URC

Re-balancing or Counter-balancing?
Assessing America's Response to China's Rise through Bilateral Investment Treaties

Esther Tran-Le
 New York University

Abstract

The rise of China as an economic powerhouse with an aggressive leadership challenges America's status as world superpower. In an international system increasingly dominated by economic relations, scholars have determined that specific international trade measures support strategic policy objectives.

My research addresses whether the United States government seeks to counterbalance China's growing economic influence through bilateral investment treaties (BITs) in a certain set of countries. Using a logit regression, I show that Washington is trailing China and signing BITs with the same countries. However, running the same logit regression for Canada and Italy, I show that they too are signing BITs with the same countries as China. Because following China's BITs is not unique to the United States, there is not enough evidence to conclude that the American government is using BITs as a strategic tool to counterbalance Beijing. Rather, the United States, Canada, Italy, and China are engaging in normal, competitive trade.

My thesis provides empirical analysis of the current U.S.-China strategic and economic relationship. It sheds light on the rhetoric exchanged between the American and Chinese leaderships, hopefully alleviating concerns of Chinese scholars and policy-makers that Washington is seeking to prevent China's rise.

Introduction

With the largest economy and most powerful army in the world, the United States has dominated the international political and economic system since the end of World War II. But for the last 40 years, China has developed into a major power. Today, China is second to the United States in economic size and even exceeds the United States as the world's largest trading partner (Shambaugh, 2013). In terms of economic power, it is fair to say that China is a primary competitor for the United States. China's rise has engendered uncertainty and concern in Washington – uncertainty for how Beijing will use its economic power and concern for world order stability (Hsiung, 2001). 

These developments raise questions about what foreign policy the American government should adopt towards the Chinese. As both Chinese and American governments gage how the other will react, scholars and politicians on both sides have urged for a wide range of foreign policies. Currently, there is the notion that the American government has sought to contain China's influence by hindering its economic and strategic rise. Beyond the question of what foreign policy the United States government should assume when it deals with the Chinese government, it seems most suitable to answer the more pressing question of whether or not the United States government has already embarked on a policy of economic counterbalancing against the Chinese.

American foreign policy towards China has been ambiguous. Nonetheless, three pillars hold the Sino-American relationship together, according to Professor James Hsiung (Hsiung, 2001): (a) the Shanghai Communiqué of 1972, which paved the way for normalization of Sino-American relations, (b) the 2nd Communiqué of 1979, when the United States officially normalized relations with China and recognized the Communist Chinese Party (CCP) as the country's sole, legitimate government, and finally (c) the 1982 joint communiqué, which demanded that the United States government stop selling weapons to Taiwan. These three pillars have framed American foreign policy towards China, allowing bilateral relations to fluctuate between aggravated and peaceful but never severing the tie.

Today, China has become a great power in the international system. The United States perceives it as a substantial strategic and economic competitor. American scholars and policy-makers are engaged in an on-going debate on whether or not the United States' political and economic strategies towards China should deviate from the three fundamental pillars. In light of the Obama administration's "pivot to Asia," will Sino-American government relations change since President Nixon and former Secretary of State Henry Kissinger reopened relations with Chinese leaders? Or, will they remain constant, amidst the rhetoric of the United States reasserting its position as a regional Pacific power?

Economic relations dominate world politics as money flows have become more and more globalized. Nations are becoming increasingly economically interdependent, thus making the world economy grounds for strategic ploys. American scholars and politicians are also concerned that as China's economy becomes more important in the international economic system, Chinese leaders will force its influence in international relations (Shambaugh, 2013). There is fear that the Chinese government could use its economy to build up an army more powerful than the United States army.

The research put forth in this thesis determines whether the American government is attempting to counterbalance China's economic rise by examining and analyzing if United States bilateral investment treaties (BITs) follow Chinese ones. 

My results show that although there is a significant relationship between the signature of a Chinese BIT and an American BIT, the United States is in fact not economically counterbalancing China. Using a robustness test, I determined that it is not only the United States that is following China's BIT signature lead but also non-strategic countries such as Canada and Italy.

These results contradict the common point of view that the United States is indeed pursuing a hawkish foreign economic policy against China through trade agreements, such as BITs. By answering that the United States is not economically counterbalancing China, I hope to assuage fears of a renewed Cold War, zero-sum game between the United States and China. I also provide empirical evidence for debate on how foreign investment can be used as foreign policy tools.

The first section of this paper is an extensive literature review, covering the Sino-American relationship, the importance of economic relations in the new world order, China's rise to power, and how trade, specifically BITs, is used in international politics. In the second section, I explain my research design model, which includes my theory and descriptions of my independent variable, dependent variable, controls, and sources of data. I will describe my results in the third section and proceed to discuss their impact in the fourth section. Finally, I will discuss the meaning and impact of these results in a fourth section, labeled "Discussion," and end the thesis with a summary of research in a conclusive fifth section.

Literature Review

American Foreign Policy Towards China

Historically, the United States government's policy towards China has come off as sweet-and-sour. The literature addressing American foreign policy towards China expresses the ambiguous continuum of policies that range between containment and engagement.

