh. But it is to be remembered that he knew the weaknesses and the
corruption of those who were posing as masters of economic statecraft”.1
Here, economic statecraft refers to mercantilism, and the so-called mas-
ters of economic statecraft were mercantilists. It is Adam Smith who frst
invented the concept of “Mercantilism” in his famous book, The Wealth
of Nations.2 He posits that, for mercantilists, “the two great engines for
enriching the country were restraints upon importation, and encourage-
ments to exportation.3
In 1918, William Stephen Sanders, a British politician and scholar, elabo-
rated upon German economic statecraft. Sanders stated,

An economic statecraft was invented, having for its object the building
up of German trade, commerce, and industry in the way best suited to
promote the power and prestige of the German nation as a predomi-
nantly militarist Power with world-wide ambitions.4

He further explained,

To do this successfully it was necessary not only to encourage, control,

and direct the energies of the capitalist and give him a national aim,
but also to grant some measure of protection to the workman. This
was also imperative for military reasons. As the army remained the frst
care of the State, it was essential that its potential cannon-fodder should
not be allowed to sufer from the efects of unrestricted individualistic
capitalism.5

DOI: 10.4324/9781003351382-2
This chapter has been made available under a CC-BY-NC-ND license.
10 Economic Statecraft – Concepts and Theories

Sanders emphasized, “in Germany the State declined to play the secondary
role of ‘night-watchman.’ It assumed a leading part and became the organiser
and controller in the economic as well as in the political sphere”.6
John A. Hobson applied the concept of economic statecraft in his 1922 arti-
cle, criticizing the British government by saying “Economic statecraft would
have avoided at least three fatal blunders. The frst is the economic-political
dismemberment of Austro-Hungary which left her a rotting carcass in the
European system. Second comes the boycott of Russia, accompanied for two
years by a squandering of vast sums of money and men by the Western Pow-
ers in the work of further injuring the economic resources of that ill-governed
and impoverished country. Third comes the fastening upon Germany of an
immeasurable load of reparations, instead of a fxed, practicable sum.7
James T. Shotwell, president emeritus of the Carnegie Endowment for
International Peace, analyzed Wilson’s leadership, by saying

In the preceding sketch of Wilson’s tarif policy we have seen the conti-
nuity of thought between the domestic issues and world afairs. Yet was
this true of the rest of Wilson’s economic statecraft? Few fgures in world
history have been more mercilessly attacked than the chief architect of
the Treaty of Versailles, and although the controversies of the 1920’s
have cooled with the passing years, there is still wide divergence of opin-
ion on the methods as well as the results of the Paris Peace Conference
of 1919.8

So, for Shotwell, Wilson’s economic statecraft included tarif policy and the US
demand for German reparation in the Treaty of Versailles.
In 1961, Kenneth K. Kurihari and Kenneth K. Kurihara, the latter a
post-Keynesian economist of Japanese origin, discussed “mixed economic
statecraft”, which was most closely associated with the name of Keynes. For
Kurihara, the concept of a mixed economy (which he referred to as “mixed
economic statecraft”) represents an ingenious combination of the advantages
of capitalism (laissez-faire) and socialism without their disadvantages.9 Mixed
economic statecraft is something between a laissez-faire economy and an
authoritative planned economy.
In 1960, Sir Douglas Copland concluded his paper presented to the Indus-
trial Development Conference in Wellington with the warning “the assump-
tion upon which economic statecraft in the modern world must be based is
growth. Those who fear it, or entertain doubts about the risks involved will be
bypassed while the rest of the world goes forward”.10
By going through the literature of economic statecraft over the past
100 years, we can conclude that economic statecraft as a concept has been
employed since the end of the 19th century. Economic statecraft could refer
to at least four things: frst, mercantilism, as indicated in Alfred Marshall’s
book Principles of Economics; second, a mixed economy in the Keynesian style;
third, a state’s strategy to increase power and prestige (as indicated in William
 Economic Statecraft – Concepts and Theories 11

Stephen Sanders’s German economic statecraft); and fourth, a statecraft using

economic means to achieve diplomatic and strategic purposes (as described by
John Hobson).
In 1985, a landmark year for the study of economic statecraft, American
political scientist David Baldwin published his seminal book, Economic State-
craft. Prior to this, the meaning and connotation of economic statecraft were
ambiguous and fuid. Baldwin was the frst scholar in the Western world to
clearly defne and theorize economic statecraft. Almost single-handedly, he
constructed a theoretical framework around the concept. In Encyclopedia
Britannica’s entry on the topic, David Baldwin defned the term as “the use
of economic means to pursue foreign policy goals”.11 In his book Economic
Statecraft, he assigned a more academic defnition to the concept, referring to,
“infuence attempts relying on resources which have a reasonable semblance of
market price in terms of money”.12
By the time Economic Statecraft was published in 1985, Baldwin had frst-
hand experience and ample time to consider a series of intermingled political
and economic events, such as the oil embargo imposed by the Arab world on
the West in the 1970s and the food embargo imposed on the Soviet Union
by the United States (in protest of the Soviet invasion of Afghanistan). In
these events, economic resources were used as tools and weapons in inter-
national political struggles. In Baldwin’s defnition of “economic statecraft”,
the economy was regarded as a means and instrument of foreign policy, and
the practice of economic statecraft was a one-way transformation of economic
resources into diplomatic infuence. Since then, US policy makers and the
academic community have gradually embraced economic statecraft, rather
than economic diplomacy, as an overall concept and an ofcial policy term.
The defning moment of this was when Hillary Clinton, then secretary of
state, gave a keynote speech on economic statecraft in 2011 and placed eco-
nomic statecraft at the heart of America’s foreign policy agenda. In her speech,
Clinton expanded the policy tools and objectives of “economic statecraft”.
She explained that economic statecraft involved two components: (1) how
one harnesses the forces and uses the tools of global economics to strengthen
diplomacy and international presence, and (2) how such diplomacy and pres-
ence can work to strengthen a domestic economy.13 Unlike Baldwin, Clinton
understood economic statecraft as a two-way transformation between eco-
nomic and diplomatic infuence, a “two-way street” of wealth and power.

1.1.2 “Economic Statecraft” Versus “Economic Diplomacy”

In contrast to the US preference for economic statecraft, China, the EU, and
Japan are accustomed to using the term “economic diplomacy” to charac-
terize the interrelationship between economics and diplomacy. What are the
reasons for this diference? Some American diplomats argue that “economic
statecraft” and “economic diplomacy” can be used interchangeably.14 In fact,
long before Baldwin’s book was published, the United States used the term
12 Economic Statecraft – Concepts and Theories

“economic diplomacy” rather than “economic statecraft”.15 Even after the

publication of Baldwin’s book, the United States continued to use the term
“economic diplomacy” in an ofcial capacity.16 However, after former Secre-
tary of State Hillary Clinton’s 2011 policy announcement on “economic state-
craft”, US ofcials and think tanks began using the term “economic statecraft”
with greater frequency, and made less frequent use of the term “economic
diplomacy”.17 According to Maaike Okano-Heijmans, a senior research fellow
at the Netherlands Institute for International Relations (Clingendael), there
are two main reasons why “economic statecraft” was favored by Secretary
Clinton and a signifcant number of US scholars and ofcials: (1) The United
States was paying more attention to the economic factors in diplomacy. Sec-
retary Clinton elevated economic statecraft to one of the pillars of US foreign
policy, proposing that, “Increasingly, economic progress depends on strong
diplomatic ties, and diplomatic progress depends on strong economic ties”.18
(2) Those who use the term economic statecraft tend to accentuate the ele-
ment of power play, which is consciously or unconsciously deemphasized in
scholastic and practical references to economic diplomacy.19
China and Europe’s preference for the term “economic diplomacy” vis-à-
vis the United States refects diferent perceptions, understandings, and appli-
cations of the concept of power among the three. In contrast, the United
States places the greatest emphasis on power, and the US strategic community
is chiefy concerned with the transformation between economic resources and
power in “economic statecraft”, which is increasingly becoming an essential
building block of US grand strategy. China and European countries (and insti-
tutions), however, emphasize the process of diplomatic negotiation and dis-
favor the use of power. Among the best-known European (including British)
fgures in the study of economic diplomacy are Sir Nicholas Bayne, former
economic director at the British Foreign and Commonwealth Ofce, and Dr.
Stephen Woolcock, of the London School of Economics and Political Science
(LSE). With the LSE as their main arena, Sir Nicholas Bayne and Dr. Stephen
Woolcock have been ofering courses in economic diplomacy since 1999. They
defne economic diplomacy as “the methods and process of decision-making
and negotiation”, emphasizing that economic diplomacy is about, “how they
make decisions domestically, how they negotiate with each other internation-
ally, and how these two processes interact”.20 It is thus clear that Sir Nicholas
Bayne and Dr. Stephen Woolcock, in their study of economic diplomacy, focus
primarily on the process and institution of economic diplomacy and less so on
the deployment and transformation of power embedded in the negotiation
process of economic diplomacy. Clearly, this defnition of economic diplomacy
is heavily infuenced by Robert Putnam’s two-level game theory. In fact, Sir
Nicholas Bayne and Robert Putnam are good friends, and their friendship
has inspired them both and has greatly benefted Putnam’s advancement and
refnement of his two-level game theory.21 The two men also worked together
on a book on the Group of 7 (G7) Summit, a topic they examined using two-
level game theory.22
 Economic Statecraft – Concepts and Theories 13

However, economic diplomacy is a niche feld of study in the EU, and

its development and policy practice have not achieved substantial attention.
For example, from 2016 to 2017, the EU tried to launch an EU economic
diplomacy strategy, but ultimately, the strategy was aborted for various rea-
sons. On February 24, 2016, the European Political Strategy Centre (EPSC),
the European Commission’s in-house think tank, organized a conference with
the theme of “Economic Diplomacy and Foreign Policy: Friends or Foes?”
The conference featured a keynote speech by Jyrki Katainen, the then-Finnish
vice-president of the European Commission with a trade policy portfolio, and
gathered elite fgures from EU politics, business, and academia to discuss how
political and economic goals and tools can be combined and how trade-ofs
between political and economic interests should be made.23 The conference
can be seen as a precursor to the EU’s advancement of economic diplomacy
from 2016 onwards. In order to advance the economic diplomacy strategy
at the EU level, the European External Action Service (EEAS) also created a
special ambassadorial-level economic diplomacy advisor role for managing the
formulation of an economic diplomacy strategy paper. However, the strategy
paper (called “Communication” in the EU jargon) was not released for two
reasons: (1) There was disagreement among EU member states concerning
the defnition of economic diplomacy. Some considered economic diplomacy
as trade and investment promotion, which falls under the jurisdiction of mem-
ber states. Other member states and the EEAS (European External Action
Service) believed that the EU needed a unifed and coordinated economic
diplomacy approach to better employ its economic strengths and means to
achieve the EU’s foreign policy objectives. Therefore, the EU should have
jurisdiction over economic diplomacy matters. (2) Within the European Com-
munity, there were diferent views as to how to align economic and strategic
interests. The Directorate for Trade of the European Commission was less
inclined to weaponize trade policy instruments, whereas the EEAS (in charge
of foreign policy) favored using trade, monetary, and fnancial instruments to
achieve strategic foreign aims. As a result, no EU-level economic diplomacy
strategy paper was released.

1.1.3 Analysis and Critique of the Concept of Economic Statecraft

To accurately discern the concept of “economic statecraft”, we must frst

understand what “statecraft” is. The Cambridge Dictionary defnes state-
craft as “the skill of governing a country”.24 Other dictionaries defne it
as “the art of government and diplomacy”, “the art of conducting pub-
lic afairs”, or “statesmanship”.25 The Merriam-Webster Dictionary’s entry
reads, “the art of conducting state afairs”.26 In Margaret Thatcher’s State-
craft: Strategies for a Changing World, “statecraft and statesmanship are,
according to the dictionary defnition, interchangeable. But the former has
a more practical ring to it, emphasising activity rather than rhetoric, strategy
not just diplomacy”.27
14 Economic Statecraft – Concepts and Theories

Regrettably, there is a lack of scholarly attention to techniques of statecraft

among domestic policy analysts in contemporary American political science.
In other words, scholars of domestic politics discontinued using the term
“statecraft” to discuss domestic afairs in the United States.28 Among students
of foreign policy and international politics, the term “statecraft” is sometimes
used to encompass the whole foreign-policy-making process, but more often it
refers to the selection of means for the pursuit of foreign policy goals.29
Second, we must understand the modifer “economic” in the term “eco-
nomic statecraft”. In the West, the word “economics” comes from statistics,
and the word “statistics” begins with “stat”, which means the “state”. There-
fore, “economic statecraft” refers to the study of how a state expands its wealth
and administers good governance. In a way, the economics itself is a matter of
governance, the objective of which is to improve the strength of the country at
the individual and state levels. This is consistent with the meaning of the word
“economics” in Chinese history. In the historical Chinese context, “economics”
refers to the practical study of how to run the state and improve people’s welfare.
In summary, the discourse from US scholars and policymakers on “eco-
nomic statecraft” involves three characteristics: (1) It emphasizes the state.
The main actor in the implementation of economic statecraft is the central
or federal government, which includes the president, the secretary of state,
the treasury secretary, the secretary of commerce, trade representatives, and
other senior cabinet ofcials. (2) It concerns the use of economic tools to
serve foreign policy goals, emphasizing its instrumentality. (3) it underscores
the role of authority. However, there are three problems with the current
research and application of “economic statecraft”. The frst problem is that it is
too instrumentalized, which limits economic statecraft to the art of deploying
tools of economic diplomacy, yet it often fails to elevate economic statecraft
to the strategic level. This is particularly evident in Baldwin’s book Economic
Statecraft. In fact, Baldwin attaches the utmost importance to the study of the
techniques of “economic diplomacy” rather than strategy. Second, Baldwin
largely ignored the domestic dimensions of economic statecraft, a fact that he
acknowledged and explained in his book.30 Third, “economic statecraft” in
the US context largely overlooks economic development and the growth of
wealth, being understood primarily within the foreign policy framework.

1.1.4 Reconstruction of the Concept of Economic Statecraft

Following the global fnancial crisis of 2008 and at the confuence of the
COVID-19 pandemic and the Russia-Ukraine war, geoeconomic competition
has become increasingly ferce. At a time when China has surpassed Japan and
the EU as the world’s second largest economy and the largest trading state
and recipient of foreign direct investment, the pertinent question China faces
is how to rise peacefully and avoid the failure to rise. The United States, on
the other hand, urgently needs to answer the question of how to maintain
its economic competitiveness and international leadership and perpetuate its
 Economic Statecraft – Concepts and Theories 15

supremacy for as long as possible. Therefore, the theoretical proposition of

“economic statecraft” in this book aims to examine the dialectical relation-
ships between how a nation grows its wealth, converts wealth into power,
and manages wealth and power during the rise and fall of great powers. Its
essence is the economic dimension of grand strategy and the external eco-
nomic dimension of governance. Compared with the previous defnition of
economic statecraft – which is relatively narrow, instrumentalized, and technical –
this book intends to elevate and expand the meaning and connotation of
economic statecraft. The author contends that four key ideas in the defnition
of economic statecraft require further clarifcation so that the defnition can
better adapt to the latest developments in the global political and economic
order and the need for great-power play. These four key ideas are “wealth”,
“power”, “transformation”, and “strategic management”.
“Wealth” primarily means economic resources. In his defnition of economic
statecraft, Baldwin believes that infuence is mainly derived from resources. He
notes that resources can be measured in monetary terms and have a market
price. In my view, resources have fve characteristics: (1) they can be quantifed;
(2) they can be transformed; (3) they can be exchanged; (4) they represent a
possibility; and (5) according to the Merriam-Webster Dictionary, a resource
is defned as an ability to meet and handle a situation. In addition to being
regarded as an economic resource, wealth also encompasses other factors of
production, including land, labor, capital, technology, managerial expertise,
and institutions. Taking institutions as an example, institutional innovation
can create new wealth. The combination of institutional and traditional factors
of production can increase the productivity of wealth generation. Institutional
change has a great impact on a nation’s wealth. China’s experience is “crossing
the river by feeling the stones” – a kind of institutional innovation – which has
had a major efect on China’s economic growth and wealth production.
According to the classical defnition from Max Weber, “Power” (Macht) is
the probability that one actor within a social relationship will be in a position
to carry out his own will despite resistance, regardless of the basis on which
this probability rests.31 According to the Merriam-Webster Dictionary, power
is the “capability of acting or of producing an efect; possession of control,
authority, or infuence over others”.32 Therefore, power refers to a causal rela-
tionship that Party A possesses the ability to force Party B to do something
that Party B is originally unwilling to do. In addition to relational power,
power can also mean power resources, that is, material power, such as military
and economic power. John Mearsheimer distinguishes between potential and
actual power.33 A state’s potential power is based on the size of its population
and the level of its wealth. These two assets are the main building blocks of
military power. Wealthy rivals with large populations can usually build formi-
dable military forces. A state’s actual power is embedded mainly in its army
and the air and naval forces that directly support it. Armies are the central
ingredient of military power, because they are the principal instrument for
conquering and controlling territory – the paramount political objective in a
16 Economic Statecraft – Concepts and Theories

world of territorial states. In short, the key component of military might, even
in the nuclear age, is land power.
“Transformation” refers to the conversion of wealth into power. As previously
defned, power consists of two dimensions: relational power and material power,
mainly military power. Baldwin proposed that “power can be defned broadly to
include all relationships in which someone gets someone else to do something
that he or she would not otherwise do”.34 In other words, Baldwin places empha-
sis on relational power. This book, however, adopts an eclectic approach, arguing
that wealth can be transformed into a result that changes the behavior of the
other side, as well as into material power, especially military power.
In his book The Rise and Fall of Great Powers, Paul Kennedy discusses, in
detail, the “transformation of wealth into power” as the central tenet of eco-
nomic statecraft. Kennedy argues that economic prosperity does not always
and immediately translate into military efectiveness, for that depends upon
many other factors, from geography and national morale to generalship and
tactical competence. Nevertheless, the fact remains that all of the major shifts
in the world’s military-power balances have followed alterations in the produc-
tive balances; and further, that the rising and falling of the various empires and
states in the international system has been confrmed by the outcomes of the
major great power wars, where victory has always gone to the side with the
greatest material resources.35 For example, the American Civil War ultimately
turned into a war of attrition. Confederate leader Jeferson Davis confessed
that the “magnitude” of the war had far exceeded his expectations.

The enemy have displayed more power and energy and resources than
I had attributed to them. Their fnances have held out far better than I
imagined would be the case . . . a war of the dimensions that this one has
assumed, of proportions so gigantic, can be very long protracted. The
combatants must be soon exhausted.36

In his book The Tragedy of Great Power Politics, Mearsheimer compared the
wartime economic capacity of Germany and the Soviet Union and found that
the Soviet Union’s wartime economic capacity far exceeded that of Germany’s,
even at the beginning of the war when the Soviet Union sufered military
setbacks and Germany was on a rampage against the Soviet Union. Even at
that time, the Soviet Union was producing more tanks and artillery than Ger-
many.37 It was this economic transformation capability that established the
Soviet Union’s military superiority over Germany.
In his book Freedom’s Forge, Herman emphasizes that the mass produc-
tion capability was the key for the United States to win World War II.38 Total
economic production in the United States had doubled; wages rose by 70%.
American workers were twice as productive as their German counterparts, and
four times more productive than the Japanese. What made America productive
wasn’t the war or government dictates or a supreme sense of national urgency.
It was the miracle of mass production, which, once turned loose, could
overcome any obstacle or difculty. In those fve years, America’s shipyards
 Economic Statecraft – Concepts and Theories 17

launched 141 aircraft carriers; eight battleships; 807 cruisers, destroyers, and
destroyer escorts; 203 submarines; and, thanks to Henry Kaiser and his col-
leagues, almost 52 million tons of merchant shipping. Its factories turned out
88,410 tanks and self-propelled guns, 257,000 artillery pieces, 2.4 million
trucks, 2.6 million machine guns – and 41 billion rounds of ammunition.
The transformation of wealth to power should avoid strategic overdraft,
and it requires strategic management of the wealth-power transformation
process. At the heart of “strategic management” is the idea of being holistic
and comprehensive and keeping expenditures within the limits of revenue.
Strategic management in this context refers to setting clear goals; acquiring
resources and the means to achieve such goals; and maintaining a balance
among results, approaches, and means. Maintaining this balance requires not
only fnding ways to achieve goals, but also constantly adjusting the goals to
discover the most realistic path to success via feasible means.39 Implementing
strategic management does not mean that strategic overdraft is never permit-
ted. At certain moments in a nation’s history, such as national independence,
unifcation, or a major war, a nation can certainly overspend strategically. The
top four periods in US history for defense spending as a share of GDP were
the Civil War at 11.73% in 1865, the Korean War at 17.4% in 1953, the end
of World War I at 21.79% in 1919, and World War II at 41.52% in 1945.40
However, after overdraft, new resources must be drawn on in time for the
nation to recover. Professor Shi Yinhong of Renmin University of China advo-
cates “strategic economy”41 based on strategic prudence, and Professor Zhang
Wenmu of the Center for Strategic Studies at Beijing University of Aeronaut-
ics and Astronautics proposes “strategic health preservation”,42 both of which
emphasize that a nation must not strategically overspend and must achieve a
balance between wealth and power.
In summary, I provide a new defnition for economic statecraft that dif-
fers from Baldwin’s. I defne “economic statecraft” as the skill, art, strategy,
and process of wealth generation, extraction, mobilization, and the two-way
transformation of wealth and power by a state’s central government for the
purpose of acquiring and maintaining great power status. Its implementation
is essentially a nation’s strategic management of wealth and power, with a view
to a dynamic equilibrium between the two.
There are three types of economic statecraft: (1) the pursuit of power
through wealth, (2) the pursuit of wealth through power, and (3) wealth and
power both as ends or means.

1.2 The Theoretical Construct of Economic Statecraft

1.2.1 Theoretical Assumptions

When a country conducts economic statecraft, there are three implicit

premises: (1) economic resources are relatively sufcient or even unlimited;
(2) economic power is fungible and transformable; and (3) the relationship
between wealth and power is harmonious, or at least nonconficting and
18 Economic Statecraft – Concepts and Theories

noncontradictory. However, these three premises are not always present,

and thus, three limiting conditions emerge for the implementation of a
country’s economic statecraft: (1) economic resources are not sufcient,
but rather, are scarce; (2) economic power may not always be transform-
able; and (3) wealth and power are in a relationship of unity of opposites.
The neglect or underestimation of these three implicit premises is often key
to the failure of economic statecraft. Economic statecraft should examine
these three implicit premises that previous studies have overlooked, that is,
how to achieve economic growth, extract economic resources, and achieve
the two-way transformation of wealth and power.
The frst and second limiting conditions for the use of economic statecraft –
namely, that economic resources are scarce and that wealth does not always
translate into power – imply that the relationship between wealth and power
is in fact one of contradiction that does not always match. There exists the
contradiction between the scarcity of wealth and the state’s infnite quest for
power. “Scarcity” refers to a state in which goods are always limited relative to
demand, whereas economics is the study of how societies use scarce resources
to produce valuable goods and services and distribute them among diferent
individuals.43 For a nation, wealth is also scarce, so there is a need for “state
economics”, that is, “economic statecraft”, the subject of this book; it aims to
bridge economics, diplomacy, and management studies. The so-called “state
economics” or “economic statecraft” is required mainly because of the under-
appreciated role of the state in classical economics. Because international poli-
tics is largely in a state of anarchy, there is always competition among states,
and as large states are after ambition, glory, and centrality and small states after
survival, states are inevitably hungry for power. Classical economics is less con-
cerned with the role of the state; rather, its research focuses on the individual
and market levels. From the perspective of Western economics, since Keynes,
economics and political science have parted ways. The era of classical political
economy is over. Instead, the study of economic statecraft takes an opposite
approach. It aims to establish links between economic policy and foreign and
security policy and to drive the study of international political economy at the
practitioner’s level.
The third limiting condition in the implementation of economic statecraft,
that is, the dialectical relationship between a nation’s wealth and power implies
that wealth and power are both contradictory and complementary – they shape
and construct one another. As Professor Jacob Viner once said,

wealth and power are each proper ultimate ends of national policy; there
is long-run harmony between these ends, although in particular circum-
stances it may be necessary for a time to make economic sacrifces in the
interest of military security and therefore also of long-run prosperity.44

In other words, this contradictory relationship between wealth and power is

the object of study in economic statecraft. My theoretical assumption is that
 Economic Statecraft – Concepts and Theories 19

there is a contradiction between the relative scarcity of state wealth and the
state’s unlimited pursuit of power. Likewise, there is a contradiction between
the scarcity of state power and the state’s unlimited pursuit of wealth. In a
political state, wealth is on the supply side and power on the demand side. In
an economic (commercial) state, wealth is on the demand side and power on
the supply side. The inherent equilibrium between the two is the key to the
rise and fall of great powers. For many of the former great powers, their mar-
ket players had an immense or even unlimited demand for wealth, which drove
these powerful states to pursue even greater power. For example, the evolution
of the British Empire from nonmilitary imperialism (the Second Empire or
“informal empire”) to military imperialism was largely the result of a drive by
industry and commerce.

1.2.2 The Main Actor of Economic Statecraft

The main actor of economic statecraft is the state. However, a government

is often fragmented and siloed, lacking global awareness due to limitation of
insights or functional constraints. Only national leaders, superseding coordi-
nating bodies, and senior policy advisors can have a holistic view and connect
the dots. The ideal actor to implement economic statecraft is a leader who can
coordinate with the big picture in mind – frst, the head of state and govern-
ment, and second, the fnance minister, economic minister, trade minister, or
interior minister, etc. King Louis XIV of France was adept at economic state-
craft, and he relied heavily on capable advisors, such as Comptroller General
of Finances Jean-Baptiste Colbert. Helmut Schmidt, who served as minister of
economics, minister of defense, and eventually West German chancellor, made
skillful use of economic statecraft. The actors of economic statecraft should
be strategic thinkers with holistic control. As the Chinese saying goes, “those
who do not plan with a holistic view are not ft to plan for a region”. When
implementing economic statecraft, the main actor must balance breaking
down entrenched domestic interests and conducting external negotiations.
In addition to the state, we must recognize that the legislature, social classes,
large corporations, the media, and other types of interest groups are also play-
ers in economic statecraft – they participate in and seek to infuence a nation’s
economic statecraft in their own ways.

1.2.3 Steps and Methods of Implementing Economic Statecraft

The process of economic statecraft consists of wealth production, wealth

extraction, and wealth-power transformation.

1.2.3.1 Wealth Production

Wealth production concerns how a nation pursues economic growth in

a sustainable manner. Colonization, war, and plunder were the primary
20 Economic Statecraft – Concepts and Theories

means of wealth production in ancient Greece, but Athens and Sparta had
very diferent ways of acquiring wealth. Athens was a maritime empire that
relied on overseas colonization. Sparta, on the other hand, was primarily
an agrarian civilization. In ancient Rome, the main motivation for Roman
armies to go to war was purely economic gain – to plunder spoils and slaves
that would support a slaveholding empire. Thus, the expansion and rise of
Rome was primarily through military might. As it expanded, it constantly
exported troops and plundered wealth.45 Montesquieu said, “Rome grew
great because she had successive wars” (French: Rome s’était agrandie, parce
qu’elle n’avait eu que des guerres successives).46 There are many explanations
for the decline of the Roman Empire. The ancient Roman historian Appi-
anus (c. 95–c. 165) stated that a very important reason for the fall of the
ancient Roman Empire was slavery and the unsustainable economy of large
plantations. This economic approach forced the ancient Roman Empire
to expand constantly to acquire new territories and slaves to support its
slaveholding empire, eventually leading to militarism and extravagance. As
hedonism bred internally, the late Roman Empire was forced to rely on large
troops of Germanic mercenaries, which eventually led to the empire’s demise
(at the hands of the Germanic mercenary chiefs). In feudal societies, one
of the Pope’s wealth-making methods was the sale of the indulgence letter,
which eventually led to the Reformation, with Martin Luther’s Ninety-Five
Theses as the precursor.
For the early mercantilists, wealth was gold and silver. All economic activi-
ties of the state served the sole purpose of acquiring more gold and silver.
Mercantilism held that there were two sources of wealth: (1) the mining of
gold and silver, and (2) the development of external trade. In contrast, Adam
Smith, a leading fgure in classical liberalism, argued that the so-called national
wealth is the sum of commodities produced by a nation, and that the source of
wealth is labor in various sectors such as agriculture, industry, and commerce.
There are two primary conditions or means to grow wealth: to increase labor
productivity, which requires improving the division of labor, and to increase
the number of workers, which requires further capital accumulation. Adam
Smith opposed mercantilism, believing it to be the most detrimental to the
organic growth of wealth.
Nineteenth-century German economist Friedrich List criticized Adam
Smith and proposed the “theory of productive power” based on the idea that
wealth is generated for causes quite diferent from wealth itself. List believed
that a person may possess wealth, i.e. exchangeable value; if, however, he does
not possess the power of producing objects of more value than he consumes,
he will become poorer. This applies to individuals, but is still more the case
with entire nations (who cannot live out of mere rentals) than with private
individuals. Germany has been devastated in every century by pestilence, by
famine, or by civil or foreign wars; she has, nevertheless, always retained a
great portion of her powers of production, and has thus quickly reattained
some degree of prosperity; while rich and mighty but despot- and priest-ridden
 Economic Statecraft – Concepts and Theories 21

Spain, notwithstanding her comparative enjoyment of internal peace, has sunk

deeper into poverty and misery. The same sun still shines on the Spaniards,
they still possess the same area of territory, their mines are still as rich, they
are still the same people as before the discovery of America, and before the
introduction of the Inquisition; but that nation has gradually lost her powers
of production, and has therefore become poor and miserable.47 List concluded
that “the power of producing wealth is therefore infnitely more important
than wealth itself”.
List was also a supporter of protective duties. He argues,

it is true that protective duties at frst increase the price of manufactured

goods; but it is just as true, and moreover acknowledged by the prevail-
ing economical school, that in the course of time, by the nation being
enabled to build up a completely developed manufacturing power of its
own, those goods are produced more cheaply at home than the price at
which they can be imported from foreign parts.48

List’s doctrine had a great infuence on Germany and the United States during
their rises and catch-up phases.
In the history of economic doctrine, economic statecraft has received
attention from various economic schools of thought, with varying degrees
of importance given to the role of government. The frst was the free market
school, starting with Adam Smith and continuing through Milton Friedman
in the 1960s. The second was the Keynesian school, with its emphasis on gov-
ernment regulation. The third was the school of supply-side economics, which
was also derived from Adam Smith; it advocated small government and mar-
ket-based allocation. Unlike the Keynesian belief of government regulating
the market, the school of supply-side economics believed that supply begets
the market and demand. The main and most successful application of supply-
side economics in the context of economic statecraft was in the early 1980s,
when Europe, represented by Thatcher, and the United States, represented
by Reagan, solved the problem of “stagfation” through supply-side economic
reform. Europe’s economic boom in the 1990s and the United States’ in the
late 1980s (from Bush Sr. through the Clinton years), can be attributed to the
foundation laid by Thatcher and Reagan in the 1980s. Thanks to the growing
economic strength of the United States and Britain, the United States out-
lasted the Soviet Union and won the Cold War, while Britain won the Falkland
Islands War over Argentina.49

1.2.3.2 Wealth Extraction

Wealth extraction refers to the collection and expenditure of government

revenues, as well as the function and act of government intervention in
the economy, which falls within the scope of the study of public econom-
ics or government economics.50 Wealth extraction has been a core subject
22 Economic Statecraft – Concepts and Theories

in Western fnance, and later, public economics research. In 1662, William

Petty published A Treatise of Taxes and Contributions, which analyzed the
reasons for increases in state expenditure, people’s objection to taxation and
the methods of tax collection, and the ways and means by which the state
raised funds. It pioneered the study of Western fnance. In The Wealth of
Nations, Adam Smith also spoke at length about state fnance.51 Historically,
wealth was extracted frst by rulers to consolidate their reign and later for
expansion. For example, in the late Middle Ages, to maintain the broadening
functions of the royal throne, it was necessary to fnd ways to increase taxes.
In this age, European monarchs began to collect sales taxes and duties on
imports and exports. On the back of thriving commerce and expanding mar-
kets, business revenues continued expanding, and the monarchs did not waste
this opportunity to collect money.52 Wealth extraction was a game between
the rulers and the ruled, as well as one played among the ruling elite. In the
late Middle Ages, with the rapid rise of royal power in England, the nobles
had to protect their own interests, so they began to demand that the crown’s
power be shared. The Magna Carta was introduced to limit the king’s per-
sonal powers, which set the precedent for the modern bourgeois-democratic
revolution. France experienced similar developments. During the Hundred
Years’ War with England, the French crown was also on the verge of fnan-
cial and economic exhaustion. The French crown was forced to summon the
Estates General and surrender some of its power in exchange for the nobil-
ity’s support for taxation. In addition to taxation, another important avenue
of wealth extraction was borrowing, and borrowing had to be done on good
credit.53 When a country’s wealth extraction is insufcient, it must consider
international supplementation. Arguably, the Trump administration raised
tarifs to make up for the gap in its domestic tax cuts by launching a world-
wide trade war. Trump’s domestic policies were built on drawing resources
from other countries.
The ability to extract wealth matters in the rise and fall of nations. The
famous “Reforms of Wang Anshi” in Chinese history largely dealt with the
means of wealth extraction. It signifcantly enriched the state’s revenue and
empowered its army through the Green Sprouts Law, the Land Survey and
Equitable Tax Law, and the Market Exchange Law. However, the failure of
Wang Anshi’s reforms eventually led to the demise of the Song Dynasty. The
Ming Dynasty used up all the silver in its treasury to help the Joseon Empire of
Korea resist the Japanese warlord Toyotomi Hideyoshi, so much so that it had
nothing left to pay soldiers to defend against Li Zicheng, eventually leading
to the end of the dynasty. Ray (Renyu) Huang mentioned that the efciency
of Chinese taxation was highly correlated with the expansion and convergence
of the empire.54 Chen Yun, a key Chinese Marxist economist and leader, once
said that the political authority of the Chinese central government should
be underpinned by its economic authority. In 1994, China initiated reform
towards a tax-sharing system, which signifcantly increased the country’s abil-
ity to extract fscal revenue.55
 Economic Statecraft – Concepts and Theories 23

1.2.3.3 Wealth-Power Transformation

David Baldwin’s defnition of economic statecraft already implied the transfor-

mation of wealth into international infuence, but he did not explicitly say so.
“Transformation” is a key strategy for the realization of economic statecraft,
and an integral component of the study of economic statecraft. “Transforma-
tion” in the context of economic statecraft refers to the act, art, and process
of consciously transforming wealth and power through the strategy, tactics,
and institutional design of a country’s (central) government in its external
relations.56 The “strategy” here is a plan of action for the actors to mobilize,
cultivate, organize, and deploy various existing and potential forces to achieve
predetermined goals.57 The realization of transformation strategy depends on
various policy tools. In this regard, Baldwin grouped the tools of economic
statecraft into two categories: positive sanctions (e.g., granting most-favored-
nation status, providing aid) and negative sanctions (e.g., embargo, boycott).58
In addition to the economic statecraft mentioned by Baldwin, countries are
“inventing” and “reinventing” various types of economic statecraft tools to
transform wealth into power – for example, the EU’s latest inventions of the
International Procurement Instrument (IPI) and the Anti-Coercion Instru-
ment (ACI). The IPI allows the EU to reciprocally close its own government
procurement market if a foreign government fails to open its government pro-
curement market to wthe EU, so at its core, it is a system of “negative reci-
procity”. Under the ACI, the EU can take economic countermeasures when a
third country tries to coerce the EU or a member state to act or not to act in
certain ways through measures afecting trade or investment. To some extent,
the contest of economic statecraft is a contest of ability to develop economic
statecraft tools. The development of economic statecraft tools requires bal-
anced consideration of a country’s economic strength, domestic afordability,
and international reputation, among other considerations.
At the same time, a “transformation” strategy also requires consideration
of the efciency and efectiveness of transformation. In The Tragedy of Great
Power Politics, John Mearsheimer raised the question, which type of politi-
cal and economic system (something we can call “wealth-power-system”) is
most conducive to transformation? After comparing the economic systems of
the Soviet Union, the United States, and Germany, Mearsheimer concluded
that the Soviet and US economies were far better organized than the Ger-
man economy for mass-producing weaponry.59 Huang Qixuan argues that big
powers’ choice of economic growth model often leads to diferent interna-
tional political outcomes. In the late 19th and early 20th centuries, why did
the economic growth of the United States not invite a strong confrontation
from Britain, while the rise of Germany economically pushed Britain and Ger-
many to war?60 In fact, an important aspect of the study of economic statecraft
is “comparative economic statecraft”, that is, the study of whether the politi-
cal and economic system of a country (wealth-power system) is conducive to
more efcient and sustainable transformation of wealth into power.
24 Economic Statecraft – Concepts and Theories

1.2.4 Academic and Theoretical Standing of Economic Statecraft

According to Gilpin, in the late 19th century, the broad defnition of what econ-
omists study narrowed considerably. Alfred Marshall, the father of microeco-
nomics, turned his back on the earlier emphasis on the nation as a whole and on
the political as important. In his highly infuential Principles of Economics (1890),
Marshall substituted the present-day term “economics” for “political economy”
and greatly restricted the domain of economic sciences.61 The study of economic
statecraft has a purpose to the contrary; it is to return to the research ethos and
origins of classical political economy and to make new bridges between econom-
ics and political science and between international political economy, economic
diplomacy, grand strategy, and management studies.
The theoretical roots of economic statecraft are frst and foremost the political
economy; it is inextricably linked, and in some cases, synonymous with political
economy. As John Stuart Mill, the last major classical economist, commented,
political economy is the science that teaches a nation how to become rich. Clas-
sical economists emphasized the wealth of nations, and the term “political” was
as signifcant as the term “economy”.62 In The Wealth of Nations, Adam Smith
argued that political economy is, “a branch of the science of a statesman or leg-
islator”. It was also a guide to the prudent management of the state economy.
Adam Smith regarded economics as a science of the production, distribution,
and consumption of wealth.63 With the publication of Smith’s major works
and their German translations, a German political economy called “Staatswis-
senschaft” or “state economics” began to emerge in Germany. The Germans
considered “Staatswissenschaft” as a science that systematically studied the
measures and instruments that the state should adopt to manage, infuence,
restrict, and organize industry, commerce, and crafts to maximize the welfare of
the people.64 Economic statecraft looks at the rich and complex dialectical rela-
tionships between politics and economics and between wealth and power. This
study is meant to serve the state’s strategy and policy making. In ancient times,
economic statecraft was, for the king, the art of ruling, the way of governing.
In contemporary times, economic statecraft is largely about the governance of a
country’s afairs. Marxist parties pay particular attention to economic statecraft
because the Marxist way of thinking is that the economic base determines the
superstructure, and economic strategies interact closely with political and dip-
lomatic strategies. However, the current disciplinary divide leaves a gap for an
integrated analytical framework to examine and address this issue.
In Chapter Two, we are going to study the four major paradigms of eco-
nomic statecraft in modern times, namely, mercantilism, liberalism, imperial-
ism, and Marxism.

