Containment – The Ideal US Strategy for China

Background

Though it is commonly believed that China is on a trajectory to cross the US both economically
and in terms of military power, that is not a certainty. China grew in the last two decades by
repressing wages and interest rates, but such a pattern of growth is not possible to maintain
perpetually. China is also in a low end space of the global market. China has some presence in
apparently high-end consumer electronics market. But, data reveals that China is stuck in a low-
to-middle end of these industries. China is likely to have a lost decade or two akin to Japan did in
the ‘90s and the US did in the ‘30s. It’s true that the Chinese have done military build- up in the
Pacific, and have a history of proliferation to rogue and/or failing states such as North Korea,
Iran and Pakistan. China has a reckless track record of dumping in WTO regime; they have an
atrocious record of human rights repression in Tibet and Xinjiang. China also has been
threatening its neighbors in the South China Sea and the East China Sea. It has drawn the “Nine
Dashed Line” – which is, incidentally, close to China’s First Island Chain. China’s military
doctrine and power projection is directed at the USA. China probably is trying to raise the cost
for the US to stay in the Pacific region; China’s needlessly provocative postures in the ASEAN
region could be considered, in a sense, a game of chicken. China’s strategists would have
calculated that the war weary US public would not like to be involved in a conflict with a large
country like China. However, the US can grow an alliance modeled on the erstwhile SEATO.
The US can also implement new operational doctrines such as the Air Sea Battle. The prospect
of conflict would dwindle if China senses that the US has an insurmountable lead in both
conventional and nuclear arsenals. With the expected trouble in Chinese economy, the US should
adopt a strategy of containment. The US should build up the military presence and an alliance in
the Pacific. The US has been diffident about raising China’s proliferation to rogue states, the
sanctions have been directed at individual Chinese companies. Neither have the US raised the
Chinese occupation of Tibet in any meaningful manner. This needlessly accommodating posture
should change. The US should raise China’s record of proliferation, dumping and human rights
violations in international forum to put sustained pressure on China. The US should encourage
greater federalism and political reforms over time.

Proliferation

The Chinese have proliferated to rogue regimes in Pakistan, Iran and North Korea. A US
Congressional Research Service report explains the gravity (1):
 1. On December 3, 2012, the China Nuclear Industry Huaxing Construction Company of
Nanjing pled guilty in a U.S. criminal case for illegal exports of high-performance epoxy
coatings from the United States to the Chashma-2 reactor (1). The Section 721 Report for
2011 continued to report that PRC entities were associated with Pakistan’s nuclear
programs (1).
2. A Chinese company reportedly delivered 12 shipments of missile components to
Pakistan’s Shaheen-1 SRBM and Shaheen-2 MRBM programs (1).
3. Experts from China worked at a uranium mine at Saghand and a centrifuge facility (for
uranium enrichment) near Isfahan in Iran (1).
4. On April 13, 2012, a military parade two days later in Pyongyang showed an apparent
KN-08 ICBM on a 16-wheel transport-erector- launcher (TEL) (1). Nonetheless, the
suspected WS51200 TEL in the DPRK was produced as a 122-ton vehicle by the Hubei
Sanjiang Space Wanshan Special Vehicle Company, which is a part of the China Space
Sanjiang Group under the China Aerospace Science and Industry Corporation (CASIC)
(1).

It is important to recognize that China is a threat to the global non-proliferation regime and the
global order. A nuclear Iran poses a grave threat to the US allies in the Middle East. A nuclear
North Korea is a low cost way for China to keep the US allies such as South Korea in check. As
the US unwinds its engagement in Af-Pak, the US dependency on Pakistan goes down. It should
be possible to raise China’s proliferation activities in the bilateral dialogues with China and also
keep a consistent pressure on China by aggressive public diplomacy on China’s proliferation
activities.