Most relevant to this thesis is American foreign policy after the Chinese Communist Party (CCP) took over leadership of China's government in 1949. The CCP takeover ushered in twenty years of antagonistic relations between the United States and China (McDougall, 2007), during which the American government followed a rigorous policy of containment towards China. Scholars, like James Peck, argue that the United States went beyond containment, conducting policy that forcefully isolated China: "American hostility was driven by a fear of China's attaining a great-power status capable of allowing it to challenge an Asian system shaped by America" (Peck, 2006). In addition, Washington feared the Chinese for their revolutionary, nationalist fervor: "Chinese nationalism was now viewed as a revolutionary blend of communism and radical nationalism that required an almost pathological fanaticism and hatred for the United States and the Western world" (Peck, 2006). Washington saw China as a 'double-threat': (a) a leader of revolutionary struggle for the recently decolonized, independent countries and (b) a third great-power rival allied with the Soviet Union.

Containment became policy when the Truman administration refused to recognize the People's Republic of China as sovereign, turning instead to the Republic of China, also known as Taiwan. Washington perceived China to be a "Soviet satellite" ruled by an illegitimate government (Hsiung, 2001). Before the Korean War, Washington's primary containment strategy was withholding China's entry to the United Nations. Once the Korean War broke out, Washington's containment avenues broadened to include Taiwan recognition, an economic embargo on China supported by increased Japanese trade, and placement of the 7th fleet in the Taiwan Strait (Peck, 2006). Historians, such as Franz Schurmann, explained how the American administration at the time not only needed Chinese revolutionary and communist influence contained but all of China isolated in order to construct an effective American, capitalist system (Schurmann, 1974). Isolating China took a military, economic, and ideological form, leaving China shunned by the international community, insulated from regional neighbors, and constantly threatened by American intervention. Although Washington dropped the isolation aspect of containment by the 1960s, American leaders still believed in reigning in Beijing's influence on its neighbors. 

It was not until the early 1970s that American and Chinese leaders began to consider reopening Sino-American relations. Former Secretary of State and National Security Advisor, Henry Kissinger, recalled in On China how President Nixon shifted the outlook on China from hostile to neutral, choosing instead to focus on a common enemy – the Soviet Union (Kissinger, 2011):

It was a revolutionary moment in U.S. foreign policy: an American president declared that we had a strategic interest in the survival of a major Communist country with which we had had no meaningful contact for twenty years and against which we had fought a war and engaged in two military confrontations.

The desire for reconciliation was not solely American. In fact, it was Mao Zedong who first addressed the need for re-opening dialogue between the China and the United States (Kissinger, 2011). For Mao, rapprochement was a strategic play. At the time, Sino-Soviet relations were hostile, and it was in China's interest to turn to the Soviet Union's largest enemy – the United States – for potential, future support. Nixon, on the other hand, saw the opportunity to "redefine the American approach to foreign policy and international leadership" (Kissinger, 2011). Thus, both nations believed in a Sino-American rapprochement as a way to obtain their own strategic interests.

In 1972, Nixon carried out the reconciliation when he visited Mao in Beijing and then left China having signed the Shanghai Communiqué of 1972 – the first pillar in what frames present-day American foreign policy towards China (Hsiung, 2011). In signing the 1972 Shanghai Communiqué, Nixon agreed that the United States would abide by the One China Policy, recognizing the People's Republic of China as the only China. However, the United States government did not actively support the One China Policy until the second joint communiqué in 1978, which effectively normalized relations between China and the United States. Normalization required the United States government to recognize the CCP as the sole, legitimate government of China and terminate the mutual security agreement with Taiwan (Hsiung, 2001). The third pillar of America's foreign policy towards China is the 1982 joint communiqué, in which the American leadership at the time agreed to phase out weapons sale to Taiwan. But in retaliation, American congress under the Reagan administration passed the Taiwan Relations Act to salvage the relationship between the United States and Taiwan. The act declared that the United States would continue to sell self-defense weapons to Taiwan on an unofficial basis, allowing interest groups and other parties to maintain trade and cultural ties with Taiwan without formal US government recognition (Hsiung, 2001).

During the 1970s and 1980s, China and the United States were quasi-strategic partners as they sought to counter the Soviet Union (Kissinger, 2011). However, the fall of the Soviet Union altered Sino-American dynamics. Post-Cold War, the United States found itself as the world's superpower, while China was now a major regional power in East Asia (McDougall, 2007). Observing this, Washington took the position that "no one power should dominate East Asia," implying that the United States government would seek to prevent China from becoming a regional hegemon. On the other hand, the Chinese government sought out the opportunities of being a regional leader. McDougall (2007) explained how these new positions pitted the United States and China against each other:

With these different perspectives there was scope for both conflict and cooperation between China and the United States.Conflict would arise if the United States regarded China as essentially a rival to be blocked or contained, or if China viewed the United States as an implacable enemy.

These tensions still exist today as American leaders struggle to make room for China's increasing influence in the world, and Chinese leaders accommodate to their new, even more powerful role at the regional and global levels.