Notes
1 Marshall, A. (1890). Principles of Economics. London: Macmillan, p. 41.
2 Smith, A. (2012). An Inquiry into the Nature and Causes of the Wealth of Nations.
Chicago: University of Chicago Press, p. 556.
 Economic Statecraft – Concepts and Theories 25

3 Smith, A. (2012). An Inquiry into the Nature and Causes of the Wealth of Nations.
Chicago: University of Chicago Press, p. 587.
4 Sanders, W. M. S. (1918). Pan-German Socialism. London: W.H. Smith & Son, p. 12.
5 Sanders, W. M. S. (1918). Pan-German Socialism. London: W.H. Smith & Son,
pp. 12–13.
6 Sanders, W. M. S. (1918). Pan-German Socialism. London: W.H. Smith & Son, p. 12.
7 Hobson, J. A. (1922). Britain’s Economic Outlook on Europe. Journal of Political
Economy, August, 30(4), p. 483.
8 Shotwell, J. T. (1951). The Leadership of Wilson. Current History, November,
21(123), pp. 263–264.
9 Kurihari, K. K., & Kurihara, K. K. (1961). Mixed Economic Statecraft and Democratic
Safeguards. Social and Economic Studies, June, 10(2), pp. 223–228.
10 Copland, S. D. (1960). Economic Problems for New Zealand in an Expanding
Economy. Industrial Development Conference, Wellington, June.
11 Baldwin, D. A. Economic Statecraft. Britannica, see www.britannica.com/topic/
economic-statecraft
12 Baldwin, D. A. (1985). Economic Statecraft. Princeton, NJ: Princeton University
Press, pp. 13–14.
13 Clinton, H. (2011). Economic Statecraft Speech. Economic Club of New York, New
York City, October 14.
14 (2012). I interviewed a diplomat at the U.S. Embassy, Beijing, April.
15 Economic diplomacy frst appeared in American academic journals in 1959, when
Robert B. Wright, Chief of the Economic Defense Division of the US Department
of State, published a paper titled “American Economic Diplomacy and the Soviet
Bloc” in Social Science, see Wright, R. B. (1959). American Economic Diplomacy
and the Soviet Bloc. Social Science, October, 34(4), p. 200. In the 1960s, there was
a slowly growing number of publications on economic diplomacy. Examples in-
clude “The Challenge of Coexistence: A Study of Soviet Economic Diplomacy” by
Milton Kovner in 1961 (American Political Science Review, Vol. 55, No. 4); Heir to
Empire: United States Economic Diplomacy (1916–1923) by Carl P. Parrini in 1969
(University of Pittsburgh Press); and Herbert Hoover and Economic Diplomacy:
Department of Commerce Policy, 1921–1928 by Joseph Brandes in 1970 (Univer-
sity of Pittsburgh Press). The 1970s witnessed a mild increase of publications on
economic diplomacy. It seems that economic diplomacy was mainly the interest
of American diplomatic historians. Representative works include “Anglo-American
Corporatism and the Economic Diplomacy of Stabilization in the 1920s” by Carl
Parrini and Michael Joseph Hogan in 1978 (Reviews in American History, Vol
6, p. 379); Economic Diplomacy: The Export-Import Bank and American Foreign
Policy, 1934–1939 by Frederick C. Adams in 1976 (University of Missouri Press,
Columbia); and Informal Entente: The Private Structure of Cooperation in Anglo-
American Economic Diplomacy, 1918–1926 by Michael J. Hogan in 1977 (Univer-
sity of Missouri Press, Columbia). The only exception is political scientists Samuel
P. Huntington et al.’s foreign policy piece “Trade, Technology, and Leverage: Eco-
nomic Diplomacy” in 1978 (Foreign Policy, Vol. 32, pp. 63–106).
16 Wayne, E. A. (2006). U.S. Economic Diplomacy: Priorities and Concerns. Houston
World Afairs Council Corporate Briefng, Houston, Texas, January 13.
17 Goodman, M. P. (2017). Trump’s Economic Statecraft: The First 1,000 Days.
CSIS Newsletter, April 27; Kirshenbaum, J. (2021). Economic Statecraft Toward
China from Trump to Biden: More Continuity than Meets the Eye. German Mar-
shal Fund, June 23.
18 Clinton, H. (2011). America’s Pacifc Century. Foreign Policy, October 11.
19 Okano-Heijmans, M. (2013). Economic Diplomacy: Japan and the Balance of
National Interests. Leiden and Boston: Martinus Nijhof Publishers, footnote 4,
p. 18.
26 Economic Statecraft – Concepts and Theories

20 Bayne, N., & Woolcock, S. (Eds.). (2017). New Economic Diplomacy: Decision-
Making and Negotiation in International Economic Relations (4th edition). New
York: Routledge, p. 1.
21 Bayne, N. (2015). Economic Diplomat (X. Zhang, Trans.) (in Chinese). Beijing:
China Social Sciences Press, pp. 98–106.
22 Putnam, R., & Bayne, N. (1988). Hanging Together: Cooperation and Confict
in the Seven-Power Summits (2nd edition). Cambridge, MA: Harvard University
Press.
23 (2016). Economic Diplomacy and Foreign Policy: Friends or Foes? February 24, see
https://ecdpm.org/events/economic-diplomacy-and-foreign-policy-friends-or-foes/
24 See https://dictionary.cambridge.org/zhs/词典/英语/statecraft
英
25 See www.dictionary.com/browse/statecraft
26 See www.merriam-webster.com/dictionary/statecraft
27 Thatcher, M. (2002). Statecraft: Strategies for a Changing World. London: Harper-
Collins, footnote 1 of Introduction.
28 Baldwin, D. A. (1985). Economic Statecraft. Princeton, NJ: Princeton University
Press, p. 8.
29 Baldwin, D. A. (1985). Economic Statecraft. Princeton NJ: Princeton University
Press, p. 8.
30 Baldwin, D. A. (1985). Economic Statecraft. Princeton, NJ: Princeton University
Press, p. 5.
31 Weber, M. (1947). The Theory of Social and Economic Organization (A. M. Hen-
derson and T. Parsons, Trans.). New York: Oxford University Press, p. 152.
32 See www.merriam-webster.com/dictionary/power
33 Mearsheimer, J. J. (2001). The Tragedy of Great Power Politics. New York: W. W.
Norton & Company, p. 40.
34 Baldwin, D. A. (2020). Economic Statecraft (New edition). Princeton, NJ: Princeton
University Press, p. 19.
35 Kennedy, P. (1987). The Rise and Fall of the Great Powers: Economic Change and
Military Confict from 1500–2000. New York: Random House.
36 Stoker, D. (2012). The Grand Design: Strategy and the U.S. Civil War. New York:
Oxford University Press, p. 405 cited in Friedman, L. M. (2016). Strategy: A His-
tory (J. Wang, Trans.) (in Chinese). Beijing: Social Science Academic Press, p. 146.
37 Mearsheimer, J. J. (2001). The Tragedy of Great Power Politics. New York: W. W.
Norton & Company, pp. 75–76.
38 Herman, A. (2017). Freedom’s Forge: How American Business Produced Victory in
World War II (Y. Li, Trans.) (in Chinese). Shanghai: Shanghai Academy of Social
Science Press, pp. 353–355.
39 Friedman, L. M. (2016). Strategy: A History (J. Wang, Trans.) (in Chinese). Beijing:
Social Science Academic Press, p. 3.
40 US Spending, Defense Spending. See www.usgovernmentspending.com/defense_
spending
41 Shi, Y. (2015). Traditional Chinese Experience and Contemporary Chinese Practices:
Issues of Strategic Adjustment, Strategic Overdraft and Great Rejuvenation. Foreign
Afairs Review, 32(6), pp. 57–68.
42 Zhang, W. (2015). Strategy and Wellness. Meditations on Life, Guancha Syndicate,
December 15, see www.guancha.cn/ZhangWenMu/2015_12_15_344682.shtml
43 Samuelson, P. A., & Nordhaus, W. D. (2014). Economics (C. Xiao, Trans.) (in Chinese).
Beijing: The Commercial Press, pp. 5–6.
44 Viner, J. (1958). The Long View and the Short: Studies in Economic Theory and
Policy. New York: The Free Press, p. 56.
45 Chen, L., & Zhou, H. (2003). The Process of European Civilization (in Chinese).
Beijing: SDX Joint Publishing Company, pp. 28–33.
 Economic Statecraft – Concepts and Theories 27

46 Montesquieu. (1875). CHAPITRE XIX in Considérations Sur Les Causes De La

Grandeur Ees Romains Et De Leur Décadence. Edited by Édouard Laboulaye.
47 List, F. (2022). The National System of Political Economy (S. Lloyd, Trans.). Perth:
Imperium Press, p. 110.
48 List, F. (2022). The National System of Political Economy (S. Lloyd, Trans.). Perth:
Imperium Press, pp. 119–120.
49 Zhang, M. (2001). American Foreign Economic Strategy (in Chinese). Beijing:
World Afairs Press, pp. 230–232.
50 Li, C., & Liao, Q. (2015). Economics of the Public Sector (in Chinese). Wuhan:
Huazhong University of Science & Technology Press, p. 3.
51 Li, C., & Liao, Q. (2015). Economics of the Public Sector (in Chinese). Wuhan:
Huazhong University of Science & Technology Press, p. 6.
52 Chen, L., & Zhou, H. (2003). The Process of European Civilization (in Chinese).
Beijing: SDX Joint Publishing Company, p. 67.
53 Kennedy, P. (1987). The Rise and Fall of the Great Powers: Economic Change and
Military Confict from 1500–2000. New York: Random House, pp. 80–82.
54 Huang, R. (2007). Macro-History of China (in Chinese). Beijing: SDX Joint Pub-
lishing Company, pp. 6–7.
55 Ma, J. (2007). Governance and Financial Management (in Chinese). Beijing: SDX
Joint Publishing Company, p. 58.
56 Zhang, X. (2013). Theoretical Construction of Chinese Economic Diplomacy: A
Preliminary Attempt. Foreign Afairs Review, 30(6), p. 53.
57 Zhang, M. (2001). American Foreign Economic Strategy (in Chinese). Beijing:
World Afairs Press, p. 8.
58 Baldwin, D. A. (1985). Economic Statecraft. Princeton, NJ: Princeton University
Press, pp. 41–42.
59 Mearsheimer, J. J. (2001). The Tragedy of Great Power Politics. New York: W. W.
Norton & Company, p. 76.
60 Huang, Q. (2012). Economic Growth Patterns of Major Powers and Their Interna-
tional Political Consequences. World Economics and Politics, 385(9), pp. 107–130.
61 Gilpin, R. (2001). Global Political Economy: Understanding the International Eco-
nomic Order. Princeton, NJ: Princeton University Press, p. 25.
62 Gilpin, R. (2001). Global Political Economy: Understanding the International Eco-
nomic Order. Princeton, NJ: Princeton University Press, p. 25.
63 Smith, A. (2012). An Inquiry into the Nature and Causes of the Wealth of Nations.
Chicago: University of Chicago Press.
64 Marx, K., & Engels, F. (2012). Selected Works of Marx and Engels (Vol. 1). Beijing:
People’s Publishing House, p. 867.
2 Paradigm Shifts in Economic
Statecraft Over Time

Since modern times, four paradigms of economic statecraft have emerged

among the world’s major powers: mercantilism, liberalism, imperialism, and
Marxism, with a number of variants. The so-called “paradigm” of economic
statecraft refers to the wealth-power strategy (WPS) of the dominant state
(especially the hegemonic state) over a long historical period.
The WPS in Western history could be a long-duration strategy or short-
term tactics. I therefore divide the WPS into three types: long, medium, and
short-duration. The frst type of WPS was the long duration, covering frst the
ancient Greco-Roman imperial era, then the Christian feudal era, and last, the
nation-state era. For the ancient Roman Empire, economy and empire were
closely linked. The survival of ancient Rome depended on the expansion of
the empire and the maintenance of its vast territory. Expansion brought in
more slaves to serve the slaveholding large plantation economy. The Roman
Republic built a Roman Empire across Eurasia through constant expansion
and conquest. During Trajan’s reigning period (53 AD–117 AD), the Medi-
terranean Sea became Mare Nostrum (Latin: Our Sea) of the Roman Empire.
The ancient Roman Empire resisted internal division and external barbarian
invasions with its administrative structure and the linked military apparatus.
The empire eventually disintegrated when it became too difcult to maintain
local loyalty to the center and fght of foreign invaders. The slaveholding large
plantation economy led to urban polarization, economic and social inequal-
ity, and intensifed conficts within the ancient Roman Empire. This gave rise
to Christianity, which became a faith of the lower classes and the poor – and
eventually, the state religion.1
By the late Middle Ages, monarchs, eager to expand their territories, achieve
internal unity, and fortify absolute monarchy, had taken ownership of taxation,
a form of political sovereignty. The notion of the supremacy of monarchy and
kingship began to emerge, and the notion of mutual restraints and contracts,
characteristic of feudalism, was replaced by that of superior power. The pope,
the German princes, and the French, Spanish, English, and Scandinavian mon-
archs ran swiftly toward authoritarianism.2 In the recent past, the West has
experienced mercantilism, liberalism, and imperialism. These were systemic-
level, global, and long-lasting paradigms.

DOI: 10.4324/9781003351382-3
This chapter has been made available under a CC-BY-NC-ND license.
 Paradigm Shifts in Economic Statecraft Over Time 29

The second type of WPS was the medium-duration WPS. It included power
strategies (transformation of wealth into power) such as the Marshall Plan pro-
posed by US President Harry S. Truman, the Build Back Better World (B3W)
initiative proposed by President Joe Biden, the Global Gateway initiative pro-
posed by the European Commission under the presidency of Ursula von der
Leyen, and a series of wealth strategies such as monetarism, Keynesianism,
and Ordo-liberalism. These wealth strategies, though expressed in the form of
economic policies, have profound political implications.
The third was the short-duration WPS, referring to the two-way transfor-
mation of wealth and power in specifc negotiations. It is essentially a negotia-
tion strategy and a projection of bargaining power. There are many examples
of short-term economic statecraft, such as trade wars, fnancial wars, and eco-
nomic sanctions. The global trade war started by President Trump in 2018
was essentially about using the United States’ position of strength and eco-
nomic power to impose economic coercion on other major economies. China,
the EU, India, Turkey, and other economies responded to Trump’s economic
coercion with retaliations, resulting in a global phenomenon of what we can
call “competing economic statecrafts”. In recent years, interdependence has
been increasingly instrumentalized, politicized, and weaponized.
All the WPS of diferent durations concern the central issue in the study
of economic statecraft – the two-way transformation of wealth and power.
This chapter focuses on the WPS in the long duration. In the marathon of
great power competition, an emerging great power must adopt a novel wealth
strategy, that is, it acquires new productivity and enjoys higher labor efciency.
At the same time, this new power must have adopted a more efcient and
sustainable WPS. At the end of the day, the strategic competition among great
powers is a competition of WPSs. Following is the analysis of the paradigms
of economic statecraft of Western hegemonic powers and their catching-up
counterparts since modern times, as summarized in Table 2.1.

2.1 The Age of Classical Mercantilism (15th–18th Centuries)

Mercantilism was by far the longest-lasting form of economic statecraft. Jacob
Viner summarized fve elements of mercantilism:

(1) policy should be framed and executed in strictly nationalistic terms,

that is, national advantage alone is to be given weight; (2) in apprais-
ing any relevant element of national policy or of foreign trade, great
weight is always to be put on its efect, direct or indirect, on the national
stock of the precious metals; (3) in the absence of domestic gold or sil-
ver mines, a primary national goal should be the attainment of as large
an excess of exports over imports as is practicable, as the sole means
whereby the national stock of the precious metals can be augmented; (4)
a balance of trade “in favor” of one’s country is to be sought through
direct promotion by the authorities of exports and restriction of imports
Table 2.1 The Economic Statecraft of Western Hegemonies and Catching-up Counterparts since Modern Times

30
Economic Statecraft Paradigm

Paradigm Shifts in Economic Statecraft Over Time

Wealth Strategy Wealth-Power Dominant States/ Power Strategy
Strategy (WPS) Catching-up States

15th–18th Portugal and Spain: Emphasis on Mercantilism Dominant: Habsburg Old colonialism, old imperialism,
centuries gold and silver and Columbus’s monarchy/ religious wars; parity, balance of
expedition in 1492; France: catching-up state: power and Westphalian system;
Colbertism; England: Navigation France domestically: despotism (from
Acts (1651–1849); Netherlands: confessional absolutism to
Financial Revolution courtly absolutism to enlightened
despotism)
1846–1870 Classical liberalism: abolition of the Liberalism Hegemon: UK Victorian era: no longer concerned with
Corn Laws and the Navigation balance of power, but emphasized
Acts; representative thinker: open cooperation and free trade;
Adam Smith informal imperialism
1871–1890 Bismarck era: Developmentalism Catching-up state: German national unifcation; keeping
In 1879, Germany abandoned (mercantilism + Germany balance of power; domestically:
its traditional free trade policy liberalism) enlightened despotism, opposition to
and opted for protectionism; Social Democratic Party (SPD) and
representative thinker: restriction of the Central Party
Friedrich List
1890–1914 German-Russian Trade Agreement Imperialism Hegemon: UK/ UK: Scramble for Africa, new imperialism,
(1890) signifcantly reduced tarifs catching-up states: naval arms race (1908–1909, domestic
on industrial exports; UK insisted Germany, United tax increases in the UK and Germany);
on free trade policy, while pivoting States Germany: World policy; United States:
to Africa and Asia for new markets Spanish-American War, Panama Canal,
(leading to new imperialism) and Open Door policy
1913–1921 The Dawes Plan Liberal United States: Rising Woodrow Wilson’s Fourteen Points:
internationalism to hegemony open diplomacy, free trade, League
(derived from of Nations; reliance on international
liberalism) opinion, international law,
international organizations; Germany’s
Weimar Republic came to power
1929–1940 Economic nationalism Mercantilism Hegemonic transition The return of the United States to
United States: Smoot-Hawley from UK to United “isolationism”
Tarif Act States/Catching-up

Paradigm Shifts in Economic Statecraft Over Time

states: Germany,
Soviet Union
1945–1970s Bretton Woods vs. the Soviet Liberal Hegemon: United US hegemony; US-Soviet rivalry; rise of
planned economy institutionalism States/catching-up Europe and Japan
(derived from state: Soviet Union
liberalism)
1980s–2008 Globalization; regional economic Neoliberalism Hegemon: United Liberal democratic expansion strategy;
integration; Reaganomics (derived from States/catching-up: North Atlantic Treaty Organization/
(supply-side school); liberalism) Europe, Japan, EU expansion to the east
Clintonomics (strategic trade China
policy, super-salesman Clinton,
World Trade Organization/
North American Free Trade
Agreement [NAFTA]/Asia-
Pacifc Economic Cooperation);
trade policy emphasizing
“positive reciprocity”
(Continued)

31
Table 2.1 (Continued)

32
Economic Statecraft Paradigm

Paradigm Shifts in Economic Statecraft Over Time

Wealth Strategy Wealth-Power Dominant States/ Power Strategy
Strategy (WPS) Catching-up States

2009–2016 Obama (Trans-Pacifc Partnership Shift from Hegemon: United Return of geopolitics; pivot to Asia-
[TPP]/Transatlantic Trade and neoliberalism to States/catching-up: Pacifc; gradual withdrawal from Iraq
Investment Partnership [TTIP]) mercantilism + China, EU
imperialism
2016–2020 Trump (exit from TPP and TTIP, Mercantilism + Hegemon: United US-China trade war and the Indo-Pacifc
renegotiation of NAFTA); trade imperialism + States/catching-up: strategy
policy emphasizing “negative liberalism China, EU
reciprocity”
2021-present Biden: American Rescue Plan Mercantilism + Hegemon: United Withdraw from Afghanistan; repair
(ARP), American Jobs Plan liberalism + States/catching-up transatlantic relations; build the
(AJP), and American Families imperialism state: China Quadrilateral Security Dialogue
Plan (AFP) – total budget of US (Quad) and the Australia-UK-US
$6 trillion (AUKUS) partnership; and
propose the Indo-Pacifc Economic
Cooperation Framework (IPEF)
 Paradigm Shifts in Economic Statecraft Over Time 33

or by other measures which will operate indirectly in these directions; (5)

economic foreign policy and political foreign policy are to be pursued
with constant attention to both plenty and “power” (including security
under this latter term) as coordinate and generally mutually supporting
national objectives, each capable of being used as a means to the attain-
ment of the other.3

The early representatives of mercantilism were the Italian city-states, where

capitalism frst emerged. Venice was Europe’s frst full-blown colonial adventure.
It provided something of a model to its successors, notably Holland and Brit-
ain, as to the ability of small maritime states to gain global reach. It served as a
warning, too, of the vulnerabilities of far-fung possessions linked by sea power.
The Venetian business model became suddenly obsolete and its supply lines
vulnerable. Ultimately the Stato da Mar was as hard to defend as the American
colonies were for Britain.4 In addition to the above-mentioned factors that led
to the decline of Venice, German political economist Friedrich List pointed out,

One thing alone was wanting to Italy to enable her to become what Eng-
land has become in our days, and because that one thing was wanting to
her, every other element of prosperity passed away from her; she lacked
national union and the power which springs from it.5

With the decline of the Venetian maritime empire came the rise of the Portu-
guese maritime empire.
However, Portugal lacked a sustainable wealth strategy. The huge colo-
nial revenues were not used to reinvest in production, but rather to squander
them. The countryside showed signs of decline, and its secular feudal lords
intensifed their exploitation of the peasantry. Portugal’s geopolitical strategy
also had major missteps. Its war fronts were too long and overstretched. In the
mid-16th century, as Portugal faced a pronounced religious and political crisis,
some began to ponder the future of Portugal. There were proposed plans to
conquer China, and others to abandon the East and focus colonial eforts on
the west coast of Africa to shorten the voyage and reduce the large overseas
garrison, a plan known as “the empire at the gate”. In 1578, the young King
Sebastião, 24, led an army of 170,000 men to Africa and was killed in the ill-
fated battle. Since the young king died without an heir, this led to a succession
crisis in Portugal, which was eventually annexed by Spain.
Spain achieved massive wealth by way of geographical discoveries and
colonial wars and built a large, worldwide empire. However, Spain, out of
religious fanaticism, did not hesitate to launch successive foreign wars. Its
wealth strategy was unsustainable, its subjects lived by gold and silver, and its
way of making profts led the country and the people down the wrong path.
The Spaniards were proud of not producing for themselves, instead, having
foreigners produce for them. Production was outsourced to the countries of
northwest Europe, especially England and the Netherlands.
34 Paradigm Shifts in Economic Statecraft Over Time

The reason why Spain and Portugal in the 16th and 17th centuries were
overtaken by emerging powers such as the Netherlands, the UK, and France
(which also adopted mercantilism), was largely because Spain’s and Portu-
gal’s wealth strategy was unft for their power strategy, or the ft was not as
good as that of England and France. On the one hand, Spain and Portugal
were involved in religious and territorial disputes, and on the other hand,
their wealth supply was insufcient and still based on the feudal system. Their
technological and market development also lagged behind other countries.
Friedrich List argued that the UK and the United States were much more
powerful than Spain from a productivity standpoint. He analyzed,

The War of Independence of the United States of America cost that

nation hundreds of millions, but her powers of production were immeas-
urably strengthened by gaining independence, and it was for this reason
that in the course of a few years after the peace she obtained immeasur-
ably greater riches than she had ever possessed before.6

The mercantilism practiced in France was known as “Colbertism”. Jean-

Baptiste Colbert was a long-time comptroller general of fnance and secretary
of state for the navy. With a true passion for his work, a clear and steady mind,
and a loyal and patriotic spirit, Colbert strove to rebuild the French economic
structure and to make the country self-sufcient by increasing its revenues.
The core principle of Colbertism was that “the wealth and the economy of
France should serve the state”. Colbert creatively supported the development
of manufacturing, encouraged domestic industry and commerce, and raised
tarifs to protect such. He established colonial trading companies and opened
state-of-the-art factories through direct government control of economic sec-
tors. Colbert’s eforts succeeded in expanding the industrial and trade capac-
ity of France and laid a solid material foundation for Louis XIV’s European
domination. It’s no wonder that Louis XIV’s chief minister Mazarin, on his
deathbed, nominated Colbert for his position to Louis XIV: “I am acquitting
myself of some of that debt [I owe] to Your Majesty in giving you Colbert”.
Unfortunately, Louis XIV squandered his wealth and was caught in many
wars, so that when his son succeeded to the throne, the French treasury was
already depleted. Before his death, Louis XIV cautioned his son to avoid war
at all cost, but in the end, France became so poor and weak that it lost the
Seven Years’ War in Europe and Quebec.
The UK also practiced mercantilism from the 17th century through the
1850s, represented by the Navigation Acts (1651–1849), the Corn Laws
(1815–1846), and the general protection tarif system. In many ways, how-
ever, the UK’s wealth strategy was more efcient than that of France or Spain.
Douglas North, a Nobel laureate of economics, argued that “Efcient eco-
nomic organization is the key to growth; the development of an efcient eco-
nomic organization in Western Europe accounts for the rise of the West”.7 He
compared France with England and found that the French institutions were
 Paradigm Shifts in Economic Statecraft Over Time 35

less efcient than the English ones. As a result, the French wealth strategy
failed to compete with the English one.
Among the many countries that implemented mercantilist statecraft, Ger-
many is of particular interest because it is a classic case of economic catch-up
and national unifcation accomplished through basic adherence to mercantilist
statecraft. Germany’s mercantilist policy was largely infuenced by the theory of
German political economist Friedrich List. Based on extensive studies of Italians,
Hanseatic merchants, Dutch, English, Spaniards, Portuguese, French, Germans,
Russians, and Americans, List arrived at very important historical lessons:

History teaches us how nations which have been endowed by Nature

with all resources which are requisite for the attainment of the highest
grade of wealth and power, may and must – without on that account for-
feiting the end in view – modify their systems according to the measure
of their own progress.8

The centerpiece of List’s approach to economic statecraft is not only this, but
also his “theory of national productive powers”.9 By List’s defnition, produc-
tive powers are created by both “material capital” and “mental capital”, that
is, the accumulation of human knowledge. Acting on his proposition around
productive forces, List advocated a series of policies to promote productive
forces, including the introduction of protective tarifs, the implementation of
a patent policy to protect scientifc and technological inventions and creations,
and the importation of advanced technology management practices from
abroad. He stressed the need to develop domestic education, nurture scientifc
and technological talent, and enact various economic legislation.
Looking back at the three centuries of the rise and fall of mercantilism, its
fourishing was closely linked to geographical discoveries, trade, the rise of com-
mercial capital, colonial policies, import bans, and protective tarifs. In the era
of mercantilism, the kings were as fervent in their pursuit of wealth as they were
of power, and the merchant class also sought out wealth, so there was a natu-
ral ft for great cooperation between kings and merchants. As such, the rise of
capitalism coincided with the emergence of the modern state. The Renaissance
bankers provided loans to the monarchs, and the monarchs became increas-
ingly involved in economic management, establishing customs tarifs code and
monopolies and adopting protectionist measures, thus giving economic man-
agement a state character. Gradually, however, a rift arose between the kings
and the merchants, a confict between the state’s quest for power and the state’s
quest for wealth. So, eventually bourgeois revolutions took place, overthrow-
ing the despots, frst the Glorious Revolution of 1688 in England and then the
French Revolution in 1789. The feudal dictatorship was replaced by a capital-
ist republic. The primary contradiction here was between the two actors of
wealth-power – the bourgeoisie and the feudal monarchs. This is also the pair
of contradictions inherent in the mercantilist economic statecraft, which largely
determined the rise and fall of the great mercantilist states.
36 Paradigm Shifts in Economic Statecraft Over Time

2.2 The Age of Classical Liberalism (1846–1870)

Economic liberalism was the second major paradigm of economic statecraft
to emerge after mercantilism. Adam Smith frst introduced the idea of mer-
cantilism in The Wealth of Nations and proposed the theoretical framework of
classical liberalism based on a critique of mercantilism. Adam Smith proposed:
(1) it is not necessary to pursue the stock of precious metals, (2) there is no
need to seek trade surplus, and (3) there is no need to reward exports while
restricting imports.
The key components of economic liberalism include (1) free markets; (2)
minimal state intervention; (3) individual consumers, frms, or households
(rather than the state) form the basis of society; and (4) the primary objective
of economic activity or wealth creation is to serve consumers. In Adam Smith’s
words, the role of government was to act as a “night watchman” to prevent
foreign aggression and maintain public security.
Before Britain, the frst country to adopt liberal policies was the Nether-
lands. The Dutch liberal policies, both political and economic, were so thor-
oughly implemented that they were liberalism on steroids. The Dutch Empire
made its name for the skill of one-stroke herring gutting and thrived on the
herring trade. At that time, to resist the rule of the Spanish Habsburgs, the
Protestant provinces in the northern Netherlands formed the Union of Utre-
cht to fght for independence, but the southern provinces were long under
the Catholic rule of the Spanish Habsburgs. As a result, wealthy and skilled
Jews from the south and from Spain and Portugal fed to the north to escape
religious persecution, where there was a capitalist republic and freedom of reli-
gion, politics, and commerce. This freedom was refected in scientifc research,
writing, and many other aspects. The northern Netherlands became a sanctu-
ary for businessmen, scientists, publishers, and freedom seekers. This freedom
in religion, politics, commerce, and publishing led to a boom in art, culture,
and foreign trade in the Netherlands. In terms of foreign trade, the Nether-
lands traded with the Middle East, Central Asia, and the Far East. The most
important was the spice trade, which led to the establishment of the Dutch
East India Company. Thanks to the private capital raised from the Amsterdam
Stock Exchange, in less than a century, the Dutch East India Company grew
to become the most powerful and wealthy trading company in the world.
Amsterdam also became a hub of scientifc research, higher education, and
commerce in Europe. As for the decline of the Netherlands, it was mainly due
to the rise of other great powers such as Britain and France, as the Netherlands
lacked an assertive power organ. The decline of the Netherlands was relative.
As a small, oppressed country, the Netherlands rose to become a maritime
empire of global reach with unique wealth and power strategies, of which, the
liberal wealth-power strategy was the most crucial and emblematic.
After the Netherlands, Britain rose to become the new hegemon. Brit-
ain was initially mercantilist and later liberal. Prior to Adam Smith, Britain
enforced the Navigation Acts, the so-called “entrepôt colonialism”. Under the
 Paradigm Shifts in Economic Statecraft Over Time 37

Navigation Acts, raw materials from the Caribbean and American colonies had
to be shipped to Britain frst and be carried by British-owned ships, regardless
of the fnal market. Entrepôt colonialism imposed a commercial straitjacket on
colonial economies that was deeply resented as an infringement of freedom –
by the Protestant Anglo-Irish as well as by planters in Barbados: “Free Trade is
the life of all colonies”, declared the Barbados governor rebelliously.10
In the free trade phase, the British government abandoned trade protection
and adopted a policy of free trade, establishing “free trade imperialism”. What
motivated this change was Britain’s increased wealth production capacity. After
the Industrial Revolution, Britain became the most competitive country in the
world, so in the mid-19th century, the Corn Laws and the Navigation Acts
were abolished, and liberalism was introduced. As Britain embarked on the
Industrial Revolution, Adam Smith’s book The Wealth of Nations was pub-
lished. The book no longer emphasized the state as mercantilism had, but
rather, promoted cosmopolitanism, fnding that the source of wealth genera-
tion was no longer circulation, but the division of labor in the production
stage. Smith believed that to increase national wealth, the state must increase
the number of workers and labor productivity. An increase in the number of
workers requires the accumulation of capital, and the increase in labor pro-
ductivity is predicated upon the division of labor. The division of labor, in
turn, leads to exchange, and exchange leads to a series of economic categories
such as value.11 In Smith’s time, England had become a capitalist industrial
nation, and agriculture had become capitalist agriculture. The bourgeoisie, as
a progressive class, demanded the clearing of obstacles for capitalist develop-
ment, the elimination of state intervention and mercantilist policies,12 and the
abolition of feudalism.
However, from the perspective of economic statecraft, Britain, which
adopted liberal policies, did not actually forego the power strategy of the state.
What truly made the British Empire strong was the combination of liberalism,
the industrial revolution, and the empire. It was the bourgeoisie that pushed
Britain to adopt liberal policies. Therefore, in the liberal era, the bourgeoisie
was responsible for implementing both the strategy of wealth and the strategy
of power. This transcends the dichotomy between the actors of wealth and
power strategies during the mercantilist period (bourgeoisie vs. feudal des-
pot). In the classical liberal period, the state’s pursuit of wealth required the
supply of state power, and when the general state system failed to deliver, Brit-
ain moved toward colonialism and eventually the establishment of an empire.
When state power could not satisfy the state’s need for wealth, the empire
was abandoned. For nations that uphold the liberal doctrine, their states are
controlled by merchants and capitalists, and their states seek wealth maximiza-
tion. To maximize wealth, the state needs a constant supply of power and the
appropriate political scale to accommodate wealth maximization, which is why
Britain adopted the political form of empire and eventually occupied India.
British economic statecraft in the 17th and 18th centuries, essentially, was to
fexibly deploy its political and military power to maximize economic gains.
38 Paradigm Shifts in Economic Statecraft Over Time

Two historians of Europe’s imperialisms, John Gallagher and Ronald Rob-

inson, sketched out Britain’s route to world empire after 1815. At the heart
of their argument lay two crucial assertions: that the British constantly sought
the least efortful way of pursuing their interests in every part of the world,
partly because of their system of government with its inbuilt constraint on
public expenditure; and that this led them, wherever they could, to rely upon
cooperation (“collaboration”) with the local elites into whose backyards they
strayed. The result was a complex historical pattern. In some parts of the
world, the British could secure an open door for their trade by an energetic
diplomacy that left local sovereignty more or less intact: this was the Latin
American model. In less cooperative regions, a more coercive approach was
adopted: if the locals would not open the door, the lock would be forced and
the door battered down. Between 1839 and 1842, the British applied this
to China, demanding free entry to its markets, and blocking the Yangtze –
China’s main artery – with their steamers until Beijing gave way.13 The British
power strategy in diferent places fully illustrates that the acquisition of wealth
must be accompanied by diferent types of power strategies, and the imperial
form is nothing but a manifestation of the power strategy.
Diferent from mercantilist economic statecraft, which seeks power maxi-
mization, liberal economic statecraft seeks wealth maximization. The rise and
fall of a liberal hegemon depend on the transformation from power to wealth.
Again, there exists a wealth-power paradox. The more wealth a liberal state
seeks, the more power she needs; the more she expands, the more wealth is
needed, leading to a fragile equilibrium of her supremacy. But compared with
a mercantilist state, a liberal state is more fexible in managing her internal
tensions and adjusting her political scale. A liberal state is a merchant state in
which the ruling actors are the same group of people – capitalists – whereas
in a mercantilist state, the leading actors are a dichotomy of feudal despot (or
authoritarians) and capitalists. That is why mercantilist states (or empires)
tend to sufer internal upheaval in a cyclical way, manifested in revolutions
and wars.

2.3 The Age of Imperialism (1870–1914)

John A. Hobson was among the frst who systematically studied imperial-
ism. In his famous book Imperialism (1902), he linked the phenomenon of
imperialism with the demands of maturing capitalism for markets, investment
opportunities, raw materials, and cheap labor.14 Inspired by Hobson, Lenin
developed a theory arguing that imperialism was the highest and fnal stage
of capitalism. Among Marxist theoreticians, Rosa Luxemburg did not agree
with Lenin on this point. She considered imperialism not as a historical stage
in the development of capitalism, but rather as a manifestation of the policy
of capitalist countries competing for the remaining “non-capitalist spheres” in
the world. Luxemburg argued that the inability of capital accumulation to take
place within the capitalist system, which led to and prompted the expansion
 Paradigm Shifts in Economic Statecraft Over Time 39

of capitalist aggression abroad, was the most profound root cause of imperial-
ism.15 She further suggested,

Though imperialism is the historical method for prolonging the career

of capitalism, it is also a sure means of bringing it to a swift conclusion.
This is not to say that capitalist development must be actually driven to
this extreme: the mere tendency towards imperialism of itself takes forms
which make the fnal phase of capitalism a period of catastrophe.16

Lenin and Luxemburg had diferent perceptions of imperialism because Lenin’s

defnition of imperialism was based on his answers to the problems of world
revolutions, especially the Russian revolution, whereas Rosa Luxemburg drew
from her study of political economics, which focused on revealing the laws of
capital movement. Lenin developed Marx’s theory of revolution and identi-
fed the motivation for revolution in the age of imperialism, while Luxemburg
developed Marx’s theory of capitalism and defned the logic of capital in the
age of imperialism.
Combining the views of Hobson, Lenin, and Luxemburg on imperialism,
we can revisit imperialism from the perspective of economic statecraft. Impe-
rialism emerged because the state’s unrestricted pursuit of wealth (capital)
demanded the imperial form and motivated inter-imperialist wars. In the age
of imperialism, the actor of the wealth strategy was monopoly capital, and the
actor of the power strategy was the government controlled by the monopoly
capitalists. The imperialist policy was largely an integrated strategy of wealth
and power; it was both wealth and power strategies.
Let’s frst look at Japan’s imperialist economic statecraft at the time of its rise.
After the Meiji Restoration created the foundation and conditions for Japan’s
transformation and rise to power, Japan began to rise. Economically, Japan gradu-
ally completed the transition to monopoly capitalism. Politically, Japan began to
expand after the annexation of Ryukyu, and in 1905, it formally annexed Korea.
A war is the most typical event that changes the balance of power. Japan rose to
become an internationally recognized power after winning the Sino-Japanese and
Russo-Japanese wars. However, Japan’s imperialist economic statecraft made it dif-
fcult to balance between its wealth and power strategies. In fact, imperialist Japan
always worried about its ability to produce wealth. It expanded territory by means
of war (power strategy) to gain greater abilities to produce wealth and extract
power. The result was militarization and strategic adventurism. The attempt to
annex China and the attack on Pearl Harbor both stemmed from the contradic-
tion inherent in Japan’s economic statecraft – wealth maximization depended on
militarist policy and the need to maintain an ever-expanding empire. This under-
lying dilemma of economic statecraft has been refected in varying degrees in all
major powers, but Japan was most torn by this “wealth-power dilemma”, likely
due to the small size of the Japanese island and the strategic anxiety of its political
elites. Therefore, the rise and fall of Japan in the frst half of the 20th century was
more or less concerned with Japanese imperialist economic statecraft.
40 Paradigm Shifts in Economic Statecraft Over Time

We will then examine the economic statecraft of tsarist Russia. Why did tsa-
rist Russia fnally choose the power strategy of imperialism and the wealth strat-
egy of industrialization? First was the loss of the Crimean War of 1853–1856.
In a battle from 1828 to 1829, Russia defeated the Turkish army and tried to
establish a protectorate over the increasingly tattered Ottoman Empire. But
this expansion threatened the balance of power in Europe and caused a mili-
tary confict between the Russian Empire and an alliance that included Britain,
France, the Kingdom of Sardinia, and the Ottoman Empire. The Crimean
War clearly revealed the weakness of the Russian Empire against the military
might of the industrialized nations of Western Europe. In September 1854,
the allied forces launched an attack on Russia’s Black Sea feet, the port city
of Sevastopol on the Crimean Peninsula. Despite European troops’ mediocre
command, the Russian army sufered a disgraceful defeat, with heavy losses on
its own territory due to its inability to mobilize, equip, and transport soldiers.
Russia’s economy could not support the tsar’s expansionist ambitions, and
the Crimean War clearly exposed the vulnerability of an agricultural economy
based on an unfettered labor force. The military defeat forced the tsarist gov-
ernment to reassess Russia’s social order and implement a sweeping restruc-
turing program. The most crucial elements of Russian social reform were the
emancipation of serfs; the establishment of local self-government (zemstvos)
in 1864 to manage the local afairs of health, education, and welfare; and
industrialization. The chief proponent of industrialization in Russia was Count
Witte, minister of fnance from 1892 to 1903 and fan of the German econo-
mist Friedrich List. In 1893, the objectives of his frst budgetary bill were
“removing the unfavorable conditions which hamper the economic develop-
ment of the country”, and “kindling a healthy spirit of enterprise”. At the heart
of his industrial policy was a massive railroad construction project that would
link vast areas of the Russian Empire and stimulate the development of other
industries. More importantly, the new railroad would cross Siberia, making
large-scale settlement, development, and industrialization possible in Siberia.
To raise funds for industry domestically, Count Witte reengineered the state
banks and encouraged the establishment of savings banks. He supported bur-
geoning industries with high protective tarifs, while also attempting to fund
industrialization with large foreign loans from Western Europe. French and
Belgian capital played a pivotal role in the development of the steel and coal
industries, while British money supported the boom of the oil industry in the
Caucasus region. In terms of power strategy, tsarist Russia embarked on a path
of continuous imperial expansion. However, economic crises, coupled with
military setbacks in World War I, led to the October Revolution and the col-
lapse of tsarist Russia.
Starting in the late 19th century, the hegemony of the British Empire was
challenged on many fronts. Britain’s competitiveness declined relative to the
rise of Germany, the United States, Japan, and other powers. Competing with
European powers in Africa and Asia had gradually exhausted Britain’s power. In
fact, up to 1914, British opinion still regarded free trade as the vital ingredient
 Paradigm Shifts in Economic Statecraft Over Time 41

of British prosperity. By that time, however, it was widely accepted that free
trade was under general attack and that it would be hard for the British to
defend their huge stake in a world now all but divided between fve Western
powers and the cadet power of Japan.17 The British Empire eventually fal-
tered. As Britain’s “free trade imperialism” collapsed, it adopted the approach
of closed regionalism by establishing the protectionist “system of imperial
preferences” and “sterling area” to extend the life of the British Empire.

2.4 Marxism
The Soviet Union was the frst country to adopt Marxism as its prevailing eco-
nomic statecraft. Following the triumph of the October Revolution, no prior
experience with socialism was available, and Lenin had to chart a new path.
In response to the problems revealed by the implementation of wartime com-
munism from the second half of 1918 to the spring of 1921, Lenin proposed a
new economic policy and made profound changes to the wartime communist
policy. After Lenin’s death, Stalin gradually developed the singular system of
public ownership of the means of production, a top-down command economy
system, through the issuance of directives and a highly centralized political
system. After the founding of the People’s Republic of China in 1949, Mao
Zedong also implemented a Marxist economic statecraft in China.
This highly centralized model of state ownership was well suited to war-
times, and China’s economic statecraft under Mao Zedong helped China pre-
vail in the Korean War and force an armistice deal with the United States. In
1950, the year after the founding of the Peoples Republic of China, China
managed to mobilize and extract resources from a very weak foundation of
wealth in a way that was unprecedented in history and efciently converted
such wealth into Chinese military power. It surprisingly forced the United
States, which at the time had half of the world’s gross domestic product
(GDP) and unmatched military power, to stop its advances at the 38th paral-
lel. However, this practice of a command economy subsequently experienced
major missteps, leading to the “Great Leap Forward” and the “Cultural Revo-
lution”, which caused signifcant economic and social harm to China. China’s
economic statecraft only saw meaningful changes after the reform and open-
ing-up in 1978, when it gradually moved toward a socialist market economy.
China’s diplomatic strategy also saw signifcant changes, accordingly.
In January 2013, Chinese President Xi Jinping refected on the Soviet
model of economic statecraft, arguing that the Soviet model promoted the
rapid economic and social progress of the Soviet Union under specifc histori-
cal circumstances and played an important role in the victory of the antifascist
war by the Soviet army. However, due to the lack of respect for economic laws,
its shortcomings grew increasingly pronounced over time and became a seri-
ous institutional hurdle to economic and social development. In the 1980s,
facing the predicament of economic and social development, the Soviet Union
and Eastern European countries tried to make adjustments, but under the
42 Paradigm Shifts in Economic Statecraft Over Time

strong ofensive of powers in the West, such adjustments deviated from the
right direction and led to a series of dramatic changes in Eastern European
countries in 1989, the disintegration of the Soviet Union, and the dissolution
of the Communist Party of the Soviet Union in 1991. Socialism sufered a
major setback in the world.18
To this day, China remains the largest testing feld for the Marxist economic
statecraft. Obviously, China’s economic statecraft is very diferent from Sta-
lin’s, the most crucial diference being the implementation of a market econ-
omy system. This system is called a “socialist market economy system” with
“Chinese characteristics”. This suggests that China’s Marxist economic state-
craft is a novel, ongoing experiment of statecraft that may come across various
challenges as it advances. The Communist Party of China (CPC) places great
emphasis on the “dialectic”, which was systematically invented by German phi-
losopher Hegel and later inherited and adapted by Karl Marx. The CPC seems
very comfortable with this dialectical process of moving from one contradic-
tion to another and from one problem to another, and it rejoices as these
contradictions and problems are resolved. To a large extent, communism, like
mercantilism and liberalism, is a philosophy as much as a methodology of
economic statecraft.