Air Sea Battle

China has disputes with Vietnam over the Spratly Islands since it took over the Mischief Reef
in1995 and installed some garrisons there (1). China occupied Scarborough Shoals after a stand-
off with the Philippines in 2012 (1). In 2014, drilling by a Chinese oil firm in waters 120 nautical
miles (222km) from the Vietnamese coast triggered anti-Chinese rallies in Vietnam. China has
problems with Japan over the Senkaku/Diaoyu islands since 2010 (1).

A recent book by Robert Haddick refers to China’s tactics as “salami-slicing” (1). It is “the slow
accumulation of small changes, none of which in isolation amounts to a casus belli, but which
can add up over time to a significant strategic change” (1).

Chinese defense literature mentions ASCEL – Active Strategic Counterattacks on Exterior Lines,
first mentioned by Major General Peng Guangjian, a theorist at the Academy of Military
Sciences, in 2001 (3). ASCEL recommends China should strike first, strike deep and hit hard
against an approaching enemy (3). There is a strong probability that China’s increasingly
aggressive posture on the South China Sea and the East China Sea is to increase the “cost” of any
conflict in the region. The Chinese planners probably are aware that due to the engagement in
Iraq, the US leadership may not find public support to intervene in a conflict in the Pacific.

In his recent Beyond Air Sea Battle, Professor Aaron L. Friedberg describes the outlines of a
doctrine that could check China’s dangerous ambitions. .

The US should apply a sequence of steps that compels China to periodically makes its existing
systems obsolete and China is forces to replace them with an ever changing set of systems at
progressively higher expense (3). Signals should be given to China that the US is ok if the
Chinese capabilities are purely defensive and has no design to upset the existing balance of
power in Asia (3) . The US also needs to reassure its allies such as Japan, South Korea and the
Philippines that the US would not abandon the region in any event, otherwise there may be
another costly arms race and the US allies in the region may be forces to attain nuclear weapons
to deter China (3).

China’s defense capabilities increased by an average of 11% in the 2002-11 period in real terms
(3). As of now Military’s share of GDP has not increased, as China spends less than 2% of its
output on defense (3).

The American planners should have a strategy to maintain “crisis stability” (3). Although the US
should prefer a liberal democracy coming to China over time, this should not be the US public
stance at this point (3). The Chinese planners should not think they can attain a quick victory,
but they also should not feel threatened enough to launch a first strike fearing a “use it or lose it”
situation about their military capability (3). The Chinese planners should not think that the US
would attempt a regime change – in such a case an authoritarian regime may be more prone to a
“use it or lose it” posture about their military capabilities (3). So, the US should not attempt a
maximalist aim such as overthrow or unconditional surrender. Thus the US could frame its
objectives in a conflict in defensive terms – i) Fending off a Chinese attack, ii) Restoring the
status quo ante and iii) bringing hostilities to an end at the earliest opportunity and, iv) if the
status quo ante cannot be attained at the earliest, apply enough military and economic pains on
China to bring the hostilities to an end in terms that are favorable to the US (3).

Though framing should not be too aggressive, the US should none the less strive to maintain
superiority in both conventional and nuclear weapons (2). Otherwise China will keep playing a
game of chickens to ease the US off the Pacific. If the US gives in to the game of chickens too
easily, it may reduce the risk of war, but it will also lose vital strategic spheres of influence in the
Pacific which has significant impact on the world order. It has been estimated that the cost of
new operational doctrines such as Air-Sea-Battle come to about 4.6% of the annual DoD budget
in 2014 (3) , it is not an unbearable cost.
As China’s economic growth slows down, a topic discussed in details in the next section, the key
is to push China to spend more and more on modernizing its navy. China has choke points in
Malacca Strait, Sunda Strait, Sumba Strait and Lombok Strait.

The vast majority of China’s energy imports come from the Middle East and Africa (78% in
2011), and, at present, most transit through the Malacca Strait (80% in 2012) (3). Potentially,
Malacca Strait could be blockaded (3).