The most recent juncture for Sino-American relations has been in the last twenty years, during which China's economic growth propelled it onto the world stage. American foreign policy towards China under George W. Bush and Barack Obama has wavered between "the competing notions of China as either a 'strategic partner' or a 'strategic competitor'" (McDougall, 2007). The discrepancy between these two terms illustrates how conflicted the United States government still is in response to China's rise as a strategic and economic world power.

Most recently, since the United States hosted the 2011 APEC Summit, containment of China seems to dominate discussions about American foreign policy. Out of the negotiations has come a reinvigorated commitment to the Trans-Pacific Partnership (TPP), featuring a drafted outline of a trade agreement. The trade agreement includes 9 different countries, several of which are located in Southeast Asia. Its purpose is to "enhance trade and investment among the TPP partner countries, promote innovation, economic growth and development, and support the retention of jobs," as described by the Office of the United States Trade Representative. Coinciding with the summit was Secretary of State Hillary Clinton's statement titled "America's Pacific Century" in Foreign Policy magazine. The article confirmed the United States' will to invest a majority of its resources and policies towards the Asia Pacific: "Harnessing Asia's growth and dynamism is central to American economic and strategic interests and a key priority for President Obama" (Clinton, 2011). The TPP and Clinton's article are key parts of the Obama administration's foreign policy legacy – the "Asia pivot" or "Re-balancing" towards Asia.

Chinese Reactions to Re-Balancing

In his most recent book, China Goes Global: The Partial Power, China expert David Shambaugh elaborated on the world's most recent perspectives of a rising China in the 21st century. He observed how "China's global reputation has fluctuated over the past decade and has in fact declined globally in recent years" (Shambaugh, 2013). Coinciding with the financial crisis of 2008, worldwide views of China have gotten more negative. Interpreting data from the Pew Global Attitudes Poll and British Broadcasting Service (BBC) polling, Shambaugh (2013) reported that there is a "globally mixed perception of China:"

China's rise in world affairs has been disconcerting for many, with China often seen as enigmatic, nontransparent, truculent, propagandistic, and dismissive of foreign concerns. China is also seen by many as not comfortably fitting into the existing international liberal order and having a hidden "revisionist" agenda to overturn that order.

These views resonate with Americans. Pew Polling has also reported on American public opinion towards China. As told by China-US Focus, in early 2011, 53 percent Americans appeared to have a more positive view of China, answering how "it was more important to build a strong relationship with China." This number compared to 40 percent who believed in a more hawkish approach to China. But by late 2012, 49 percent now supported this hawkish approach versus 42 percent who supported a strong relationship with China.

We have seen the United States government emulating these ambivalent views when rhetoric and policy contradict each other. Research fellow, Wu Zhenglong, for the China Foundation for International Studies noted how the Obama administration "welcomes China's peaceful rise" (Wu, 2013), giving the example of Secretary of State Clinton urging American policy-makers "to find a new answer to the ancient question of what happens when an established power and a rising power meet" (Wu, 2013). On the other hand, the United States government has carried through aggressive policies, such as the announcement that it will deploy "60 percent of its warships to the Asia Pacific region by 2020" (Wu, 2013). It has also held joint military exercises aimed at deterring the Chinese army, sold arms to allies, such as Taiwan, and taken sides in regional disputes as with Japan and South-East Asia nations (Wu, 2013).

Chinese leaders see these developments as the resurfacing of antagonistic, American foreign policy towards China. A victim of aggressive containment during the Cold War, Chinese leaders since Mao have been especially wary of the American government's motives to reorient foreign policy towards the Pacific theater. Professor Yong Deng of the United States Naval Academy claimed that containment is a familiar policy for Washington and one that Chinese leaders are convinced the United States would renew if directly threatened by China (Yong, 2001).

Today, American leaders are less apprehensive of China as an agent of monolithic communism as they were during the Cold War. Washington is rather concerned with China's accruing economic capabilities and whether this increased wealth will compel Chinese leaders to expand the country's military prowess on a regional level and possibly a global one: "Indeed, China's rise has led to fears that the country will soon overwhelm its neighbors and one day supplant the United States as a global hegemon" (Nathan & Scobell, 2012). An added dimension to these concerns is the uncertainty about how the new Chinese leadership, with Xi Jinping in charge, will accelerate the Chinese government's desire to seek a more powerful stance within the international system or keep with the status quo.

On the other hand, as claimed by Professor Yong, Beijing leaders, including Xi, are all too aware of the United States' increasingly wary perception of China. Chinese leaders view the United States as a "hegemon on the offensive" (Yong, 2001). The Chinese government's evaluation of American leaders' grand foreign policy strategy is one that maintains American global primacy. Analyst Wang Jincun expressed Chinese officials' belief that, "the United States will contain, besiege, and even launch a preemptive military strikes against any country which dares to defy the U.S. world hegemony or which has constituted a latent challenge to the United States" (Yong, 2001). Other Chinese scholars conclude similarly: "Most Chinese strategists assume that a country as powerful as the United States will use its power to preserve and enhance its privileges and will treat efforts by other countries to protect their interests as threats to its own security" (Nathan & Scobell, 2012). The literature conveys how Chinese politicians are convinced that as China continues to rise, the United States will find a way to counter it. According to Yong (2001), the Chinese government has responded by balancing American power in the Asia-Pacific region in three ways: allying with Russia, forging ties with its neighbors, and bolstering the CCP's power.