Notes
1 On February 27, 380 A.D., the Roman Emperor Theodosius I (Eastern Emperor)
and Gratian (Western emperor) jointly issued the Edict of Thessalonica, declaring
the trinity of Christianity orthodox and the state religion of the Roman Empire.
2 Chen, L., & Zhou, H. (2003). The Process of European Civilization (in Chinese).
Beijing: SDX Joint Publishing Company, p. 67.
3 Viner, J. (1968). Economic Thought: Mercantilist Thought. In David L. Sills (Ed.),
International Encyclopedia of the Social Sciences. New York: Free Press, p. 436.
4 Crowley, R. (2011). City of Fortune: How Venice Won and Lost a Naval Empire.
New York: Random House, p. 408.
5 List, F. (2022). The National System of Political Economy. Perth: Imperium Press,
p. 4.
6 List, F. (2022). The National System of Political Economy. Perth: Imperium Press,
p. 109.
7 North, D. C., & Thomas, R. P. (1973). The Rise of the Western World: A New Eco-
nomic History. Cambridge: Cambridge University Press, p. 2.
8 List, F. (2022). The National System of Political Economy. Perth: Imperium Press,
p. 92.
9 List, F. (2022). The National System of Political Economy. Perth: Imperium Press,
p. 118.
10 Darwin, J. (2012). Unfnished Empire: The Global Expansion of Britain. New York:
Bloomsbury Press, p. 20.
11 Zhao, Y. (2004). Studies in the History of Economic Theory (in Chinese). Beijing:
China Social Science Press, p. 59.
12 Zhao, Y. (2004). Studies in the History of Economic Theory (in Chinese). Beijing:
China Social Science Press, p. 58.
13 Darwin, J. (2012). Unfnished Empire: The Global Expansion of Britain. New York:
Bloombury Press, pp. 11–12.
 Paradigm Shifts in Economic Statecraft Over Time 43

14 Evans, G., & Newnham, J. (1998). The Penguin Dictionary of International Rela-
tions. London: Penguin Books, p. 244.
15 Zhang, K. (2018). A Genealogy of Foreign Marxist Political Economy Figures (in
Chinese). Beijing: People’s Publishing House, p. 171.
16 Luxemburg, R. (2003). The Accumulation of Capital (A. Schwarzschild, Trans.).
London: Routledge Classics, pp. 426–427.
17 Darwin, J. (2012). Unfnished Empire: The Global Expansion of Britain. New York:
Bloombury Press, p. 26.
18 Publicity Department of the Communist Party of China (2016). Readings from
the Series of Important Speeches by General Secretary Xi Jinpin (in Chinese). Beijing:
People’s Publishing House & Xue Xi Chu Ban She, pp. 21–22.
3 America’s Economic Statecraft

Economic statecraft has been at the heart of US foreign policy since the found-
ing of the republic.1 This chapter breaks down the history of US economic
statecraft into three main historical phases: US economic statecraft in the con-
text of British hegemony (1775–1898), US economic statecraft in the context
of US hegemony (1898–2008), and US economic statecraft in the context of
the rise of the rest (since 2008).
In breaking down the history of US economic statecraft, I superimpose
the long world economic cycle and the hegemonic cycle to form a compos-
ite perspective that maps out the contours of US economic statecraft (see
Table 3.1). The so-called “long economic cycle” refers to 50–60 years of
fuctuations over two stages: phase A (economic growth) and phase B (eco-
nomic depression), each stage lasting about 20–30 years. The cycle is also
called the Kondratief long wave, named after the Soviet economist Nikolai
Kondratief. How the term came about remains up for debate. According to
Joseph Schumpeter, innovation was the main driver, including technological
and institutional innovation. The swell and ebb of economic tides has been
accompanied by the rise and fall of great powers. In the long world economic
cycle, hegemony rises and falls. Since modern times, three hegemonic powers
have emerged, namely, the Netherlands (which peaked in the mid-17th cen-
tury), the UK (which peaked in the mid-19th century), and the United States
(which peaked in the mid-20th century). Our discussion of US economic
statecraft is also placed in the context of the long economic wave and the rise
and fall of hegemonic powers.
In describing each historical stage, I focus on the critical junctures of that
stage and analyze the economic statecraft at these critical junctures, such as
the Truman Doctrine (economic aid to Greece) on the eve of the Cold War
and the Marshall Plan. Given the richness of US economic statecraft, I cannot
run a full analysis; I can only select some critical junctures in history to exam-
ine, and these junctures often coincided with transitions of diferent historical
stages that can help reveal the underlying reasons behind the paradigm shift
and major US economic statecraft decisions.

DOI: 10.4324/9781003351382-4
This chapter has been made available under a CC-BY-NC-ND license.
 America’s Economic Statecraft 45

Table 3.1 Evolution of US Economic Statecraft from the Perspective of the Long
World Economic Wave Coupled with the Hegemonic Cycles

Long Economic Cycle Hegemonic Cycle US Economic Statecraft

(Kondratief Long Wave)

Kondratief The beginning of the British Founding of the nation

long wave I-A hegemonic cycle: (1783–1814):
(1790/98–1815/25) Rise of British hegemony: Independence, national
Glorious Revolution unifcation, and forming
(1688–1689), joining of nation. Washington’s
the anti-French Grand Farewell Address:
Alliance in 1689, loss Development of
of American colonies commercial relations, but
(1783), French Revolution nonentanglement with
(1789), Napoleonic Wars European powers. Second
(1803–1815). War of Independence
(1812–1815).
Kondratief The triumph of British Continental Empire
long wave I-B hegemony: Power parity (1815–1850s): Monroe
(1820/25–1848/52) through “European Declaration (1823),
coordination”. Mexican-American War,
purchase of Florida,
Gadsden Purchase.
Kondratief long Maturity of British hegemony: Civil War: 1861–1865;
wave II-A “High hegemony” and free purchase of Alaska.
(1848/52–1870/75) trade phase, Great Britain
as a hegemonic power with
establishment of global
free trade regime and naval
dominance, colonial control
of the periphery, American
Civil War, unifcation of
Germany and Italy, Russia
enters world stage, initial
disruption to capitalist
world economy, China’s
tributary system.
Kondratief long Decline of British hegemony: Overseas Empire:
wave II-B Decline of Britain, process Reciprocity Treaty of
(1870/75–1893/96) of challenge to British 1875, began to expand
hegemony from Germany, into overseas markets,
United States, and Japan established naval bases
following domestic political and coaling stations,
restructuring; the classical started trading at a surplus
age of imperialism; Western from 1874 onward, with
powers scramble for Africa surplus lasting 75 years.
and struggle for supremacy
in Europe; Britain and Russia
competing for Central Asia
(“Great Game”) while China
and Japan compete for East
Asia leadership; Second
Industrial Revolution.

(Continued)
46 America’s Economic Statecraft

Table 3.1 (Continued)

Long Economic Cycle Hegemonic Cycle US Economic Statecraft

(Kondratief Long Wave)

Kondratief long Beginning of US hegemony Rise of US hegemony:

wave III-A cycle: Rise of US hegemony Spanish-American War,
(1893/96–1914/20) and end of British hegemony Panama Canal, “Open
– a world power beyond the Door” (1899–1900),
Americas, consolidation of New York City became
US and German economic a global fnancial center,
leadership, arms race, mediation of Russo-
Western powers and Japan Japanese War.
scrambling for China and
the rest of Asia.
Kondratief long Triumph of US hegemony: Triumph of US
wave III-B Inter-regnum; demise hegemony: Wilson’s
(1914/20–1940/45) of British hegemony, no Fourteen Points; US
immediate takeover of global retreat to isolationism;
leadership by the United World War II.
States, leaving a global power
vacuum and the so-called
“Kindleberger Trap”, imperial
competition, beginning of
revolts in periphery.
Kondratief long Maturing of US hegemony: Maturing of US
wave IV-A Undisputed leader of the hegemony: Bretton
(1940/45–1967/71) free world, establishment of Woods system.
US hegemony, Cold War,
economic growth, new
core-periphery relations.
Kondratief long Decline of US hegemony Decline of US hegemony:
wave IV-B (competition from Japan Bretton Woods
(1967/71–1989/91) and Europe): unraveling of collapsed, Nixon’s “ice-
postwar geopolitical world breaking” trip to China.
order.
Kondratief long A new cycle of great power Globalization, regional
wave V-A competition begins: economic integration,
(1989/91–2001/08) multipolarity, dramatic Reaganomics (supply-side
changes in the Soviet school), Clintonomics
Union, the end of the (strategic trade
Cold War, a temporary policy, super salesman
stay of the decline of US Clinton, World Trade
hegemony, rise of the Organization/North
European Union and American Free Trade
China. Agreement/Asia-Pacifc
Economic Cooperation),
trade policy emphasizing
positive reciprocity; liberal
democratic expansion
strategy, North Atlantic
Treaty Organization
eastward expansion;
geoeconomic strategy.

(Continued)
 America’s Economic Statecraft 47

Table 3.1 (Continued)

Long Economic Cycle Hegemonic Cycle US Economic Statecraft

(Kondratief Long Wave)

Kondratief long New power structure forms: Establishment of the G20

wave V-B new hegemonic cycle/ in 2008, pivot to Asia in
(2001/08–2025/35?) multipolarity? 2010, populist President
China’s continued rise, Trump came into power
continued decline of US in 2016, US-China
hegemony, “profound Trade War in 2018, US
changes unseen in a troop withdrawal from
century” (2007 subprime Afghanistan in 2021,
mortgage crisis, Trump’s President Biden’s “Build
rise to power, US-China Back Better” framework
trade war, COVID-19 and “Build Back Better
pandemic, Russia-Ukraine World” (B3W) initiative,
confict), old international US-led coalition against
order crumbles while the Russia’s invasion of
world enters a geopolitical Ukraine in 2022.
transition, “Kindleberger
Trap”.
Source: Prepared by the author.

3.1 American Economic Statecraft in the Context of British

Hegemony (1775–1898)
British hegemony was on the rise during the historical period in which the
British Empire lost the American colonies. In a sense, the loss of the Ameri-
can colonies did not prevent Britain’s historic rise on the world stage. In
terms of the cadence of the long economic cycle, British hegemony, from
its rise to decline, went through two long economic cycles (Kondratief long
waves) from the end of the 18th century until the end of the 19th century,
a period of about 100 years (see Figure 3.1). These long 100 years provided
the historical background for the founding and rise to prominence of the
United States. My observation of American economic statecraft in the 100
years after the founding of the United States also proceeds from this larger
background.

3.1.1 Founding of the United States of America

The period from the War of Independence (1775–1783) to the Second War
of Independence (1812) constituted the frst historical phase of America’s eco-
nomic statecraft.
In the nation’s early years, American statecraft was best encapsulated
by George Washington’s open letter to the people of the United States of
America, published in Philadelphia’s Daily American Advertiser on Sep-
tember 19, 1796. At its core was isolationism and pragmatism based on
 48
America’s Economic Statecraft
˜ ° ˛ ˝ ˙ ˆ
A B A B A B A B A B A B
The Fourth
Lead Region Restructuring Lead Region Restructuring
Stagnation Industrial
Britain Spread to Britain as the Rise of
in the recent “Great Revolution?
adjacent workshop of the United After the war
Stagnation depression Depression”?
continent the world States and L ,
Growth in the in the Great ICIA NCE
Germany T TIF E
Depression NE OGY AR LLIG NG, E
“Edwardian ER T E I
INT HNOL I N
PR
IN T NC
CIE OG
Y?
Stagnation boom” T EC 3D EN S NOL
ION CS BIO E
GR TEC
H
in the “late IAT I AN
D
AV TRON
Growth in Victorian E C
EL
the “mid- depression” S
IP IC Economic
Victorian SH R
Stagnation M CT Nationalism
boom” T EA LE ER
around the S /E
S OW Neoliberalism
Growth in the “hungry” GA P
“original” forties S
AY Liberal
Industrial W
A IL EEL Institutionalism
R S T
Revolution Lead Regions Restructuring Lead Region Restructuring Lead Regions Restructuring Lead Region
The United Within lead The United Rise of West The United Rise of China China?
States and states States as Germany States and and India United States?
R
ON E Germany great economic and Japan
TT OW European Europe?
CO M P power The decline of
A Union
TE Europe? Anti-
S
globalization,
populism
1780/90 1820/25 1848/52 1870/75 1893/96 1914/20 1940/45 1967/71 1986/91 2005/08 2025/30 2050/55 2070/80

Figure 3.1 The Evolution of the Kondratief Cycle and Hegemonic Cycle
Source: Xiaotong, Zhang & Flint, Colin. “Why and Whither the US-China Trade War?: Not Realist ‘Traps’ but Political Geography ‘Capture’ as Explanation”.
Journal of World Trade 55, no. 2 (2021): 341.2
 America’s Economic Statecraft 49

US self-interest. It called for strict US neutrality and independence of US

foreign policy from the complexities of European afairs to avoid “entan-
gling alliances” with Europe. George Washington exhorted American peo-
ple: “the great rule of conduct for us in regard to foreign nations is, in
extending our commercial relations, to have with Europe as little political
connection as possible”.
George Washington told American people,

Europe has a set of primary interests, which to us have none or a very

remote relation. Hence she must be engaged in frequent controversies,
the causes of which are essentially foreign to our concerns. Hence there-
fore it must be unwise in us to implicate ourselves, by artifcial ties, in
the ordinary vicissitudes of her politics or the ordinary combinations and
collisions of her friendships or enmities.

Regarding American foreign policy choice, George Washington suggested,

Our detached and distant situation invites and enables us to pursue a

diferent course. . . . Why forgo the advantages of so peculiar a situation?
Why quit our own to stand upon foreign ground? Why, by interweav-
ing our destiny with that of any part of Europe, entangle our peace and
prosperity in the toils of European ambition, rivalship, interest, humor,
or caprice? It is our true policy to steer clear of permanent alliances with
any portion of the foreign world.3

Washington’s inveterate realism was rooted in his commitment to control,

over himself and over any and all events with the power to determine his fate.4
Washington adhered to such an axiom: no nation is to be trusted farther than
it is bound by its interest.5
The most obvious corollary to Washington’s view of American national
interest was the avoidance of a major war during the gestative phase of
national development.6 This phase can be considered the infancy of the
United States (1783–1812). Guided by Washington’s isolationist and
pragmatic ideology, the founding fathers were able to focus on building
national strength, improving national defense, and opening new territo-
ries. The priority for the subsequent generations was to consolidate Ameri-
can control over the North American continent and to exclude, at any
cost, that which would hinder or deviate from this central task. During
this time, there was a century-long struggle between Britain and France
for dominance over Europe and the world, which did not end until Napo-
leon’s defeat at Waterloo in 1815. Washington remained level-headed on
the situation, and the centerpiece of foreign policy during his presidency
was the 1793 Proclamation of Neutrality and the 1794 Jay Treaty. The
Proclamation of Neutrality stated that the United States would act only
as a witness to the ongoing European confict. Washington even went so
50 America’s Economic Statecraft

far as to project the likely duration of this active American distance from
European politics:

Twenty years peace with such an increase of population and resources as

we have a right to expect; added to our remote situation from the jarring
powers, will in all probability enable us in a just cause to bid defance to
any power on earth.

In a sense, it was a fresh application of a strategic lesson he had learned dur-

ing his tenure as commander-in-chief of the Continental Army. That strategic
lesson was to do anything possible to avoid a head-to-head confrontation with
a more powerful army until winning becomes possible. Washington’s strategy
of 20 years of delay proved to be astute in hindsight, and the United States
enjoyed exactly 20 years of peace until the outbreak of the Second War of
Independence with Great Britain in 1812.
Against the backdrop of the British Empire and other European powers,
the newly formed United States of America took a defensive position diplo-
matically but was economically aggressive. It vigorously developed trade and
kept tarifs low. At the same time, it actively expanded westward, incorporating
Louisiana (1803) through land purchase. To defend its sovereign independ-
ence, the United States also actively used the tools of economic sanctions,
such as the Embargo Act of 1807. Washington knew that the future of the
United States lay in the western region and its development into a continental
empire in the coming century. Washington focused many resources on build-
ing canals. For example, the Potomac constituted a direct link to the river
system of the interior. Washington knew in his bones that the energy of the
American people must fow in that direction.7
The Second War of Independence (1812–1815) was the frst external war
for the United States after independence. This war forced a peace treaty from
the British Empire and won the United States international prestige. It also
inspired strong patriotism among Americans. In 1812, Thomas Jeferson said,

The acquisition of Canada this year, as far as the neighborhood of Que-

bec, will be a mere matter of marching, and will give us experience for
the attack of Halifax . . . and the fnal expulsion of England from the
American continent.

The belief that “the U.S. is destined to expand its dominion across the entire
North American continent”, was later termed “manifest destiny”. Thus, even
at the outset of the nation’s founding, the idea of an empire was already pre-
sent in the statecraft and diplomatic practices of America’s founding fathers. In
Washington’s mind, the United States was an “empire on the rise”.8
Among the founding fathers, another fgure who had a profound infuence
on American economic statecraft was Alexander Hamilton, whose ideas on
statecraft were best captured in the Federalist Papers and the First Report on
 America’s Economic Statecraft 51

Public Credit. The First Report suggests that the enormous but latent poten-
tial of the American economy required more than mere release to achieve
its full potential. Hamilton believed that the mobilization of these resources
required abiding management and strategic orchestration at the national level.
Diferent from Hamilton, Madison, and to an even greater extent Jeferson,
seemed to think that economic policy consisted of getting out of the way
to allow the natural laws of economic recovery and growth to proceed. But
Hamilton thought the conditions for economic development needed to be
created, then enduringly overseen. His model was England, with its national
bank, regulated commerce, and powerful fnance ministers.9 So, Hamilton was
arguably a mercantilist.
In the First Report on Public Credit, there is the Hamiltonian confdence
that the concentration of political and economic power was a dynamic force;
it was not a threatening cluster of invasive corruption, but a synergistic fusion
of developmental energies.10 In terms of statecraft, Hamilton difered greatly
from Madison. While Madison’s frame of reference was instinctively political
and idealized the dispersal of power naturally checked by the inherent diver-
sity of difused interest groups, Hamilton’s cast of mind was instinctively eco-
nomic. He visualized the concentration of capital in the hands of a select few as
the essential precondition for commercial investment and economic growth.11

3.1.2 Continental Empire (1815–1850s)

Thanks to the gradual increase in national power and the second war of inde-
pendence that forced Great Britain, the incumbent hegemonic power, into
a peace deal, the United States became more assertive and began to build a
larger continental empire under the mantra of “manifest destiny” and expan-
sionism. This history extends from the Monroe Doctrine to the Civil War.
On December 2, 1823, US President James Monroe delivered a State of
the Union, prepared by John Quincy Adams, to Congress. The diplomacy
component of this address was referred to as the Monroe Declaration, which
would become known as the Monroe Doctrine. It contained three basic prin-
ciples: (1) the United States would oppose any further eforts at coloniza-
tion by European powers in the Americas, (2) “non-intervention”, and (3) the
“inter-American system”.
In terms of territorial expansion, the United States acquired Florida from
Spain (1819) and, through the Mexican-American War of 1846–1848,
acquired present-day California, Nevada, Utah, Texas, and parts of several
other states from Mexico. In 1854, the United States purchased a large por-
tion of land in the southern part of Arizona and New Mexico from Mexico for
US $10 million, which became known as the Gadsden Purchase.
The United States also began negotiating a series of foreign trade agree-
ments with countries such as Russia, Spain, Turkey, Britain, Canada, the Ger-
man Customs Union (Zollverein), and Ceylon. The trade agreement with
Ceylon was the frst trade deal the United States signed with an Asian nation.
52 America’s Economic Statecraft

During this period, US tarifs rose signifcantly in response to both the need
to increase government revenues to pay of the debt accumulated during the
Second War of Independence and because of domestic protectionist pressures.
Tarif acts of 1824, 1828, 1832, 1833, 1842, and 1857 were passed during
this period, and the tarifs peaked in 1832 before falling to their lowest levels
(during this period) in 1857.
Meanwhile, the United States expanded overseas, including forcing the
Qing Empire to sign the unequal Treaty of Wangxia in 1844 and the Perry
Expedition of 1853, which opened the gates of Japan.
This stage of history described when the United States strengthened its
power, building a continental empire and expanding its territory westward
to the Pacifc coast (through both land acquisition and warfare) under the
mantra of “manifest destiny”. The United States would eventually become a
bicoastal nation. At the same time, the country began small steps of expansion
in Asia. Behind all these actions was the shadow of the British Empire as the
world’s leading power.

3.1.3 Civil War and Overseas Empire (1860/65–1898)

This period was in the run-up to the rise of US hegemony, a period of transi-
tion in American history. During this period, the British Empire reached its
apex before its power began to wane.
The Civil War was a watershed moment in American history. In the 1830s
through 1850s, Americans believed that the westward expansion movement
was guided by manifest destiny, an expansion of American democracy and
capitalism witnessed and blessed by God. But the abolition of slavery and the
brutality of the Civil War caused President Abraham Lincoln to question why
God had allowed the American nation to fght each other to such an extent.
The question Abraham Lincoln kept asking is: If the remarkable US expan-
sionism of both territory and a democratic system was manifest destiny, why
did it climax in the Civil War?12
The answer lay in the model of American economic development. The Ameri-
can nation became increasingly divided. The industrial north desperately needed
cheap cotton from abroad to boost its burgeoning textile industry, while the agri-
cultural south desperately needed high tarifs to protect its cotton production. As
a result, keeping or abolishing slavery became a key issue in American politics.
Only after the Civil War was the American industrial potential fully released.
The United States became the world’s largest economy during this period,
but it did not immediately embark on a path of expansion until the Spanish-
American War in the late 19th century. Fareed Zakaria, an American scholar
of international studies and media commentator, asked the question: Why did
the United States, the world’s most powerful industrialized nation since the
beginning of 1870s, hew to a relatively isolationist line, with few exceptions,
until the 1890s – a highly unusual gap between power and interests, for it
lasted some 30 years.13 This is a central question in economic statecraft.
 America’s Economic Statecraft 53

Zakaria’s answer is the so-called “state-centered realism”.14 The pattern of

American foreign policy from the end of the Civil War to the close of Theodore
Roosevelt’s term as president largely confrms the predictions of state-centered
realism: central decision makers, which in the American case means the presi-
dent and his closest advisers, expanded American infuence abroad when they
perceived increases in state power. The decades after the Civil War saw the
beginning of a long period of growth in the United States’ material resources.
But this national power lay dormant beneath a weak state, one that was decen-
tralized, difuse, and divided. Zakaria argues that the presidents and their secre-
taries of state tried repeatedly to convert the nation’s rising power into infuence
abroad, but they presided over a federal state structure and a tiny bureaucracy
that could not get men or money from the state governments or from society at
large. During this period, the power of the presidency was at a historic low and
the unprecedented national debt after the Civil War fostered a pervasive sense
of national bankruptcy and weakness that exacerbated this tension. America
was an unusual great power – a strong nation but a weak state. The 1880s and
1890s mark the beginnings of the modern American state, which emerged
primarily to cope with the domestic pressures generated by industrialization.
The exigencies of the growing national economy and the collapse of the con-
gressional bid for supremacy gave the federal government a more centralized,
less political, and rational structure. And as the only nationally elected ofcer of
government, the president emerged with strengthened authority.15
Many historians have another theory for the lack of US expansion during this
period: the economic difculties of the 1870s prevented expansion in that era.
According to this theory, when the southerners left Washington in 1861, the
northerners who now controlled Congress quickly passed a series of laws that cre-
ated a foundation for the American industrial and fnancial complexes that soon
dominated world afairs.16 The legislation included, for example, a much higher
tarif. Such a tarif had long been opposed by southerners, whose plantation owners
wanted access to the cheapest (that is, British) industrial products. Now protected
by the ever-rising tarif, northern steel makers such as Andrew Carnegie joined the
creators of other new industries, such as John D. Rockefeller’s Standard Oil Com-
pany, to build an industrial complex that became the world’s most productive by
1900. A new overseas economic empire was being developed by the Americans.17
In 1867, the United States purchased Alaska from tsarist Russia. The coun-
try began to develop its naval forces during this period, establishing naval bases
and coaling stations around the world. In 1875, the United States signed a
free trade agreement with the Hawaiian Kingdom.

3.2 American Economic Statecraft in the Context

of US Hegemony
US hegemony rose to its peak and matured from the late 19th century to the
1960s. It is inseparable from the United States’ impressive economic growth
during this period.
54 America’s Economic Statecraft

According to Robert Gordon, an American economic historian, the eco-

nomic revolution of 1870 to 1970 was unique in human history, unrepeat-
able because so many of its achievements could happen only once.18 Gordon
fnds, with an average annual rate of total factor productivity (TFP) growth
of 1.89% per year between 1920 and 1970, in 1970–2014, by contrast, the
growth rate was only 0.64% per year, just a third the pace of 1920–70.19 Gor-
don argues that the 1920–70 upsurge in TFP growth refected the impor-
tance of the great inventions of the Second Industrial Revolution (IR #2). His
interpretation is that the digital Third Industrial Revolution (IR #3), though
utterly changing the way Americans obtain information and communicate, did
not extend across the full span of human life as did IR #2, with the epochal
changes it created in the dimensions of food, clothing, housing and its equip-
ment, transportation, information, communication, entertainment, the curing
of diseases and conquest of infant mortality, and the improvement of working
conditions on the job and at home.20 For Gordon, chief among the headwinds
that slowed TFP growth since 1970 is the rise of inequality that has steadily
directed an ever larger share of the fruits of the American growth machine to
the top of the income distribution.21
Robert Gordon’s fndings help us understand why US hegemony rose and
matured from the late 19th century to the 1960s, especially after the Great
Depression when the United States leapt to world hegemony through World
War II and completely shaped the post-World War II international order. How-
ever, from 1971 onward, US hegemony entered a period of relative decline,
and this decline has continued to this day with a profound underlying wealth
rationale, that is, the decline of US growth. The decline of US growth led to
the decline of US hegemony.
Next, I will elaborate on American economic statecraft in the order of the
rise, victory, maturity, and decline of US hegemony from the Spanish-Ameri-
can War of 1898 through the 2008 global fnancial crisis.

3.2.1 Rise of US Hegemony (1898–1913)

In the 19th century, thanks to the Industrial Revolution, the United States
saw substantial gains in economic productivity and, by 1894, had become
the world’s top industrial producer. As industrial production far outstripped
domestic demand, the United States expanded its territory and market
towards the west – guided by “manifest destiny” – from the Atlantic to the
Pacifc coast. In 1898, the Spanish-American War broke out, and the system
of US overseas colonies came into being. Following the Spanish-American
War, the occupation of Cuba was the turning point for US policy in Latin
America. The Americas became the continents for Americans. With the intro-
duction and implementation of the Open Door policy and the Big Stick pol-
icy, the United States used the Philippines and Cuba as bases for its expansion
plans towards China and Latin America. China and Latin America quickly
became the two major centers of US overseas expansion. Such dynamics took
 America’s Economic Statecraft 55

on the nature of global expansion and allowed the United States to grow into
a world power.
In terms of the development of the capitalist world economy since 1780,
the hegemony of the British Empire has gone through two Kondratief long
waves (see Figure 3.1), that is, long waves I and II. Starting with long wave
III, that is, the 1890s, the United States embarked on the path of hegemonic
rise. Since the American War of Independence in 1783, it took the United
States 100 years to go from being an independent nation to a strong nation.
In the next 100 years, it would then complete its ascendence to supremacy.
Walter LaFeber, a distinguished American diplomatic historian, concluded,
“the economic foundation for this new empire was laid in the 1860 to 1890s
era. Yet the new empire’s political structure strikingly appeared on this founda-
tion between the 1890s and 1913”.22 This is an intriguing quote from Profes-
sor LaFeber. Indeed Zakaria, in his book From Wealth to Power: The Unusual
Origins of America’s World Role, addressed a similar question. Although the
United States had become the world’s largest economy in the 1870s, it waited
30 years before embarking on the path of expansion. What was the reason for
this 30-year lag between the United States becoming a major economic power
and a strong political power? Fareed Zakaria suggested an answer, that it was
because the American state was too weak before 1880s. Only when a new
strong state appeared in the 1880s and 1890s, could the United States embark
on the path of expansion. I would label the years of the 1890s as the gesta-
tive stage of a modern economic statecraft, when the United States was fnally
able to transform wealth to power in a confdent manner. And only when the
United States was able to practice strong economic statecraft was she able to
rise to hegemony, a combination of supreme economic and military strengths.
In April 1898, then-US President William McKinley declared war on Spain.
In what then-Secretary of State John Hay described as a “splendid little war”,
American troops defeated the European power of Spain in less than three
months, capturing Cuba, Puerto Rico, and the Philippines. In 1899–1900
John Hay issued two historic Open Door notes that defned the main princi-
ples for the new empire. His Open Door notes opposed colonialism and vigor-
ously supported open foreign markets (in which the new American economic
dominance could compete successfully against anyone). These two principles
dominated US foreign policy into the 21st century.23
In 1903, then-US President Theodore Roosevelt aided the Panamanian
rebellion, which led to Panama’s independence from Colombia and the
acquisition of a 10-mile-wide strip of land on both sides of the Panama Canal.
With his passion for infrastructure projects, President Roosevelt took over
the Panama Canal project, which the British and French had failed to com-
plete, and after 10 years of hard work and mobilization of every economic,
military, and diplomatic means available to the United States, the Panama
Canal was fnally completed and opened in 1914. During 1904–1905, Presi-
dent Roosevelt proposed the famous Roosevelt Corollary, a supplement to
the Monroe Doctrine, that stated that the United States has the right to
56 America’s Economic Statecraft

intervene in the afairs of the countries in the Western Hemisphere to avoid

“external invasion” that would harm the overall interests of the countries in
the Americas. The United States has a responsibility to exercise its role as
international police in the Americas.
Theodore Roosevelt’s successor, President Taft (1909–1913), inherited
Roosevelt’s mantle of economic interventionism and vigorously pursued “dol-
lar diplomacy”. Both Taft and his secretary of state, Philander Chase Knox,
believed that the goal of US foreign economic policy was to create a stable
external environment that would facilitate business abroad for American busi-
nessmen. They also believed that private capital was conducive to this goal.
Guided by this foreign economic policy, they used the US military to protect
US investments in South America, Central America, and China, among other
places. Taft’s approach to economic statecraft can be seen as a two-way trans-
formation of wealth and power, particularly the direction of power to wealth
with diplomacy and the military serving economic interests. The United States
encouraged American bankers to lend to Haiti, resulting in massive indebted-
ness for Haiti. At the same time, Taft’s “dollar diplomacy” was designed to
squeeze European and Japanese capital out of the Western Hemisphere and to
make the Americas truly America’s Americas. This policy caused a great deal of
controversy around the world.
The United States also exerted control over Latin American countries
through regional international organizations. The First International Con-
ference of American States, held in Washington, DC, from October 1889 to
April 1890, approved the creation of the Organization of American States
(OAS). Additionally, a structure of institutions was gradually established to
promote cooperation in specifc areas: the Pan American Health Organiza-
tion (1902), which later became the regional ofce of the World Health
Organization; the Inter-American Juridical Committee (1906), the Inter-
American Children’s Institute (1927), the Inter-American Commission of
Women (1928), the Pan American Institute of Geography and History
(1928), the American Indian Institute (1940), the Inter-American Insti-
tute for Cooperation on Agriculture (1942), the Inter-American Defense
Board (1942), the Inter-American Commission on Human Rights, the
Inter-American Court of Human Rights, the Inter-American Drug Abuse
Control Commission, the Inter-American Telecommunication Commission,
the Inter-American Committee on Ports, and the Justice Studies Center of
the Americas, etc. By this time, the entire network of regional international
institutions – created to strengthen cooperation among American states on a
wide range of regional issues – became an instrument of economic statecraft
by the United States to exert infuence and control over the countries of
Latin America.
In 1905, Theodore Roosevelt was awarded the Nobel Peace Prize for medi-
ating the Russo-Japanese War. By this point, the United States had become a
major force on the international stage.
 America’s Economic Statecraft 57

3.2.2 Triumph of US Hegemony (1914–1945)

This historical phase began and ended with the First and Second World Wars,
when US hegemony gradually reached its pinnacle. However, during this
30-year period, US foreign policy and US external relations underwent a dra-
matic swing: the United States declared neutrality at the beginning of World
War I, but then intervened unexpectedly and sought to lead the world after
the war. However, the American public was not interested in the role of world
leader, and the Senate refused to ratify the Treaty of Versailles or join the
League of Nations. What followed was the Republican government’s limited
entanglement in international afairs and the abandonment of the collective
security principle in the 1920s. By the 1930s, isolationism, which strenu-
ously avoided any international obligations, dominated US foreign policy.
After Pearl Harbor, the United States became fully involved in world wars
and assumed responsibility for reshaping the international order and leading
the world in the postwar era.24 Professor Wang Lixin of the Department of
History at Peking University calls this period of US hegemony (from 1913 to
1945) “hesitant hegemony”.25

3.2.2.1 Hegemonic Hesitance (1913–1933)

The United States rose to power in the late 19th century. Compared with the
old powers, its accumulated economic strength was transformed into power
through a path featuring unprecedented institutional shifts and innovation.
This was best refected in the diplomatic philosophy and practice of President
Woodrow Wilson.
World War I enabled the United States to break free from the shackles of
isolationism. To avoid another war, Wilson’s “idealism” came to the forefront
and won international discourse for the rise of US hegemony. In his “Fourteen
Points”, Wilson proposed the establishment of an international organization
for the purpose of maintaining world peace and security. Wilson frst advo-
cated his plan for a world union in May 1916 and publicly proposed that the
United States become a member of the League of Nations in January 1917.
At that time, many countries had doubts about establishing the League of
Nations themselves, and Wilson was ready to apply pressure on this matter.
Soon after the United States entered the war in April 1917, Wilson wrote to
his good friend Colonel Edward House, saying: “When the war is over we
can force them to our way of thinking, because by that time they will, among
other things, be fnancially in our hands”.26 After the Paris Peace Conference
on January 18, 1919, Wilson insisted on discussing the establishment of the
League of Nations frst and having the Covenant of the League of Nations as
a necessary component of the peace treaty with Germany. After 26 revisions,
the Covenant of the League of Nations was adopted at the Paris Peace Con-
ference on April 28, 1919. Under the terms of the peace treaty, the League
of Nations, the world’s frst international political organization with sovereign
58 America’s Economic Statecraft

states as members, was established in January 1920. The United States actively
spread the idea of free markets for economic development and social progress
on a global scale through international organizations and other means. Addi-
tionally, its own development story confrmed the enforceability and superior-
ity of the idea and enabled both the further penetration of liberal ideas and a
consolidation of US dominance in international discourse.
However, in March 1920, the Republican-controlled US Senate rejected
the ratifcation of the Treaty of Versailles, mainly on the grounds that the Cov-
enant of the League of Nations formed part of the Treaty of Versailles, and
that the United States could not accept the control by a supranational power
(i.e., the League of Nations would be controlled by Britain and France, which
would hinder the expansion of US hegemony). Therefore, Republican leaders
within the Senate remained opposed to the creation of the League of Nations.
For most of the 120 years since the founding of the United States, the coun-
try’s foreign policy had followed the nonalignment ideas of Washington and
Jeferson, and Wilson’s policy of international institutionalism was met with
great resistance at home. Faced with such resistance, Wilson began speaking
throughout the country to persuade the American public to accept his inter-
nationalist philosophy. Unfortunately, he sufered a stroke while in Colorado
and lost his ability to speak. After the stroke, Wilson became more determined
and unwilling to concede to Republicans. This attitude eventually led to the
complete rejection of the Treaty of Versailles by Congress. The United States
did not join the League of Nations. This was a major setback for US economic
statecraft. As the world’s largest economy and the victor of World War I in
Europe, the United States had sufcient national power to shape – and had
clearly proposed a blueprint – for the postwar order through its own diplo-
matic practice, but because of domestic constraints and opposition, it ulti-
mately became a lost cause. This major historical event fully illustrates that the
transformation from wealth to great power status will never happen overnight
or automatically. Whether the domestic public will follow and whether the
various domestic forces can unite under a common philosophy are key tests
confronting rising powers.
After missing the window of opportunity in 1919, US foreign policy fell
into indecision. Regardless, the decade from 1919 to 1929 was a bright spot
in the practice of US economic statecraft, and the United States fully wielded
its economic power to become a decisive force on the international scene in
Europe after World War I. The representative fgure was then-US Vice Presi-
dent Charles Dawes, who proposed the Dawes Plan as an economic solution
to the geopolitical disputes in Europe. The Paris Peace Conference of 1919
forced Germany to pay huge war reparations, which led to hyperinfation and
economic collapse, while France needed to recover lost territories from Ger-
many as the victor of World War I. At a time when the international order
in Europe was disintegrating and Germany was in economic crisis, American
bankers and exporters knew that Germany was the most important industrial
power on the European continent, and they knew that if the German economy
 America’s Economic Statecraft 59

collapsed, then Europe would fall into an economic depression. In 1924, Chi-
cago banker and then-Vice President Dawes quickly convened an international
conference and proposed a US loan facility to settle German war reparations,
injecting a large amount of US private capital to rebuild the German economy,
and France backed down from its territorial claims. Order was briefy restored
in Europe.
But such stability was short-lived, as the United States began to sufer an
economic crisis in 1928–1929. This crisis lasted until 1933, when the US
economy was still underwater and unemployment levels had reached a record
25 million. European and Japanese economies were also in downfall. In 1933,
Hitler’s Nazi regime came to power, and the Japanese militarist government
took over. Herbert Hoover (1929–1933), then president of the United
States, found himself in a helpless position. To make matters worse, during his
term of ofce, Congress passed the Smoot-Hawley Tarif Act, which sharply
increased tarifs. This led to retaliatory tarifs from countries around the world,
caused US imports and exports to plummet, and deeply scarred the world
economy. Nor could Hoover fundamentally reconsider the foreign policies
of the 1920s, which had rested on US economic power and cooperation with
Japan and Germany. And so, along with the British and French, he did little as
Japan invaded China and as Germany slid downwards into Nazism.27 Hoover’s
presidency could be likened to the Waterloo moment of US economic state-
craft, as the US government adopted a policy of economic nationalism and
implemented “beggar-thy-neighbor” tarifs. Its economic relations with other
countries deteriorated seriously. Externally, the United States adopted a policy
of disengagement and appeasement toward Germany and Japan. There was a
serious divide between the economic power of the United States and its for-
eign policy. Against the background of the Great Depression at home, US eco-
nomic power sufered steep losses, and the use of such power lost its goal and
bearing. Wealth could not be transformed into power for the United States.
In his 1973 book World in Depression (1929–1933), Charles Kindleberger
refected on the history of the Great Depression and put forward the hegem-
onic stability theory. Kindleberger argued that a hegemonic state needs to pro-
vide leadership and international institutions so as to keep the stability of the
existing international system. Although the United States surpassed Britain
and became the world’s largest economy, she failed to inherit the British role
as the world leader. As a result, the world fell into the so-called “Kindleberger
Trap”, featuring economic recession, genocide, and world war.28

3.2.2.2 Hegemonic Triumph (1933–1945)

The pinnacle of US economic statecraft occurred during the Franklin Delano

Roosevelt (FDR) presidency. His tenure (1933–1945) was considered a tri-
umph of US hegemony. In his frst term (1933–1937), FDR proposed the
New Deal, whose core objectives were the three Rs, namely, (1) relief to help
the unemployed and the poor, (2) recovery to restore the economy to normal
60 America’s Economic Statecraft

levels, and (3) reform of the fnancial system to prevent a repeat depression.
The New Deal eased the Great Depression and helped the recovery of the
US economy, partially restoring the country’s economic strength. During
this period, the United States established Pax Americana through a massive
transformation of wealth to power. The American economist Robert Gordon
suggested that the Great Depression and World War II taken together consti-
tute the major explanation of the sharp jump in total factor productivity that
occurred between the 1920s and 1950s.29
However, FDR’s frst term was largely characterized by an isolationist pol-
icy that prioritized US domestic afairs. The London Economic Conference
of 1933 also failed because the United States refused to assume leadership
of the world economy, and the dollar continued to depreciate against gold,
from $20.67 to $35 per ounce. However, a major positive change in US trade
policy occurred in 1934. The Reciprocal Trade Agreements Act (RTAA),
spearheaded by Cordell Hull, the then-US secretary of state, not only opened
the US market and fueled America’s postwar prosperity, but also became one
of the pillars of America’s global economic leadership.30 The RTAA was an
important milestone historically, as it ended the US trade protectionist para-
digm in efect since 1860 and replaced it with an internationalist approach.
This act laid the cornerstone of US free trade policy for the next 70 years.
Additionally, in 1936, the United States, Great Britain, and France signed the
Tripartite Monetary Agreement, which stabilized exchange rates and ended
the currency war of 1931–1936. For the frst time in history, the United States
played a leading role in international monetary cooperation. All these eforts
were precursors to FDR’s vigorous advancement of internationalism during
his second term.
President Franklin D. Roosevelt’s second and third terms (from 1937 to
1945) can be considered the culmination of US economic statecraft. Drawing
upon Wilson’s experience and lessons, the United States in this period used
its economic and military power not only to win World War II, but also to
establish an international order that has lasted to this day. As a supporter and
believer of President Wilson’s international institutionalism, President Frank-
lin D. Roosevelt conceived the idea of a postwar international system as early
as the beginning of World War II. On August 14, 1941, FDR and Churchill
cosigned the Atlantic Charter, which proposed the establishment of a “wider
and permanent system of general security”. In the second half of 1943, World
War II took a strategic turn in favor of the Allies. President Roosevelt began
to conceptualize the postwar world. He believed that cooperation among the
major powers was necessary to maintain peace and prevent aggression after
the war was over. He proposed the establishment of an international peace
organization centered on the United States, Great Britain, the Soviet Union,
and China to play the “role of international police” for the great powers. At
the Tehran Conference on November 29, 1943, President Roosevelt outlined
his idea of the “four policemen” to Stalin. He envisioned the establishment of
three bodies: (1) a police council composed of the Big Four, (2) an executive
 America’s Economic Statecraft 61

council to address all issues except military ones, and (3) a general assembly
in which each country, including small countries, could express their views.31
In 1944, the Dumbarton Oaks Conference established the framework of the
United Nations (UN) Charter, and the UN was formally established in 1945.
The study of economic statecraft is more concerned with how the United
States used its economic power to win hegemonic status and build the postwar
international economic order. Professor Zhao Ke pointed out that although
the main target of US military campaigns was the Axis alliance led by Germany
and Japan, in another “smokeless battlefeld”, the US opponent was precisely
its wartime ally, Great Britain. Both sides fercely competed for the leader-
ship of the postwar world through economic diplomacy. The United States,
through its intervention, frst dismantled the sterling area and established the
central position of the US dollar; later, through the establishment of a multi-
lateral free trade system, the United States gradually dismantled the bilateral
trade system carefully crafted by the British based on the imperial system of
preferences. The British Empire was thus drained of the last source of vitality
and fell into decline.32
The United States began by maximizing the depletion of Britain’s gold and
dollar reserves and eroding the credit base of the pound sterling. To support
the fnancially troubled Britain to continue the war against fascist Germany,
Congress passed the Lend-Lease Act in 1941, which allowed the US govern-
ment to provide supplies to the Allies frst, which they could repay and settle
after the war was over. This was in contrast to the previous arrangement of
“cash and carry” for US supplies. Henry Morgenthau, then-US treasury secre-
tary, understood that the US government had decided to aid Britain, and did
everything possible to force Britain to settle its outstanding debts before the
Lend-Lease Act came into efect to prevent Britain from using the Lend-Lease
Act to delay repayment. Determined to cap the balance of British reserve assets
at the minimum level necessary to survive the war, Morgenthau aimed to keep
Britain’s reserves below $1 billion to ensure that Britain would be fnancially
dependent on the United States going forward and to force Britain to comply
with the US-led postwar world order. He demanded that Britain liquidate
various cashable assets, especially large proft-making companies. For example,
the American Rayon Company, the largest and most proftable US company
owned by Britain, was sold to an American bank at half price. Keynes, keenly
aware of Morgenthau’s intentions, angrily said, “the United States Treasury
would prefer us to end the war with exiguous gold and dollar reserves so that
they will be in a position to force solutions on us”.33
The second step taken by the United States was to have the British accept
America’s design for the postwar international monetary system, that is, the
White Plan. Under the plan, the dollar was pegged to gold at a fxed ratio,
while other currencies were pegged to the dollar, making the dollar the anchor
of the international monetary system. At the same time, the International
Monetary Fund (IMF) was established to coordinate national monetary poli-
cies and to provide short-term fnancing for countries with balance of payment
62 America’s Economic Statecraft

defcits. Using the Lend-Lease Act as leverage, the Treasury Department under
Morgenthau forced Britain to accept the White Plan and abandon the Keynes
Plan because the British understood that it was impossible for Britain to win
the war without war supplies from the United States. This was the price that
Britain had to pay for “borrowing” US supplies.34
In the area of trade, the United States was determined to eradicate the
Britain-led “imperial system of preferences”. When British Prime Minister
Winston Churchill met with President Roosevelt on a warship in the Atlan-
tic Ocean in August 1941, with Assistant Secretary of State Sumner Welles
joining as Roosevelt’s aide, Roosevelt had intended for the talks to focus on
Anglo-American cooperation in resisting fascist aggression. However, Welles
seized this opportunity to draft the Atlantic Charter, a bilateral joint declara-
tion to incorporate under the fourth point provisions about access without
discrimination and on equal terms. Such language directly targeted the “impe-
rial system of preferences”. Welles was frm in his request, saying,

I said it was not a question of phraseology, but that it was a vital principle
which was involved. I said that if the British and the United States gov-
ernments could not agree to do everything within their power to further
after the termination of the present war, a restoration of free and liberal
trade policies, they might as well throw in the sponge and realize that
one of the greatest factors in creating the present tragic situation in the
world was going to be permitted to continue unchecked in the postwar
world.