Experts estimate that a distant blockade would require a minimum of 16 surface vessels, four
replenishment ships and an unspecified number of additional units to relieve the initial force, as
well as other ships, submarines and aircraft to provide protection against attempted attacks by
Chinese forces (6). Sean Mirski concludes that a total cut-off of oil imports would cause a 12.5%
contraction in China’s GDP (3).

However, it’d take time for such a blockade to really bite Chinese economy. The energy
blockade is a distant blockade – it’s slightly far from Chinese coast. To really hurt China, the
battle has to be taken close to Chinese coast – to the South China Sea, close to China’s first
island chain. Friedberg explains how. The distant blockade, in response to Chinese aggression,
may not be adequate to defend the US allies and protect their territory. Thus it’s important to
attain capability to block Chinese access to South China Sea (5). Collins and Murray have
estimated that only 16 ships at a time would be required to close off the main passages into the
South China Sea is low (3). Even slower varieties such as the much maligned Littoral Combat
Ships (LCS) may be adequate (3). The objective is to enforce ‘a maritime no-man’s-land within
the first island chain’ (3). China would lose access to offshore supplies of oil and gas.

Imports and exports account for over 50% of China’s GDP (3). 85% of China’s international
trade moves by sea (3). Thus, a blockade imposed on the South China Sea would hurt Chinese
economy.

An aggressive Anti-Submarine Warfare (ASW) campaign should be combined with anti-ship

cruise missiles and undersea monitoring equipment on small islands in the Ryukyus, in the
Philippines archipelago and along the coast of South Korea (3). Such a step would also make it
very difficult for PLAN surface ships or submarines to break free from the first island chain (3).
Chinese movement into the blue waters of the Western Pacific would be hamstrung.

The threat of a blockade should hang in the manner of a Damocles’ sword over the Chinese.
Actual threats should be avoided; they are not required also. American planners could quietly
play on Chinese anxieties about energy security. The US should conduct war games prominently
featuring interdiction scenarios, and joint training exercises with allies. The US should
implement forward deployment of ships, aircraft and possibly missiles.
Chinese Economy

Chinese economy is not as strong as is commonly claimed. Two books explain that the Chinese
economy has feet of clay. One is Professor Michael Pettis’ Avoiding the Fall – it explains the
wage repression, artificial lowering of household consumption and the wasteful investments
made by the Chinese state. Parts of Pettis’ work is also supported by the World Bank’s oft
quoted China 2030 report. The second book – The Rising Tide- is by Professor Robert
Lawrence. Lawrence examines many exaggerated about China’s growth in high-value categories
such as semiconductors. He finds no evidence that China has actually moved up the value chain.
The main arguments in the two books are being presented here (5) :

Chinese economy is not as strong as is commonly claimed; China has excessive household
savings, reduced household consumption, investments in infrastructures that may not deliver
economic returns, and, industries getting stuck in the low end of the value chain (4). Each of
these problems is being analyzed below (6):

Repression of household consumption: In China, in 1980s, household consumption was 50-52%

of the GDP (6). By the end of the nineties the figure was at 46%, and by 2005, household
consumption in China had declined to around 40 percent of GDP (6). In 2011, the last year for
which figures are available, the household consumption is at 34-35% of GDP (6). As the
household consumption went down savings went up - the savings started to rise as a percentage
of disposable income from 1992 to 1998, stabilized at around 24-25%, and is now at 26% (6).

Household savings bankrolled the investments: The household savings earned low interests in
the banks. Thus, industry obtained cheap credit. In the last decade nominal lending rates have
been fixed at 6% while the economy grew by 14 to 16% (6). The lending rate has been 4-8%
below the adjusted GDP growth rates, and household deposits at anywhere from 80-100% of
GDP (6). The minimum spread between the deposit rate and the lending rate is set very high,
guaranteeing the banks a steady return (6). This transfer can be assumed to be at 1% of GDP.
Investment was around 23% of GDP in 1990, rose to 31% in 1992-94, stabilized at that level,
and then climbing again in 1998 to reach around 50% in 2011 (6). If the imported commodities
are added to investment, the figure would be higher (6).