However, China's policy-makers would argue otherwise and say that what remains crucial to China, rather than counterbalancing American power, is enhancing the country's economic and technical capabilities. Long-time advisor to the Chinese leadership, Zheng Bijian, explained in his Foreign Affairs article, "China's 'Peaceful Rise' to Great-Power Status," how China set itself a goal in 1978 under Deng Xiaoping's leadership: "The development path to a peaceful rise" (Zheng, 2005). Zheng explained how Deng, and all Chinese leaders since, have driven China to keep up with economic globalization, carrying out economic reforms to "foster domestic markets and tap into international ones" (Zheng, 2005). Given this trend, he believed that the Chinese leadership would be primarily concentrated with "securing a more comfortable and decent life for its people" (Zheng ,2005). It is Zheng, in fact, who coined the term China's "peaceful rise." President Hu Jintao confirmed Zheng's analysis of the Chinese national interest in his speech to the opening ceremony of the 2004 Boao Forum for Asia, with the less threatening term: "peaceful development" (Hu, 2004).

"Age of Geo-Economics"

As Zheng addressed in his article, the economy is indeed a key variable in the international system's structure. According to Hsiung (2009), the international system is becoming dominated by geo-economics, where a country's economic security is more important than its military security. Hsiung argued that individual states do not necessarily balance against one another. Instead, the balance power is played out between economic blocs, like the Eurozone bloc, the North-American Free Trade Association (NAFTA), and the hypothetical East Asian Summit (EAS). Through this age of geo-economics, Pacific Asia's combined economies have outperformed the world's other economies. Hsiung concluded that, in an age of geo-economics, Pacific Asia will be at center stage of the global economy, with China in the spotlight (Hsiung, 2009).

Recent data do not contradict Hsiung's prediction. China and the United States have the world's largest economies, with gross domestic products (GDPs) of $15.09 trillion and $7.3 trillion as of 2011 respectively. The countries are also the world's largest trading partners, with China recently surpassing the United States in November 2012. In terms of GDP growth rates, China has seen outstanding growth for the last decade, sustaining growth rates between 7 to 11 percent. In comparison, the United States has seen growth between 1 to 2 percent annually. China is also the largest holder of foreign exchange reserves and second nation with the largest military budget (Shambaugh ,2013). Furthermore, professionals and scholars have predicted that the Chinese economy will overtake the United States in the next 10 or so years.

Given these economic developments, Hsiung's case for the age of geo-economics offers a plausible explanation for why the United States government feels threatened by China's rise as an economic power and would be motivated to follow a policy of economic containment.

Trade as a Foreign Policy Tool

The international system is becoming more dominated by economic relations, meaning a nation can achieve its strategic goals by influencing other countries with its economy. In the case of the United States-China relationship, the question is whether the American government will use its economic prowess to prevent China's rise.

Historically, economic containment can be observed in three fashions: (a) economic warfare through sanctions, (b) strategic embargoes, and (3) tactical linkage. All three strategies have the same goal of weakening the adversary state's economy to diminish its military might (Mastanduno, 1985). Given the tight Sino-American economic interdependence, economic sanctions and embargoes would be tactless and unwarranted in today's international politics. However, there is potential for undermining the Chinese economy through tactical linkage where trade is viewed as a tool of foreign policy: "Linkage rewards (or promises to reward) desirable behavior by permitting or promoting trade, and punishes (or threatens to punish) undesirable behavior by promoting trade" (Mastanduno, 1985). This type of tactical linkage is reserved primarily to bilateral state relations. The economic containment I will address is subtler than the policy followed by the United States during the Cold War, which is why I will from now on refer to it as economic counter-balancing.

One aspect of economic counter-balancing in the 21st century is the strategic motives behind trade agreements. Trade can be perceived as a foreign policy tool because it can be used as a concealed path for political influence, in the same way as foreign aid (Bueno de Mesquita & Smith, 2007). Richard N. Cooper and Albert Hirschmann argued how governments do in fact use trade as a foreign policy tool. Cooper asked whether trade policy can truly be classified as 'high foreign policy' versus 'low foreign policy' when trade issues are only injected in diplomatic matters when leaders want to make them high policy factors (Cooper, 1972). He argued that bad trade relations between countries, irrelevant of original categorization, affect high policy foreign relations. Quoting scholar T.C. Schelling, Cooper wrote: "Broadly defined to include investment, shipping, tourism, and the management of enterprises, trade is what most of international relations are about. For that reason trade policy is national security policy" (Cooper, 1972).

This thesis treats bilateral investment treaties (BITs) as trade agreements as done by the Office of the United States Trade Representative. BITs serve the purpose of "increasing [a nation's] prosperity through foreign investment" (Vandevelde, 1998). The United States government put out a framework in 2012 of model BITs. The document elaborated on the purpose of BITs between the United States and other countries, including the promotion of greater economic cooperation between two nations through investments and the establishment of a "stable framework for investment" to carry out investments more efficiently. One of the document's notable points is the agreement of both investment parties, meaning from both countries, to protect investments.