Churchill immediately rejected the request and demanded that “the fourth
condition would evidently have to be amended to safeguard our obligations
contracted in Ottawa and not prejudice the future of Imperial Preference”.
To issue the joint declaration as soon as possible and show a united front of
Anglo-American cooperation to the outside world, Roosevelt made conces-
sions to Churchill by adding under the fourth point the prerequisite of “with
due respect for their existing obligations” (i.e., to keep the imperial system
of preferences), while deleting “access without discrimination and on equal
terms”. As a result, the revised fourth principle completely defeated Welles’s
intention of committing Britain to abolishing the preference system. Despite
this frst failure of “head-on confrontation”, Welles did not give up. In the
Anglo-American Mutual Aid Agreement for the implementation of the Lend-
Lease Act negotiations led by the State Department with Britain, the State
Department continued to pressure Britain to accept Article VII of the Mutual
Aid Agreement, that is, the elimination of all forms of discriminatory treat-
ment in international commerce. Furthermore, the State Department clearly
explained that the so-called “discriminatory treatment” referred to Britain’s
“imperial system of preferences”.35
The State Department tied the “abolition of the imperial system of pref-
erences” to the Lend-Lease Act, believing it was an essential win for US aid
 America’s Economic Statecraft 63

to Britain. During Churchill’s visit to the United States in December 1941,

Cordell Hull personally asked Churchill to accept Article VII as soon as possi-
ble, but Churchill refused. Hull fnally persuaded President Roosevelt to urge
Churchill personally. In February 1942, Roosevelt sent a telegram to Church-
ill demanding his acceptance of Article VII. This was at a time when Britain
had sufered a major military defeat in Southeast Asia and the Japanese occu-
pied Singapore, which had been under British rule for many years. Church-
ill bitterly described the fall of Singapore as the “worst disaster and largest
capitulation in British history”. Under such circumstances, US support and
aid became even more vital to Britain, and the British government accepted
Article VII on the condition that Roosevelt promised that the United States
would also reduce its own tarifs reciprocally. As World War II came to an
end, in 1945, Britain and the United States launched meaningful negotiations
to establish a postwar international trade system. Hull had already left ofce
as secretary of state, but the State Department’s determination to end the
imperial system of preferences continued unabated. Concurrently, the British
government was negotiating with the United States on the Anglo-American
Financial Agreement to secure loans from the United States. Under fnancial
distress, Britain fnally reached a consensus with the United States, namely,
the “proposals for consideration by an international conference on trade and
employment”, which contained three provisions against the imperial system
of preferences: (1) the existing agreements between Britain and its dominions
shall not prevent the adjustment of preferential tarifs; 2) lower and cut pref-
erential tarifs; 3) the level of preference must not be raised, or no new prefer-
ence must be added under any circumstances. The Americans believed that
these three provisions were sufcient to fnally dismantle the imperial system
of preferences.36 This was followed by a series of multilateral actions to reduce
tarifs among countries through the platform of the General Agreement on
Tarifs and Trade (GATT). The imperial system of preferences was inundated
by a deluge of free trade and fnally ended. The global multilateral system of
free trade under US leadership came into being.

3.2.3 Maturing of US Hegemony (1945–1967/73)

After World War II, the United States became the world hegemon with half of
the world’s GDP. This laid a strong economic foundation whereby the United
States could popularize liberal institutionalism at scale. The United States
maintained world peace by establishing the United Nations to replace the old
colonial empire and free trade on a global scale by establishing the Bretton
Woods system (IMF, World Bank, and GATT). The Bretton Woods Confer-
ence of 1944 paved the way for a postwar international economic order with
the World Bank, IMF, and GATT as the three pillars to ensure the mobility
of capital and commodities in the world market under US domination, to
squeeze the sphere of infuence of old colonialism, and to prevent wars caused
by tarif, monetary, and military barriers to redivide the world.
64 America’s Economic Statecraft

The United States launched two Marshall Plans (in the East and West) to
export excess capital to these regions and to aid the reemergence of Western
Europe and Japan. In the March 1947 State of the Union Address, President
Truman proposed the Truman Doctrine to provide economic and military
assistance to Greece and Turkey in an efort to help them suppress popular
revolutionary movements. The Marshall Plan, ofcially implemented in 1948,
and the North Atlantic Treaty Organization (NATO), established in 1949,
laid the groundwork for US dominance in the political, economic, and mili-
tary afairs of Western Europe.
US efort to shape the postwar international order, regrettably, did not
elicit cooperation from the Soviet Union, which led to the subsequent con-
frontation between the two powers. George Kennan, a diplomat and designer
of the Containment Doctrine, explained in his Memoirs the origin of the Con-
tainment policy. As deputy chief of mission at the US Embassy in the Soviet
Union, George Kennan considered in 1944 whether to provide aid to the
Soviet Union. He eventually concluded that the

Soviet people and regime were bound in a common dialectical relation-

ship, so that you could not help people without helping regime, and you
could not harm regime without harming people. In these circumstances
it was better, surely, to try neither to help nor to harm, but rather to
leave people alone.37

This is indeed the origin of George Kennan’s thinking about the “contain-
ment”. He believed that separating the Soviet Union from the rest of the
world was the only appropriate choice for American foreign policy. This line
of thinking was fully manifested in his famous “Long Telegram” written
in mid-February 1946, in which he proposed to the US government the
Containment Doctrine. And the immediate trigger for writing the Long
Telegram was an inquiry made by the US Department of the Treasury and
the State Department – “Why was the Soviet Union unwilling to adhere to
the World Bank and International Monetary Fund? What lay behind it?”38
In contrast to the internationalist thinking of the Treasury, Kennan meticu-
lously analyzed the motivations of Soviet behavior and suggested that the
US strategy toward the Soviet Union should be containment. Walter LaFe-
ber, also observed:

Ominously, the Soviet Union refused to join the World Bank or the
IMF in 1945–6. Stalin refused to allow any international organization
controlled by the United States to examine Soviet records or try to shape
the Russian economy. The dictator’s refusal to cooperate with the US
policy of an open economic world was also linked to the failure of the
Russians and Americans to agree on how the post-war world should be
rebuilt politically.39
 America’s Economic Statecraft 65

3.2.4 Decline of US Hegemony (1967/73–2001/08)

The “countercultural movement”, the oil embargo, the Vietnam War, and
domestic infation since the 1960s seriously depleted US national power, under-
mined its credibility in the IMF, and weakened its status as a strong economic
power and international creditor. The United States continued exporting the
dollar infation problem to other countries within the Bretton Woods system,
which intensifed grievances from other countries relying on this monetary
system. At the same time, more Third World countries became independent
and began to form a united front. The signifcantly intensifed North-South
confrontation made Congress more reluctant to provide resources for inter-
national organizations, which in turn led to these organizations holding more
negative opinions toward the United States and waning US infuence within
such organizations. In this period, US hegemony began to decline.
Unable to overcome the Trifn paradox, the United States had to decou-
ple the dollar from gold in the late 1960s, resulting in the “Nixon Shock”.
Coupled with the Vietnam War and the oil crisis, this event led to the relative
decline of US hegemony, beginning in the late 1960s. In terms of the prac-
tice of economic statecraft (transforming wealth into power), Arthur Stein, a
US professor of international relations, suggested the so-called “Hegemon’s
Dilemma” – hegemons may lead, but they need followers, and they must make
concessions to gain others’ assent. In other words, the liberal trade regimes
that emerged in both centuries were founded on asymmetric bargains that
permitted discrimination, especially against the hegemon.40 But when the
hegemon refused to ofer concessions, his allies’ loyalty would be reduced and
the hegemonic system start to decline. In the late 1960s and early 1970s, the
Bretton Woods system collapsed under the “Nixon Shock”. US free trade pol-
icy began to be compromised. Section 301, which was invoked by the United
States in the 2018 US-China trade war, was derived from laws passed in this
period, the Trade Expansion Act of 1962 and the Trade Act of 1974. And at
the same time, the prolonged Vietnam War and global oil crisis continued to
weigh on the US economy, which was further challenged by Japan and West-
ern Europe. This period witnessed full-scale trade wars between the United
States, Japan, and Western Europe. Nonetheless, it is worth pointing out that
the United States did not fully abandon a liberal trade order. Instead, the
United States practiced the so-called “managed trade”, or put another way, a
type of protectionism with a certain level of openness. This is mainly because
US hegemony was far from in full decline and still capable of maintaining a
liberal international trade order.
During this period of the relative decline of US hegemony (from the late
1960s to the late 1980s, before Reagan reinvigorated the US economy),
the United States implemented a largely liberal institutionalist approach to
economic statecraft, that is, managing the decline of US hegemony within
the framework of an international economic system and coordinating eco-
nomic and security policies with Western Europe, Japan, and other developed
66 America’s Economic Statecraft

economies. The main vehicle of US economic statecraft was the G7. This is an
institutional innovation with the tools of economic statecraft. However, the
G7 was originally formed as a summit of seven heads of state, and among its
founders were not the United States, but French President Giscard d’Estaing
and German Chancellor Schmidt. Nicholas Bayne, a senior ofcial at the For-
eign and Commonwealth Ofce, who was involved in the G7 afairs, recalled
that “The (G7) summit as frst envisaged by Giscard and Schmidt was a per-
sonal, anti-bureaucratic instrument. But the Americans, frst Henry Kissinger
and then Jimmy Carter, wanted to make it an institution. These two concepts
persisted side-by-side”.41 This notion of institutionalism was very important
during the decline of US hegemony. In summary, the aim was to slow the
decline by means of institutional coordination.
The decline of US hegemony slowed considerably in the 1980s after Rea-
gan took ofce. In the early years of Reagan’s presidency, the US economy
was struggling. But thanks to Reaganomics, Reagan’s economic statecraft, the
United States turned its economy around and secured victory in the Cold War.
The question worth asking is, how did the United States win the Cold War
through its economic statecraft? This question was debated in US policy and
academic circles: was Reagan the reason the United States won the Cold War?
One school of thought says yes. Proponents of this view believe that Reagan’s
arms race and his policy of head-to-head confrontation with the Soviet Union
by supporting anticommunist guerrilla movements in the Third World eventu-
ally forced the Soviet Union to make strategic and political concessions during
1987–1989. Another school of thought sees the end of the Cold War as the
fruition of long-standing US policy toward the Soviet Union. According to
this viewpoint, although the Reagan doctrine may not have forced the Soviet
Union to end the Cold War, the longer-term impact of US policy towards the
Soviet Union and international revolution, more generally, posed huge bur-
dens that could only undermine the domestic political and economic legiti-
macy of the Soviet Union and its allied regimes – thus bearing out Kennan’s
prognosis in “The Sources of Soviet Conduct”42 that the United States should
contain Soviet power until the domestic problems within the Soviet Union
forced political change – particularly through the way in which economic
resources were channelled towards maintaining the military-geopolitical bal-
ance with the United States.43 In other words, the United States’ winning
strategy over the Soviet Union was its combined advantages from the capital-
ist socioeconomic system, which predetermined US victory in the Cold War.
In the late 1980s and early 1990s, the international landscape underwent
tectonic shifts, such as the collapse of the Soviet Union and Eastern Europe.
The United States prevailed over the Soviet Union thanks to Reaganomics,
supply-side reforms, and President Bush Sr.’s “new world order” strategy. Dur-
ing the Clinton presidency, the United States promoted the dotcom econ-
omy. At this stage, relying on its abundant fnancial resources and optimism
about the times, the United States returned to free trade, as evidenced by the
establishment of the North American Free Trade Agreement and Asia-Pacifc
 America’s Economic Statecraft 67

Economic Cooperation, and vigorously promoted the neoliberal economic

statecraft that started with the Reagan administration. The United States
began to accept China into the world economic system: China’s rejoining of
the GATT in 1986 and its 1995 application for accession to the World Trade
Organization were both supported by the United States. However, it is worth
noting that the free trade practiced under Clinton was a kind of managed and
protected free trade, which was very diferent from the multilateral free trade
order established by the United States after World War II and only marginally
more open than the practice in the 1970s. Although the United States won
the Cold War, US hegemony at this time was far weaker than it had been
during the post-World War II period. In hindsight though, the 20 years from
Reagan to Clinton could at best amount to a moment of revival in the broader
decline of the United States while a more multipolar world was emerging.
A massive transformation of wealth to military power was realized during
the frst decade of the 21st century when the United States was fghting its
wars on terror. After 9/11, the U.S. fought two major wars on terror. U.S.
defense spending swelled quickly from USD 294 billion in 2000 to USD 705
billion in 2011.44 In terms of trade policy, George W. Bush largely inherited
the free trade doctrine by launching the Doha round of WTO trade negotia-
tions and driving a series of regional and bilateral free trade agreement (FTA)
negotiations.

3.3 US Economic Statecraft in the Context of the Rise

of Other Great Powers (2008–2020)
Since the 2008 global fnancial crisis, US hegemony has entered a new phase of
decline. This is considered the second phase of decline of US hegemony. What
was the wealth-power strategy of the United States during this phase? Three
presidents – Obama, Trump, and Biden – took ofce during this period. Their
economic statecraft is mainly characterized by the following: a signifcantly
larger role of the federal government and a series of massive bailout programs;
strategic competition with other major powers; a signifcant increase in wealth-
to-power transformation; and a high priority on national security, including
economic security. Under President Trump, the United States implemented
broad-based economic statecraft aimed at reshaping the world economic order
and maintaining US hegemony. During the Trump presidency, US foreign
economic aid reached record highs, including a peak of US $55.59 billion in
2020.45 This refected a typical US policy of wealth-to-power transformation.
In the frst year of the Biden administration, US defense spending reached a
staggering $754.85 billion, and foreign economic aid reached $35.38 billion.
This suggests, despite the impact of COVID-19 and the “Kabul Moment”
(the United States’ full withdrawal from Afghanistan in 2021), the United
States had not relented its wealth-to-power strategy in the least, but rather,
turned on the full horsepower of the state machine to increase wealth supply
to meet its power objectives. Biden’s demand for and practice of economic
68 America’s Economic Statecraft

statecraft is unprecedented. In the face of the once-in-a-century COVID-19

pandemic, the Biden administration has prioritized domestic afairs, especially
wealth creation. The US fscal budget for 2021 was $10.43 trillion, the high-
est in the last decade, with healthcare, welfare, and pensions consuming the
highest shares. Under the “Build Back Better” vision, the Biden administra-
tion has launched the American Rescue Plan, the American Jobs Plan, and the
American Families Plan totaling approximately $6 trillion, a number compa-
rable to Roosevelt’s New Deal. In 2021, the US government spent 45.79% of
its GDP, more than the 45.62% share in 1945 – the last year of World War II.46
Comparing the economic statecraft of Presidents Obama, Trump, and
Biden, the three presidents each adopted policies with varying degrees of
economic nationalism, and all with a foreign policy objective of containing
China’s rise, especially President Trump. The Trump administration believed
that the United States was losing out bilaterally, regionally, and multilaterally,
and therefore demanded the realignment and comprehensive renegotiations
of US international trade interests, the strengthening of US technological
superiority, increased US exports, and improved market access to other coun-
tries, with a view to the re-onshoring of manufacturing, the return of jobs and
prosperity, and “making America great again” (Trump’s campaign slogan).
The Trump administration’s demands were not fundamentally diferent than
those of the Obama and Biden administrations; they only difered in means.
This concerned President Trump’s personal style and the mounting pressure
on the US economy and society. President Trump’s “bullying” negotiating
style was in stark contrast to that of Presidents Clinton, Obama, Biden, and
other multilateralists. It left most countries, including US allies, uncomfort-
able and unprepared. In dealing with China, the George W. Bush and Obama
administrations focused on rebalancing US-China economic interests through
the Strategic Economic Dialogue and the China-US Joint Commission on
Commerce and Trade (JCCT), while the Trump administration adopted an
antagonistic approach with aggressive punitive tarifs and ideological confron-
tation. The Biden administration adjusted the Trump-era approach of fghting
China alone. It forged alliances, especially an alliance of Western democracies,
built the Indo-Pacifc Economic Framework, repaired transatlantic relations,
advanced the AUKUS (Australia-UK-US) trilateral security partnership, and
imposed unprecedented, large-scale economic sanctions on Russia. In terms
of trade policy, the Biden administration has largely continued protectionist
policies due to pressure from domestic labor groups. On the security front,
the greatest challenge to the Biden administration is the Russia-Ukraine war,
but the administration has strengthened NATO and the G7 through alliances,
achieved NATO’s northern expansion by accepting Sweden and Finland as
members, and broadened NATO’s sphere of infuence to the Indo-Pacifc
region, all in an efort to maintain US hegemony. Arguably, since President
Obama took ofce in 2009, the policy paradigm of US economic statecraft has
gradually shifted from its liberal undertone to a mixed palette of mercantilism,
imperialism, and liberalism.
 America’s Economic Statecraft 69

3.3.1 US Economic Statecraft Under President Obama (2008–2016)

President Obama’s biggest challenge at the beginning of his presidency was

managing the global economic crisis. When President Obama came into ofce,
he was told by his economic advisors that there was one chance in three of
a 1930s-style depression. If he had not avoided that disaster, all else would
have paled.47 In this context, President Obama introduced the largest eco-
nomic stimulus package in history. Internationally, the G8 was transformed
into the G20. Closely related to his response to the economic crisis, Obama
changed the US-China Strategic Economic Dialogue (SED) established under
George W. Bush into the Strategic and Economic Dialogue (S&ED), add-
ing a strategic track – institutional innovation of US economic statecraft with
China. Through the S&ED, the United States could establish a kind of linkage
between the economic and strategic tracks, thus contributing to the two-way
conversion of wealth and power.
The strategic catchphrase of the Obama years was “smart power”. As then-
Secretary of State Hillary Clinton put it, “We must use what has been called
smart power, the full range of tools at our disposal – diplomatic, economic,
military, political, legal, and cultural – picking the right tool or combination
of tools for each situation”.48 Joseph Nye also noted that the “smart power”
narrative used by the United States for the 21st century was not about maxi-
mizing power or preserving hegemony. Rather, it was about fnding ways to
combine resources in successful strategies in the new context of power difu-
sion and “the rise of the rest”.49 Smart power and economic statecraft serve
similar purposes. Economic statecraft is essentially about the two-way trans-
formation of wealth and power, which requires decision makers to be able to
combine resources to achieve the objectives of a grand strategy.

3.3.2 U.S. Economic Statecraft Under President Trump (2016–2020)

After President Trump took ofce in November 2016, US economic state-

craft faced its greatest paradigm shift since World War II, with a gradual shift
from a liberal institutionalist base to economic nationalism, for which Presi-
dent Trump was a key driver. The new policy doctrine pursued by President
Trump and his staf was “America First”. President Trump has long held that
American politicians had been negligent in protecting US national interests;
they had not done enough, in domestic or foreign afairs.
Under President Trump, the United States announced its withdrawal from
UNESCO, the United Nations Human Rights Council (OHCHR), and the
Universal Postal Union in quick succession. President Trump also threatened
to exit the WTO, arguing that the United States had not been “treated fairly,
that the WTO had ruled against the US in many decisions”, and that the agree-
ment establishing the body “was the single worst trade deal ever made”.50 If
the WTO does not “shape up”, President Trump said, the United States would
withdraw.51 President Trump’s “exitism” was the greatest existential threat to
the global governance system since World War II.
70 America’s Economic Statecraft

In terms of regional trade, President Trump demanded the renegotiation

of NAFTA, which he called an unfair trade deal that “sacrifced our prosper-
ity and shipped away our companies, our jobs, and our nation’s wealth”.52 On
his frst day in ofce, President Trump announced his withdrawal from the
Trans-Pacifc Partnership (TPP), saying the agreement would spell disaster
for the United States and would be replaced by fairer bilateral FTAs. By the
same token, President Trump ceased negotiation with the EU for the Trans-
atlantic Trade and Investment Partnership (TTIP). Trump disliked the EU as
a regional trade bloc and preferred negotiating bilaterally with member states
rather than with the EU as a whole in order to gain an advantage. At the
November 2017 APEC summit in Danang, President Trump reiterated his
intention of revising multilateral and regional trade agreements into bilateral
FTAs, pronouncing that “what we will no longer do is enter into large agree-
ments that tie our hands, surrender our sovereignty, and make meaningful
enforcement practically impossible”. Rather, he wanted to build a new type of
partnership based on the principle of reciprocity.
The Trump administration expressed dissatisfaction with the current inter-
national trade order across the board, arguing that the United States was at
a disadvantage at the bilateral, regional, and multilateral levels, and therefore
demanded realignment and a comprehensive revamp of the international trade
order. The administration intended to strengthen US technological superior-
ity, increase US exports, and improve market access to other countries for the
return of manufacturing, jobs, and prosperity – and to “make America great
again”.
President Trump’s demand for a readjustment of the international trade
order was not entirely unreasonable. After all, it had been 70 years since the
international trade order was established, during which time it had been
dynamically adjusted. Trump was trying to “bargain” a fairer trade order for
the United States. The root of his trade policy “revolution” was the progressive
decline of US hegemony and its severely diminished ability and willingness to
maintain the current liberal international trade order. The United States under
President Trump was increasingly unwilling and unable to preserve this order
that it had established after World War II.
In the process of hegemonic decline, there will be decades of repeated
struggles and contention between the challengers (more than one) and the
hegemonic power. The rise and fall of the hegemon constitute the main thread
of the history of international political economy and is also the result of each
country’s choice of economic statecraft. The free trade order previously estab-
lished by the British Empire and the United States, coupled with globaliza-
tion and the spread of democracy, inevitably brought about the difusion of
knowledge and technology, which would allow other countries to catch up.
The hegemonic power is thus always in an apprehensive state of mind. This
is an iterative yet inevitable historical process. As a hegemon rises and falls, it
adapts its trade policy accordingly. As a general principle, a rising power adopts
trade prohibitionism, such as the mercantilism adopted by Britain in the 16th
 America’s Economic Statecraft 71

to 18th centuries. Then it gradually opens up and adopts protectionism with

some degree of openness, such as Britain in the frst half of the 19th century
and the United States in the 1930s. Finally, it embraces free trade and estab-
lishes an international free trade order. For example, in the second half of the
19th century, Britain signed the Cobden-Chevalier Commercial Treaty with
France, which ushered in the era of free trade. The United States after World
War II started the era of free trade multilateralism by establishing the Bretton
Woods system. With the decline of hegemony, trade policies have reverted to
protectionism, or even prohibitionism, completing a historical cycle. Like a
pendulum, it swings from left to right before eventually returning to the start-
ing point. We must remember that it is not liberalism, but mercantilism that
has lasted the longest in international trade since the 1500s. Even the British
Empire, known for free trade, practiced mercantilism for 300 years, from the
16th century until the mid-19th century. While we enjoy the boon of free
trade, we must understand that free trade is a “luxury” product of the progress
of human history that should be cherished.

3.4 Paradigm Shift in US Economic Statecraft: Pendulum

Between Liberalism and Mercantilism
Since its founding, the United States has adopted three paradigms of eco-
nomic statecraft and has developed some variants that ft the American context
with American characteristics (such as liberal institutionalism and neoliber-
alism after World War II, variants of the liberal paradigm). After achieving
independence in 1776, the United States frst implemented mercantilism to
prioritize the development of manufacturing. After the Spanish-American War
of 1898, the country practiced imperialism for some time. After World War II,
liberal institutionalism took hold, followed by neoliberalism in the 1980s. US
economic statecraft after the 2008 global fnancial crisis was a mix of mercan-
tilism, imperialism, and liberalism. Under President Trump, the United States
largely adopted mercantilism that was also known as “economic nationalism”.
Economic nationalism is nothing new for American politics. In fact, US pol-
icy favored economic nationalism long before World War II. In the early days of
American trade policy after the War of Independence, the Congress took action,
passing the Tarif Act of 1816, which unifed America’s tarif policy, and doubled
the average rates. This further sheltered America’s industries from British com-
petition, and truly set the stage for the explosive growth of America’s industrial
revolution.53 This tendency was best encapsulated in the Smoot-Hawley Tarif
Act of 1930. At that time, a large majority of economists believed the Smoot-
Hawley Tarif Act would exacerbate the US recession into a worldwide depres-
sion. They warned that the tarif would “inevitably provoke other countries to
pay us back in kind against our goods”. Economists today, however, hold a dif-
ferent view of the efects of Smoot-Hawley. While economic historians generally
believe the tarif was misguided and may have aggravated the economic crisis,
the consensus appears to relegate it to a minor status relative to other forces.54
72 America’s Economic Statecraft

This trend was only reversed after Franklin D. Roosevelt was elected presi-
dent. President Roosevelt’s then-Secretary of State Cordell Hull was a staunch
supporter of free trade. To repair the damage caused by the Smoot-Hawley
Tarif Act, he set about negotiating free trade agreements to lower tarifs
between the United States and other signatories. Following the Allied Victory
in World War II, the international community at the time generally believed
that greater economic integration would help rebuild the postwar economy,
and the United States actively promoted the signing of the GATT. In the
decades that followed, member countries met many times to negotiate steeper
tarif reductions. Lower tarif barriers and closer economic integration were
important components of US foreign policy at the time. The US government
believed that economic ties and military alliances could help counter Soviet
economic statecraft.
During the process, the United States preferred global agreements such
as the GATT over trade agreements among smaller groups of countries.
However, this preference began to shift in the early 1980s when the United
States attempted to launch a new round of GATT negotiations, but failed,
while Canada ofered to establish a bilateral open trade agreement with the
United States. In 1988, the US-Canada FTA was concluded, which soon
became NAFTA among the United States, Canada, and Mexico in 1993. But
just as the Clinton administration was fnalizing NAFTA, opposition grew
domestically, arguing that the US strategy of supporting globalization was
problematic. The opposition was of the view that FTAs were destroying the
foundations of the American middle class by forcing them to compete with
cheap foreign labor, which was unfair, and that these agreements valued eco-
nomic gains at the expense of working people. In 1994, the United States
chose to support the creation of the WTO, an organization that was con-
sidered the mortal enemy of economic nationalism, in the Uruguay Round
of negotiations. The WTO as an international organization sought positive
cooperation among its members and inevitably, it required members to sac-
rifce part of their sovereignty on trade policy. Despite the opposition, the
notion of free trade still prevailed at the time. During his presidency, George
W. Bush concluded negotiations or signed into force bilateral trade agree-
ments with Jordan, Chile, Singapore, Morocco, Australia, the Dominican
Republic-Central America, Bahrain, Oman, Peru, Colombia, Panama, and
South Korea. President Obama, who did little on trade in his frst term,
became an active advocate of TPP in his second term, arguing it was vital
for the United States and its partners to set forward-looking rules for the
global economy. But in the election year of 2016, political support dwindled,
particularly among rank-and-fle Republicans, and even among establishment
Senate Republicans who held back for a combination of economic and politi-
cal motives. The two leading GOP presidential contenders were vociferous
critics of trade agreements, as was Democratic hopeful Hillary Clinton’s chal-
lenger, Bernie Sanders. Traditional Republican free-market stalwarts such as
House speaker Paul Ryan became increasingly lonely free-trade advocates.
 America’s Economic Statecraft 73

The then-presidential candidate Donald Trump’s antitrade position made

many conservative Republicans follow his opinion.
The paradigm shift in US economic statecraft from liberalism to mercantil-
ism has been a slow process. Liberal institutionalism, which was implemented
globally after World War II, began to lose ground to neoliberalism during
the Reagan years. While neoliberalism supports free trade, as US hegemony
slowly declined, it became increasingly difcult for the United States to
drive free trade on a global scale, and even regional FTAs became increas-
ingly difcult to advance after President Clinton left ofce. Since NAFTA
came into efect on January 1, 1994, until the days of President Joe Biden in
2021–2025, the United States has only concluded the negotiations for the
US-Dominican Republic-Central America FTA (CAFTA-DR), whereas the
other negotiation processes for regional FTAs such as the Free Trade Area
of Americas (FTAA), the US-Middle East FTA (MEFTA), the US-Southern
African Customs Union (SACU) FTA, the US-European Transatlantic Trade
and Investment Partnership (TTIP), and the Trans-Pacifc Partnership (TPP)
all failed. This points to three major dilemmas faced in the implementation of
US economic statecraft.

3.4.1 The Dilemma of Deglobalization

The current regression of globalization began in the developed Western coun-

tries that established the Bretton Woods system. The Trump Doctrine and
Brexit were just the tip of the iceberg of this wave of deglobalization. Over
the past 30 years since the 1990s, most Americans have seen sluggish income
growth, the middle class has contracted, and the United States has gradu-
ally shifted from being an advocate of globalization to being a proponent of
deglobalization. Prior to Trump’s presidency in 2017, the United States was
already showing a tendency toward deglobalization, and when Trump was
elected president, he took a series of policy actions that attempted decoupling
from globalization, including discouraging outsourcing by US manufacturers,
imposing tarifs on imports, restricting immigration, and other “withdrawal”
actions.
Deglobalization has added economic and political pressures on America.
Globalization is a major driver of low infation and low interest rates, and if
this process is reversed, prices and interest rate trends are likely to reverse too.
The US government and corporations are far more indebted than any other
country. At the same time, increased tarifs and trade frictions would weaken
fnancial globalization, erode US multinational profts and stock market valu-
ation substantially, and reduce foreign demand for US Treasuries signifcantly.
These would be counterproductive to the US agenda of an aggressive eco-
nomic statecraft. The COVID-19 pandemic has exacerbated the deglobali-
zation dilemma and hampered international cooperation. Deglobalization
further fueled protectionism and isolationism among countries and seriously
dented their willingness and ability to cooperate internationally.
74 America’s Economic Statecraft

3.4.2 The Dilemma of US Hegemony

Given the relative decline of its power, the United States fnds it increasingly
difcult to swallow the mega-regional trade agreements. After World War II,
the United States ushered in the era of free trade multilateralism by establishing
the Bretton Woods system. With the decline of US hegemony, trade policies
have reverted to protectionism, or even prohibitionism, creating a historical
cycle. After World War II, when US hegemony was in its prime, the United
States established a multilateral trade order and system. When US hegemony
declined, it could only return to regionalism. Now with the further decline of
US hegemony, the country could barely hold onto the bottom line of open
regionalism. The institutional arrangements of US foreign trade are likely mov-
ing towards closed regionalism, “small clubs”, and bilateral FTA arrangements.
In the evolution of interregional relations following the Cold War, Clin-
ton’s policy of regional cooperation was a turning point: Clinton shifted from
traditional global multilateralism to regional (NAFTA) and interregional mul-
tilateralism. However, this shift was fundamentally motivated by economic
interests and served the interest of the United States in relative hegemonic
decline. The US-led APEC, FTAA, and the New Transatlantic Agenda (NTA)
intensely contradicted the more deeply cooperative regional organizations
such as the Southern Common Market (Mercosur), the Association of South-
East Asian Nations (ASEAN), and the EU. This is because the United States
is not as keen on such a highly integrated form of cooperation as these three
regional organizations because such cooperation does not serve US economic
interests and would threaten US global hegemony.
George W. Bush attempted to place this unfnished business of interre-
gional cooperation under post-9/11 security considerations in 2001. As a
result, US interregional cooperation in this period was largely unfruitful. This
confrmed the ultimate failure of Presidents Clinton and Bush Jr.’s attempts to
revive declining hegemony and US-led multilateralism through interregional
arrangements, whether focused on free trade or security.

3.4.3 The Dilemma of US Domestic Politics

In the aftermath of the 2008 global fnancial crisis, the United States saw
intensifed domestic economic and social contradictions. The gap between the
rich and the poor further widened. The middle class saw little income growth
for a prolonged period. Populism started to rise. Labor groups and biparti-
san politics restricted the US government’s foreign trade cooperation. These
social trends have gradually dismantled the domestic support for free trade and
regionalism. Senator Bernie Sanders frequently and openly attacked free trade.
Antitrade sentiment prompted Hillary Clinton, who previously called the TPP
the gold standard of trade agreements, to turn against it. Trump’s supporters
were even more opposed to free trade.
After President Trump left ofce in January 2021, the US policy elites
have started to refect on and criticize Trump’s economic statecraft. There
 America’s Economic Statecraft 75

are strong opinions within the United States about President Trump’s global
trade war. For example, former Treasury Secretary Jacob Lew wrote in For-
eign Afairs back in 2018, criticizing Trump: “His (Trump’s) administration
is behaving as if the United States is immune to consequences, whether in the
form of adversaries exerting economic pressure or allies rejecting the legiti-
macy of US policy”.55 Other criticism includes:

the United States is getting worse at economic diplomacy just as other

countries are learning how to adroitly wield economic instruments. By
focusing on sticks to the exclusion of carrots, the Trump administration has
squandered the United States’ economic leverage. In the process, it has also
undercut whatever strategic advantages it inherited from its predecessors.56

But despite the criticism of Trump’s economic statecraft, we can be certain

that one of the things that makes President Trump stand out from his pre-
decessors is the frequency and ambition of his administration’s approach to
economic statecraft. This president has been keen to use economic leverage
to extract concessions across a wide array of security and economic issues.57 As
Trump has said, the United States had not used its enormous capabilities to
strike better bargains with allies and adversaries alike.58
Unlike President Trump, President Biden, as part of the political establishment
elite, advocates fne-tuning the unreasonable international order, rather than
completely overturning the old one, as Trump had suggested. President Biden
has the distinct character of the Silent Generation – patient and inclusive. An
intellectual the Frankfurt School would describe as “social cement”, Biden tries
to bring together stakeholders with diferent opinions to work toward a common
goal. With this kind of persona, Biden advocated a return to multilateralism.
Shortly after he took ofce, President Biden attended the 2021 Munich Security
Conference to renew the transatlantic partnership under the slogan, “America is
back”, trying to increase the US political leverage against China through coor-
dination and interaction with Europe. In February 2022, after Russia’s “special
military operation” against Ukraine, President Biden’s eforts to coordinate allied
relations were further recognized and strengthened, and despite the many dif-
ferences within the G7 and NATO, there was overall agreement on the strategy
toward Russia. This has maintained the stability of the alliance and even expanded
NATO’s membership. In short, President Biden appears to be more disciplined
than Trump on diplomacy. However, he has not reversed the historical course of
US economic statecraft’s slide from liberalism to mercantilism.