Wage Repression: Wage growth has been depressed – in the last decade, worker productivity has
trebled, but the wages have just doubled (6). Lagging wage growth is a wealth transfer from
workers to employers (6). By subsidizing the employers at the expense of workers, the
competitiveness of businesses has been increased, but consumption has been suppressed (6).

Extent of transfer from households: Lagging wage growth, undervalued currency, and repressed
interest rates together effectively tax the households and pass the benefit to producers (6).
From 2000 to 2010, the household consumption, dropped from 46 percent of GDP to 34 percent
of GDP (6). An IMF study estimates that households and small enterprises have been forced to
subsidize growth at a cost to them that amounts to 4 percent of GDP (6). With a household
income that is only 50 percent of GDP, a transfer every year of 4 percent of GDP, requires
massive growth in household income just to keep pace with GDP (6).

The total transfer from households to State-owned-enterprises (SOEs), infrastructure investors

and other favored investors amounts to anywhere between 3-8% of GDP (6). Thus, there is a
hidden tax of 4-9% of GDP on the households (6). The IMF estimates the “tax” at 4% of GDP.
This low cost of capital is a factor in China’s seemingly capital intensive, rather than labor
intensive model (6).

Credits and Investments: As the investments grow the return eventually has to slow down (6).
Chinese firms still show profit, but that’s due to low interest rates given to depositors (6). As
much as 20-40% of the loans are forced into the depositors in the form of low interests (6). The
credit to industries has gone up - the chairman of Bank of China said in 2012 that China, which
accounted for 11-12% of global economy accounted for 40-50 % of the total money creation (6).

China’s economic data has seen faster credit growth. 2012 was the fourth year in a row that net
new credit will exceed a third of GDP (6). However, eventually deposits in banks would not
grow fast enough to cover previous losses as well as fund new loans.

Low end of the value chain: An analysis of the Chinese exports at disaggregated 6-digit level
North American Industry Classification System (NAICS) was done in a study: it revealed the
unit values of the Chinese products are lower than the US or OECD exports (7). For a
commercial 30 GB ipod, the value added by the Chinese factories was $4 out of a total value of
$150 (7).

The US could implement a few policy actions to contain China in economic sphere:

1. The US could look at policies that drive up savings - there have been policy suggestions
such the Bradford X tax which should improve savings in the US (2). As the savings
increase in the US, that is a low cost way to keep China in check.

2. The US should complete the Trans Pacific Partnership (TPP) at a priority that would help
other countries such as Vietnam and Philippines to become competitors to China. The US
can also include India in TPP,that would create an alternative balance of power.
3. China entered the World Trade Organization (WTO) in 2001. Between 2001 and 2009,
the US initiated 76 anti-dumping (AD) cases against China and imposed AD measures in
59 of those cases (8). China has been the biggest target of US anti-dumping actions (8).
 Thus, China is not a good citizen of the global trade order. It’s important for the US to
expedite TPP and prepare alternatives to China as a supplier in the global supply chain.

Water

In a recent book, From Arms Racing to “Dam Racing” in Asia, Dr. Brahma Chellaney has written on
Chinese threat to its downstream neighbors.

A 2012 U.S. intelligence report says “the use of water as a weapon will become more common during the
next 10 years with more powerful upstream nations impeding or cutting off downstream flow” (10)

China is now involved in water disputes with most of its neighbors, from Russia and India to even a weak
client-state like North Korea (10). With North Korea China has yet to settle issues relating to Lake
Chonji and two border rivers, the Yalu and the Tumen (10).

In November 2011 Bhutan hosted a summit meeting of Himalayan countries in an effort to draft a
collective ten-year blueprint to address the multiple threats from climate change, particularly the threat
from thawing of Himalayan glaciers (10). India, Bangladesh, and Nepal, many aid agencies, donors,
NGOs, and environmentalists attended the meeting (10). China, Pakistan, and Myanmar did not attend
(10).