As discussed by K. Scott Gudgeon (2012), United States BITs were in fact created specifically as foreign policy tools "as a means of strengthening principles of customary international law and practice as observed and advocated by the United States." Another scholar, Kenneth J. Vandevelde, made the case that BITs were a form of economic nationalism. He concluded that bilateral investment treaties are tools used more for the protection of state interests than the liberalization of trade. Vandevelde supported his argument by assessing recipient states of BITs and their host states. For the purposes of my research, it is crucial to recognize Gudgeon's point that investment protection measures actually help preserve the host states' interests, and investment neutrality permits it "to dictate the circumstances under which its investors will be permitted to invest abroad" (Gudgeon, 2012).

Taking a step back and looking at all trade as a strategic tool, Hirschmann (1945) identified two effects: (a) the supply effect and (b) the influence effect. The supply effect is a positive one where a participating country's potential military force is enhanced. The influence effect, in contrast, occurs when foreign trade leads countries to depend on and influence one another. When countries decide to trade with one another, they also have the potential to stop trading. If trade stops, then other countries are forced to find other markets and sources as replacement. The stoppage of trade thus incurs costs on the target country: "A country trying to make the most out of its strategic position with respect to its own trade will try precisely to create conditions which make the interruption of trade of much graver concern to its trading partners than to itself" (Hirschmann, 1945). Country A trading with Countries B, C, or D creates a situation where these countries depend on Country A's trade so much that they would be "content to grant A certain advantages—military, political, economic—in order to retain the possibility of trading with A" (Hirschmann, 1945).

American policy-makers appear to have sought to apply this influence effect. Chuck Hagel wrote for the Foreign Affairs magazine: "All nations can share in the prosperity that comes from sound economic governance practices and trade-based growth policies" (Hagel, 2004). Indeed, since the Bush Jr. administration, United States foreign policy officials have aimed to recreate a world order advantageous for its national interests. Thus, trade with other countries generally comes with conditions for a target country to adopt American norms, such as intellectual property rights, policy concessions, and so on. As a consequence, when studying Sino-US relations, trade agreements, such as BITs, can be seen as foreign policy tools meant to influence countries to adopt American versus Chinese norms for economic or strategic policy.

For now, however, most of the debate on Washington's renewed economic counter-balancing of China is rhetoric, most recently provoked by the 2011 Trans-Pacific Partnership and Obama's announcement that his administration plans to refocus its attention towards the Pacific theater. There has not been a formal, holistic statistical study confirming that the United States is engaged in economic counter-balancing of China. Thus, the bilateral trade investments I analyze open up a discussion, backed by empirical evidence, for whether or not the United States government is indeed pursuing economic counter-balancing towards China through BITs.

Research Design 

Theory

I argue that the United States government has the incentive to counter-balance China's rise through economic means, but there is not enough evidence to conclusively say that this is indeed happening through bilateral investment treaties.

The United States' motivation for economically counterbalancing China is due to the changing world order where economic relations are taking a more prominent role in international relations. In this changing international environment, the world has watched China take the economic lead as its government builds up its economic abilities, catching up to the United States. This turmoil in the world order has led to a renewed fear that China aims to become a regional power and will then seek to usurp the United States' place as the world's leader of the international economic and political system (Shambaugh, 2013).

In order to prevent China from gaining momentum in the overturn of the American world order, the United States could potentially undermine China's international economic relations by using trade as a foreign policy weapon (Hirschmann, 1945). Here is a conceptual example: when the United States government agrees to sign a trade agreement with another country, it allows another country preferential access to its market. Although not all trade agreements require the target country to reciprocate, the United States still ends up having power over that country as it has the capacity to take that preferential trade treatment away if the target country does not comply with American strategic objectives (Lederman 2007).

For my analysis, I chose to test BITs as they are the best available trade agreement to assess the United States' foreign economic actions. The Office of United States Trade Representative treats all multilateral trade agreements, Free Trade Agreements (FTAs), Trade & Investment Framework Agreements (TIFAs), and BITs as official trade agreements employed by the United States in foreign affairs. BITs are the best indicators for my research because they are quantifiable for both the United States and China, and they are numerous for the purposes of testing. Hence, for the scope of my research, I solely use BITs as representative of foreign trade as a strategic-setting tool.

Model

To test my theory, I conduct four different analyses for which I determine whether or not a relationship exists between the Chinese government signing a BIT and the American government following suit, by signing its own BIT with the same country. I analyzed the following research design model:

In my model, the dependent variable, labeled as US BITi,t, is measured by 1 if a BIT exists between the United States and countryi and by 0 if no BIT exists between the United States and countryi. The independent variable, labeled CH BITt-n, is also measured by 1 or 0 – 1 if a BIT can be observed between China and countryi and 0 if no BIT is observed between China and countryi. I also lag the independent variable by n amount of years from year t.