Notes
1 Drenzner, D. W. (2019). Economic Statecraft in the Age of Trump. The Washington
Quarterly, 42(3), p. 7.
2 This chart is based upon and upgraded the related chart of Flint, C., & Taylor, P. (2018,
May 4). Political Geography: World-Economy, Nation-State and Locality (7th edition).
Brussels: Routledge.
76 America’s Economic Statecraft

3 See www.govinfo.gov/content/pkg/GPO-CDOC-106sdoc21/pdf/GPO-CDOC-
106sdoc21.pdf
4 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 120.
5 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 122.
6 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 124.
7 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 123.
8 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 44.
9 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, pp. 54–55.
10 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 57.
11 Ellis, J. J. (2000). Founding Brothers: The Revolutionary Generation. New York:
Vintage Books, p. 57.
12 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 47.
13 Zakaria, F. (1998). From Wealth to Power: The Unusual Origins of America’s World
Role. Princeton, NJ: Princeton University Press, p. 4.
14 Zakaria, F. (1998). From Wealth to Power. Princeton, NJ: Princeton University
Press, p. 8.
15 Zakaria, F. (1998). From Wealth to Power. Princeton, NJ: Princeton University
Press, pp. 8–9.
16 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 47.
17 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, 2012, pp. 47–48.
18 Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of
Living Since the Civil War. Princeton, NJ: Princeton University Press, p. 2.
19 Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of
Living Since the Civil War. Princeton, NJ: Princeton University Press, p. 624.
20 Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of
Living Since the Civil War. Princeton: Princeton University Press, p. 624.
21 Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of
Living Since the Civil War. Princeton, NJ: Princeton University Press, p. 2.
22 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 48.
23 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 49.
24 Wang, L. (2015). Hesitant Hegemony: The Identity Confusion and the Pursuit of
Order after the Rise of America (1913–1945) (in Chinese). Beijing: China Social
Sciences Press, p. 1.
25 Wang, L. (2015). Hesitant Hegemony: The Identity Confusion and the Pursuit of Order
after the Rise of America (1913–1945) (in Chinese). Beijing: China Social Sciences Press.
26 Kissinger, H. (1994). Diplomacy. New York: Simon & Schuster.
 America’s Economic Statecraft 77

27 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy (2nd edition). Oxford: Oxford University
Press, p. 52.
28 Nye, J. (2017). The Kindleberger Trap. Project Syndicate, January 9, see www.
belfercenter.org/publication/kindleberger-trap
29 Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of
Living Since the Civil War. Princeton, NJ: Princeton University Press, p. IV.
30 Destler, I. M. (2005). American Trade Politics (4th edition). Washington, DC:
Institute for International Economics, p. 6.
31 Li, S. (1995). On the Historical Course of Relations Between the United States
and the United Nations. The Chinese Journal of American Studies, 2, pp. 91–98.
32 Zhao, K. (2014). On the Strategic Goals of Great Power Economic Diplomacy:
American Economic Diplomacy and the Collapse of the British Empire. China
Journal of European Studies, 32(4), pp. 63–75.
33 Steil, B. (2013). The Battle of Bretton Woods. Princeton, NJ: Princeton University
Press, p. 180.
34 Zhao, K. (2014). On the Strategic Objectives of Great Power Economic Diplo-
macy: American Economic Diplomacy and the Collapse of the British Empire. Eu-
ropean Studies, 32(4), p. 69.
35 Gardner, R. N. (1969). Sterling-Dollar Diplomacy. New York: McGraw-Hill Book
Company, pp. 40–68.
36 Zhao, K. (2014). On the Strategic Objectives of Great Power Economic Diplo-
macy: American Economic Diplomacy and the Collapse of the British Empire. Eu-
ropean Studies, 32(4), p. 72.
37 Kennan, G. F. (1967). Memoirs 1925–1950. Boston: Little, Brown and Company,
p. 275.
38 Kennan, G. F. (1967). Memoirs 1925–1950. Boston: Little, Brown and Company,
pp. 292–293.
39 LaFeber, W. (2012). The US Rise to World Power, 1776–1945. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy. New York: Oxford University Press, p. 55.
40 Stein, A. A. (1984). The Hegemon’s Dilemma: Great Britain, the United States,
and the International Economic Order. International Organization, 38(2),
pp. 355–386.
41 Bayne, N. (2010). Economic Diplomat: The Memoirs of Sir Nicholas Bayne KCMG.
Durham: The Memoir Club, p. 115.
42 Kennan, G. F. (1947). The Sources of Soviet Conduct. Foreign Afairs, July, 25(4),
pp. 566–582.
43 Saull, R. (2012). American Foreign Policy During the Cold War. In Michael Cox &
Doug Stokes (Eds.), US Foreign Policy. New York: Oxford University Press, p. 78.
44 US Spending, Defense Spending, see www.usgovernmentspending.com/defense_
spending
45 US Spending, Defense Spending, see www.usgovernmentspending.com/defense_
spending
46 US Spending, Government Spending, see www.usgovernmentspending.com/spending_
chart_1940_2026USp_23s2li111mcny_F0t
47 Nye, J. (2012). Obama and Smart Power. In Michael Cox & Doug Stokes (Eds.),
US Foreign Policy. New York: Oxford University Press, p. 98.
48 Clinton, H. (2009). Confrmation Hearing for Secretary of State. New York Times,
see https://www.nytimes.com/2009/01/13/us/politics/13text-clinton.html
49 Nye, J. (2012). Obama and Smart Power. In Michael Cox & Doug Stokes (Eds.),
US Foreign Policy. New York: Oxford University Press, p. 106.
50 Bloomberg. (2018). Trump Threatens to Pull U.S. Out of WTO If It Doesn’t
‘Shape Up’, August 30, see www.bqprime.com/business/2018/08/30/
trump-says-he-will-pull-u-s-out-of-wto-if-they-don-t-shape-up.
78 America’s Economic Statecraft

51 BBC. (2018). Trump Threatens to Pull US Out of World Trade Organization, Au-
gust 31, see www.bbc.com/news/world-us-canada-45364150.
52 The White House. (2018). President Donald J. Trump Is Keeping His Promise to
Renegotiate NAFTA, August 27, see https://trumpwhitehouse.archives.gov/
briefngs-statements/president-donald-j-trump-keeping-promise-renegotiate-nafta/.
53 Morrison, S. P. (2017). 7 Protectionist Presidents-America’s Hidden Trade History,
January 20, see www.nationaleconomicseditorial.com/2016/12/22/americas-
protectionist-history/.
54 Phalan, T. (2012). The Smoot-Hawley Tarif and the Great Depression, February 29,
see https://fee.org/articles/the-smoot-hawley-tarif-and-the-great-depression/
55 Lew, J. J., & Nephew, R. (2018). The Use and Misuse of Economic Statecraft: How
Washington Is Abusing Its Financial Might. Foreign Afairs, 97(6), pp. 139–149.
56 Drezner, D. W. (2019). Economic Statecraft in the Age of Trump. The Washington
Quarterly, 42(3), p. 8.
57 Drezner, D. W. (2019). Economic Statecraft in the Age of Trump. The Washington
Quarterly, 42(3), p. 7.
58 Drezner, D. W. (2019). Economic Statecraft in the Age of Trump. The Washington
Quarterly, 42(3), p. 13.
4 The EU’s Economic Statecraft

After 2019, research on the EU’s economic statecraft fourished. The Euro-
pean Council on Foreign Relations (ECFR), a think tank specializing in EU
foreign policy, launched the Task Force for Protecting Europe from Economic
Coercion,1 produced a series of articles on the EU’s economic statecraft,
and promoted the introduction of the Anti-economic Coercion Instrument
(ACI)2 and the Recovery and Resilience Facility, etc.3 Think tanks such as the
Royal Institute for International Relations (EGMONT), Bruegel, the Centre
for European Policy Studies (CEPS), and the European Centre for Interna-
tional Political Economy (ECIPE) all have researchers dedicated to economic
statecraft.4
Unlike the United States, economic statecraft is a relatively new concept
for Europe and was rarely mentioned before 2019. Earlier, the concept associ-
ated with economic statecraft was economic diplomacy. In 2016–2017 the EU
considered producing a strategy paper (a “Communication” in the EU jargon)
on European economic diplomacy.
Here’s what happened: on February 24, 2016, the European Commission
(EC)’s in-house think tank, the European Political Strategy Centre (EPSC),
organized a high-level seminar, “Economic Diplomacy and Foreign Policy:
Friends or Foes?” The seminar, which featured a keynote speech by Jyrki
Katainen, then-Finnish Vice-President of the EC and head of trade policy,
brought together the best minds in EU politics, industry, and academia to
discuss how political and economic goals and tools can be combined and how
to make trade-ofs between political and economic interests.5 The seminar was
considered a precursor to the EU’s advancement of economic diplomacy from
2016 onwards. For an economic diplomacy strategy at the EU level, the EU
European External Action Service (EEAS) created an ambassadorial-level post
of economic diplomacy advisor to oversee the development of an EU commu-
nication on economic diplomacy. However, the communication on economic
diplomacy stopped at release for two reasons. First, there was a disagreement
among EU member states on the defnition of economic diplomacy. Some
member states considered economic diplomacy as trade and investment pro-
motion, which falls under the jurisdiction of member states. Other member
states, the European Commission, the EU High Representative for Foreign

DOI: 10.4324/9781003351382-5
This chapter has been made available under a CC-BY-NC-ND license.
80 The EU’s Economic Statecraft

Afairs and Security Policy, and the EEAS that supported the High Represent-
ative, believed that unifed and coordinated economic diplomacy was neces-
sary at the EU level to better use economic power and instruments to achieve
the EU’s foreign policy objectives, and therefore the EU has jurisdiction over
economic diplomacy issues. Second, there were divergent views within the
European Commission on how to reconcile economic and strategic interests.
The Commission’s Directorate General for Trade was less inclined to weap-
onize trade policy instruments, whereas the EEAS in charge of foreign policy
favored the use of trade, monetary, and fnancial instruments to achieve stra-
tegic external interests. As a result, a communication on economic diplomacy
was not launched at the EU level.
However, the situation has become more compelling. Against the backdrop
of President Trump’s inauguration in 2017, the outbreak of the COVID-19
pandemic in 2020, and the Russo-Ukrainian War in 2022, the EU fnds itself
in an environment far from the peace and prosperity of Kant’s world, but
rather still in a Westphalian system of contention and “wrangling” between
major powers. Even interdependence has increasingly become “weaponized”.
As a result, the EU, as a major economic force in the world, recognizes what it
can and must use to its advantage is its own economic power. As such, the bloc
continues to practice economic diplomacy through strategy papers of various
forms and substance, including the strategy paper, “Connecting Europe and
Asia: Building Blocks for an EU Strategy”, unveiled in 2018.6
November 2019 marked the beginning of a gradual shift of the EU’s eco-
nomic statecraft, with a new European Commission in place. The new Com-
mission president, former German Defense Minister Ursula von der Leyen,
characterized her Commission as a geopolitical one.7 This was a prelude to the
EU’s shift to geopolitics. In this process, discussions on the EU’s economic
statecraft have been gradually added to the agenda. To a large extent, we can
consider economic statecraft as an economic version of the EU’s strategy of
geopolitics.
Maaike Okano-Heijmans, a senior research fellow at the Clingendael
Institute, makes the distinction between economic diplomacy and economic
statecraft. She notes that those who use the term economic statecraft tend to
accentuate the element of power play, which is consciously or unconsciously
deemphasized in scholarly and practitioners’ references to economic diplo-
macy.8 However, against the backdrop of intensifying geopolitical tension and
the growing competition between major powers, EU institutions soon recog-
nized the imperative to use their economic power to defend their economic
and diplomatic interests. Therefore, economic statecraft, which emphasizes
the power play, has gradually become a buzzword among the EU think tanks.
On February 24, 2022, the Russia-Ukraine war broke out in full force.
The confict triggered a series of global energy and geopolitical crises. For
the EU, this was a wake-up call. In the past, the EU believed that the existing
international order could be maintained through dialogue, but this war com-
pletely shattered such an illusion, and the EU turned to intense and sweeping
 The EU’s Economic Statecraft 81

economic sanctions on Russia, completely changing the landscape of the EU-

Russian relationship, established since the end of the Cold War.
Against this backdrop, the EU increasingly feels the need to channel its own
power resources that are scattered across various policy areas and strengthen
internal coordination to maximize its overall impact. Since 2019, there has
been a major debate within the EU around economic statecraft. In fact, even
in the current geopolitical era, there is no consensus within the EU on what
constitutes economic statecraft. For Europeans, economic statecraft is an
ancient craft of state-centrism, reminiscent of 18th-century mercantilism. If
the big debate on economic diplomacy (that started within the EU in 2016)
eventually led to a series of EU strategies, the great discussion on economic
statecraft (that started in late 2019) will likewise lead to a raft of new EU
papers on economic statecraft with the transformation of wealth to power as
the core element. This will tilt the EU policy scale from liberalism towards
mercantilism.
This chapter is a completely new endeavor to review the EU’s power
through the prism of economic statecraft. It remains a puzzle that the EU is
able to punch above its weight when its economy has sufered serious blows
since the Euro Debt Crisis in 2009. I argue that the EU’s economic statecraft
played a signifcant role since the EU has found innovative ways of pooling
wealth at the EU level and transforming wealth to power internationally. To
a signifcant extent, the rise of the EU’s power cannot be separated from the
EU’s rediscovery of the ancient art of “statecraft”, or, to be more precise,
“EU-craft”.

4.1 Inherent Defciencies in the EU’s Implementation of

Economic Statecraft and the EU’s Innovative Solutions
The implementation of the EU’s economic statecraft may be an impossible
mission. This is because economic statecraft, as the name suggests, refers to
the statecraft of a country, while the EU is not a single sovereign state; its 27
member states are not unifed under the United States of Europe (USE) ban-
ner envisioned by the EU’s founding fathers, nor centralized in a European
federation. Therefore, when it comes to the EU’s statecraft, the frst challenge
is the inherent lack of EU jurisdiction. The foreign and security policies related
to economic statecraft, and even a considerable part of economic authority, are
still in the hands of member states. For these policies, EU competence remains
limited, playing only a coordinating, supporting, and supplementary role.
Therefore, the EU has been facing a chronic “capabilities-expectations gap”.
Next, I will examine the inherent defciencies of the EU’s economic statecraft
and explore how the EU has remediated such defciencies over the years.
To be precise, the EU has strengths, but it lacks competence, so it cannot
efectively, efciently, and comprehensively direct its strength into the policy
goals it wishes to achieve. Here, the EU encounters what Joseph Nye charac-
terized as a “paradox of power”, that is, those best endowed with power do
82 The EU’s Economic Statecraft

not always get the outcomes they want.9 According to Nye, the fragmentation
of world politics into many diferent spheres has made power resources less
fungible, that is, less transferable from sphere to sphere.10 All great powers
encounter such a paradox of power, and they all have their ways of mitigating
this problem. The EU is unique in this aspect since it is a sui generis interna-
tional actor.
In the absence of sufcient jurisdiction, the EU achieves the transformation
of wealth into power mainly through the following six policy tools. Although
these policy tools are not proposed within the framework of economic state-
craft or economic diplomacy strategy, they are, in essence, economic statecraft,
a wealth-to-power strategy with EU characteristics.
First, trade policies are used to realize the objective of foreign and security
policies. The Lisbon Treaty links the principles and objectives of the EU com-
mon commercial policies and the integral external action. In the trade strategy
published by the European Commission on October 14, 2015, the EU took
the initiative to link trade and other issues in order to realize the goals of
foreign afairs and values.11 By ofering developing countries aid and the Gen-
eralized System of Preferences, it intends to exert political infuence on devel-
oping countries and even pursue the change of political system.12 On the other
hand, the EU relies heavily on the negotiation of free trade areas or linkage
agreements for its geopolitical strategic purposes. The most typical is that the
EU signed the Deep and Comprehensive Free Trade Agreement (DCFTA)
with some former Soviet Union member states, including Ukraine, Georgia,
and Moldova and it attempted negotiating with the United States over the
Transatlantic Trade and Investment Partnership (TTIP). These agreements
have a strong geopolitical characteristic. As negotiated, the DCFTA will pro-
vide a modern trade framework for Ukraine, which will abolish the tarif and
quota gradually, create an open market, formulate a unifed law, standard, and
set of norms in diferent trading areas, and fnally make the Ukrainian econ-
omy consistent with the EU standard.13 Although the EU tries its best to avoid
the word “geopolitics”, the DCFTA is still regarded by numerous scholars as
part of its geopolitical strategy, which provides support for the sustaining of
stability in its peripheral regions and its strategy of eastern expansion.14 The
then-EU Trade Commissioner Cecilia Malmstrom also highlighted the impor-
tance of DCFTA to EU security in her speech in 2015.15 Since Ukraine was
a traditional ally and important trade partner of Russia, it caused strong dis-
satisfaction and resistance in Russia. Former Ukrainian President Yanukovych
postponed the signing of the DCFTA, which led to a domestic political crisis
in Ukraine. With intervention from Russia and NATO, it fnally evolved into
the Ukrainian crisis and triggered the merging of Crimea to Russia.
The TTIP between the United States and the EU is of extreme geopoliti-
cal strategic signifcance as well.16 In the face of the rising Asia, the TTIP will
strengthen EU-US cooperation apart from the existing WTO and make global
trading rules. Also, the EU has relied on Russia for natural gas imports for
a long period, and the TTIP will enable the United States to export oil and
 The EU’s Economic Statecraft 83

natural gas to Europe, which will improve the EU’s energy security environ-
ment greatly.
Another strategy is the EU expansion policy. The EU’s expansion policy is a
major tool with which it intends to realize the transformation from economic
strengths to political power by setting prerequisites. This is something that
traditional great powers cannot do through peaceful approaches. In the EU
Copenhagen Summit in 1993, the EU established strict accession rules – the
Copenhagen criteria: (1) to establish a stable institution in order to safeguard
democracy, rule by law, respect for human rights, and ethnic groups’ rights;
(2) to have a market economy system that operates well and the capacity to
respond to the EU’s internal competition pressure and market forces; (3) to
have the capacity to undertake responsibilities as a member state, including
agreeing with the political, economic, and monetary alliance objectives. The
Treaty of Amsterdam specifes the political criteria for joining the EU. The
applicant should have a democratic system. If it acts against the principles
of democracy and human rights after accession, the EU, with other mem-
ber states’ unanimous decision, can cancel some rights of this member state
in the EU. The political criterion is also regarded as the precondition that a
country must satisfy before it triggers the accession negotiations.17 Through
the EU expansion policy, new member states can acquire benefts in political
and economic terms. Politically, a country can elevate its international sta-
tus, participate in the EU’s decision making, and enhance its national image
by joining the EU.18 The economic benefts are more comprehensive. First,
the status as an EU member state can change a country’s institutional envi-
ronment fundamentally. The government and corporations of the newcomer
must abide by the EU’s laws and regulations. Second, joining the single Euro-
pean market can boost the new member state’s growth of trading and invest-
ment scale and refuel the free fow of goods, services, capital, and people in
economic terms. Next, the new member state can access the EU fund, which
is able to help improve this country’s infrastructure and other areas, as well
as stimulate its economic development. Last, the EU will provide regional
aid for its underdeveloped member states or regions. Since the establishment
of the EEC, the organization has grown from 6 countries to 28 countries
through several rounds of expansion. The EU has exerted its attraction and
implemented the carrot policy comprehensively on countries that wish to join
the EU. With the economic hard power embodied in the EU expansion policy,
the EU expands its normative power objectives like freedom, democracy, and
rule by law to former Communist countries in central-eastern Europe and
southeast Europe. Through this method, the EU has reshaped the post-Cold
War European order.
The third strategy is economic sanction. The nature of economic sanction is
to reach political and security objectives through the employment of forceful
economic hard power. For the EU, economic sanction is a major tool to imple-
ment its Common Foreign and Security Policy.19 In large measure, the EU’s
sanctions against more than 30 countries, including Russia, China, Iran, Syria,
84 The EU’s Economic Statecraft

Myanmar, and Haiti, are still efective. Among the sanction measures, there
is generally economic sanction. For instance, during the Ukrainian crises, the
EU issued rounds of economic sanction against Russia, utilizing the linkage
strategy of combining economic and military security issues.
The fourth is the structural foreign policy. The structural foreign policy
means the EU develops linkages with neighboring countries and remote part-
ners by signing cooperation agreements. A feature of this foreign policy is
that it emphasizes long-term instead of short-term objectives. It attempts to
change other countries’ conditions of action step by step. To exert its power,
the civilian mode rather than the military mode is the basis. The objective is to
strengthen cooperation, reach a consensus, consolidate international mecha-
nisms, and spread multilateralism to every level. This policy does not exclude
a compulsory dimension, which means that the EU, by setting conditions, can
deprive other countries of their profts when the latter refuse to accept the
EU’s conditions. It authorizes a country party to enter the European market
or add to the tarif for a third party.20 The structural foreign policy is also called
the cooperation policy or cooperation power.
The ffth is the grand bargain strategy, whose major vehicles are mixed
agreements containing various issue areas signed by the EU and third coun-
tries,21 the strategic partnerships,22 and the summit system. The negotiation
mode of the grand bargain does not exist solely in the EU, but is widely used
in political games and multilateral negotiations. For instance, the negotiation
mode inside the WTO is a package deal that organizes multiple issues and
realizes a grand bargain. This negotiation mode is conducive to the realization
of an overall balance of interests. It also compensates departments and groups
that have their domestic interests impaired in cross-border negotiations and
thus facilitates the reaching of domestic consensus. Such a package negotia-
tion is particularly signifcant for the EU as a nonmilitary power. With the
long-term comprehensive partnership, the EU can exert long-term and subtle
infuence on its partners.
The sixth is party linkage – linkage with a third party of the EU. The term
“party linkage” frst appears in Sebenius’s article, “Negotiation Arithmetic:
Adding and Subtracting Issues and Parties”, published in the journal Inter-
national Organization in 1983.23 Sebenius contends that the number of
issues and parties in a negotiation is a variable. Thus, to add more parties with
substantial infuence over the nature of the negotiation or material interests
involved in the negotiation can increase one party’s bargaining power or legiti-
macy. In the EU’s foreign policy practice, cases of adding parties are numer-
ous. In fact, when the EU initiates foreign negotiations, identifying parties
with compatible interests and constructing a negotiation alliance is a key step.
Allies could be traditional great powers outside the EU or developing and
small countries. As long as they can enhance the EU’s status in negotiations,
the EU will consider them. Nevertheless, when the EU negotiates with politi-
cal and military powers with diferent values, it tends to borrow power from
the United States. To the United States, the EU is always ambivalent. It wants
 The EU’s Economic Statecraft 85

to rid itself of the United States’ restriction and seek autonomy, but to separate
totally from the United States is difcult. Driven by this ambivalence, the EU
has formed a tentative party linkage strategy with the United States. In other
terms, on the global political and economic stage, the EU keeps a close eye on
the United States and is ready to work or split with the latter, follow it or act
independently, and cooperate or compete with it.
In the current context, the discussion on the EU’s strategic autonomy and
rearmament has intensifed, which in turn, has fueled internal debate on the
EU’s economic statecraft, the central objective of which is to enhance the
EU’s coordinated use of various power endowments (especially economic
power endowments) to achieve its foreign policy objectives (i.e., the trans-
formation of wealth into power, the most important subject of our study on
economic statecraft). There is now renewed urgency for the EU to launch its
wealth-power strategy to push economic statecraft to the center of the EU’s
foreign policy agenda.
The EU is looking for ways to expand the sources of its wealth. The Next
Generation EU (NGEU) program has authorized the EU to issue bonds. The
NGEU program is radically changing the way the EU interacts with fnancial
markets because of its ambitious and ground-breaking new public debt pro-
gram. The EC has adopted a new, diversifed borrowing strategy, similar to
that of other major issuers, to raise money safely, reliably, and in a cost-efective
manner. Member states authorized the EC to borrow up to EUR 750 billion
in 2018 prices (around EUR 806.9 billion at current prices) until 2026. This
means that the EU will borrow up to approximately EUR 150 billion per year
over the next few years.24

4.2 Updating the EU’s Economic Statecraft

“Toolbox” Since 2020
Since 2020, at the confuence of various challenges such as the COVID-19 pan-
demic, geopolitical tensions between major powers, and the Russia-Ukraine con-
fict, the top political, diplomatic, and business minds of the EU and its member
states have begun to plan new economic statecraft and rapidly update their “tool-
box”. Such economic statecraft has clear strategic objectives, issue areas, imple-
mentation means, and instruments, as manifested in the following ways.

4.2.1 Promote the Further Instrumentalization of Military and

Economic Power to Create a “Europa Geopolitica” 25

The new European Commission believes that hard power (i.e., credible mili-
tary capabilities) is an important instrument.26 The establishment of a “Euro-
pean army” has become the consensus among member states, led by France
and Germany. The European Commission led by President Von Der Leyen is
fully aware of the intensifcation of geopolitical competition and its own ina-
bility to deal with geopolitical issues. Speaking at the World Economic Forum
86 The EU’s Economic Statecraft

in Davos on January 22, 2020, Ursula von der Leyen said, “We must also do
more when it comes to managing crises as they develop. But to be more asser-
tive in the world, we know we must step up in some felds”. The EU is a master
of rebuilding, but it must develop hard power – “credible military capabilities” –
to infuence world events. She stressed that there is a European way of for-
eign policy and foreign security policy where hard power is an important tool.
These capabilities will be complementary to and “diferent” from NATO.27
Von der Leyen endorsed the concept of an “EU army”, at least as a sort of
rhetorical call for improving the bloc’s collective military and defense capabili-
ties, rather than a literal expectation of soldiers in EU uniforms. Josep Borrell,
EU High Representative for Foreign Afairs and Security, said, “We see the
rebirth of geostrategic competition”, notably between China, Russia, and the
United States, and the EU must step up, and it “has the option of becom-
ing a player, a true geostrategic actor, or being mostly the playground”.28 He
endorsed increasing the EU’s military capabilities and quoted Dutch Prime
Minister Mark Rutte as saying, “If we only preach the merits of principles, and
shy away from exercising power in the geopolitical arena, our continent may
always be right, but it will seldom be relevant”.29 In terms of building a cred-
ible military force, the EC under von der Leyen’s presidency has put forward
a number of ideas for strengthening EU defense policy, including increasing
the EU Defense Fund (EDF), for which the EC proposes to invest EUR 13
billion between 2021 and 2027 (an average of 1.8 billion euros per year) to
fund cooperative defense research and the joint development of European
military capabilities.30

4.2.2 Promote a “Sovereign Europe” and Protect the “Economic

Sovereignty” of Europe

Economic sovereignty has become the core demand of the current EU eco-
nomic statecraft. To pursue economic sovereignty, the EU needs to bolster its
ability to participate in defning the rules of the game for the global economy;
boost Europe’s research, scientifc, technology and innovation base; protect
assets critical to national security from foreign interference; enforce a level
playing feld in both domestic and international competition; and strengthen
European monetary and fnancial autonomy.31 The key objective of the EU’s
new trade policy is to seek the so-called “Open Strategic Autonomy”. It means
striking the right balance between a Europe that is open for business and a
Europe that defends its companies and consumers from unfair competition
and hostile actions.32 Moreover, in pursuit of strategic economic sovereignty,
the EU is actively building resilience into its industrial value chains, promot-
ing green transformation, and maintaining economic and industrial security.
In participating in the world geoeconomic competition, the EU is carefully
managing its interdependence with other major trading powers, closely moni-
toring its supply networks, diversifying its production chains, and minimizing
its reliance on a single actor (whether a company, country, or region).
 The EU’s Economic Statecraft 87

4.2.3 Promote the “Geoeconomic Europe” Agenda by Vigorously

Implementing Economic Diplomacy

The EU Strategy for Cooperation in the Indo-Pacifc, the EU-Asia Connec-

tivity Strategy, the Globally Connected Europe Strategy, and the EU Global
Gateway initiative are emblematic strategies of EU economic diplomacy
that point to the key areas and main objectives of EU economic diplomacy
today.
In its strategic competition in the Indo-Pacifc region, the EU prioritizes
the regularization of trade relations with the region and actively participates
in shaping the region’s political and economic order. From 2018 to 2020,
the EU signed free trade agreements with Japan, Singapore, and Vietnam,
and reached a strategic partnership agreement with the Association of South-
east Asian Nations (ASEAN). In April 2021, the EU Foreign Afairs Council
adopted the Council Conclusions on the EU Strategy for Cooperation in
the Indo-Pacifc, stating that the EU wished to accelerate the reduction of
its economic dependence on China by strengthening economic ties with
India, Japan, and ASEAN. The EU plans to conclude the Partnership and
Cooperation Agreement (PCA) negotiations with Malaysia and Thailand;
start negotiations on the PCA with the Maldives; conclude trade negotia-
tions with Australia, Indonesia, and New Zealand; restart trade negotiations
with India; and conclude negotiations with the East African Community on
the Economic Partnership Agreement (EPA). Clearly, the EU is directing
more resources to strengthen partnerships with like-minded countries such
as Japan, India, and ASEAN and to connect such eforts with its existing
initiatives in the region.

4.2.4 Economic Coercion Is an Increasingly Important Tool

in the EU’s Economic Statecraft

Since von der Leyen became the new EC president, the EU has updated and
reinvented its trade policy toolbox to include the International Procurement
Instrument (IPI), the Supply Chain Due Diligence Act, and the Anti-Eco-
nomic Coercion Instrument (AECI), among others.
Take the IPI as an example. In 2012, the EC submitted the “Regulation of
the European Parliament and of the Council on the Access of Third-Country
Goods and Services to the Union’s Internal Market in Public Procurement
and Procedures Supporting Negotiations on Access of Union Goods and Ser-
vices to the Public Procurement Markets of Third Countries”, but it failed to
be adopted by the Council of the European Union. However, the situation
has changed since 2021, and there is a new attitude within the EU towards
this instrument. Anna Michelle Asimakopoulou, vice-chair of the Interna-
tional Trade Committee (INTA), believes that the IPI and other associated
measures aim to deter malpractice and level the playing feld for the European
Union in this new geopolitical trade game. The EU’s new, more assertive
trade stance is not only necessary and pragmatic, but also the most intelligent
88 The EU’s Economic Statecraft

course of action.33 BusinessEurope is frmly convinced of the urgent need to

have the IPI in place. It views the EU’s IPI as an indispensable instrument
that can complement existing EU tools in the trade policy area.34 As a result,
the IPI has garnered more support from European politicians and businesses.
The EU believes that its existing government procurement rules overly insist
on the principles of free trade, yet its trade negotiation counterparts and
competitors refuse reciprocal opening, even as they gain free access to the
EU market. Against the backdrop of the world economic downturn and the
intensifying economic crisis in Europe, and in the face of the increasingly
challenging trade environment, the EU began to shift its position by trying to
open the government procurement markets of countries that have previously
denied the EU access or adopted restrictive measures – in pursuit of “de facto
reciprocity”. The IPI allows the EU to develop a “review-negotiate-retaliate”
process, whereby the EC has the power to initiate a review of a third country
and to impose provisional price penalties on suppliers and products from that
third country. Therefore, the IPI can be used by the EU as a new ofensive
trade tool, demanding that the market access opportunities provided by the
EU are reciprocated by its trading partners. This can increase the EU’s bar-
gaining power in bilateral negotiations with countries such as China, India,
Brazil, and Russia.
Let us also examine the Anti-Economic Coercion Instrument (ACI). The
ACI is the EC’s instrument for imposing punitive sanctions on countries that
try to infuence EU political policy through economic coercion. On Decem-
ber 8, 2021, the EC ofcially published the long-awaited draft “Regulation
on the Protection of the EU and Its Member States from Economic Coercion
by Third Countries”. The draft regulation seeks to supplement and strengthen
the EU’s legal instruments to deter and counteract economic and trade
restrictions from other countries. EC Executive Vice-President and Trade
Commissioner Valdis Dombrovskis said that “At a time of rising geopolitical
tensions, trade is increasingly being weaponized, and the EU and its Member
States are becoming targets of economic intimidation. We need the proper
tools to respond”.35 In the regulation, the EC stated the aim of this instru-
ment was to “remedy a legislative gap” to “ensure the efective protection
of the interests of the Union and its Member States where a third country
seeks, through measures afecting trade or investment, to coerce the Union
or a Member State into adopting or refraining from adopting a particular act”
and “provide a framework for the EU to respond in such situations with the
objective to deter, or have the third country desist from such actions, whilst
permitting the Union, in the last resort, to counteract such actions”. It sug-
gests that the ACI “strengthens the EU’s toolbox and will allow the EU to
better defend itself on the global stage”. With this new instrument, the EU
will be able to respond to cases of economic coercion in a structured and
harmonized manner.
 The EU’s Economic Statecraft 89

4.3 The History of EU Foreign Policy From the

Perspective of Economic Statecraft
Given that economic statecraft is increasingly becoming an important com-
ponent of EU foreign policy practice and study, it is necessary to review the
history of EU integration and foreign policy from the perspective of economic
statecraft. Based on the Kondratief long waves and the critical junctures in the
EU integration process, I divide the history of EU integration and its foreign
policy into fve stages (see Table 4.1).

Table 4.1 Stages of EU Integration and Its Foreign Policy from the Perspective of
Economic Statecraft

Years Paradigm of the Stages of EU Integration The EU’s Power

EU’s Economic and Foreign
Statecraft Policy Model

1945–1967/71 Liberalism Initiation stage: the International

Kondratief long Schuman Declaration of actor, but not
wave IV-A 1950; establishment of yet emerged
the European Coal and as a signifcant
Steel Community; Treaty force
of Rome entered into
force on January 1, 1958
1967/71–1986 Liberalism + Patience stage: “Empty Civilian Power
Kondratief long mercantilism Chair Crisis”; economic Europe
wave IV-B stagnation in the 1970s;
European Economic
Community (EEC)
enlargement (UK, Ireland,
Denmark, and Greece)
1986–2001/08 Liberalism Relaunch stage: Single Normative Power
Kondratief long European Act of 1986; Europe
wave IV-B Delors’ Plan; EU
enlargement (Spain and
Portugal); end of the
Cold War; entry into force
of the Maastricht Treaty
of 1992; birth of the
European Union; launch
of the euro in 1999; EU
enlargement (Austria,
Finland, and Sweden)
2008–2025/2035? From liberalism Crisis stage: global fnancial Linkage Power
Kondratief long to mercantilism crisis of 2008; European Europe
wave V-B debt crisis; refugee crisis;
geopolitical crisis; the rise
of the far right; Brexit
90 The EU’s Economic Statecraft

4.3.1 The Foundation of European Power (1950–1967)

In the context of the bipolar confrontation between the United States and the
Soviet Union, it is easy to overlook the major political and economic events
that colored the rise of Europe. The period from the 1950s to the mid-1960s
saw the laying of the “European Mansion” foundation. This was also a forma-
tive stage of the EU’s economic and market power, paving the way for wealth
creation on the continent.
The 1950s saw the frst peak of the construction of the “European Man-
sion”. In September 1950, the then-French Foreign Minister Robert Schuman
frst presented the Schuman Plan, which proposed the creation of a European
Coal and Steel Community (ECSC), placing coal and steel for arms production
in a central supranational body with a view to “a farewell to arms”. This plan –
drafted by Jean Monnet and endorsed and put into action by Schuman – was the
guide and program of action for European integration. In the plan, Schuman
advised German Chancellor Konrad Adenauer to take joint charge of the coal
and steel industries of the member states and to exempt related tarifs, and the
latter immediately agreed. On April 18, 1951, France, the Federal Republic of
Germany, Italy, Belgium, the Netherlands, and Luxembourg signed the treaty
establishing the ECSC in Paris, which entered into force on July 25, 1952. This
was the frst example of interstate cooperation in European history, whereby
nation states ceded some of their powers to a supranational body. The treaty
facilitated a signifcant improvement in Franco-German relations and marked
the beginning of Franco-German rapprochement, a precursor for the union of
western Europe. By 1954, virtually all the trade barriers to coal, coke, steel,
and pig iron among the six nations had been removed. The ECSC went on to
establish a series of common regulations to monitor cartels and regulate merg-
ers. Its central executive body determined prices, set production quotas, and was
authorized to penalize companies that violated the treaty and its regulations. On
March 25, 1957, further to the ECSC, the heads of government and foreign
ministers of France, the Federal Republic of Germany, Italy, the Netherlands,
Belgium, and Luxembourg signed the Rome Treaty, establishing the European
Economic Community (EEC) and the treaty establishing the European Atomic
Energy Community (EAEC), later collectively known as the Treaty of Rome. In
1967, the institutions of the European Coal and Steel Community, the ECSC,
EEC, and EAEC were merged to form the European Community. This was an
important milestone for European integration. At this time, the EC had become
a key international player but had not yet become a major force.
This period witnessed the birth of European economic statecraft, the
essence of which is to convert the market power to the political construction
of European communities.

4.3.2 The “Upward Spiral” of European Power (1967–2008)

This period saw the rise of European power, which coincided with the decline
of American hegemony. From a long-cycle perspective, this phase consists of
Kondratief long waves IV-B and V-A (see Figure 3.1). This phase began in
 The EU’s Economic Statecraft 91

1967/1971 and was marked by the “Nixon Shock” that forced the dollar to
be unpegged from gold, the oil shock that began in 1973, and the stagfation
that rippled through Western economies. In Kondratief long wave IV-B, there
was an economic depression and development stagnation, as well as the rise
and fall of the major powers. The relative decline of the United States, the
relative rise of Japan and western Europe, and intensifed competition between
the United States, Japan, and Europe characterized this shift in the balance
of major powers. The European Community aspired to a greater role in the
international arena as a nonmilitary “civilian power”.
The rise of European power during this 40-year period was far from smooth
sailing. From the perspective of economic statecraft, I frst focus on the impact
of European integration on European economic power, which was at a low
ebb from the 1960s to the mid-1980s. Jean Monnet, “the Father of Europe”,
described the period of 1964–1972 as “a time for patience” for the develop-
ment of the European Community. The “Empty Chair Crisis”, a key event in
the process of European integration, happened during this time. This crisis
occurred in 1965, when Walter Hallstein, president of the Commission of the
European Economic Community, tried to expand the powers of the Euro-
pean Parliament and the European Commission by shifting towards suprana-
tionalism. French President Charles de Gaulle vehemently opposed this and
recalled the French representative to the European Economic Community
(EEC), which resulted in no French representation at the EEC meetings for
six consecutive months, efectively crippling the work of the EEC. Therefore,
real development of the EEC was not realized until after 1972.
While the EC survived the Empty Chair Crisis, the economy of western
Europe was experiencing the greatest recession since World War II. The three
decades after World War II were a period of great economic exuberance for
the capitalist economies of western Europe. In particular, from 1945 to 1971,
the entire Western capitalist system experienced an extraordinary boom fol-
lowing World War II.36 But after that, the capitalist world encountered cycli-
cal changes, with slower growth, rising unemployment, rising infation, and
declining purchasing power among workers. Hesitation, anxiety, and pent-up
anger fueled right-wing sentiment in Europe and the United States.37
From the late 1960s to the late 1980s, the world economy entered a down-
ward cycle. From the perspective of the long cycle of the world economy, the
late 1960s/early 1970s to around 1990 was Kondratief long wave IV-B, a
period of stagnation. During this period, the West sufered from the frst and
second oil crises (1971–1973 and 1980–1981). European economies were
severely battered. US power was in its post-World War II prime before enter-
ing a period of relative decline after the Vietnam War followed by a revival
after the end of the Cold War in 1989. These dramatic changes in the world
economic and political landscape provided an important backdrop for the
adjustment of the EC’s diplomatic strategy.
In the late 1980s and early 1990s, with the end of the Cold War and the
return of the world economy to an upward trajectory, European integration
gained more space for development. In 1986, the EC adopted the Single
92 The EU’s Economic Statecraft

European Act, which started qualifed majority voting in the single market.
In 1989, the Delors’ Plan was adopted, which proposed an economic and
monetary union. With the accession of Spain and Portugal to the European
Community in 1986, the number of EC member states grew to 12, and its
strength, status, and infuence continued to expand. In February 1992, the
12 EC member states formally signed the Treaty on European Union in the
Dutch border city of Maastricht, also known as the Maastricht Treaty. After
experiencing stagnation in the late 1970s and the frst half of the 1980s, the
European economy gradually came out of the doldrums with a great revival
of strength and confdence. The economic recovery of the EC, the rapid pro-
gress on integration, and the dramatic changes that were taking place in the
Soviet Union and Central and Eastern Europe (driven by Gorbachev’s “new
thinking”) led the EU to refect on its power dynamics. The identity of the
EU, which European scholars later termed “normative power”, was gradually
taking shape.
From a global economic perspective, the world economy from the 1990s
to the global fnancial crisis is referred to as the Great Moderation. The main
features of the world economy during this period were that macroeconomic
instability was considered to have been eradicated and that low and stable
infation and “sustainable” global economic growth were considered likely to
coexist in the long term.38 The Washington Consensus and neoliberal policies
were in full swing. From the power shift standpoint, the United States had
restored its power. After the end of the Cold War, the US liberal-democratic
worldview outshined all others. EU integration progressed rapidly during this
period. The euro was launched, and the EU achieved its largest expansion in
its history, with a total of 25 member states.

4.3.3 Decline of European Power (Since 2008)

In Kondratief long wave V-B (2001/08–2025/35), we witnessed the Septem-

ber 11 terrorist attacks, the global fnancial crisis of 2008, and the outbreak of
the European Debt Crisis in 2009. Carmen Reinhardt, a senior research fellow
at the Peterson Institute for International Economics, and Kenneth Rogof, a
professor at Harvard University, have described the efects of the crisis as the
Second Great Contraction, following the Great Depression of the 1930s. In
terms of power shifts, the West is in relative decline. Populism is on the rise.
In the United States, populist President Trump was elected. The UK left the
EU. The EU has experienced multiple crises – including the refugee crisis and
geopolitical crises (the two Ukrainian conficts) – and slow economic recov-
ery. Economic nationalism within the EU is on the rise and pushing Europe
towards “Fortress Europe”, with rising pressures for protectionism and pop-
ulism. This onslaught of complex crises has overwhelmed the EU, stunted the
process of European integration, and undermined the overall power status
of the EU. I will discuss the changes in European power from three aspects:
political, economic, and institutional.
 The EU’s Economic Statecraft 93

4.3.3.1 The Decline of Europe’s Political-Strategic Power

First, the outbreak of multiple crises, such as the European debt crisis and
Brexit, dealt a heavy blow to the political-strategic power of the EU. For some
outside observers, these multiple crises may be the precursor to the disinte-
gration of the EU and the eurozone. In his book The Truth of the European
Debt Crisis, Shi Hanbing argues that in the absence of strong statesmen in
Europe who can drive Europe towards a political union, the breakup of the
eurozone is nearly the only possible endgame.39 Indeed, at the height of the
Greek crisis in 2015, both German and Greek leaders considered the option
of a Greek exit from the eurozone. Ahead of the July 5, 2015, referendum on
whether Greece should accept an international bailout plan, Prime Minister
Alexis Tsipras called on the Greek people to reject “blackmail” and vote no
in the referendum. Earlier, European leaders warned that voting “No” could
mean Greece exiting the eurozone.40 In the end, Greek voters overwhelm-
ingly rejected the international bailout package, with 61.3% voting against the
plan.41 German Finance Minister Wolfgang Schäuble said on July 16, 2015,
that a temporary exit from the eurozone would give Greece the fexibility
to work over the debt issue. Schäuble stressed that to discount or forgive
Greece’s massive public debt of more than EUR 300 billion was not in line
with eurozone membership. He implied that Greece would get its best shot at
a substantial cut in its debt only if it was willing to give up membership in the
European common currency.42 In the 2017 French election, Jean Louis Marie
Le Pen, leader of the French far-right party National Front, argued that France
should leave the EU, like the UK, saying that if elected president, she would
lead France out of the eurozone (Frexit). This shows that since the European
debt crisis, European integration has faced serious headwinds. Some member
states exiting the eurozone or even the EU has become a plausible policy
option. This would clearly be a major afront to the EU’s international status.
Second, the EU is internally divided and unable to reach consensus on
economic, political, and environmental policy reforms. In terms of economic
policy, there is heated debate within the EU. Since the European debt cri-
sis, Germany has advocated austerity across Europe. This policy lasted until
around 2013, when it began to meet widespread criticism. Germany and its
allies pushed for the continuation of harsh austerity measures to address the
fscal defcits of member states and to prevent a repeat of the debt crisis. On
the other hand, some member states, led by France and Italy, proposed end-
ing austerity and restoring economic growth through increased spending.
After all, economic conditions and political constraints vary signifcantly from
state to state. After French President François Hollande took ofce in May
2012, a pivot to economic growth rather than austerity increasingly began
to dominate France’s European policy. In the process, France has gradually
formed an alliance with Italy and the European Central Bank to promote eco-
nomic growth and stimulus programs.43 German Chancellor Angela Merkel,
on the other hand, was isolated. In terms of climate and energy policy, the
divergence in emissions reduction within the EU has intensifed due to the
94 The EU’s Economic Statecraft

“East-West” political game. Specifcally, the European Commission advocates

more ambitious emissions reduction targets, and western European countries
tend to support the Commission’s proposition, whereas central and eastern
European countries (led by Poland) have serious misgivings about the EU’s
reformulation of a more ambitious emissions reduction plan for 2030 due to
their dependence on conventional energy sources. On the issue of accepting
refugees, there were signifcant diferences between western European coun-
tries and central and eastern European countries. For political, economic, and
religious reasons, central and eastern European countries such as Hungary, the
Czech Republic, Slovakia, and Poland opposed the compulsory solidarity plan
proposed by the EC on the issue of refugee settlement.
Finally, controversy over the transparency of EU trade policy has intensi-
fed among the European public, and even representatives of member states
in Brussels are questioning the EC negotiators for backroom deals with for-
eign countries.44 In particular, the US-EU Transatlantic Trade and Investment
Partnership (TTIP) negotiations have sparked fresh debates related to trade
policy, including the democratic defcit, environmental protection, and data
privacy. European public protests against the TTIP have continued, such as
the September 2014 protest in Brussels (by Europeans from diferent walks of
life) against the continuation of negotiations. The public is concerned that the
EU and the United States have diferent implementation standards in many
areas, such as genetically modifed food and the auto industry, and that once
the TTIP agreement is reached, European environmental, health, and safety
standards will all yield to US standards, which will ultimately harm the public
interest in Europe. In response to public concerns and controversies, the EC
has tried its best to issue various papers and measures to gain public support for
its policies. Opposition to trade within the EU is growing as EU trade policy
becomes increasingly controversial. Consumers, workers, and small business
owners have expressed increasingly vocal grievances against EU trade policy.