China presses for integration in the Mekong region in trade, investment, communication, transportation,
and energy (10). However, China has stated its desire to convert “water into white gold” by building
dams and exporting hydroelectricity (10).

The Intergovernmental Panel on Climate Change (IPCC) has identified the Mekong Delta as one of the
world’s three “hot spots,” vulnerable to climate change and major shifts in hydrology and water quality.
Nearly half of Vietnam’s rice is grown in Mekong Delta.

Mekong is the world’s 12th-longest river — it passes through Tibetan Plateau into Laos, Thailand,
Cambodia, and Vietnam, besides forming part of Myanmar’s borders with China and Laos, and
Thailand’s frontier with Laos. Vietnam, Laos, Cambodia, and Thailand, and the United States have
launched the Lower Mekong Initiative, or LMI. LMI faces a roadblock in since there is no
institutionalized arrangements involving all the Mekong Basin states, particularly China. The Mekong
River Commission, which was set up by Laos, Cambodia, Thailand, and Vietnam through a 1995 treaty
backed by multinational aid donors.

China rejects the very concept of water sharing. China does not even share statistics on the flows of
transnational rivers. When pressed for data, China mischievously flaunts the accords it has signed on
sharing flow statistics with co-riparian states. However, these agreements are commercial accords to sell
hydrological data. Upstream countries provide such data free to downriver states. China closely guards
data on water resources and river flows. Since it’s only possible to manage what can be measured -
dependable data is crucial for efficient resource allocation and utilization of river water. Reliable data can
serve as the building blocks for basin-level collaboration.
The UN Watercourses Convention, as it is called, lays out a set of principles that should be addressed
when negotiating international water management agreements. Such conventions require 35 signatories to
ratify and help the convention come into force. The 35th ratification was obtained on 19 May 2014.
Accordingly, the convention entered into force on 17 August 2014, 90 days after that 35th ratification was
deposited. China has not ratified the convention.

Such conventions give rise to norms. The definition of a ‘norm’: “a standard of appropriate behavior for
actors with a given identity” (1). Now, China is certainly not a respectable actor in the global order.
Rogue states e.g., Pakistan, and North Korea find a benefactor in China. However, constant diplomatic
pressure can be applied on China by periodically passing resolutions on watercourses in international
bodies and isolating China. Public diplomacy, measured but clinically ruthless, should be applied on
China to check its riparian aggression.

Human Rights Abuse and Cultural Genocide

In 2006, “Audencia Nacional”, the highest instance of Spanish Penal System remarked that the
Chinese genocide in Tibet satisfied the characteristic set out in the Article 2 of the Convention on
the Prevention and Punishment of the Crime of Genocide of 1948 . In a High-level Plenary
Meeting of the General Assembly (World Summit) in 2005, heads of state and government
agreed to a Responsibility to Protect (RtoP) populations from genocide, war crimes, crimes
against humanity and ethnic cleansing (5). This commitment is included in paragraphs 138 and
139 of the 2005 World Summit Outcome Document (WSOD) (5) . The US should raise the
systemic violations of human rights in Tibet and Xinjiang at the UN using the RtoP norms. The
US and its allies can also raise the issue regarding RtoP in regional forum such as ASEAN to
maintain a sustained pressure on China.

Conclusion

China is not a law abiding member of the global proliferation or trade regime; it is “salami-
slicing” the vital interests of its neighbors in the Pacific and putting the US allies at risk. It
violates the global trade regime also. It has been accused of genocide in Tibet. However, Chinese
economy is not so strong. The US should have “containment” as a strategy against China. The
US should maintain overwhelming superiority over China in both conventional and nuclear
weapons. As China faces problems with a likely lost decade or two, the US should help other
countries such as Vietnam and Philippines move up the economic ladder with TPP. There should
be sustained pressure on China for its proliferation activities and genocide in Tibet. The US
should not launch any risky military operation against China, but should maintain sustained
pressure and wait for the internal contradictions to bring in change in China.
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