US BITi,t = β0 + β1 CH BITi,t -n + logGDPi,t + logDISTANCEi,t + logPOPULATIONi,t

I control for the effects of gross domestic product (GDP) – variable GDPi – of each BIT target country. It is well known that the size of a country's economy could adversely affect the regression between United States BITs and lagged China BITs (Mansfield & Bronson, 1997). The variable DISTANCEi,t controls for the distance between countryi and the United States. It is also recognized that the closer in proximity one country is from another; the more likely they are to trade, thus increasing the chances of the creation of a trade agreement. The third control is population of countryi , which I label as variable POPULATIONi,t . Population is controlled for because countries with larger populations are generally better at providing for themselves, relying less on trade, than smaller countries. As stated by Edward Mansfield and Rachel Bronson (1997) on how international trade and alliances: "Bilateral trade flows will be directly related to the GDP of i and j and inversely related to both the population of i and j and the distance between them."

As aforementioned, the data for United States BITs comes from the Office of the United States Representative, which is listed under their Trade Agreements section on their website. I collected data for China BITs from the International Centre for Settlement of Investment Disputes (ICSID), which defines itself as "an autonomous international institution" with the purpose of arbitrating and settling disputes between investors and States. I retrieved GDP and population data from the World Bank. The statistics for distance proximity is from Kristian Skrede Gleditsch's data (Gleditsch, 2002).

I conducted a logistic (logit) regression using country-year as the unit of analysis. My null and alternative hypotheses are as follows:

Null Hypothesis:
There is no relationship between an observed BIT between the United States and countryi and an observed BIT between China and countryi.

H0 : β1 = 0
HA: β1 > 0

Alternative Hypothesis:
There is evidence suggesting that the United States reacts to an observed BIT between China and countryi by signing its own BIT with countryi.

I use a logit regression because I am working with dichotomous categorical data rather than data that can be measured continuously. A logistic regression allows me to model how different variables affect changes in a dependent variable that can only take values of 1 and 0. If I were to use a linear regression, my model would not fit the data, giving me negative predictions, which are impossible in this context.

I expect to see a positive and significant relationship between the signature of United States BITs and China BITs, where I observe the American government rushing to sign BITs within one to two years of China initially signing a BIT with a specific country.

My hypothesis looks into the relationship between China's national government signing a bilateral investment treaty (BIT) with a particular country and the United States' government following suit by signing its own BIT with this same country. Table 1 presents the significance of the relationship between Chinese BITs and American BITs, while Table 3 and Table 4 shed light on Canada and Italy's reaction to Chinese BITs.

Results

Table 1. Logit Analyses of US BITs following China BITs, lagged by 2, 3, 4, 5 years

 

(1)

Lag: 1 year

(2)

Lag: 2 years

(3)

Lag: 3 years

(4)

Lag: 5 years

BIT China (t-1)

1.890**

 

 

 

 

(0.619)

 

 

 

BIT China (t-2)

 

2.516**

 

 

 

 

(0.505)

 

 

BIT China (t-3)

 

 

 

 

 

 

 

2.224**

 

 

 

 

(0.551)

 

BIT China (t-5)

 

 

 

1.406*

 

 

 

 

(0.742)

log(GDP per capita)

-0.085

-0.109

-0.131

-0.173

 

(0.106)

(0.108)

(0.109)

(0.113)

log(Distance, in km)

-0.287

-0.315

-0.332

-0.362

 

(0.293)

(0.296)

(0.296)

(0.295)

log(Population)

0.203

0.218

0.236*

0.273*

 

(0.139)

(0.141)

(0.142)

(0.143)

Constant

-3.873

-3.368

-2.915

-2.099

 

(3.066)

(3.090)

(3.108)

(3.143)

Pseudo-R2

0.02

0.04

0.03

0.01

N

6752

6752

6441

5585

* p < 0.10, ** p < 0.05

Table 2. Predicted Probability Holding All other Values at Median

 

(1)

Lag: 1 year

(2)

Lag: 2 years

(3)

Lag: 3 years

(4)

Lag: 5 years

No BIT China

(0.35%, 0.72%)

(0.33%, 0.68%)

(0.35%, 0.71%)

(0.38%, 0.77%)

0.54%**

0.50%**

0.53%**

0.58%**

BIT China

(-0.46%, 7.34%)

(0.73%, 1.11%)

(0.86%, 9.4%)

(-0.93%, 5.77%)

3.44%*

5.91%**

4.74%**

2.41%

* p < 0.10, ** p < 0.05

US and China BITs

Table 1 shows the logit analysis of the United States government contracting a BIT with countryi as a dependent variable and China's government contracting a BIT with the same countryi , lagged by 1, 2, 3, and 5 years, as the independent variable. I coded the variable US BITi,t as "1" for all country-years when the United States government signed a BIT with countryi . A "0" was coded for all others. The logit analysis ran the variable US BITi,t and all independent variables, including CH BITt-n. As Table 1 illustrates, all coefficients are positive as hypothesized. Coefficients lagged by 2, 3, and 4 years are significant above the 0.05 level while a lag of 5 years proves significant above the 0.10 level.

In order to understand the magnitude of these effects, I computed the predicted probability that the United States government sign an agreement with given countryi , holding all other variables at their median. The results are reported in Table 2. For example, for a lag of 2 years, I recorded a predicted probability baseline level of 0.50 percent. There is 0.50 percent chance that the United States government will sign a BIT with countryi given the Chinese government has not previously signed one two years prior. However, this predicted increases given the Chinese government has indeed signed a BIT with countryi two years prior. In this case, the United States government is 5.91 percent more likely to sign a BIT with countryi .  The magnitude of this change is statistically significant, as shown in the regression table.