4.3.3.2 The Relative Decline of the EU’s Economic Power

According to Eurostat, the EU’s economic aggregate plummeted from the frst
place in 2006, accounting for 30% of world GDP, to 22% in 2016, behind the
United States at 25%. Overtaken by the United States, Europe’s ranking in the
world economy retreated to second place. In 2021, China surpassed EU27 in
terms of GDP, pushing the EU’s economic ranking down further to third place.

4.3.3.3 Changes in the EU’s Institutional Power

In the period between 2009 and 2019, the most defning event with the great-
est impact on the EU’s institutional power was the formal ratifcation of the
Lisbon Treaty in December 2009. The Lisbon Treaty introduced new changes
to the EU’s external trade negotiations. Regarding foreign policy, prior to
the Lisbon Treaty, there were three pillars with diferent decision-making
 The EU’s Economic Statecraft 95

processes. After the adoption of the Lisbon Treaty, at least in form, the three
pillars were merged under a single institutional framework, and the EU uni-
formly adopted qualifed majority voting. Under the Lisbon Treaty, the EU
established the new EU presidency and the European External Action Service
(EEAS). It also developed a unifed set of objectives and decision-making pro-
cesses for all EU external policies. The Lisbon Treaty created a “dual-hatted”
position of High Representative of the Union for Foreign Afairs and Secu-
rity, who also serves as Vice President of the Commission, primarily to ensure
greater coordination between the EEAS, the Commission, and the member
states. Article 205 of the Lisbon Treaty incorporated trade and investment
policy into the EU’s external action, and trade policy is henceforth formulated
within the “framework of the principles and objectives of the Union’s external
action” (Article 207.1). These basic principles and objectives include, inter
alia, to consolidate and support democracy, the rule of law, human rights, and
the principles of international law; commit to world peace, security, and sus-
tainable development; and promote an international system based on stronger
multilateral cooperation and good global governance. The Lisbon Treaty
made investment an area of competence for the EU, while giving the Euro-
pean Parliament co-decision powers in the feld of trade legislation, which
signifcantly increased the power of the European Parliament.45
In summary, the EU’s overall power has been signifcantly reduced, mainly
in connection with the sources of its economic power and political-strategic
power. While the EU’s power has been eroded, its institutional power has not
declined signifcantly. On the contrary, thanks to the implementation of the Lis-
bon Treaty, the EU’s institutional power has been consolidated to some extent.
What does the future hold for the EU? According to the trajectory of the
long cycles of the world economy and the underlying logic of Europe’s histori-
cal evolution, I predict that in the period of 2025–2035, the EU may gradually
move towards the form of “Fortress Europe”. There may be a transitional phase
between Kondratief long waves V-A and V-B, most likely around 2030. History
suggests that this transition phase will see multiple conficts fare up. The EU may
not be able to resist internal protectionist and populist sentiments, and its trade
policy will degenerate from liberalism to mercantilism or economic nationalism.
Specifcally, there are four basic characteristics of a potential “Fortress
Europe”. First, the EU may see small-scale opportunistic expansion, including
absorbing the Western Balkans and Ukraine into the union. The second is the
gradual internal stratifcation that resulted in the “center-periphery” structure
of Europe. The EU’s economic core is the western European countries, while
southern Europe and central and eastern Europe are the periphery and semi-
periphery. Third, externally, the EU will become tough and obstinate. In terms
of external trade policy, the community will adopt a defensive liberal policy with
“reciprocity” at the core, strengthen trade remedies, implement the EU foreign
investment review system, and propose new industrial policies. This stance is
obviously diferent from the neoliberal approach. At the heart of defensive lib-
eralism is “reciprocity”, but if the policy of “reciprocity” fails, the EU may shift
96 The EU’s Economic Statecraft

towards mercantilism, which is protectionist at its core. The EU will also join
hands with the United States and other countries with similar interests in areas
such as fnance, exchange rate, trade, intellectual property rights, and the sup-
ply chain, to implement ofensive economic diplomacy and exert pressure on
developing countries and emerging economies. The emergence of a “US-EU
Transatlantic Fortress” may become a real possibility. Fourth, the EU will be
“strong on the outside and weak on the inside”. Solidarity is in short supply
within the EU, and its inner core of power remains relatively weak. Compro-
mise is still necessary when dealing with populist forces. At a time of internal
challenges and external threats, the EU will become increasingly self-protective.
Externally, it will go after imaginary enemies to rally internal unity. The external
negotiations of “Fortress Europe” must be hard-lined, and its strategy must be
Machiavellian and strategic rather than based on values alone – but the values
of liberal democracy will never be abandoned.46 In its external negotiations,
the EU will still connect and link values and pragmatic interests, which are not
necessarily contradictory to each other.47
Arguably, the period between 2020 and 2035 will be remembered as a
grand era for the emergence of the EU’s economic statecraft. Whether for val-
ues diplomacy or economic diplomacy, the EU must proceed from the wealth-
power equation and achieve the two-way wealth-power conversion. Whether
that conversion can take place is a function of multiple factors, especially inter-
nal coordination.

Notes
1 European Council on Foreign Relations. Economic Coercion, see https://ecfr.eu/
europeanpower/economic-coercion/
2 Hackenbroich, J. (2022). Europe’s New Economic Statecraft: A Strong Anti-
Coercion Instrument, April 1, see https://ecfr.eu/article/europes-new-economic-
statecraft-a-strong-anti-coercion-instrument/
3 Hackenbroich, J. (2022). Europe’s New Economic Statecraft: Unity Through a
European Resilience Fund, see https://ecfr.eu/article/europes-new-economic-
statecraft-unity-through-a-european-resilience-fund/
4 Garcia-Herrero, A. (2021). Chinese Economic Statecraft: What to Expect
in the Next Five Years? In J. Strobl & H. Borchert (Eds.), Storms Ahead: The Future
Geoeconomic World Order’ on the Expectations from the Next Five Years of Chinese
Economic Policy. Bruegel, see www.bruegel.org/2021/11/chinese-economic-
statecraft-what-to-expect-in-the-next-fve-years/
5 ECDPM. (2016). Economic Diplomacy and Foreign Policy: Friends or Foes?
February 25, see https://ecdpm.org/events/economic-diplomacy-and-foreign-
policy-friends-or-foes/.
6 European Commission. (2018). EU Steps Up Its Strategy for Connecting Europe
and Asia, September 19, see https://ec.europa.eu/commission/presscorner/
detail/en/IP_18_5803.
7 Ministry of Commerce of the People’s Republic of China. (2019). Von der Leyen
Stressed the EU’s Leadership in Dealing with Global Issues (in Chinese), see www.
mofcom.gov.cn/article/i/jyjl/m/201911/20191102915555.shtml.
8 Okano-Heijmans, M. (2013). Economic Diplomacy: Japan and the Balance of Na-
tional Interests. Leiden: Martinus Nijhof Publishers, footnote 4, p. 18.
 The EU’s Economic Statecraft 97

9 Nye, J. S. (2011). The Future of Power. New York: Public Afairs, p. 8.

10 Nye, J. (1990). Soft Power. Foreign Policy, Fall Issue 80, p. 153.
11 European Commission. (2016). Trade for All: Towards a More Responsible Trade
and Investment Policy, March, see http://trade.ec.europa.eu/doclib/docs/2015/
october/tradoc_153846.pdf.
12 Hill, C., & Smith, M. (2005). International Relations and the European Union.
Oxford: Oxford University Press, p. 402.
13 (2013). EU-Ukraine Deep and Comprehensive Free Trade Area, April 17, see
http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150981.pdf.
14 Studdart, A. (2014). Europe’s Trade Strategy at a TTIP-ING Point. Global Eco-
nomics Monthly, III(7), see http://csis.org/fles/publication/140731_Global_
Economics_Monthly_Vol_3.pdf.
15 Malmström, C. (2015). The Geopolitical Aspect of TTIP, Speech at ALDE Hearing
on TTIP, Brussels, June 3.
16 Malmström, C. (2015). The Geopolitical Aspect of TTIP, Speech at ALDE Hearing
on TTIP, Brussels, June 3.
17 Chen, Z., & [Belgium] Geeraerts, G. (2003). Foreign Policy Integration in Euro-
pean Union: A Mission Impossible? (欧洲联盟对外政策一体化 – 不可能的使命?)
(in Chinese). Beijing: Current Afairs Press, pp. 289–291.
18 Geremek, B. (2005). Thinking about Europe as a Community. In K. Michalski
(Ed.), What Holds Europe Together? Budapest: Central European University Press,
pp. 5–12.
19 European External Action Service. Sanctions Policy, see http://eeas.europa.eu/
cfsp/sanctions/index_en.htm.
20 Telo, M. (2009). International Relations: A European Perspective. Routledge,
p. 180.
21 Henry Schermers, famous Dutch international relations scholar, based on comprehen-
sive consideration in material and procedure senses, defnes mixed agreement as – a
kind of agreement signed by international organizations, a part of or all member
states, and one or more third parties, of which either international organizations
or member states have the complete implementing authority. See Schermers, H.
G. (1983). A Typology of Mixed Agreements. In D. O’Keefe & H. G. Schermers
(Eds.), Mixed Agreements. Leiden: Kluwer Law & Taxation Publishers, pp. 23–27.
Other jurists of the EU also follow his idea in the defnition of mixed agreement
basically.
22 Promoted by Catherine Ashton, former High Representative of the Union for For-
eign Afairs and Security Policy, the EU proposed to establish strategic partnerships
with ten major countries – Brazil, Canada, China, India, Japan, Mexico, Russia,
South Africa, South Korea, and the United States.
23 Sebenius, J. K. (1983). Negotiation Arithmetic: Adding and Subtracting Issues and
Parties. International Organization, 37(2), p. 307.
24 Christie, R., Claeys, G., & Weil, P. (2021). Next Generation EU Borrowing: A
First Assessment. Policy Contribution, Bruegel, p. 1.
25 Xie, N., & Zhang, X. (2020). Europa Geopolitica: The Geopolitical Pivot of EU’s
Power (in Chinese). Chinese Journal of European Studies, Issue 2.
26 Brown, S., & Herszenhorn, D. (2020). Von der Leyen. EU Must Develop “Cred-
ible Military Capabilities”, see www.politico.eu/article/ursula-von-der-leyen-eu-
military-capabilities, last accessed on 27 February 2020.
27 Brown, S., & Herszenhorn, D. (2020). Von der Leyen. EU Must Develop “Cred-
ible Military Capabilities”, see www.politico.eu/article/ursula-von-der-leyen-eu-
military-capabilities, last accessed on 27 February 2020.
28 Barigazzi, J. (2019). Borrell Urges EU to be Foreign Policy “Player, Not the Play-
ground”, see www.politico.eu/article/on-foreign-policy-josep-borrell-urges-eu-
to-be-a-player-not-the-playground-balkans, last accessed on 1 March 2020.
98 The EU’s Economic Statecraft

29 Tefer, P. (2019) Rutte Warns EU to Embrace “Realpolitik” Foreign Policy. Brus-

sels: Euobserver, February 13.
30 Simón, L. (2020). A Geopolitical Commission? Beware the Industrial-Strategic Gap
in EU Defence Policy, see www.realinstitutoelcano.org/wps/portal/rielcano_en/
contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/ari1-
2020-simon-a-geopolitical-commission-beware-the-industrial-strategic-gap-in-eu-
defence-policy, last accessed on 1 March 2020.
31 Pisani-Ferry, J., & Wolf, G. (2019). The Threats to the European Union’s Economic
Sovereignty: Memo to the High Representative of the Union for Foreign Afairs and
Security Policy. Bruegel: Policy Brief.
32 Dombrovskis, V. (2020). Between Open Economy and Geoeconomics: Will Trade
be Enough to Promote the EU Recovery Plan Abroad? Brussels, November 11, see
https://ec.europa.eu/commission/commissioners/2019-2024/dombrovskis/
announcements/eu-ambassadors-conference-speech-evp-dombrovskis-between-
open-economy-and-geoeconomics-will-trade-be_en
33 Asimakopoulou, A. M. (2021). IPI: Europe’s New Rules to Level the Playing
Field in the Geopolitical Trade Game, September 8, see www.theparliamentmaga-
zine.eu/news/article/ipi-europes-new-rules-to-level-the-playing-feld-in-the-
geopolitical-trade-game
34 (2021). Statement on an EU International Procurement Instrument. Busi-
nessEurope, April 14, see www.businesseurope.eu/sites/buseur/fles/media/
position_papers/rex/2021-04-14_statement_on_international_procurement_
instrument.pdf
35 European Commission. (2021). EU Strengthens Protection Against Economic Co-
ercion, December 8, see https://ec.europa.eu/commission/presscorner/detail/
en/ip_21_6642
36 Beaud, M. (2011). Histoire du Capitalisme (F. Zheng et al., Trans.) (in Chinese).
Shanghai: Shanghai Lexicographical Publishing House, pp. 239–250.
37 Beaud, M. (2011). Histoire du Capitalisme (F. Zheng et al., Trans.) (in Chinese).
Shanghai: Shanghai Lexicographical Publishing House, p. 254.
38 San, F. (2015). Reunderstanding the EU in the crisis (in Chinese). Beijing: China
Social Science Press, p. 56.
39 Shi, H. (2012). Shi Hanbing said: the Truth of European Debt Warns China (in
Chinese). Beijing: China Machine Press.
40 (2015). Greek Debt Crisis: You Have Duty to Vote “No”, Says PM Tsipras. BBC
News, July 1, see www.bbc.com/news/av/world-europe-33352769
41 (2015). Greece Debt: Bailout Ofer Rejected by Greek Voters. BBC News, July 5,
see www.bbc.co.uk/news/av/world-europe-33400053
42 Bittner, J. (2015). Germany’s Finance Minister Says It Would Be Better for Greece
to Leave the Euro Zone (in Chinese). New York Times, July 17.
43 Hollande, F. (2018). Les Leçons du Pouvoir. Stock, April, pp. 155–162.
44 Lee-Makiyama, H. (2015). The Transatlantic Trade and Investment Partner-
ship: An Accident Report. ECIPE Policy Briefs, No. 1, see https://ecipe.org/
publications/ttip-accident-report/
45 Forward by Mogherini, F. (2016). Shared Vision, Common Action: A Stronger Europe –
A Global Strategy for the European Union’s Foreign and Security Policy. Brussels, June,
p. 49.
46 Zhang, X., & Lai, Y. (2017). The Internal Game and External Infuence of Euro-
pean Social Thought. People’s Tribune, 12, pp. 113–115.
47 Zhang, X., & Xie, N. (2016). Linkage Power Europe: the EU as a Power and
its Strategies in the Westphalia System. Chinese Journal of European Studies, 3,
pp. 1–29, 165.
5 China’s Economic Statecraft
Under Xi Jinping

China’s economic statecraft entered a new phase in November 2012 when Xi

Jinping became General Secretary of the Communist Party of China. Thanks
to the increasing national wealth accumulated by the previous generations of
leadership, President Xi was able to launch several ambitious geoeconomic
projects, including the Belt and Road Initiative (BRI). But his assertive great
power diplomacy quickly encountered headwinds due to China’s economic
slowdown and deteriorating international environment. Therefore, economic
statecraft (translating wealth to power) has become a central question for Pres-
ident Xi’s “Major-Country Diplomacy with Chinese Characteristics”（中国特
色大国外交）.1
President Xi’s diplomacy is opposite to what the former Chinese leader
Deng Xiaoping called “low-profle diplomacy” (韬光养晦). President Jiang
Zemin (1993–2002) and President Hu Jintao (2002–2012) largely adhered
to this low-profle diplomatic style. However, President Xi put an end to it
and launched his fagship project – the BRI. Equally important but much
less reported was his initiative of further reform and opening-up inspired by
economic liberalism, represented by the launch of the negotiations on the
RCEP (Regional Comprehensive Economic Partnership) and the two Bilateral
Investment Treaties (BIT) with the United States and the EU, respectively, in
2013–2014. This economic liberalization agenda climaxed in the Third Ple-
nary Session of the 18th Central Committee of the Communist Party of China
on November 9–12, 2013, announcing new economic reforms and giving
market forces a decisive role in allocating resources.
The year 2018 marks another watershed for China’s economic statecraft. In
2012, China’s economic growth started to slow. In 2014, President Xi Jinping
created a new phrase “New normal” (新常态).2 to describe China’s economic
slowdown after a three-decade-long double-digit economic growth. In 2017,
Xi created another new phrase “Changes Unseen in a Century”（百年未有之
大变局）.3 to describe the chaotic global context. In March 2018, the United
States launched a trade war against China. This trade war and the United
States’ labeling of China as a “strategic competitor” signifcantly changed
China’s relationship with the United States, and the Communist Party of
China’s (CPC’s) perception of the outside world.4 The COVID-19 pandemic

DOI: 10.4324/9781003351382-6
This chapter has been made available under a CC-BY-NC-ND license.
100 China’s Economic Statecraft Under Xi Jinping

beginning at the end of 2019 further worsened China’s economic situation

and strained China’s economic power resources for an ambitious major coun-
try diplomacy. To a large extent, the new economic stress that China has been
experiencing since 2012 determines that Xi’s economic statecraft needs to
focus on development, instead of assertive outreach.

5.1 What Was President Xi’s Economic Statecraft in His First

Term (2012–2017)?
President Xi’s new economic statecraft in 2012–2017 had two origins: one
external and the other domestic.5 Externally, Xi’s new economic statecraft
stemmed from a frustration over President Hu Jintao’s low-profle diplomacy.
Specifcally, the frustration was expressed in fve areas. The frst was on trade.
China had not assumed leadership in the global economy through the Doha
Round multilateral trade negotiations that started in 2001, and it did not
respond efectively when the United States shifted focus from Doha to regional
and bilateral trade talks in 2004 and afterwards. Thus far in its modern history,
China has not realized global economic leadership, despite its clear position as
the world’s largest benefciary of an open multilateral trading system.
Finance is the second origin of the Chinese perspective on economic state-
craft. For example, in 2009 during the peak of the fnancial crisis, the Chi-
nese central bank governor Zhou Xiaochuan’s proposal for a “super-sovereign
international reserve currency” refected China’s aspirations and dissatisfac-
tion with US dollar hegemony. Zhou proposed a super-sovereign international
reserve currency to replace the US dollar as the world’s reserve currency.
Third, on energy, China was deeply and increasingly concerned about
potential disruptions to its sea lanes of economic supply, especially the narrow
passage of the Malacca Strait, which from Beijing’s perspective could be easily
blockaded to the detriment of China’s economic development and security.
Accordingly, China is seeking to lock up sources of supply and create alternate
routes of delivery that require its innovative use of channels of investment not
beholden to the West.
Fourth, on technology, China has become even more deeply frustrated
with the persistent arms embargo and export controls of dual-use products
imposed by the Western world. Some of these measures date from normaliza-
tion and have evolved; that evolution was afected by the “Tiananmen Inci-
dent” on June 4, 1989. These and other equally strongly held views on the
lack of fairness of the core institutions of the international order drive foreign
policy priorities that combine to defne China’s desire for recognition as a
“major country” and to fuel popular expectations of a “great rejuvenation of
the Chinese nation”.
Finally, on the structure of the international order, China has been frustrated
with the lack of reform of the International Monetary Fund, the Group of 20
(G20), and the World Trade Organization, among others, and has not yet suc-
ceeded in reshaping these institutions toward greater recognition of China.
 China’s Economic Statecraft Under Xi Jinping 101

Xi came to power cognizant of these frustrations and determined to earn

a place in history that would refect his ability to satisfy the Chinese peo-
ple’s hunger to repudiate historical weakness and satisfy their desire to see
China take its rightful place in the world. He has adopted a more assertive
foreign policy, characterized by willingness to defy convention and to over-
come obstacles.6
On the basis of this perception that China has naturally evolved in the early
21st century toward a greater role in global economic leadership, and that
China has greater leverage in a post-Great Recession world, the Xi administra-
tion initiated a diverse array of initiatives, including the land-based Silk Road
Economic Belt and the Maritime Silk Road (known as the Belt and Road
Initiative, BRI), the China-Pakistan Economic Corridor (CPEC), and the
Bangladesh-China-India-Myanmar Economic Corridor” (BCIM-EC), which
involved infrastructure investment and other forms of economic cooperation.
Moreover, President Xi proposed a “new concept of morality and interests”
(新型义利观) vis-à-vis developing countries, putting morality (Yi, 义in Chi-
nese)7 before interests (Li, 利in Chinese) in the Chinese perspective.8 Xi’s new
concept of morality originates from China’s traditional Confucian understand-
ing of the relationship between wealth and morality, which tends to put morals
(or virtues) above economic interests. Confucius and his disciples believe that
“the gentleman understands what is moral and the small man understands
what is proftable”.9 For Xi, economic interests can be subject to a higher moral
authority, and in many cases strategic and political interests in China’s relations
with other developing countries are similarly subordinate to the same higher
moral authority. In other words, Xi’s understanding of economic statecraft is
infuenced by China’s traditional political thought and philosophy, which still
has relevance in today’s international politics.
Xi’s economic statecraft is also designed to overcome a fear of insecurity,
increasing territorial integrity, energy supply, food security, and a greater ability
to withstand potential economic and fnancial shocks in the global economy.
Moreover, Xi’s new economic statecraft had its domestic origins. China’s eco-
nomic growth – based on fxed asset investment, the main engine of wealth cre-
ation – had started to decelerate in 2012 and entered a “new normal”. This new
phase represents a downshifting from a high-speed growth pattern of 1992–
2012 toward a sustainable, mid- to high-speed growth rate with higher ef-
ciency and lower costs. The economic slowdown had complicated implications.
On the one hand, it spurred China’s ambitious agenda of economic statecraft,
such as the BRI, and, on the other, signifcantly constrained the translation
of China’s wealth into power and global infuence. Therefore, Xi’s economic
statecraft has dual objectives: to develop the economy and to achieve the stra-
tegic goals of a major country. From a long-term perspective, these two goals
complement each other. With stronger national economic strength, China will
more easily be able to achieve the status of a major country. However, in the
short run, these two goals might confict one with the other. The overstretch of
a country’s economic strength for strategic goals costs the sustainability of that
102 China’s Economic Statecraft Under Xi Jinping

country’s economic growth. Over the past decades since China’s reform and
opening-up in 1978, economic growth had always been the core objective of
China’s economic statecraft.10 Only after President Xi came to ofce, did there
appear to be more internal debates about which objective takes precedence –
economic growth or achieving the strategic goals of a major country. The dual
nature of China’s economic statecraft is determined by China’s dual identities
as both a developing country and a great power.
In discussing what principles China should adopt for economic diplomacy,
former Chinese Commerce Minister Gao Hucheng suggested, “We must
insist on the strategic guideline that diplomacy should serve the economy”.11
During President Xi’s frst term, major economic diplomacy initiatives such as
the BRI, high-speed railway diplomacy, and nuclear power diplomacy were all
closely linked to China’s domestic development agenda. The Silk Road Eco-
nomic Belt was designed to promote development of China’s western region,
especially Xinjiang Uygur Autonomous Region, and to redress the uneven
development between China’s eastern and western regions. The Bangladesh,
China, India, and Myanmar Economic Corridor (BCIM) and China-Pakistan
Economic Corridor (CPEC) were designed to develop the southwest region of
China, improve transportation and communication connectivity in the south-
west, stimulate economic growth in the border areas of the southwest, narrow
regional development disparities, and consolidate border defense. High-speed
railway diplomacy was implemented to export China’s excess capacity of high-
speed railway manufacturing. In China, high-speed railway had been given
high hopes and tremendous resources to improve modernization, technologi-
cal sophistication, economic power, international competitiveness, and capac-
ity for independent innovation. As a result, in under a decade, the high-speed
railway mileage China built has already exceeded the combined mileage of
new high-speed railways built by developed countries in the West in the last 50
years or so. Excess manufacturing capacity of high-speed railways led China to
implement high-speed railway diplomacy to export its large-scale, high-speed
railway technology and manufacturing capacity to other countries.
As China’s economy continued to slow in 2014, President Xi created a new
phrase of “New Normal”. For Xi, the “New Normal” is a statement based on
his comprehensive assessment of the long cycles of the world economy and the
diferent stages of China’s development and how these two interact.12 Since
reform and opening-up, China’s manufacturing capacity in all sectors has seen
explosive growth, a considerable amount of which was amassed during the
golden period of world economic growth for meeting external demand and
during the stage of rapid economic growth at home. Some capacities further
expanded in response to the impact of the global fnancial crisis.13
President Xi further stated,

As our current challenges are largely non-cyclical, a V-shaped rebound

through short-term stimulus measures may be unlikely, and our economic
trajectory may be L-shaped. We should be prepared to fght a protracted
 China’s Economic Statecraft Under Xi Jinping 103

battle, endure painful tribulations, appropriately manage expectations for

a gear shift and speed reduction, and frst protect our downside before
seeking recovery. We should face up to the difculties, defne our path,
boost our confdence, and make joint eforts to strengthen institutional
dynamics and organic vitality, unlock the huge potential of our economic
growth, and lead our economy to the next level.14

President Xi’s analysis of “New Normal” is largely based on Marxist dialec-

tical and historical materialism. Xi observed,

In the context of longer history, China’s economic development will

always be reaching for a new state, a new pattern, and a new stage. The
New Normal of economic development is part of this long process and is
fully consistent with the law of motion of an upward spiral. To compre-
hensively understand and grasp the New Normal requires a spatiotem-
poral view of China’s development.15

Despite President Xi’s Marxist belief, he and his economic advisors decided
to implement supply-side structural reform, a prescription for China’s eco-
nomic gloom arguably having a semblance of Reaganomics.16 It seems that
the CPC does not reject Western economics. During the global fnancial cri-
sis starting in 2008, President Hu Jintao and Premier Wen Jiabao adopted a
large-scale economic stimulus package largely inspired by Keynesianism. But
we also need to bear in mind that the CPC economics cannot be separated
from the Marxist concern about the people’s livelihood.
During Xi’s frst term, he was very much concerned about two “traps”:
one is the “Thucydides trap” and the other is the “middle-income trap”. For
Xi, the former is political, that is, how to manage the relationship with the
United States and other major countries. The latter is economic, that is, how
to improve the quality and efciency of China’s economic development.17 In
Xi’s mind, economic development remained his priority, an overriding objec-
tive of China’s socialism.
On international economic policy, President Xi launched a series of strate-
gic economic negotiations. For China, reaching high-quality agreements with
key trading partners is both a major trend in global trade and investment and
an attempt by the new CPC Central Committee leadership to forge ahead,
promote supply-side structural reform, and increase institutional openness.
China launched or accelerated a number of major external economic negotia-
tions during 2012–2013, including the US-China BIT, the EU-China BIT,
RCEP, and the China-Japan-Korea Free Trade Agreement. Among them, the
US-China and EU-China BITs were the most ambitious and concerned the
highest level of market opening, pre-establishment national treatment, and
negative list model. However, these agreements were “hard bones” that would
face many obstacles at the operational level, so they were strategic decisions
that were made despite many constraints at that time.
104 China’s Economic Statecraft Under Xi Jinping

After the new CPC Central Committee and State Council took ofce in 2012–
2013, the Chinese government began to seriously consider using large-scale
trade and investment negotiations as a lever for adopting advanced international
trade rules while driving domestic reforms through opening-up. The launch of
these strategic economic negotiations was based upon a renewed confdence by
the new generation of Chinese leadership that China’s economy had achieved
signifcant growth and gained greater resilience. At the ffth US-China Strategic
and Economic Dialogue in July 2013, China formally accepted and announced
that it would enter into substantive negotiations with the United States based on
the “pre-establishment national treatment and negative list” model. The nego-
tiations on the EU-China Comprehensive Agreement on Investment (CAI, also
called the EU-China BIT) began in November 2013 during the 16th EU-China
Summit, four months later than the launch of the US-China BIT. On December
30, 2020, Chinese and European leaders jointly announced that the CAI nego-
tiations were concluded on schedule after 35 rounds over seven years.
The negotiations on a China-US BIT largely failed. The negotiations came to
a stop one week before Donald Trump became president in January 2017. The
Chinese side experimented with the “pre-establishment national treatment” and
the “negative list” under the treaty in Shanghai before rolling them out across the
country by establishing multiple pilot free trade zones. During the G20 Hang-
zhou Summit in 2016, China and the United States were close to reaching an
agreement. Once the Obama administration was replaced by the Trump adminis-
tration, the positive reciprocity mode between the United States and China gave
way to negative reciprocity and climaxed in a historical trade war in 2018–2020.
To summarize, the frst term of President Xi’s economic statecraft was char-
acterized by both ambitious geoeconomic projects such as the BRI, and an
economic liberalization agenda as well as supply-side structural reform with
a semblance of Reaganomics. It’s therefore a cocktail approach of socialist
people-frst economics and Western-styled market economy driven by China’s
profound motivation for a great rejuvenation.
During President Xi’s frst term in 2012–2017, there were clear eforts
made by China’s foreign policy community to achieve a two-way conversion
between wealth and power. For these foreign policy elites, the mutual con-
version of economic resources and diplomatic resources are two sides of a
coin that must both remain viable. These elites are seeking China’s way of
managing international relations and a viable international order that draws
inspiration from China’s history. For them, in the face of new international
circumstances, China needed to adopt the right concept of morality and
interests, continuously cultivate its international institutional power, achieve
increased economic power and efective conversion to diplomatic manoeuvres.

5.2 What Was President Xi’s Economic Statecraft in His

Second Term (2017–2022)?
The year 2018 marked a new watershed for China’s economic statecraft,
spurred by the US-China trade war. But several years before, there were already
 China’s Economic Statecraft Under Xi Jinping 105

worrying signs everywhere, such as the Crimean crisis, Brexit, and the change
in US domestic politics. The rise of populism and deglobalization seems to
have become the dominant spirit of the times. At the end of 2017, President
Xi made a judgement about the global context, claiming that the world was
undergoing “profound changes hitherto unseen for a century”.18
When President Xi labeled the global context as “changes unseen for a
century”, he labeled China’s domestic context as “the best moment since
the Opium War of [the] 1840s”.19 Xi made that statement in the climax of
an unexpected trade war with the United States in 2018. The trade war
was launched by President Donald Trump in February 2018. Before that,
US-China economic relations were managed in an institutionalized envi-
ronment, represented by the US-China Strategic & Economic Dialogue
(S&ED) and the Joint Commission on Commerce and Trade (JCCT). Pres-
ident Trump abandoned this strategic dialogue approach and launched an
economic war.
President Trump launched this economic warfare in a Blitzkrieg way. The
Chinese side was caught by surprise. When President Trump visited China
in November 2017, three months before the breakout of the trade war, he
reaped the biggest orders ever in human history, of US $253.5 billion: 300
Boeing airplanes; a 20-year $83.7 billion investment by China Energy Invest-
ment Corp in shale gas developments and chemical manufacturing projects
in West Virginia; and Qualcomm signed nonbinding agreements worth $12
billion with Xiaomi, OPPO, and Vivo. The Chinese administration thought
unrealistically that it could do business with President Trump, as it had with
previous GOP presidents. However, President Trump was already determined
to fght China in a dramatic way. On August 18, 2017, two months before
his visit in China, he had already signed a presidential memorandum regard-
ing the results of a Section 301 investigation, preparing for an economic war.
The trade war witnessed mutual impositions of high tarifs and lasted until
January 2020, when the frst phase of a trade agreement was fnally signed. As
a result, US-China bilateral trade relations were signifcantly damaged. Presi-
dent Joe Biden kept the high tarifs in place.
As a result of these unexpected events, President Xi’s perception of the
international context turned increasingly realistic. He warned against the so-
called “black swan” incidents as well as “grey rhino” ones. President Xi urged
his senior ofcials to adhere to bottom-line thinking and making eforts to
prevent and resolve major risks in the face of the treacherous international
situation, the complex and sensitive atmosphere, and the daunting and ardu-
ous tasks of reform, development, and stability.20 Eight months later in 2019,
President Xi again warned of major risks at the Central Party School:

Currently and going forward, China is navigating through a period of

confuence, in which risks and challenges are likely increasing . . . those
of you in leadership positions must be able to sensibly discern potential
risks and understand where they will come from, how they will material-
ize and evolve, and if a fght is inevitable – like knowing a deer passing
106 China’s Economic Statecraft Under Xi Jinping

through grass when you hear leaves move, a tiger coming when pine
leaves are rufed, and autumn arriving when a leaf changes color.21

Increasingly, President Xi emphasized the spirit of struggle. He frst men-

tioned in his Report of the 19th CPC Congress in October 2017 that “Real-
izing our great dream demands a great struggle”.22 On September 3, 2019, he
reemphasized the “great struggle”.23 President Xi emphasized that the great
rejuvenation of the Chinese nation can never be achieved through half-meas-
ured eforts or by loudly beating a drum, and that a great struggle is necessary
to achieve a great ambition.24 For Xi, “As communists, we fght with an aim,
a position, and principles. The bigger goal is to unswervingly adhere to the
leadership of the CPC and our socialist system”.25 The US-China trade war
and the chaotic global context has been perceived by the CPC as major risks
threatening the survival of the CPC.
Immediately after the trade war, China sufered another major blow.
COVID-19 infections hit China unexpectedly and badly in 2020–2023.
China was the frst country to experience the COVID-19 pandemic. The
frst cluster of pneumonia patients was discovered in late December 2019 in
Wuhan, Hubei Province, and a public notice on the outbreak was distributed
on December 31, 2019.26 The Chinese government adopted a zero-COVID
policy, with lockdowns in many cities. These measures signifcantly reduced
the death toll but weighed heavily on China’s economy and turned out to be
unsustainable. The pandemic largely cut of China’s international exchanges.
In 2020, China’s economy slowed to 2.3%. Despite 8.1% growth in 2021,
China’s economy sufered a major setback in 2022, with a low growth rate of
3.0%. Finally, the Chinese government ended its zero-COVID policy in early
December 2022.
As China’s economic situation turned increasingly difcult, President Xi
refocused on economic growth. Supply-side structural reform, the Dual Cir-
culation Strategy and High-Quality Development formed the backbone of
President Xi’s development-oriented economic statecraft.
In 2020–2023, to keep China’s economy growing and tackle the dramatic
changes both in and outside of China, the Chinese government formu-
lated a series of economic policies, frst, the “Dual Circulation”（双循环）;
second, “High Quality Development” (高质量发展), and third, “the Strat-
egy of Boosting Domestic Consumption”. High Quality Development is the
fnal goal of China’s development. The domestic-international Dual Circu-
lation is the layout of China’s development. More specifcally, the dual cir-
culation is a strategy to reorient China’s economy by prioritizing domestic
consumption (“internal circulation”) while remaining open to international
trade and investment (“external circulation”). On December 14, 2022,
China set out plans to expand domestic consumption and investment as the
economy struggled with the COVID-19 pandemic and weakening external
demand.27 The supply-side structural reform launched in 2015 remained as
a way to improve the quality of China’s development. As a result, China’s
 China’s Economic Statecraft Under Xi Jinping 107

development-oriented economic statecraft adopted a mixture of Keynesian

demand-side and Reaganomics supply-side prescriptions. In parallel with
Western-style economic remedies, China also adopted an array of Marxist
economic narratives with Chinese characteristics, such as dual circulation and
high-quality development.
On the front of international economic policy, the BRI remained a top
priority. The Belt and Road Forum for International Cooperation (BRF) was
launched in 2017 and became increasingly institutionalized. Recognizing
increasing challenges and international resistance, President Xi publicly sug-
gested that the BRI approach needed to shift from broad-brush to meticulous
painting. While largely perceived as a geoeconomic instrument, the BRI is a
de facto instrument of China’s development-oriented economic statecraft. The
overriding objective of the BRI is not struggling for power in an imperialist
mindset, but seeking development, and largely in a Marxist mindset, to build
a community of mankind.
During President Xi’s second term, China’s economic statecraft evolved
largely due to external pressures and frustrations. The negotiations on the
BITs with the United States and the EU both stalled. The BIT negotiation
with the United States came to a halt after Donald Trump became president.
The negotiation with the Europeans on a CAI was completed by the end
of 2020, but its ratifcation was frozen due to the EU’s human rights sanc-
tion against China and China’s countersanctions simultaneously announced
in March 2021. The only harvest of President Xi’s economic liberalization
agenda was the RCEP.
The frustrations over the international economic negotiations, as well as the
economic warfare launched against China by the United States and the EU
spurred China to develop its own economic coercion instruments, such as the
Provisions on the Unreliable Entity List, adopting measures in response to the
hostile actions taken by a foreign entity in international economic, trade, and
other relevant activities such as: (1) endangering national sovereignty, security,
or development interests of China; (2) suspending normal transactions with
an enterprise, other organization, or individual of China or applying discrimi-
natory measures against an enterprise, other organization, or individual of
China, which violates normal market transaction principles and causes serious
damage to the legitimate rights and interests of the enterprise, other organiza-
tion, or individual of China.28 On June 10, 2021, China’s National People’s
Congress Standing Committee passed the Anti-Foreign Sanctions Law, giving
the Chinese government a legal tool to respond to foreign sanctions with its
own countersanctions. According to Article 3 of the law, individuals or organi-
zations involved in the making or implementation of a foreign country’s “dis-
criminatory measures against Chinese citizens” or “interference with China’s
internal afairs” are eligible to be placed on a blacklist, or “counter-list”.29
These negative economic statecraft instruments resulted from over three years
of escalating political and economic disputes with foreign countries, includ-
ing the United States and the EU. They indeed form a stark contrast to the
108 China’s Economic Statecraft Under Xi Jinping

positive economic statecraft instruments China has traditionally adopted since

the early days of its reform and opening-up.
During President Xi’s second term, China’s foreign policy community
increasingly felt a mismatch between China’s economic clout and its politi-
cal infuence.30 President Xi’s conduct of “Major-Country Diplomacy with
Chinese Characteristics” requires a large-scale wealth-power conversion.
While China’s relations with the West is deteriorating, China has to rely
increasingly on its partnerships with the group of developing countries.
That means China will continue to advance the BRI and aid diplomacy.
While China’s economy continues to slow, China’s economic statecraft
will have to balance between an assertive diplomacy and a low-profle one.
Increasingly, there are concerns that China’s “Major-Country Diplomacy”
is being overstretched.

5.3 Conclusion and Future Scenarios

President Xi is probably the frst Chinese leader who has had the luxury to
mobilize world-class economic power for achieving China’s great power status
on the world stage. But the deteriorating zeitgeist (the spirit of the times) is a
major obstacle for Xi’s ambition.
For President Xi’s two terms as China’s top leader (2012–2022), China’s
economic statecraft was fully manifested in his fagship project, the BRI (which
he proposed during his trips in central and southeast Asia), the economic lib-
eralization agenda represented by RCEP, the BITs with the United States and
the EU, and the trade war with the United States. The essence of President Xi’s
economic statecraft is a two-way conversion between China’s national wealth
and its global infuence (and power). For acquiring increased national wealth,
economic development is a must.
Diferent from hegemons in history and other great powers, China has a
mythical worship for development. President Xi is no exception. From Deng
Xiaoping’s time, the Chinese leadership has always put development at the
center of their statecraft. That’s to say, development is always the central goal
of China’s economic and diplomatic strategies. The fundamental motiva-
tion for the BRI or any other instruments of China’s economic statecraft is
development.
China’s economic statecraft is essentially a new type of developmentalism
with Chinese characteristics. China is after a new ideology of developmental-
ism, which is the result of the collective wisdom of several generations of lead-
ers: from the “Three Represents” (representing advanced productive forces,
the orientation of the advanced culture, and the fundamental interests of the
broadest masses of the people) proposed by President Jiang Zemin,31 to the
“Scientifc Outlook on Development” proposed by President Hu Jintao32, and
the “Xi Jinping Thought on Socialism with Chinese Characteristics for the
New Era”33 and the “Chinese Path to Modernization”.34
 China’s Economic Statecraft Under Xi Jinping 109

During the presidency of Hu Jintao (Xi Jinping’s predecessor), the guiding

ideology of economic statecraft was that

China is in the primary stage of socialism and will remain so for a long
time to come. Amid increasingly-ferce international competition for
comprehensive national power, it is of great strategic signifcance for a
large developing country such as China to speed up modernization by
putting economic growth at the center, seizing and efectively using the
period of important strategic opportunity, and vigorously liberating and
developing the social productive forces.35

The severe acute respiratory syndrome (SARS) epidemic in 2003 was

closely linked to the formulation of the Scientifc Outlook on Development
in the same year. The SARS epidemic was the frst major challenge Hu Jintao
grappled with after taking ofce, and it had a great impact on his thoughts.
For Hu, the victory in the fght against SARS fully demonstrated the great
superiority of China’s socialist system. However, the outbreak and spread of
SARS also revealed new contradictions and weaknesses, such as the lack of
coordinated growth, underdeveloped public health infrastructure, and the
inadequate emergency response mechanism after a stage of rapid economic
growth. It further triggered profound refections of the CPC Central Com-
mittee on China’s development under new circumstances. The CPC Central
Committee was confronted with the important theoretical and practical ques-
tions of “what kind of development do we want and how do we achieve it?”
In late August and early September 2003, Hu Jintao put forward the
thought of the Scientifc Outlook on Development during his visit to Jiangxi
Province, where he stressed the need for comprehensive, coordinated, and sus-
tainable development. In October, for the frst time in an ofcial party docu-
ment, the Third Plenum of the 16th CPC Central Committee formalized the
Scientifc Outlook on Development in its entirety, arguing that it is necessary
to “put people frst; establish a concept of comprehensive, coordinated, and
sustainable development; and promote comprehensive economic, social, and
human development”.
Here is one example of how and why President Hu Jintao attached impor-
tance to economic development. As Henry Paulson, the former US secretary
of the Treasury recalled, when President George W. Bush asked President Hu
what kept him up at night, Hu answered it was to create 25 million jobs a year.
China’s leadership puts stability above all else, and that means a strong econ-
omy is a must. Accordingly, China needs more market-oriented reforms and
a mutually benefcial relationship with its most important trading partner, the
United States. Essentially, the CPC has made a deal with the Chinese people
to ensure prosperity in exchange for long-term political power. China’s leader-
ship has rooted its credibility with the people in economic opportunity, job
creation, and rising living standards, which was the glue holding the system
110 China’s Economic Statecraft Under Xi Jinping

together. However, China’s continued success has raised the expectations of

its people. As social tensions increased, these expectations became increasingly
difcult to meet. These tensions revolved around poor air and water quality
and troubling income disparities.36
China’s adherence to development has multiple origins. The number one
reason is that China still has a huge population living under the poverty line.
Second, China’s economic level is unbalanced across its vast geography. Third,
China’s Marxist ideology preaches that economic infrastructure determines
superstructure. Therefore, China’s political stability largely depends on China’s
economic growth and its ability to create jobs.
As China has grown to be one of the world’s largest economies, China’s
ability to translate wealth to power is increasingly put in the spotlight. For
generations since Deng Xiaoping, Chinese leadership has always believed that
China is a developing country. It is still at an early stage of socialism and will
remain at this stage for a long time. But China’s ascendance to great power sta-
tus requires China to give a bigger role to its economic statecraft, the essence
of which is to translate its wealth to power (and the other way round). During
the global fnancial crisis starting from 2008, President Hu Jintao started to
practise economic statecraft. For President Hu, the key to solving all of China’s
problems was to focus on its own development.37 Therefore, the overriding
goal of President Hu’s economic statecraft was translating China’s diplomatic
capability and increased global infuence into economic growth. That being
said, President Hu also tried on several occasions to translate China’s wealth to
global infuence and power.
The biggest wealth-to-power transformation during Hu Jintao’s presidency
was pushing forward the reform of the global economic governance frame-
work and the international fnancial system. At the 2010 Central Economic
Work Conference, Hu Jintao proposed that China should accurately grasp
the characteristics of the world economic governance framework in a period
of change and strive to enhance China’s ability to participate and shape its
course.38 Under President Hu’s leadership, Zhou Xiaochuan, then governor
of China’s central bank tried to end US-dollar hegemony by proposing for
a super-sovereign international reserve currency, which turned out to be an
unsuccessful attempt. On the trade front, Chen Deming, China’s then min-
ister of commerce tried to complete the Doha Round negotiations together
with all the other major trading nations. However, Chen Deming’s eforts
did not succeed. President Hu’s frustrations in China’s economic diplomacy
largely defned his economic statecraft. For China to be able to exert more
global infuence on the world stage, there are two preconditions: one is eco-
nomic growth (on the wealth side), and the other is China’s ability to translate
wealth to power (and global infuence). For decades, there was strong domes-
tic resistance to that translation.
Looking into the future, China’s development-oriented economic statecraft
will remain for quite a long time. Development will remain a top priority for
the CPC and China’s economic statecraft. Xi labeled his vision of development
 China’s Economic Statecraft Under Xi Jinping 111

as “high-level development”. The Dual Circulation will remain as a major

layout of China’ development. That is to say, China’s development will rely
largely on domestic circulation. It is a choice determined by the worsening
global context and the continued pandemic.
China’s future economic statecraft will focus on the recovery and accumu-
lation of national wealth. The pandemic has caused signifcant destruction
in China’s economy. China’s major approach is focused on both the demand
and the supply side. On the demand side, boosting domestic consumption
is the major way while on the supply side, structural reform will be further
pursued.
As the global context is worsening, there will be more competition and
even confrontation among great powers and increasingly between the West
and the “Rest”. Against this background, China’s economic statecraft will enter
a new stage, pumping more wealth into global politics. Security will become
a buzzword for China’s future economic statecraft. That includes protecting
China’s economic security and territorial integrity. More specifcally, it means
that China’s economic statecraft will serve to preserve security in food, energy,
and the supply chain.39 In the meanwhile, China’s Global Development Initia-
tive,40 aimed at helping developing countries to prosper, will gain prominence
in China’s future economic diplomacy.
To summarize, China’s future statecraft will continue to feature a two-way
conversion between wealth and power, with development as the overriding
goal, and with reinforced leadership by the Communist Party of China.

Notes
1 Chinese Ministry of Foreign Afairs. (2003). Exploring the Path of Major-Country
Diplomacy with Chinese Characteristics – Remarks by Foreign Minister Wang Yi at
the Luncheon of the Second World Peace Forum, June 27.
2 (2014). Xi Jinping’s First Systematic Elaboration of the “New Normal” (in
Chinese). Xinhuanet, November 9, see www.xinhuanet.com/politics/2014-
11/09/c_1113175964.htm
3 (2017). Xi Jinping: Looking at the World, We Are Facing “Changes Unseen in
a Century” (in Chinese). Chinanews, December 29, see www.chinanews.com.
cn/m/gn/2017/12-29/8412268.shtml
4 Rudd, K. (2022). The World According to Xi Jinping: What China’s Ideologue in
Chief Really Believes. Foreign Afairs, November/December.
5 Zhang, X., & Keith, J. (2017). From Wealth to Power: China’s New Economic
Statecraft. The Washington Quarterly, Spring 2017, p. 191.
6 Zhang, X., & Keith, J. (2017). From Wealth to Power: China’s New Economic
Statecraft. The Washington Quarterly, Spring 2017.
7 “Yi” is an ancient Chinese concept, having a profound meaning of friendship, loy-
alty and ethics.
8 Chinese Ministry of Foreign Afairs. (2003). Exploring the Path of Major-Country
Diplomacy with Chinese Characteristics – Remarks by Foreign Minister Wang Yi at
the Luncheon of the Second World Peace Forum, June 27.
9 Confucius. The Analects. Penguin Classics, 1st edition, September 3, p. 74.
10 Zhang, X. (2014). Exploring Great Power Economic Diplomacy with Chinese
Characteristics. Chinese Journal of European Studies, 32(4), p. 82.
112 China’s Economic Statecraft Under Xi Jinping

11 Gao, H. (2014). Let the Chinese Dream Light Up the World: Learning and Im-
plementing General Secretary Xi Jinping’s Thought on Economic Diplomacy. QI-
USHI, 7.
12 Xi, J. (2015). How to Think of New Normal and How to Do With it, December
18, in Xi, J. (2017). Xi Jinping: The Governance of China II (in Chinese). Beijing:
Foreign Language Press, p. 239.
13 Xi, J. (2015). How to Think of New Normal and How to Do With it, December
18, in Xi, J. (2017). Xi Jinping: The Governance of China II (in Chinese). Beijing:
Foreign Language Press.
14 Xi, J. (2015). How to Think of New Normal and How to Do With it, December
18, in Xi, J. (2017). Xi Jinping: The Governance of China II (in Chinese). Beijing:
Foreign Language Press.
15 Xi, J. (2016). In-depth Understanding of the New Normal of Economic Devel-
opment, January 18, in Xi, J. (2017). Xi Jinping: The Governance of China II (in
Chinese). Beijing: Foreign Language Press, p. 245.
16 (2016). Xi Jinping’s Remedy for China’s Economic Gloom Has Echoes of Rea-
ganomics. The New York Times, March 3, see www.nytimes.com/2016/03/04/
world/asia/xi-jinping-china-economic-policy.html
17 Xi, J. (2015). How to Think of New Normal and How to Do With it, December
18, in Xi Jinping: The Governance of China II (in Chinese). Beijing: Foreign Lan-
guage Press, 2017, p. 239.
18 The State Council of the People’s Republic of China. (2017). Address by Presi-
dent Xi Jinping at the 2017 Annual Conference on the Work of Envoys to Foreign
Countries (in Chinese), December 28, see www.gov.cn/xinwen/2017-12/28/
content_5251251.htm
19 (2018). Xi Jinping: Striving to Create a New Situation of Great Power Diplomacy
with Chinese Characteristics (in Chinese). Huanqiunet, June 23, see https://bai-
jiahao.baidu.com/s?id=1604062900117153098&wfr=spider&for=pc
20 The State Council of the People’s Republic of China. (2019). Xi Jinping De-
livered an Important Speech at the Opening Ceremony of a Seminar for Major
Leading Cadres at the Provincial and Ministerial Levels to Adhere to Bottom-
Line Thinking and Make Eforts to Prevent and Resolve Major Risks (in Chi-
nese), January 21, see www.gov.cn/xinwen/2019-01/21/content_5359898.
htm?tdsourcetag=s_pcqq_aiomsg/
21 Party School of the Central Committee of C.P.C. (2019). Xi Jinping Delivered
an Important Speech at the Opening Ceremony of the Training Course for Young
and Middle-aged Cadres at the Central Party School (National Academy of Ad-
ministration) (in Chinese). September 3, see www.ccps.gov.cn/zt/2022zqb/
tpxw/202203/t20220303_153043.shtml
22 The State Council of the People’s Republic of China. (2017). Xi Jinping: Secure
a Decisive Victory in Building a Moderately Prosperous Society in All Respects and
Strive for the Great Success of Socialism with Chinese Characteristics for a New Era
– Report at the 19th CPC Congress (in Chinese), October 27, see www.gov.cn/
zhuanti/2017-10/27/content_5234876.htm
23 Xi, J. (2019). To Achieve the Great Dream, We Must Carry Out a Great Struggle
(in Chinese). People, September 4.
24 Xi, J. (2019). To Achieve the Great Dream, We Must Carry Out a Great Struggle
(in Chinese). People, September 4.
25 Xi, J. (2019). To Achieve the Great Dream, We Must Carry Out a Great Struggle
(in Chinese). People, September 4.
26 Tian, H. et al. (2020). An Investigation of Transmission Control Measures Dur-
ing the First 50 Days of the COVID-19 Epidemic in China. Science, 368(6491),
pp. 638–642.
 China’s Economic Statecraft Under Xi Jinping 113

27 (2022). China Plans to Expand Domestic Demand to Spur Economy –

State Media. Reuters, December 14, see www.reuters.com/markets/asia/
china-plans-expand-domestic-demand-spur-economy-state-media-2022-12-14/
28 The Chinese Ministry of Commerce. (2020). MOFCOM Order No. 4 of 2020 on
Provisions on the Unreliable Entity List, September 19, see http://english.mofcom.
gov.cn/article/policyrelease/questions/202009/20200903002580.shtml
29 (2021). China’s Anti-Foreign Sanctions Law: How Businesses Should Pre-
pare. China Briefng, August 3, see www.china-briefng.com/news/
chinas-anti-foreign-sanctions-law-how-businesses-should-prepare/
30 Wang, F. (2022). Great Power Diplomacy with Chinese Characteristics: Coordina-
tion, Change and Improvement (in Chinese). Xinhua Digest, 8, p. 5.
31 (2021). Theory of Three Represents. China.org.cn, September 23, see www.china.
org.cn/m/english/china_key_words/2021-09/23/content_77769290.html
32 (2021). Scientifc Outlook on Development. China.org.cn, September 21, see www.
china.org.cn/m/english/china_key_words/2021-09/21/content_77765465.
html 13
33 (2018). Backgrounder: Xi Jinping Thought on Socialism with Chinese Characteris-
tics for a New Era. Xinhuanet, March 17, see www.xinhuanet.com/english/2018-
03/17/c_137046261.htm
34 China Mosaic. (2022). What is the “Chinese path to modernization”? China.
org.cn, October 21, see http://www.china.org.cn/video/2022-10/21/con-
tent_78479362.htm
35 Hu, J. (2004). Accurately Grasp the Profound Connotation and Basic Require-
ments of the Scientifc Concept of Development–Speech at the Central Symposium
on Population, Resources and Environment (in Chinese), March 10. in Hu, J.
(2016). Selected Works of Hu Jintao Ⅱ (in Chinese). Beijing: People’s Publishing
House, p. 167.
36 Paulson, H. M. (2016). Dealing with China: An Insider Unmasks the New Eco-
nomic Superpower (Y. Wang et al., Trans.) (in Chinese). Hong Kong: The Chinese
University of Hong Kong Press, p. 193.
37 Hu, J. (2009). Integrating the Two Major Situations Domestically and Interna-
tionally – Speech at China’s 11th Ambassadorial Conference (in Chinese). July 17,
in Hu, J. (2016). Selected Works of Hu Jintao Ⅲ (in Chinese). Beijing: People’s
Publishing House, p. 238.
38 Hu, J. (2010). An Accurate Grasp of the New Features of World Economic De-
velopment – Speech at the Central Economic Work Conference (in Chinese). De-
cember 10, in Hu, J. (2016). Selected Works of Hu Jintao Ⅲ (in Chinese). Beijing:
People’s Publishing House, p. 457.
39 He, L. (2022). In-depth Study and Implementation of Xi Jinping’s Economic
Thought. People’s Daily, June 22.
40 Chinese Ministry of Foreign Afairs. (2022). Jointly Advancing the Global Develop-
ment Initiative and Writing a New Chapter for Common Development: Keynote
Address by State Councilor and Foreign Minister Wang Yi at the Ministerial Meet-
ing of the Group of Friends of the Global Development Initiative, September 21,
see www.fmprc.gov.cn/eng/zxxx_662805/202209/t20220922_10769721.html
6 Competing Economic
Statecrafts

The coming decades of the 21st century are destined to be an era of com-
peting economic statecrafts. Economic statecraft entered the United States’
diplomatic narrative in 2011 when the then Secretary of State Hillary Clinton
delivered her well-known “Economic Statecraft” speech.1 But it wasn’t until
Donald Trump’s presidency that economic statecraft really became a buz-
zword and started to be practiced in a big way. In the EU, economic statecraft
has become a fashionable subject since 2020, when the new European Com-
mission started to develop new geoeconomic instruments, and more so after
the EU imposed harsh sanctions against Russia. China has become a seasoned
practitioner of economic statecraft, especially under President Xi’s leadership
since 2012. It is no coincidence that these three largest economies in the
world are now competing for global infuence by leveraging their respective
economic strengths.
These three economies used to believe that economic interdependence is
a source of prosperity, stability, and mutual trust. But now, as the spirit of
the times turns introvert, conservative, nationalist, and populist, the policy
elites of these major economies have to adapt with competing and confict-
ing economic statecrafts, if not a weaponization of their mutual economic
dependences.

6.1 The Change of “The Spirit of the Times”2

The two decades since the fall of the Berlin Wall saw rapid globalization, as
well as economic integration and connectivity. The establishment of the World
Trade Organization (WTO), the European Union, the North American Free
Trade Area, and the Asia-Pacifc Economic Cooperation have greatly advanced
global and regional economic integration. People in Asia had actively discussed
an East Asian Community, or even an Asian Currency Unit. But with 9/11 and
the global fnancial crisis of 2008, this open, confdent, and win-win mentality
gradually subsided, and the spirit of the times changed for the worse. Com-
peting economic statecraft is a “product of the times” that is constantly given
new meaning as the times change. It can be argued that the liberal, open, and
inclusive spirit of the times that emerged after World War II is now slipping

DOI: 10.4324/9781003351382-7
This chapter has been made available under a CC-BY-NC-ND license.
 Competing Economic Statecrafts 115

towards populism, conservatism, and mercantilism. Its main features are four-
fold: frst, national centrism, which emphasizes the supremacy and precedence
of national interests; second, the ferce competition among countries around
geopolitical interests and power; third, the world’s major economies are start-
ing to pursue mercantilist economic policies; and fourth, the intensifcation of
social tensions within countries along class and racial fault lines.
The changing times are likely the result of a mix of both cyclical changes
in the world economy and the rise and fall of great powers. When the world
economy is on the upswing and led by countries charged with positive energy,
the spirit of the times is open and inclusive; the opposite is conservative and
protectionist, leading to a surge in geopolitical tensions.
Now, the world economy has entered the B phase of the ffth long wave
(the Kondratief cycle), which is a stagnation phase (see Figure 3.1). This
means that the future trajectory of the world economy is likely to be L-shaped
until the next industrial revolution brings the world economy back to an
upward track. Therefore, the era in which we are now living (i.e., 2005/2008–
2025/2030) can be described as an era of heightened risk. In this era, the
waves of populism, nationalism, and mercantilism that the world is experienc-
ing will continue for a considerable period. In this period, which could range
from one to two decades, geopolitical crises will further intensify.
The third decade of the 21st century (2020–2030) is a transitional period,
a transition from phase B of the ffth long wave to phase A of the sixth long
wave. In fact, the current transitional period has very salient features. If coun-
tries around the world continue to adopt a laissez-faire attitude and continue
to cater to rising populism, the spirit of the times worldwide will slide irre-
deemably towards mercantilism and conservatism. We must not forget that
this spirit of the times was last seen in the 1870s through 1914 and the 1930s,
the precursors to two world wars.
The leaders of China, the United States and the EU have paid close atten-
tion to the changes in the global context. In 2017, Chinese President Xi cre-
ated a specifc phrase “Changes Unseen in a Century”（百年未有之大变局）3
to describe the chaotic global context. China’s development-oriented economic
statecraft needs a peaceful international environment. That is why China’s deci-
sion making is highly sensitive to the changing global context. It is President
Jiang Zemin (1993–2002) who frst stated that the frst two decades of the 21st
century were a period of important strategic opportunities.4 President Xi Jin-
ping inherited this analysis of the times, but added that “opportunities and chal-
lenges are both going through new developments and changes”.5 For Chinese
leaders, dialectical materialism and historical materialism are the most important
methodology in understanding the global situation before they make any policy.
It might be a coincidence that German Chancellor Olaf Scholz also adopts
a view about the turning point of the global situation, which he calls a “Zeiten-
wende”. According to him, the world is facing a Zeitenwende: an epochal tec-
tonic shift. Russia’s war of aggression against Ukraine has put an end to an era.
New powers have emerged or reemerged, including an economically strong
116 Competing Economic Statecrafts

and politically assertive China. In this new multipolar world, diferent coun-
tries and models of government are competing for power and infuence.6
Another German politician, Ursula von der Leyen, president of the Euro-
pean Commission, anticipated the worsening geopolitical situation by clearly
positioning her European Commission as a “Geopolitical Commission”. On
November 12, 2019, in a speech at the Paris Peace Forum, she emphasized
the creation of a genuine “Geopolitical Commission” to build a more out-
ward-looking EU that would defend European values and interests worldwide.
Josep Borrell, the EU High Representative of the Union for Foreign Afairs
and Security Policy and Vice President of the EC, insisted that the EU must
now “learn to use the language of power”.7 French President Macron even
warned that with the escalating competition between China and the United
States, Europe would risk “disappearing geopolitically”.8
In short, the third decade of the 21st century is destined to be turbulent and
unsettling. For China, the years 2021–2049 overlap with the historical intersec-
tion of the “two centenaries”, when the old centenary ends and the new one
begins. The old centenary is from 1921, when the Communist Party of China
(CPC) came into being, to 2021, the 100th anniversary of the CPC. The new
centenary is from 1949, when the People’s Republic of China was established,
to 2049, the 100th anniversary of the founding of the PRC.9 For the United
States, 2026 marks the 250th anniversary since independence. Both China and
the United States hope to embark on a new journey in the third decade of the
21st century. Unfortunately, the United States and China have failed to co-
evolve in a harmonious way. Both Presidents Trump and Biden have defned
China as a “strategic competitor” to be contained on multiple levels. The expec-
tation is that the 2020s will be a defning period in the history of US-China rela-
tions. If the United States and China can properly manage their diferences, the
ship of US-China relations will have a chance to navigate on a normal course;
in the case of strategic miscalculation, it is very likely that war and large-scale
geopolitical confict will break out between the two superpowers, which would
profoundly change the course of history and the future world landscape.
During the 2020s, the EU repositioned China and its relations with China
have deteriorated. In the policy paper “EU-China: A Strategic Outlook”, pub-
lished in March 2019, the EU redefned China as, “a cooperation partner with
whom the EU has closely-aligned objectives”, “an economic competitor in the
pursuit of technological leadership”, and “a systemic rival promoting alterna-
tive models of governance”.10 The mutual trust is getting thin between the
EU and China. China’s ambiguous position on the Russia-Ukrainian War has
signifcantly damaged China’s image in the EU.

6.2 The Manifestations of Competing Economic Statecrafts

and Consequences
China’s launch of the Belt and Road Initiative in 2013 marks a watershed
in the new age of competing economic statecraft. Its global coverage and
 Competing Economic Statecrafts 117

large-scale leveraging of economic resources put China in the spotlight of

global political economy. As a positive instrument of economic statecraft,
the BRI spurred the United States to come up with competing connectivity
projects, frst the B3W initiative (the Build Back Better World) announced by
President Joe Biden in June 2021, and then the PGII (the Partnership for
Global Infrastructure and Investment) announced at the G7 Summit in June
2022, which intended to raise US $600 billion over the next fve years to
provide developing countries with fnancing for infrastructure development.
Although China was not explicitly mentioned in the statement, the PGII was
widely seen as an “alternative” to the BRI, aimed at weakening the interna-
tional infuence of the BRI.
Since China’s launch of the BRI, the EU has come up with a series of posi-
tive economic statecraft projects, including the EU Strategy for Cooperation
in the Indo-Pacifc, the EU-Asia Connectivity Strategy, the Globally Con-
nected Europe Strategy, and the EU Global Gateway initiative in 2020–2022.
There is a time lag of around eight years between China’s frst move
of grand economic statecraft, project BRI announced in 2013 and the
United States’ B3W, as well as the EU’s symbolic economic statecraft pro-
jects such as the Global Gateway announced in 2021. Why is there such a
time lag? First, it took a while before other major economies realized the
geoeconomic (and geopolitical) spillovers of China’s BRI, and managed
to organize alternative connectivity projects as a response. In 2013–2017
before the US-China trade war broke out in 2018, there was a window of
opportunity for China, the United States, and the EU to collaborate on
connectivity. A typical example was the EU-China Connectivity Platform
established in 2014. Unfortunately, the value of this platform has been
largely underappreciated.
Second, facing China’s geoeconomic rise, the frst response was initiated
by an atypical American president, Donald Trump, who decided to choose a
negative economic statecraft instrument (an economic warfare of a bullying
nature) to overwhelm China. The US-China trade war lasted from March
2018 and until January 2020 before the United States realized that there is
no winner in an economic war, and it is impossible to defeat China single-
handedly. It is not until Joe Biden’s time as president that a united Western
front was to be organized to confront China’s economic statecraft.
However, negative economic statecraft instruments such as a trade war or
sanctions can hardly be efective because of their double-edged sword efects,
creating both winners and losers domestically. In the US-China trade war in
2018–2020, the sectors benefting from US-China trade relations sufered.
According to Gary Hufbauer, a senior fellow of the Peterson Institute for
International Economics, if US exports were cut by a third in an all-out trade
war, the United States would lose about $50 billion of exports annually. About
250,000 US workers would lose their jobs. President Trump would not be
able to difuse the political backlash by calling on Americans to be patriots and
accept their economic hardships.11
118 Competing Economic Statecrafts

When both China and the United States were exhausted by the trade war,
they sat down for a truce, which led to the so-called Phase One Trade Agree-
ment signed on January 15, 2020.12 Although there were expectations by the
business communities of both sides that the punitively high tarifs would be
lifted, there has been little progress in that direction in 2021–2022 during
the Biden administration. Donald Trump was inspired by the worsened spirit
of the times and also contributed to the further worsening of it. Economic
nationalism (or mercantilism) is taking a strong hold in the United States
while China is increasingly introverted. Diferent from Japan or Germany,
two rising powers in history, China is a vast country with one of the world’s
biggest domestic markets. Therefore, China’s typical response to a chaotic
global context is a natural return to her own market and focus on her own
afairs.13
From a longer perspective, China’s economic statecraft is a response to the
United States’ economic statecraft represented by the “New Silk Road Initia-
tive”14 and the “Asia Pivot”15 envisioned in 2011. The BRI is “China’s March
West” in response to Obama-Clinton’s Asia Pivot.16 China’s negotiation of the
RCEP was to respond to the US-led TPP. China’s talks with the United States
and the EU for BITs were to boost domestic reform and introduce the most
advanced international economic rules so as to catch up with the highest level
of economic rule making.
In retrospect, the West has squandered China’s positive economic statecraft
initiatives represented by the BRI and President Xi’s economic liberalization
agenda. The West’s dissatisfaction with President Xi’s ideological pivot further
tightened the global economic statecraft competition.
We are now going through a phase of competing connectivity. Connectiv-
ity (and interdependence) is being instrumentalized and even weaponized. If
the Trump administration raised the idea of a complete economic decoupling
from China,17 the Biden administration and his like-minded allies are trying
for a partial decoupling. The essence of decoupling is an ultimate negative
usage of economic resources by rejecting the rival country’s access to markets,
key resources, high technologies, and critical human resources. Decoupling is
an upgrade of trade war and a typical example of economic warfare.
Although Joe Biden rejects the trade war model vis-à-vis China, the global
context is gradually luring the West to adopt an economic warfare approach.
This is largely inspired by the West’s economic sanctions against Russia, and
increasingly used against China, especially in the high-tech areas. The Biden
administration tried to adopt a “small yard, high fence” strategy by creating
“choke points” for critical US technologies vis-à-vis China. As Jake Sullivan,
Biden’s national security advisor, said,

Foundational technologies have to be inside that yard and the fence

has to be high because our strategic competitors should not be able to
exploit American and allied technologies to undermine American and
allied security.18
 Competing Economic Statecrafts 119

In the dark days of the world economy and warring states period of global
economic statecraft, we are witnessing dramatic innovation of economic state-
craft toolkits. To deny Russia the fnancial resources to fund its invasion of
Ukraine, the US-led coalition immobilized Russia’s sovereign wealth fund and
central bank reserves.19 To deny China’s ability to acquire or develop high-end
chips, as well as reduce the dependence on critical technologies from China,
the United States passed the Chips Act 2022.20 To stand for its values, the EU
established a global human rights sanctions regime on December 7, 2020,
which allows it to target individuals, entities, and bodies – including state and
nonstate actors – responsible for, involved in, or associated with serious human
rights violations and abuses worldwide, no matter where they occurred.21 This
global human rights sanctions regime has been applied on several occasions,
including against Russia and China. The EU’s sanctions against China on
the ground of human rights violations in Xinjiang triggered China’s furious
countersanctions.
The EU stands out in practicing trade statecraft since Von Der Leyen
became president of the European Commission in 2019. At the EU level, a
series of trade legislations have been proposed with geopolitical implications,
such as the Anti-Economic Coercion Instrument (ACI), aimed at countering
the use of economic coercion by third countries.22 The European Commission
also proposed the Due Diligence Directive, International Procurement Instru-
ment and Anti-Subsidy Regulation, all of which are giving teeth to the EU to
increase its capabilities in adapting to the birth of a “Geopolitical Europe”.23
Apart from innovation of toolkits, the negotiation strategies of economic
statecraft are also going through “smart” reconfguration. As the world seems
to become multipolar, the global politics of economic statecraft appear to enter
an era of a strategic triangle among the United States, the EU, and China. The
Biden administration successfully revived the Atlantic alliance despite some
trade disagreements. Russia’s invasion of Ukraine largely reunited the West.
President Von Der Leyen has emerged as the person to call when US ofcials
want to call Europe.24 The United States is aware that sanctions are most
efective when coordinated with allies and partners, both because coordination
bolsters diplomacy and because multilateral sanctions are harder to evade.25
China’s position is signifcantly weakened in such a strategic triangle, with
China on the one side and the United States and the EU on the other. That
being said, the strategic triangle is constantly changing. The ultimate goal
of the EU’s geopolitical pivot is to seek so-called “strategic autonomy”, an
autonomous position vis-à-vis both the United States and China.26

6.3 Competing Thoughts Behind Competing Economic

Statecrafts
Facing the deteriorating spirit of the times, the economic statecraft competi-
tion originates from competing paradigms of governing a state (or an econ-
omy). There emerged in the West, throughout history, four types of economic
120 Competing Economic Statecrafts

statecraft paradigms: mercantilism, liberalism, imperialism, and Marxism.

Accordingly, diferent models of governance and statecraft have been grown
on the soils of the United States, the EU, and other Western countries.
China is a very diferent model, a hybrid of every historical “ism”, ideologi-
cally guided by Marxism with a developmentalist pursuit of Chinese “great
rejuvenation”. That makes any simplistic labeling of China’s model of gov-
ernance misleading and quickly obsolete. The labeling of China’s governance
model as “state capitalism” is misleading, because China adheres to its Marxist
political regime and ideology. Neither can such a labeling explain President
Xi’s socialist campaigns such as “Eradication of Extreme Poverty”27 and “Seek-
ing Common Prosperity”.28 An alternative in understanding China’s govern-
ance model is an eclectic one. Since the People’s Republic was founded in
1949, Chinese leaders have embraced diferent guiding thoughts of economic
statecraft, ranging from Marxism to mercantilism and liberalism (Table 6.1).
China’s economic statecraft has a historical logic, which is inspired by Chi-
na’s “tianxia system” (天下 in Chinese, literally meaning “all under heaven”).
In ancient China and imperial China, tianxia denoted the lands, space, and
area divinely appointed to the Chinese sovereign by universal and well-defned
principles of order. The center of this land was directly apportioned to the
Chinese court, forming the center of a worldview that centered on the Chi-
nese court and went concentrically outward to major and minor ofcials and
then the common subjects, tributary states, and fnally ending with fringe
“barbarians”.29 This worldview gives China’s economic statecraft its civiliza-
tional attributes and historical depth.
Although China’s “tributary system” has been abandoned with the col-
lapse of China’s last imperial dynasty in 1911, China’s worldview of tianxia
has never been abandoned. It is already incorporated in China’s philosophy
and culture. China’s economic diplomacy today is also inspired by the tian-
xia worldview. It includes a “new concept of morality and interests”, which
advocates a dual focus on morality and interests and prioritizes morality over
proft in dealing with developing countries.30 Several episodes in China’s his-
tory are particularly commended as good examples of economic diplomacy:
Zhang Qian’s expedition to the western regions led to the establishment
of diplomatic ties between the Han Dynasty and the tribes in the western
regions, spreading friendship along the ancient Silk Road and bringing back
to China the civilization, knowledge, and goods of the West. The spirit of the
ancient Chinese explorer and diplomat Zheng He’s seven voyages to the west-
ern oceans was “to befriend the distant people, make peace with all nations,
and share prosperity with the world” and to facilitate economic exchange and
trade fows. This is in stark contrast to the slave trade and colonial rule of
the Western powers through their mighty warships and cannons.31 China’s
distinctive civilizational attributes and historical experiences helped China to
chart a diferent path of economic diplomacy unlike other great powers – to
promote relations with other countries from the dimension of civilization and
to implement the so-called “major country diplomacy” in a Chinese way. Since
 Competing Economic Statecrafts 121

Table 6.1 China’s Economic Statecraft from Mao to Xi

Political Economic ideology Main Tasks Wealth-Power-

Ideology Strategy

Mao Zedong Communist Marxist mixed Anti-imperialism, Supporting the

with China’s independence, Communist
traditional self-sufciency, Revolution,
way of building a developing
thinking strong state countries,
as a central supporting a new
kingdom international
economic order
Deng Xiaoping Communist Liberalism Economic General Agreement
development, on Trade and
building a Tarifs (GATT)
strong state accession
Jiang Zemin Communist Liberalism Economic GATT/
development, World Trade
building a Organization
strong state, accession
the great
rejuvenation of
China, “Three
Represents”
Hu Jintao Communist Liberalism Economic Emerging strategic
+ light development, industries,
mercantilism building a self-innovation,
strong
state, great national
rejuvenation
The Outlook
of Scientifc
Development
Xi Jinping Communist Light Economic Belt and Road
mercantilism development, Initiative; Asian
+ embedded “China Dream”, Infrastructure
liberalism building a Investment
+ socialism strong state, Bank; Brazil,
+ historic the great Russia, India,
logic rejuvenation China, South
of China, Two Africa (BRICS)
Centenary goals Development
Bank;
competitive
regionalism,
Regional
Comprehensive
Economic
Partnership, Free
Trade Area of
the Asia-Pacifc;
free trade zone
122 Competing Economic Statecrafts

the Belt and Road Initiative was proposed, China’s relations with developing
countries in Asia, Africa, and Latin America have become increasingly close,
gradually forming a BRI “circle of friends”.
China’s historical pursuit for a central position in the world is being imple-
mented by a highly organized political party equipped with a Marxist ideology.
That signifcantly facilitated China’s rise in a short time span. But China’s rise
is far from being completed. It requires a continuous transformation of wealth
to power.
Economic growth is therefore a precondition for China’s rise, and China’s
economic statecraft is largely development oriented.
In comparison, the United States, as an established hegemon, is practicing a
hegemonic economic statecraft, the essence of which is to maintain America’s
hegemony through a two-directional conversion between wealth and power.
Since the end of WWII, the guiding thoughts behind the American economic
statecraft has evolved from liberalism to mercantilism. What President Trump
implemented was a kind of mercantilism (economic nationalism), focusing on
“America First”, launching global trade wars and foating the idea of a com-
plete economic decoupling from China. At the same time, the Trump admin-
istration transformed military and strategic power into negotiating leverage in
pursuit of wealth, such as renegotiating the “nightmare NAFTA”32 and turn-
ing it into the USMCA (U.S.-Mexico-Canada Agreement). A global trade
war was launched against the EU, China, Turkey, Iran, and India. Mercantilist
trade policy under President Trump made the United States go after even its
own allies in the name of “America First”. This was unthinkable when the US
economic statecraft was largely infuenced by liberalism. The US-China trade
war was also essentially a mercantilist war waged by the United States, only
later painted as an ideological war by Secretary of State Mike Pompeo.33 The
Biden administration has not changed President Trump’s mercantilist trade
policy signifcantly, keeping high tarifs on China’s imports and rolling out the
CHIPS Act as well as the Infation Reduction Act, the latter of which triggered
complaints from two US allies, the EU and South Korea.
Diferent from both China and the United States, the EU is practis-
ing a defensive economic statecraft, something we may call “geoeconomic
statecraft”. The goal of the EU’s economic statecraft is to achieve “strategic
autonomy” and “strategic sovereignty”.34 In this context, the EU is seeking
strategic autonomy from China and the United States, introducing an “anti-
coercion instrument”, seeking to become a leading international advocate of
climate change, imposing investments screening, introducing an international
procurement instrument, and implementing a series of economic diplomatic
initiatives with geopolitical overtones. The EU’s economic statecraft paradigm
is still liberalism, but the liberal paradigm is shifting from positive reciprocity
to negative reciprocity. Soon, there may be a paradigm shift to mercantilism.
The EU’s wealth-power strategy is based largely upon its identity as a civilian
and normative power. Therefore, the EU’s wealth-power strategy is focused
largely on translating economic strengths to global infuence and rule setting.
 Competing Economic Statecrafts 123

Although the EU is probably the weakest link in the US-China-EU strategic

triangle, it is probably the most strategic one, poised to change the balance of
power.
The global context is the frst driver of all the major changes in interna-
tional politics. In the good old days of globalization in the high Victorian days
of the mid-19th century and the Reagan-Clinton years of the 1980s–1990s,
all the major economies benefted from mutual openness and interdepend-
ence, whether it was a liberal capitalist economy or a socialist market economy
(like China). Ideological diferences were less emphasized and international
cooperation was widely embraced. However, when globalization entered into
its dark days like now, domestic governance in major economies encountered
difculties and yesterday’s partners became scapegoats and rivals. Ideologi-
cal diferences are being reemphasized and economic statecraft is increasingly
weaponized.
Overall, the competition of economic statecraft can now be regarded as
a paradigm competition. Multiple paradigms coexist, evolve, transform, and
infuence one another. There is rivalry, competition, and cooperation among
them. The United States is now evolving “inter-paradigm”, backtracking from
liberalism to mercantilism. The EU is evolving “intra-paradigm”, still hold-
ing onto the liberal paradigm, but facing enormous mercantilist pressure and
shifting from liberal geoeconomics to increasingly realist geopolitics.
That is why we see the increasing competition among mercantilism (the
United States), weakened liberalism (the EU), and Marxism-developmental-
ism (China) in the deteriorating global context (Table 6.2). In such a com-
peting triangle, economic statecraft is gaining prominence. The essence of
economic statecraft competition is the competition among the United States,
the EU, and China in their wealth-power systems and wealth-power strategies.