Robustness Check: Canada and Italy react to China

To check the robustness of the relationship between US BITs and China BITs, I ran two other logit regressions with Canada BIT and Italy BIT as my dependent variables, respectively, reacting to CH BITt-n with a lag of 2 years. As Table 3 shows, coefficients for both Canada and Italy were positive and significant, just as they were for the United States. Table 4 illustrates that Canada's government is 3.27 percent more likely to sign a BIT with countryi , given the Chinese government has signed a BIT with that same countryi 2 years prior. With the same 2-year lag on China's BIT signature, Italy's government is also more likely to sign a BIT by 4.42 percent.

I chose to run the logit regression for Canada and Italy BITs because both countries are part of the G-7, making them relative economic powerhouses. However, Canada and Italy would not be considered strategic players on the world stage. Thus, their reasons for following China's BITs are not expected to be geo-political. Because significance for Canada and Italy BITs was indeed found, the significance of the relationship between US BITs and China BITs is not robust.

Table 3: Logit Analyses of Canada and Italy BITS following China BITs, lagged by 2 years

 

(1)

Canada BIT

(2)

Italy BIT

BIT China (t-2)

2.556***

 

 

(0.568)

 

BIT China (t-2)

 

1.610***

 

 

(0.483)

log(GDP per capita)

0.202

-0.025

 

(0.130)

(0.076)

log(Distance, in km)

-0.356

-0.315*

 

(0.360)

(0.145)

log(Population)

-0.064

0.261**

 

(0.168)

(0.101)

Constant

-6.310

-5.522**

 

(4.208)

(1.805)

Pseudo-R2

0.06

0.03

N

6803.00

6803.00

* p < 0.10, ** p < 0.05, *** p < 0.10***


Table 4: Predicted Probability of Canada and Italy BITs Holding All other Values at Median

 

(1)

Canada BIT

(2)

Italy BIT

No BIT China

(0.13%, 0.39%)

(0.67%, 1.16%)

0.26%**

0.92%**

BIT China

(-0.12%, 6.67%)

(0.46%, 8.38%)

3.27%*

4.42%**

* p < 0.10, ** p < 0.05

Discussion

The results show that the American government is more likely to sign a BIT with a country given the Chinese government has also signed a BIT with that same country. However, this positive progression in the relationship does not indicate that the United States is definitely counter-balancing against China. Italy and Canada, which can be considered non-strategic countries in the international system, are also more likely to sign a BIT with the same country as China. Instead, it appears that these target BIT countries have particularly sought after, lucrative markets. The United States government, rather than pursuing an antagonistic economic policy towards China, is instead engaging in competitive economic behavior like other member governments of the international system.

My analysis determined that the United States government is not economically counter-balancing against China through BITs, but this does not mean economic counter-balancing is not happening at a microeconomic level. It is possible that these target BIT countries have particular resources that the United States government wishes to prevent the Chinese government from monopolizing through BITs. However, a microeconomic of critical microeconomic indicators causing rifts in Sino-US relations is beyond the scope of this thesis.

What does this say about American foreign policy? It proves that the United States' motives for signing BITs with the same country of China are neutral, at the macroeconomic level. But given that China is second to the United States in economic size, set to overtake it in the next decade, another puzzle comes to light: what foreign economic strategy should the United States adopt given that it will soon no longer be the eminent economic world power?

Conclusion

The purpose of my thesis was to assess the United States' response to China's rise as a strategic and economic world power. From the studied literature, there is evidence pointing towards the American government economically counter-balancing against China to prevent it from replacing the United States as the world's superpower. Historically, American foreign policy has wavered between containment and relative engagement. There appears to be a significant amount of consensus among Chinese scholars that the United States would not hesitate to renew an aggressive foreign policy against China in order to prevail as the world's supreme global power. A changing world order, in which economic relations increasingly dominate international politics, puts the United States at risk when faced with China's economic growth. The importance of economic relations also means that power-play in the international system will be subtler, less reminiscent of Cold War, zero-sum games. Instead, states might be more tempted to derail rival, strategic powers through trade or monetary policy. My research analyzed whether the United States government has been using trade agreements, specifically BITs, to counter-balance against China's growing influence over international economic relations.

To test my theory, I used a logit regression hypothesizing that the United States government has been following Chinese BITs. My results do indeed show that the United States government has been trailing the Chinese government in the signing of BITs with the same countries. However, by conducting an additional robustness test, I observed that non-strategic countries, such as Canada and Italy, which have no geopolitical interests in counterbalancing China, are also reacting to the Chinese government signing BITs. With a lag of 2 years, the relationship between Canada and Italy BITs and China BITs is similar to that of United States BITs and China BITs.

Although the United States government is indeed reacting to the Chinese government signing of treaties, so are Canada and Italy's governments. Because Canada and Italy are non-strategic countries, it seems unlikely that the United States is in fact counterbalancing against China through bilateral investment treaties. Rather, countries are all seeking to maximize their economic power by investing in the most attractive markets. The United States government appears to be engaging in an economically competitive behavior towards China, just as Canada and Italy are.