Table 6.2 The Competing Wealth-Power System and Strategies among the United
States, the EU, and China since 2018

United States EU China

Competing models Hegemonic Geoeconomic Developmentalist

of economic economic statecraft economic statecraft
statecraft statecraft
Guiding thoughts Mercantilism Weakened Marxism-
liberalism developmentalism
Wealth-power Liberal democracy Regulatory liberal Socialist market
system democracy economy with
Chinese characteristics
Wealth-power Indo-Pacifc Global Gateway, Belt and Road
strategy strategy, Green Deal, Initiative, high-level
negative digital transition, development, dual
reciprocity, NextGen, strategic circulation, domestic
trade war autonomy consumption
124 Competing Economic Statecrafts

These three wealth-power systems were formed by historical circumstances

and are still evolving. In the long run, what dictates the future rise and fall of
great powers is, arguably, which wealth-power system is the most viable: the
one that represents the most advanced productive forces, the one that keeps
up with the times, and the one that best represents the interests of the majority
of its people. For the moment, we have at least three coexisting wealth-power
systems, and the competitive and cooperative relationship between these three
systems will shape the future global political economy.
In the short and medium term, one needs to look to wealth-power strate-
gies: how well do wealth and power work together? And what is the strategy?
Because this will determine the fate of the wealth-power system. For example,
the socialist bloc represented by the Soviet Union sufered the fate of disin-
tegration because of the failure of its wealth-power strategies. It is still too
early to tell whether China represents a more efcient and powerful wealth-
power system. The answer depends on the outcome of the long race with
other wealth-power systems in their respective wealth-power strategies.
In this context, China, the United States, and the EU are coincidentally
pivoting toward a new, inward-looking economic strategy. The United States
wants to “Build Back Better”, the EU is after “strategic sovereignty”, and
China is looking to shape a new development paradigm. The common features
are that China, the United States, and the EU are giving a bigger role to the
government. The fscal, monetary, industrial, and regulatory policies are being
mobilized at the same time. The infuence of market-based resource allocation
is gradually losing its luster.
The US government has adopted a series of proactive policies and legisla-
tion, such as the Buy American Act, the American Rescue Plan, the American
Jobs Plan, and the American Families Plan. More resources are now being
directed to supporting onshore manufacturing, improving the hard and soft
infrastructure, and increasing the potential economic growth rate.
The European Commission under President Von Der Leyen has set the fol-
lowing goals: to digitalize and green the economy within the union, strengthen
the resilience and independence of the supply chain, promote multilateral eco-
nomic diplomacy outside the union, and commit to the WTO as the main
channel for multilateral trade.
Similarly, China has set ambitious goals for lifting China towards the top
position in the world economy: to achieve high-quality economic develop-
ment in the new journey towards the second centenary goal; improve total
factor productivity through technology advances; improve industries through
core technology and disruptive innovation; continue to consolidate its posi-
tion as the world’s top manufacturing powerhouse; and form a regional value
chain with China at the core of the Asia-Pacifc region through industrial
transformation, upgrading, and relocation (similar to Japan’s fying geese
paradigm in previous times). While balancing the objectives of development
and security, China will make use of the resources in “external circulation”
 Competing Economic Statecrafts 125

and fully leverage its comprehensive strengths as a large economy, market,

and procurer to increase the interaction and circulation with the external
economy.
Driven by the justifcations of their respective agendas, the governments
of the three major economies have found a better raison d’être. Competition
has also become the most important law of survival. China, the United States,
and the EU combined account for two thirds of the world’s gross domestic
product. But among them, one’s gain is increasingly perceived as the loss of
the other. This realistic (and pessimistic) turn of economic statecraft thinking
is defning the future great power politics.
Into the future, economic statecraft is increasingly used as tools for com-
petition. The Chinese Marxist-developmentalist statecraft is the most efcient
due to China’s Communist regime, which is good at mobilizing resources for a
state goal. However, this wealth-power system may easily get overstretched by
exhausting its economic resources. Therefore, China’s wealth-power strategy
must have a solid adherence to the development dimension. Otherwise, it will
soon lose momentum.
The US hegemonic economic statecraft is the most difcult to manage
since a hegemon has constant challengers. To maintain its hegemonic posi-
tion, the hegemon has to woo its allies by giving economic concessions and
compete against its main challengers. That means the hegemon has a wealth-
power dilemma, leading to overstretching either on the wealth end or on the
power end. The inter-paradigm shift of economic statecraft from liberalism to
mercantilism is a vivid demonstration of this dilemma.
The EU’s geoeconomic statecraft is the most difcult to sustain. The
European Commission’s self-identity as geopolitical is potentially suicidal.
The EU itself is a liberal project, while geopolitics by defnition is antiliberal,
which emphasizes zero-sum and better ft mercantilist philosophy. Moreover,
the EU’s pursuit of strategic sovereignty via geopolitics is almost an impos-
sible mission. The Russia-Ukraine war is producing an energy crisis in the
EU, moving European industries out of Europe, causing capital fight to the
United States, and fanning populist anger as a result of sky-rocketing energy
prices.
In the days of competing economic statecrafts, mutual trust is getting
scarce. A nation’s wealth expansion brings power spillover, which is an impor-
tant source of strategic anxiety for other nations. This era of statecraft compe-
tition will not end until the world economy enters a new phase of productivity
growth spurred by a new technological revolution. But from now to the
next phase of prosperity, great powers will continue to compete in economic
statecrafts. Driven by competing paradigms and wealth-power systems (and
wealth-power strategies), the United States, the EU, and China may enter a
vicious cycle of competition and confrontation. During this relatively long
period of difcult days, the hope lies in people’s confdence that the good old
days will always come back.
126 Competing Economic Statecrafts

Notes
1 Clinton, H. (2011). Economic Statecraft Speech. Economic Club of New York, New
York City, October 14.
2 The spirit of the times (also called zeitgeist in German) refers to the dominant spirit
of an era and refers to the broader cultural, academic, scientifc, spiritual, and political
trends in a country or a population group in a certain context of the times, as well as
the atmosphere, morality, social environment, and ideological trends of an era.
3 Xi, J. (2017). Looking at the World, We Are Facing “Changes Unseen in a Cen-
tury” (in Chinese). Chinanews, December 29.
4 (2002). Xinhua News Agency, “Full Text of Jiang Zemin’s Report at the 16th Party
Congress”, November 17, see www.china.org.cn/english/2002/Nov/49107.htm
5 (2022). Qiushi Magazine General Secretary Xi Jinping’s Important Speech “Im-
plementing the New Development Concept in the New Development Stage In-
evitably Requires the Construction of a New Development Pattern” (in Chinese).
Xinhuanet, September 1.
6 Scholz, O. (2023). The Global Zeitenwende: How to Avoid a New Cold War in a
Multipolar Era. Foreign Afairs, January/February.
7 Lehne, S. (2020). How the EU Can Survive in a Geopolitical Age. Carn-
egie Europe, February 25, see https://carnegieeurope.eu/2020/02/25/
how-eu-can-survive-in-geopolitical-age-pub-81132
8 Leonard, M. (2019). The Makings of a Geopolitical European Commis-
sion, November 28, see www.ecfr.eu/article/commentary_the_makings_of_a_
geopolitical_european_commission
9 (2017). CPC Q&A: What Are China’s Two Centennial Goals and Why Do
They Matter? Xinhuanet, October 17, see www.xinhuanet.com/english/2017-
10/17/c_136686770.htm
10 European Commission. (2019). EU-China: A Strategic Outlook, March 12, see
https://ec.europa.eu/commission/presscorner/detail/en/fs_19_6498
11 Kuo, M. A. (2018). The US-China Trade War: Winners and Losers: Insights from
Gary Hufbauer. The Diplomat, July 11.
12 USTR. (2020). Phase One Trade Agreement, January 15, see https://ustr.gov/
phase-one
13 (2019). The Most Important Thing Is to Do Your Own Thing. People’s Daily, May
25, see www.xinhuanet.com/politics/2019-05/25/c_1124540026.htm
14 US State Department Archived Content. U.S. Support for the New Silk Road, see
https://2009-2017.state.gov/p/sca/ci/af/newsilkroad/index.htm
15 Clinton, H. (2011). America’s Pacifc Century. Foreign Policy, October 11, see
https://foreignpolicy.com/2011/10/11/americas-pacifc-century/
16 Wang, J. (2012). “Westward”: China’s Geostrategic Rebalancing, October 19, see
www.aisixiang.com/data/58232.html
17 (2020). Trump Again Raises Idea of Decoupling Economy from China. Reuters,
September 16, see www.reuters.com/article/usa-trump-china-idUSKBN25Z08U
18 (2022). Joe Biden Warns US Faces “Decisive Decade” in Rivalry
with China. Financial Times, Ocotber 13, see www.ft.com/content/
c9011130-a119-40d5-beb9-a09e7faf2e1
19 Adeyemo, W. (2022). America’s New Sanctions Strategy: How Washington Can
Stop the Russian War Machine and Strengthen the International Economic Order.
Foreign Afairs, December 16, see www.foreignafairs.com/russian-federation/
americas-new-sanctions-strategy
20 The White House. (2022). Executive Order on the Implementation of the
CHIPS Act of 2022, August 25, see www.whitehouse.gov/briefng-room/
presidential-actions/2022/08/25/executive-order-on-the-implementation-of-
the-chips-act-of-2022/
 Competing Economic Statecrafts 127

21 The Council of the EU. (2020). EU Adopts a Global Human Rights Sanc-
tions Regime, December 7, see www.consilium.europa.eu/en/press/press-
releases/2020/12/07/eu-adopts-a-global-human-rights-sanctions-regime/
?utm_source=dsms-auto&utm_medium=email&utm_campaign=EU+adopts+a+gl
obal+human+rights+sanctions+regime
22 European Commission. (2021). EU Strengthens Protection Against Economic Co-
ercion, December 8, see https://ec.europa.eu/commission/presscorner/detail/
en/ip_21_6642
23 European Council on Foreign Relations. (2022). The Birth of Geopolitical Eu-
rope: In Conversation with Josep Borrell, March 29, see https://ecfr.eu/event/
the-birth-of-a-geopolitical-europe-in-conversation-with-josep-borrell/
24 Lynch, S., & Gridnef, I. (2022). Europe’s American President: The Para-
dox of Ursula von der Leyen. Politico, October 6, see www.politico.eu/article/
europe-american-president-paradox-ursula-von-der-leyen/13
25 Adeyemo, W. (2022). America’s New Sanctions Strategy: How Washington Can
Stop the Russian War Machine and Strengthen the International Economic Order.
Foreign Afairs, December 16.
26 Borrell, J. (2020). Why European Strategic Autonomy Matters. EEAS, December
3, see www.eeas.europa.eu/eeas/why-european-strategic-autonomy-matters_en
27 Xi, J. (2021). Speech at the National Poverty Alleviation Summary and Com-
mendation Conference. Xinhuanet, Februrary 25, see www.gov.cn/xin-
wen/2021-02/25/content_5588869.htm
28 Xi, J. (2021). We Made Solid Progress in Promoting Common Prosperity. Qiushi,
Janurary 15, see www.gov.cn/xinwen/2021-10/15/content_5642821.htm
29 Wikipedia. Tianxia, see https://en.wikipedia.org/wiki/Tianxia
30 Wang, Y. (2013). Exploring the Path of Major-country Diplomacy with Chinese
Characteristics. Luncheon Speech at the Second World Peace Forum, June 27.
31 Wuhan University Center of Economic Diplomacy. (2014). Advocate the Zheng He
Spirit and Implement the Zheng He Initiative, and Vigorously Promote the Building
of the Maritime Silk Road, April.
32 (2020). Trump Signs USMCA Trade Deal to Replace ‘Nightmare NAFTA. NBC
News, January 30, see www.nbcnews.com/business/economy/trump-signs-
usmca-trade-deal-replace-nightmare-nafta-n1125526
33 US State Department Archive. (2020). Secretary Michael R. Pompeo Remarks:
Communist China and the Free World’s Future. The Richard Nixon Presidential
Library and Museum, Yorba Linda, CA, July 23, see https://2017-2021.state.
gov/communist-china-and-the-free-worlds-future-2/index.html
34 European Parliament. (2020). Strategic Sovereignty for Europe. EPRS Ideas Pa-
per, September.
Index

accession negotiations, triggering 83 Association of South-East Asian

Adams, John Quincy 51 Nations (ASEAN) 74; strategic
Adenauer, Konrad 90 partnership agreement 87
Age of Imperialism (1870–1914) 38–41 Atlantic Charter 60; drafting 62
allied technologies, undermining 118 Australia-UK-US (AUKUS) trilateral
ambassadorial-level economic diplomacy security partnership 68
advisor role, creation 13 Austro-Hungary, economic-political
“America First” doctrine 69, 122 dismemberment 10
American Civil War (war of attrition) 16 authoritarianism, approach 28
American Families Plan 68, 124
American Indian Institute, creation 56 Baldwin, David 11, 14–17, 23
American Jobs Plan 68, 124 Bangladesh, China, India, and Myanmar
American Rayon Company, sale 61 Economic Corridor (BCIM),
American Rescue Plan (Biden) 68, 124 design 102
Anglo-American Financial Agreement 63 Bangladesh-China-India-Myanmar
Anglo-American Mutual Aid Agreement 62 Economic Corridor
Anshi, Wang (reforms, failure) 22 (BCIM-EC) 101
Anti-Coercion Instrument (ACI) 23, 119 Bayne, Nicholas 12, 66
Anti-economic Coercion Instrument beggar-thy-neighbor tarifs,
(ACI) 79 implementation 59
Anti-Economic Coercion Instrument Belt and Road Forum for International
(AECI) 87 Cooperation (BRF), launch 107
Anti-Economic Coercion Instrument Belt and Road Initiative (BRI) 3, 99,
(ACI), examination 88 101, 104; launch 116–117;
anti-economic coercive mechanisms, motivation 108; priority 107;
establishment 3 proposal 122
Anti-Foreign Sanctions Law, China’s Berlin Wall, fall 114
National People’s Congress Biden, Joe 29, 67–68, 117; alliances,
Standing Committee forging 68; free trade agreements
passage 107 (FTAs) 73; trade war model
Anti-Subsidy Regulation, proposal 119 rejection 118
APEC 70, 74 Big Stick policy 54–55
“Arsenal of Democracy” 7 Bilateral Investment Treaties (BIT)
Article VII, Churchill acceptance (US negotiations 99
insistence) 62–63 bilateral trade agreements (Bush) 72
Asia-Pacifc Economic Cooperation, “black swan” incidents 105
establishment 66–67 Borrell, Josep 86, 116
“Asia Pivot” (US economic statecraft) 118 bourgeoisie: capitalist development 37
Asimakopoulou, Anna Michelle 87 bourgeoisie, wealth-power 35
 Index 129

Bretton Woods system, establishment Zedong implementation

64, 73 41; Marxist ideology 110;
Brexit 2; deglobalization efort 73 modernization, acceleration 109;
Britain gold/dollar reserves, depletion socialism, primary stage 109;
(US maximization) 61 strategic competitor, defning
British Empire: life, extension 41; peace 116; strategic goals 101–102;
treaty 50; supremacy 6–7 strategic opportunity 109;
British hegemony: context 44, 47–53; supply-side structural reform 106;
rise 47 tributary system, abandonment
“Build Back Better” (Biden) 124; New 120; wealth-power system/
Deal, comparison 68 strategies, competition 123; wealth-
Build Back Better World (B3W) 29, 117 to-power transformation 110;
Bush, George W. 68; bilateral trade zeitgeist (spirit of the times) 108
agreements 72; Hu contact China, economic statecraft: evolution
109–110; interregional 107; improvement 104–105;
cooperation 74 novelty 1; timeline 121; Xi
Bush, Sr., George 66 Jinping control 99
Buy American Act 124 China-Japan-Korea Free Trade
Agreement 103
Canada, acquisition 50 China-Pakistan Economic Corridor
capital, accumulation 237 (CPEC) 101; design 102
capitalists, energies (control/direction) 9 China Society of Economic Diplomacy,
capitalist world economy, development 55 establishment 2
Carnegie, Andrew 53 China-US BIT (failure), Trump (impact)
Carter, Jimmy 66 104
catching-up counterparts, economic China-US Joint Commission on
statecraft 30–32 Commerce and Trade (JCCT) 68
Centre for European Policy Studies China-US trade war 2–3
(CEPS) 79 Chips Act 2022 119
“Changes Unseen in a Century” (Xi choke points, creation 119
Jinping) 115 Churchill, Winston: Roosevelt meeting 62;
Chen Deming 110 US visit 63
China: citizens, discriminatory measures Civil War, overseas empire (relationship)
107–108; confuence, navigation (1860/65–1898) 52–53
105–106; developmentalism Classical Liberalism, age (1846–1870)
108; economic clout, political 36–38
infuence (mismatch) 108; Classical Mercantilism, age (15th–18th
economic diplomacy 110–111; centuries) 29–35
economic diplomacy initiatives Clinton, Hillary 11–12, 69, 72;
102; economic trajectory, shape “Economic Statecraft” speech
102–103; economy, development (2011) 114
101–102; external circulation closed regionalism 74
resources, usage 124–125; Cobden-Chevalier Commercial Treaty 71
external demand, weakening Colbertism, core principle 34
106–107; future scenarios Colbert, Jean-Baptiste 19, 34
108–111; geoeconomic rise, Cold War: US victory 66–67
facing 117; Global Development Cold War, winning 21
Initiative 111; internal afairs, collaboration 38
interference 107–108; Marxism- colonization, usage 19–20
developmentalism 123; commercial starvation blockade,
Marxism, impact 120; Marxist- imposition 4
developmentalist statecraft 125; Common Foreign and Security Policy,
Marxist economic statecraft, implementation 83–84
130 Index

Communist Party, dissolution 42 Dutch hegemony 5

competing economic statecrafts 29 Dutch liberal policies, implementation 36
Confucius, beliefs 101
“Connecting Europe and Asia: Building East African Community on the Economic
Blocks for an EU Strategy” 80 Partnership Agreement (EPA) 87
conservatism, approach 115 “East-West” political game 94
containment doctrine 64 economic activity, primary objective
contention, Westphalian system 80 (economic liberalism
Continental Empire (1815–1850s) 51–52 component) 36
Copland, Douglas 10 economic coercion 87–88
Corn Laws 34, 327 economic development, New Normal 103
Council of the European Union 87 economic diplomacy 11–12; defnition
countercultural movement, impact 65 2; implementation 87; worsening
Covenant of the League of Nations (USA) 75
57–58 “Economic Diplomacy and Foreign
COVID-19 pandemic: confuence 14; Policy: Friends or Foes?” 13
impact 73, 85, 106; outbreak 3 economic foreign policy, pursuit 33
CPC Central Committee: leadership, economic growth model 23
impact 103, 104; refections 109 economic instruments, wielding 75
Crimean War 40 economic leverage, squandering (USA) 75
Cuba, occupation 54 economic liberalism, components 36
Cultural Revolution 41 economic nationalism policy, US
adoption 59
Davis, Jeferson 16 economic power, impact 2
Dawes, Charles 58–59 economic sacrifces 18
Dawes Plan 58 economic sanctions: establishment 3;
decoupling, risks 3 usage 83–84
Deep and Comprehensive Free Trade economic sovereignty, EU pursuit 86
Agreement (DCFTA) 82 economic statecraft 11–12, 18;
de Gaulle, Charles 91 academic/theoretical standing
deglobalization: COVID-19, impact 73 24; actors, identifcation 4,
deglobalization, dilemma 73 19; application 14; Baldwin
Delors’ Plan, adoption 92 defnition 23; competing
democracy, consolidation/support 95 economic statecrafts 29;
Deng Xiaoping 99 competing thoughts 119–125;
d’Estaing, Giscard 66 competition 114; competition,
developmentalism 108 manifestations 116–119;
dialectic, emphasis 42 conducting 17–18; consequences,
Directorate General for Trade (European manifestations 116–117; context
Commission), trade policy 53–67; defning 3; economic
instruments 80 diplomacy, contrast 11–13;
Doha Round multilateral trade European Union economic
negotiations 87, 100 statecraft 79; implementation,
dollar diplomacy (Taft) 56 limiting conditions 18;
Dombrovskis, Valdis 88 implementation, steps/methods
domestic gold/silver mines, absence 29 19–23; importance, increase
domestic interests, breakdown 19 89; invention 9; paradigms 4;
Dual Circulation Strategy and High-Quality paradigm shifts 28; perspective
Development, formation 106 89–96; policy tools/objectives
Due Diligence Directive, proposal 119 11; power strategy, reinvention
Dumbarton Oaks Conference 61 5; process 4; “product of the
Dutch East India Company, times” 114–115; research
establishment 36 subject/agenda 3; Soviet model
 Index 131

41–42; theoretical assumptions European Coal and Steel Community

17–19; theoretical construct 17; (ECSC): creation, proposal 90;
theoretical proposition 15; wealth establishment 4
strategy, reinvention 5 European Commission (EC): backroom
Economic Statecraft (Baldwin) 11 deals 94; diplomatic strategy,
economic statecraft (USA) 44 adjustment 91; supranationalism
economic statecraft, concept 9–17; shift 91
analysis/critique 13–14; origin European Council on Foreign Relations
9–11; reconstruction 14–17 (ECFR) 79; research program 1
economic statecraft (USA), evolution European Economic Community (EEC),
45–47 creation/establishment 5
Economic Statecraft Program (Texas European External Action Service
A&M University launch) 1 (EEAS) 13, 79; establishment 95
Economic Statecraft Research Initiative 1 “European Mansion” foundation 90
“Economic Statecraft” speech European Parliament, supranationalism
(Clinton) 114 shift 91
economic/strategic interests, EC European Political Strategy Centre
viewpoint 80 (EPSC) 13, 79
economic supremacy, development 5 European power: decline (2008+)
economic, term (usage) 14 92–96; foundation (1950–1967)
Embargo Act 50 90; rise 91; upward spiral
“Empty Chair Crisis” 91 (1967–2008) 90–92
Energy, Economics, and Security (EES), European-Russian relationship, change 81
Center for a New American European Union (EU): austerity
Security (CNAS) initiation 1 measures, Germany push 93;
entangling alliances, avoidance 49 China, image (damage) 116;
entrepôt colonialism 36–37 competence, absence 81–82;
“Eradiation of Extreme Poverty” (Xi economic aggregate, decline 94;
Jinping) 120 economic intimidation target
EU-Asia Connectivity Strategy 87, 117 88; economic power, relative
EU-China BIT 103 decline 94; expansion policy
EU-China Comprehensive Agreement 83; external trade negotiations
on Investment (CAI) (EU-China 94–95; geostrategic actor 86;
BIT), initiation 104 institutional power, changes
EU Defense Fund (EDF), increase 86 94–96; integration, stages 89;
EU Global Gateway initiative 87, 117 internal division 93; nonmilitary
Euro Debt Crisis (2009) 81 power 84; production chains,
Europa Geopolitica (creation), military/ diversifcation 86; review-
economic power instrumentalization negotiate-retaliate process
(promotion) 85–86 development 88; solidarity,
Europe: controversies 49; economic absence 96; strategic autonomy
sovereignty, protection 86; 85, 119; strategic rearmament
Geoeconomic Europe agenda 85; strategic sovereignty 124;
(promotion), economic strengths 81–82; wealth-power
diplomacy (implementation) strategy 122–123; wealth-
87; political-strategic power, power system/strategies,
decline 93–94; politics, USA competition 123
distance 50; Sovereign Europe, European Union (EU) economic
promotion 86 statecraft 79; economic coercion,
European Atomic Energy Community usage 87–88; implementation,
(EAEC), establishment 90 defciencies 81–85; innovative
European Centre for International solutions 81–85; toolbox,
Political Economy (ECIPE) 79 updating 85–88
132 Index

European Union (EU) foreign policy: geoeconomic statecraft 122

economic statecraft, perspective “Geopolitical Commission,” creation 116
89; history, economic statecraft Geopolitical Europe, birth 119
(perspective) 89–96 geopolitics, term (avoidance) 82
eurozone, Greece (exit) 93 Germany, Nazism (increase) 59
EU Strategy for Cooperation in the global agreements, US preference 72
Indo-Pacifc 87, 117 global fnancial crisis 92
exchangeable value 20–21 Global Gateway initiative 29
exports, excess 29 globalization: rapidity 114–115; Trump
external barbarian invasions, Roman decoupling 73
Empire resistance 28 Globally Connected Europe Strategy
87, 117
Falkland Islands War 21 Glorious Revolution 35
fascist aggression, resistance (Anglo- gold, dollar (alignment) 61–62
American cooperation) 62 Gorbachev, Mikhail 92
Federalist Papers 50–51 Gordon, Robert 54, 60
feudalism, abolition 37 grand bargain strategy 84
feudal monarchs, wealth-power 35 Great Depression 7, 59–60, 92; US
First Report on Public Credit 51 hegemony, increase 54
First World War 57 Great Leap Forward 41
Florida, US acquisition 51 Great Moderation 92
foreign trade, appraisal 29 great power, rise (key) 5
“Fortress Europe”: characteristics 95–96; Greece, eurozone exit 93
shift 92 Green Sprouts Law 22
foundational technologies, impact 119 “grey rhino” incidents 105
Franco-German relations, improvement 90 Group of Eight (G8) 69
Freedom’s Forge (Herman) 16 Group of Seven (G7), US economic
free/liberal trade policies, restoration 62 statecraft (connection) 66, 75
free markets (economic liberalism Group of Twenty (G20) 69; reform,
component) 36 absence (Chinese frustration)
free trade: multilateralism 71; principles 100–101
88; support (Hull) 72
free trade agreements (FTAs): difculty, Hamilton, Alexander 50–51
increase 73; perception 72 Hanbing, Shi 93
Free Trade Area of Americas (FTAA) Han Dynasty, diplomatic ties 120
73, 74 hard power, development 86
free trade imperialism 37; collapse 41 Hawaiian Kingdom, free trade agreement
French Revolution 35 (signing) 532
Friedman, Milton 21 Hay, John 55
From Wealth to Power (Zakaria) 55 hegemonic cycles 45–47; evolution 48
hesitant hegemony 57
Gadsden Purchase 51 Hideyoshi, Toyotomi 22
Gallagher, John 38 history, instruction 35
Gao Hucheng 102 Hobson, John A. 10, 38–39
General Agreement on Tarifs and Hollande, François 93
Trade (GATT) 63, 72; China, Hoover, Herbert 59
rejoining 67 House, Edward 57
Generalized System of Preferences, Huang, Ray (Renyu) 22
ofering 82 Hufbauer, Gary 117
geoeconomic competition, ferocity 14–15 Hu Jintao 108; Bush contact 109–110;
Geoeconomic Europe agenda economic statecraft, guiding
(promotion), economic ideology 109; low-profle
diplomacy (implementation) 87 diplomacy 100; Scientifc
 Index 133

Outlook on Development membership, Soviet Union

perspective 109; wealth-to-power refusal 64; reform, absence
transformation 110 (Chinese frustration) 100–101
Hull, Cordell 60, 63; free trade support 72 International Procurement Instrument
Hundred Years’ War 22 (IPI) 23, 87; proposal 119
International Trade Committee (INTA) 87
imperialism 28; age 38–41; historical international trade order, readjustment
method 39 (Trump demand) 70
Imperialism (Hobson) 38
“Imperial Preference,” future Japan, imperialist economic statecraft 39
(prejudice) 62 Jay Treaty 49–50
“imperial system of preferences” 62; Jeferson, Thomas 50
Lend-Lease Act, connection Jiang Zemin 108; strategic
62–63 opportunities 115
individual consumers/frms/ Joint Commission on Commerce and
households (economic liberalism Trade (JCCT), representation 105
component) 36 Justice Studies Center of the Americas,
individualist capitalism, efects 9–10 creation 56
Indo-Pacifc Economic Framework 68
Indo-Pacifc Economic Statecraft “Kabul Moment” 67–68
Initiative 1 Katainen, Jyrki 13, 79
indulgence letter, sale 20 Kennan, George 64
Industrial Development Conference 10 Kennedy, Paul 16
industrialization, impact 6 Keynesianism, impact 103
Industrial Revolution 37, 54 Ke, Zhao 61
informal empire 19 Kindleberger, Charles 59
infrastructure, improvement 83 King Louis XIV, economic statecraft 19
Inter-American Children’s Institute, King Sebastião, death 33
creation 56 Kissinger, Henry 66
Inter-American Commission of Women, Knox, Philander Chase 56
creation 56 Kondratief Cycle 115; evolution 48
Inter-American Commission on Human Kondratief long waves 47, 89; IV-B 90–91;
Rights, creation 56 V-A 90–91, 95; V-B 92, 95
Inter-American Committee on Ports, Kondratief, Nikolai 44
creation 56 Kurihara, Kenneth K. 10
Inter-American Court of Human Rights, Kurihari, Kenneth K. 10
creation 56
Inter-American Defense Board, creation 56 labor productivity, increase 37
Inter-American Drug Abuse Control Land Survey and Equitable Tax Law 22
Commission, creation 56 League of Nations: joining (Senate
Inter-American Institute for Cooperation refusal) 57; membership, Wilson
on Agriculture, creation 56 proposal 57
Inter-American Juridical Committee, LeFeber, Walter 55
creation 56 Lend-Lease Act (1941) 61; imperial
inter-American system 51 system of preferences, connection
Inter-American Telecommunication 62–63; leverage 62; negotiations,
Commission, creation 56 implementation 62
interdependence, weaponization 80 Lenin, Vladimir 38–39, 41
internal division, Roman Empire Lew, Jacob 75
resistance 28 liberal institutionalism, impact 5
internal peace, enjoyment 21 liberalism 28; degeneration 95;
International Monetary Fund mercantilism, pendulum 71–75;
(IMF): establishment 61–62; paradigm 4; weakening 123
134 Index

Lisbon Treaty (2009): dual-hatted militarization 39

position 95; ratifcation 94–95 military/economic power,
List, Friedrich 20–21, 33–35, 40 instrumentalization
Lixin, Wang 57 (promotion) 85–86
London Economic Conference, failure 60 military-power balances, shift 16
London School of Economics and military security, interest 18
Political Science (LSE) 12 Mill, John Stuart 24
long economic cycle 44 minimal state intervention (economic
long-run prosperity 18 liberalism component) 36
“Long Telegram” (Kennan) 64 mixed economic statecraft 10
long world economic wave, perspective monarchy, supremacy (notion) 28
45–47 monetary war, cessation 60
Louisiana Purchase 50 Monnet, Jean 90–91
Luther, Martin 20 Monroe Doctrine 51, 55–56
Luxemburg, Rosa 38–39 Monroe, James 51
Morgenthau, Henry 61–62
Maastricht Treaty 92 multilateral cooperation, basis 95
Magna Carta, introduction 22 Munich Security Conference 75
“Major-Country Diplomacy with Chinese
Characteristics” (Xi) 99, 108 national policy: appraisal 29; wealth/
manifest destiny 50–52, 54 power, relationship 18
manufactured goods, price (increase) 21 national productive powers, theory 325
manufacturing power, development 21 national wealth, increase 37
Mao Zedong 41 Navigation Acts 34, 36–37
Maritime Silk Road 101 negative economic statecraft (Trump) 117
Market Exchange Law 22 “Negotiation Arithmetic: Adding and
Marshall, Alfred 9, 20, 24 Subtracting Issues and Parties”
Marshall Plan 3, 44, 64 (Sebenius) 84
Marxism 28, 41–42; impact 120; “new cold war” 3
paradigm 4 New Deal 59–60; “Build Back Better”
Marxism-developmentalism 123 (comparison) 68
Marxist dialectical/historical materialism, “New Normal” (Xi analysis) 102, 103
basis 103 “New Silk Road Initiative” (US
Marx, Karl 42; revolution theory, Lenin economic statecraft) 118
development 39 New Transatlantic Agenda (NTA) 74
material capital, impact 35 Next Generation EU (NGEU) program 85
McKinley, William (war declaration) 55 Ninety-Five Theses (Luther) 20
Mearsheimer, John 15, 23 Nixon Shock 65, 91
Meiji Restoration, impact 39 non-capitalist spheres, competition 38–39
Memoirs (Kennan) 64 nonmilitary civilian power, mobilization 5
mental capital, impact 35 normative power, mobilization 5
mercantilism 28; approach 115; North American Free Trade
competition, increase 123; Agreement (NAFTA) 74;
economic statecraft, reference establishment 66–67,
9; elements 29, 33; liberalism, 72; renegotiation 122;
pendulum 71–75; medieval renegotiation, Trump
feudal system, contrast 5; demand 70
paradigm 4 North Atlantic Treaty Organization
mercantilist policies, elimination 37 (NATO): establishment 64;
mercantilist statecraft, implementation 35 strengthening 68
Merkel, Angela (isolation) 93–94 North, Douglas 34
Mexican-American War 51 North Sea, war zone declaration 4
middle-income trap 103 Nye, Joseph 69, 81
 Index 135

Obama, Barack 67–68; global economic strategy, reinvention 5;

crisis, management 69 transformation 2; transformation,
October Revolution 41 smoothness/efciency 5–6;
oil embargo, impact 65 two-way street 11; wealth,
Okano-Heijmans, Maaike 12, 80 transformation 4
Open Door policy 54–55 pre-establishment national treatment
open economic world, dictatorship (China experimentation) 104
cooperation (refusal) 64 Principles of Economics (Marshall) 9,
Open Strategic Autonomy 86 10–11, 24
Opium War (1840s) 105 Proclamation of Neutrality 49–50
Organization of American States (OAS), production, powers 34
creation 56 productive power, theory 20–21
other great powers, rise (context) 67–71 prosperity, element 33
protective duties, support 21
Panama (rebellion), Roosevelt protective tarifs, introduction 35
(assistance) 55 Putnam, Robert 12
Pan American Health Organization,
creation 56 Qing Empire, Treaty of Wangxia signing 52
Pan American Institute of Geography Qixuan, Huang 23
and History, creation 56
“paradox of power” (Nye) 81–82 Reaganomics, impact 66, 103
Paris Peace Conference (1919) 10, 57–59 Reciprocal Trade Agreements Act
Partnership and Cooperation Agreement (RTAA) 60
(PCA) negotiations 87 reciprocity 95–96
party linkage 84 Recovery and Resilience Facility 79
Paulson, Henry 109 Reformation 20
Pax Americana, establishment 60 “Reforms of Wang Anshi” 22
Pearl Harbor, attack 39, 57 Regional Comprehensive Economic
People’s Republic of China (PRC), Partnership (RCEP): economic
founding (anniversary) 116 liberalization agenda 107;
Perry Expedition 52 negotiations 99, 103
Petty, William 22 Reinhardt, Carmen 92
Phase One Trade Agreement (2020) 118 Renaissance bankers, loans 35
plunder, wealth production 19–20 Report of the 19th CPC Congress
policy, framing/execution (nationalistic (2017) 106
terms) 29 resource, defnition 15
political foreign policy, pursuit 33 review-negotiate-retaliate process, EU
political-strategic power, decline development 88
(Europe) 93–94 Rise and Fall of Great Powers, The
populism: approach 115; rise 92 (Kennedy) 16
Portugal, wealth strategy (absence) 33 Robinson, Ronald 38
postwar international order, United State Rockefeller, John D. 53
(impact) 64 Rogof, Kenneth 92
postwar international system, conception 60 Roosevelt Corollary 55–56, 59–60
pound sterling, credit base (erosion) 61 Roosevelt, Franklin D. 72; Churchill
power: defnitions 15; distance 50; meeting 62; “four policemen”
European power, foundation idea 60–61; isolationist policy 60
(1950–1967) 90; European Roosevelt, Theodore 55–56
power, upward spiral Royal Institute for International
(1967–2008) 90–92; hard power, Relations (EGMONT) 79
development 86; paradox 81–82; rule of law 95
pursuit, wealth (usage) 17; Russian Empire, military confict 40
strategy, manifestation 38; Russian Revolution 39
136 Index

Russia-Ukraine war (Russo-Ukrainian Staatswissenschaft (state economics) 24

War) 3, 14, 68, 80–81, 116; stagfation, problem 21
energy crisis 125 Stalin, Josef: “four policemen” idea
Russo-Japanese War 56 (Roosevelt) 60–61
Rutte, Mark 86 Stalin, Josef (public ownership system) 41
Ryan, Paul 72–73 Standard Oil Company 53
state: actual power 15–16; economics
Sanders, Bernie 72–74 18; role 18
Sanders, William Stephen 9–11 state banks, reengineering 40
scarcity, term (usage) 18 state-centered realism 6, 53
Schäuble, Wolfgang 93 state-centrism, economic statecraft
Schmidt, Helmut 19, 66 (relationship) 81
Scholz, Olaf 115–116 statecraft: defnition 13; term, usage 14
Schuman, Robert 90 state economics (Staatswissenschaft) 24
Schumpeter, Joseph 44 state intervention policies, elimination 37
Scientifc Outlook on Development, strategic adventurism, impact 6–7, 39
formulation 109 Strategic and Economic Dialogue
Second Empire 19 (S&ED) 69
Second Great Contraction 92 strategic autonomy 119
Second War of Independence (1812–1815) Strategic Economic Dialogue 68
47, 50–52 strategic economy, advocacy 17
Second World War 57 strategic indiscretions 2
“Seeking Common Prosperity” (Xi Jinping) strategic overdraft 2, 6–7
120 strategic partnerships, usage 84
Seven Years’ War 34 strategy, plan of action 23
severe acute respiratory syndrome structural foreign policy 84
(SARS) epidemic (2003) 109 Sullivan, Jake 118–119
Shotwell, James T. summit system, usage 84
Silent Generation, characteristics 75 super-sovereign international reserve
Silk Road Economic Belt 101 currency proposal (Zhou
Single European Act, EC adoption 91–92 Xiaochuan) 100
“smart power,” usage 69 Supply Chain Due Diligence Act 87
Smith, Adam 9, 20–22, 24, 36–37 supranationalism, shift 91
Smoot-Hawley Tarif Act 59, 71–72
socialism: primary stage (China) 109; Taft dollar diplomacy 56
setback 42 Tarif Act (1816) 71
socialist market economy system 42 Tehran Conference 60–61
social productive forces, liberation/ Thatcher, Margaret 21
development (China) 109 theory of national productive powers 35
Song Dynasty, demise 22 theory of productive power 20–21
Southern Common Market (Mercosur) 74 Third Plenary Session of the 18th
Sovereign Europe, promotion 86 Central Committee of the
Soviet people/regime, dialectical Communist Party of China
relationship 64 (2013) 99
Soviet Union: containment 64; Third World, independence 65
disintegration 42 Thucydides trap 103
Spain/Portugal, religious/territorial Tiananmen Incident (1989) 100
disputes 34 tianxia system 120
Spain, religious fanaticism 33 total factor productivity (TFP)
Spanish-American War 54–55 growth 54
Spanish Habsburgs, Catholic rule 36 Trade Act (1974) 65
“Spirit of the Times, The” (change) trade balance 29, 33
114–116 Trade Expansion Act (1962) 65
 Index 137

trade policies: instruments, United Nations Human Rights Council

weaponization 13; usage 82 (OHCHR) 69
trade war model, Biden rejection 118 United States of America: bailout
Tragedy of Great Power Politics, The programs 67; domestic politics,
(Mearsheimer) 16, 23 dilemma 74–75; economic
Transatlantic Trade and Investment crisis 59; economic diplomacy,
Partnership (TTIP): geopolitical worsening 75; economic
strategic signifcance 82–83; growth 53–54; economic
negotiations 94 leverage, squandering (Trump
Transatlantic Trade and Investment administration) 75; economic
Partnership (TTIP) negotiation 82; nationalism policy, adoption 59;
Trump cessation 70 expansionism 52; foreign policy,
transformation: strategy 23; term, usage 16 indecision 58–59; foreign trade
Trans-Pacifc Partnership (TPP) 73, 118; agreements 51–52; founding
Obama advocacy 72–73; Trump 47, 49–51; hegemony, decline
withdrawal 70 65–66; infancy 49; international
Treatise of Taxes and Contributions, A prestige 50; intra-paradigm 123;
(Petty) 22 isolationist policy 60; national
Treaty of Amsterdam 83 bankruptcy, sense 53; national
Treaty of Rome 90 power, depletion 65; non-
Treaty of Versailles 10; Congressional intervention 51; power, decline
rejection 58; joining, Senate 91; security, undermining 119;
refusal 57–58 supremacy, decline (absence)
Treaty of Wangxia 52 7; tarif acts 52; technologies,
Treaty on European Union (Maastricht undermining 118; War of
Treaty) 92 Independence 34; wealth-power
Trifn paradox, overcoming (inability) 65 system/strategies, competition 123
Tripartite Monetary Agreement 60 United States of America economic
Truman Doctrine 44, 64 statecraft 44; British hegemony
Truman, Harry S. 29 (1775–1898) context 47–53;
Trump Doctrine, deglobalization efort 73 evolution 45–47; G7,
Trump, Donald: “America First” relationship 66; Obama control
doctrine 69; antitrade position 69; other great powers, rise
73; broad-based economic (context) 67–71; paradigm shift
statecraft 67; bullying 71–75; Trump control 69–71
negotiating style, contrast United States of America hegemony:
68; economic nationalism 69; decline (1967/73–2001/08)
economic statecraft, criticism 65–67; dilemma 74; economic
74–75; economic warfare statecraft, context 53–67;
105; exitism 69; global trade hesitance 57–59; maturation
war initiation 29; negative 63–64; rise 54–56; triumph 57,
economic statecraft 117; trade 59–63
realignment/renegotiations Universal Postal Union 69
demands 68; trade war 105 US-Canada FTA, conclusion 72
Truth of the European Debt Crisis, The US-China bilateral trade relations,
(Hanbing) 93 damage 105
tsarist Russia, economic statecraft 40 US-China BIT 103
Tsipras, Alexis 93 US-China economic interests,
two-level game theory 12 rebalancing 68
US-China Strategic Economic Dialogue
UNESCO, Trump withdrawal 69 (SED) (S&ED) 69, 105
Union of Utrecht, formation 36 US-dollar hegemony cessation (Zhou
United Kingdom, mercantilism 34–35 Xiaochuan) 110
138 Index

US-Dominican Republic-Central White Plan 61–62

America FTA (CAFTA-DR) 73 Wilson, Woodrow: idealism 57; tarif
US-European Transatlantic Trade and policy 10
Investment Partnership (TTIP) 73 Woolcock, Stephen 12
U.S.-Mexico-Canada Agreement World Bank membership, Soviet Union
(USMCA) 122 refusal 64
US-Middle East FTA (MEFTA) 73 World Economic Forum 85–86
US-Southern African Customs Union World Health Organization 56
(SACU) FTA 73 World in Depression (Kindleberger) 59
World Trade Organization (WTO):
Venice, colonial adventure 33 China accession 67; creation
Vietnam War, impact 65 72; reform, absence (Chinese
Viner, Jacob 18 frustration) 100–101; trade
von der Leyen, Ursula 29, 80, 85, negotiations, Doha round
116, 119 (launch) 67

War of Independence (USA) 34 Xi Jinping 41; “Changes Unseen in

war, wealth production 19–20 a Century” 115; control 99;
Washington Consensus 92 development-oriented economic
Washington, George 47, 49 statecraft 106; economic
Waterloo, Napoleon defeat 49–50 liberalization agenda 107, 118;
wealth: extraction 21–22; maximization 38; economic statecraft, identifcation
production 19–21; production, (2012–2017) 100–104;
power 21; pursuit, power (usage) economic statecraft, identifcation
17; strategy, reinvention 5; (2017–2022) 104–108;
transformation 2; transformation, “Eradiation of Extreme Poverty”
smoothness/efciency 5–6; two- 120; “Major-Country Diplomacy
way street 11 with Chinese Characteristics” 99,
Wealth of Nations, The (Smith) 9, 22, 24, 108; “New Normal” analysis 103;
36–37 non-cyclical challenges, defning
wealth-power dilemma 39 102–103; power 101; Report of the
wealth-power paradox 38 19th CPC Congress (2017) 106;
wealth/power strategies actors, risks, warning 105–106; “Seeking
dichotomy 37 Common Prosperity” 120
wealth-power strategy (WPS) 28–29,
124; sustainability 6–7 Yangtze, blocking 38
wealth-power system 23 Yinhong, Shi 17
wealth-power-system 23 Yun, Chen 22
wealth-power transformation 19, 23
wealth-to-power strategy 67–68 Zakaria, Fareed 5–6, 52–53, 55
Weber, Max 15 Zeitenwende 115–116
Welles, Sumner 62 zeitgeist (spirit of the times) 108
Wen Jiabao (large-scale economic Zhang Qian, expedition 120
stimulus package) 103 Zheng He (voyages) 120
Wenmu, Zhang 17 Zhou Xiaochuan: super-sovereign
Western hegemonies, economic statecraft international reserve currency
30–32 proposal 100; US-dollar
Western Hemisphere countries, external hegemony cessation 110
invasion (avoidance) 56 Zicheng, Li 22