The two-level testing approach to my thesis prevented me from prematurely concluding that the United States government is economically counter-balancing against China. However, the research I put forth in this thesis only observes one type of trade agreement, BITs, and only at the macro-economic level. There is potential for future research by looking into microeconomic indicators, such as the resources in target BIT countries that are so attractive to major powers such the United States and China. In time, once more complete data on China's foreign aid is collected, there is space for more research to be done on how the United States could be trying to outmatch China's foreign aid donations to key countries.

The research put forth in this thesis provides empirical evidence for the international political economy of BIT use between the United States and China. I find that the United States government is not using BITs as an economic counter-balancing tool against China, but there are other economic indicators to be studied to conclusively argue that the United States government is definitely not engaging in economic-counterbalancing against China.

References

Bueno de Mesquita, Bruce and Alastair Smith. 2007. "Foreign aid and policy concessions." Journal of Conflict Resolution 51 (2): 251-284.

China-US Focus Administration. 2013. "China-US Relations Are Now at a New Juncture." China-US Focus.

Clinton, Hillary. 2011. "America's Pacific Century." Foreign Policy 189: 56-63.

Cooper, Richard N. 1972. "Trade policy is foreign policy." Foreign Policy: 18-36.

Gleditsch, Kristian S. 2002. "Expanded Trade and GDP data." Journal of Conflict Resolution 46 (5): 712-24.

Gudgeon, K. Scott. 2012. "United States Bilateral Investment Treaties: Comments on Their Origin, Purposes, and General Treatment Standards." Berkeley Journal of International Law 4 (1): 105-135.

Hagel, Chuck. 2004. "A Republican foreign policy." Foreign Affairs: 64-76.

Hirschman, Albert O. 1945. National Power and the Structure of Foreign Trade. Berkeley: University of California Press.

Hsiung, James C. 2001. Twenty-First Century World Order and the Asia Pacific: Value Change, Exigencies, and Power Realignment. New York: Palgrave.

Hsiung, James C. 2009. "The Age of Geoeconomics, China's Global role, and Prospects of Cross-Strait Integration." Journal of Chinese Political Science 14 (2): 113-133.

Hu, Jintao. 2004. "China's Development is an Opportunity for Asia." Xinhua News.

Kissinger, Henry. 2011. On China. New York: The Penguin Press.

Lederman, Daniel. 2007. "Geopolitical Interests and Preferential Access to U.S. Markets" Economics & Politics 19 (2): 235-258.

Mansfield, Edward D and Rachel Bronson. 1997. "Alliances, Preferential Trading Arrangements, and International Trade." American Political Science Review 97 (1): 94-107.

Mastanduno, Michael. 1985. "Strategies of Economic Containment: U.S. Trade Relations with the Soviet Union." World Politics 37 (4): 503-531.

McDougall, Derek. 2007. Asia Pacific in World Politics. Boulder & London: Lynne Rienner Publishers.

Nathan, Andrew J. and Andrew Scobell. 2012. "How China Sees America." Foreign Affairs.

New Zealand Ministry of Foreign Affairs & Trade. "Trans-Pacific Strategic Economic Partnership Agreement."

Peck, James. 2006. Washington's China: The National Security World, the Cold War, and the Origins of Globalism. Amherst & Boston: University of Massachusetts Press.

Shambaugh, David. 2013. China Goes Global: The Partial Power. New York: Oxford University Press.

Schurmann, Franz. 1974. The Logic of World Power: An Inquiry into the Origins, Currents and Contradictions of World Politics. New York: Pantheon Books.

U.S. Department of State. 2012. "2012 U.S. Model Bilateral Investment Treaty."

Vandevelde, Kenneth J. 1998. "The Political Economy of a Bilateral Investment Treaty." American Journal of International Law 92 (4): 621-641.

World Bank. World Development Indicators.

Wu Zhenglong. 2012. "Shaping a New Type of China-US relationship." China-US Focus.

Yong, Deng. 2001. "Hegemon on the Offensive: Chinese Perspectives on U.S. Global Strategy." Political Science Quarterly 116 (3): 343-365.

Zheng, Bijian. 2005. "China's 'Peaceful Rise' to Great-Power Status." Foreign Affairs 84 (5): 18-24.

Acknowledgments

I would like to thank Professor Michael Gilligan for the thesis-writing guidance he provided over these two semesters. I would also like to thank Adjunct Instructor Pablo Barbera-Aranguena for his dedication to our International Relations Honors class. Lastly, I would like to thank Professor David B.H. Denoon for his mentorship and insight on of Sino-American relations and his American Empire course, which helped me immensely in the preparation for this thesis.


URC RESOURCES:

©2002-2016 All rights reserved by the Undergraduate Research Community.

Research Journal: Vol. 1 Vol. 2 Vol. 3 Vol. 4 Vol. 5 Vol. 6 Vol. 7 Vol. 8 Vol. 9 Vol. 10 Vol. 11 Vol. 12 Vol. 13 Vol. 14 Vol. 15
High School Edition

Call for Papers ¦ URC Home ¦ Kappa Omicron Nu

KONbutton K O N KONbutton