Strategic Hedging and Unipolarity's Demise The Case

Power: Back to the Future? April 29, 2015, Catholic University of Louvain (UCL), Louvain-la-Neuve, Belgium

Strategic Hedging and Unipolarity’s Demise The Case of China’s Strategic Hedging Mohammad Salman1 Vrije Universiteit Brussel (VUB), Belgium [email protected]

Gustaaf Geeraerts2 Vrije Universiteit Brussel (VUB), Belgium [email protected]

Abstract Strategic hedging is used by second-tier states in order to improve their relative position vis-à-vis the system leader. It is most likely to occur in unipolar systems that are experiencing power diffusion, and it involves the improvement of both military and economic capability while simultaneously avoiding a direct confrontation with the system leader. Strategic hedging takes place against the backdrop of key system dynamics involving the diffusion of hard and soft power away from the system leader toward various second-tier states. In this paper, we argue that strategic hedging by second-tier states involves a gradual, multi-stage process, starting with a significant power difference between the hedging state and the system leader, and possibly leading to the disappearance of this difference as a result of successful hedging policies. We provide a four-stage transformation mechanism that allows the analyst to gauge the level of transition to the second phase of strategic hedging by second-tier states. We use China as a case to illustrate our hypothesis. The results show that the transition to the second phase is not yet complete in regard to China, but, that this could be the case in the next few years. As the second-tier state evolves to the second phase its military capability relatively increases while its economic growth relatively slows down. Progressing through the stages of strategic hedging, the second-tier state’s fears of upsetting the system leader fade as the power difference between itself and the system leader declines. Given the importance of strategic hedging as a new structural theory in international relations, this paper not only contributes to the development of this theory, but also provides systematic indications of Great Power dynamics in the foreseeable future. Keywords: Balance of power theory; Strategic hedging behavior; The rising powers; Second-tier states; Competition between the great powers. 1

Mohammad Salman is doctoral research fellow at the Brussels Institute of Contemporary China Studies (BICCS), Vrije Universiteit Brussel (VUB). He is also a teaching assistant at Tishreen University. 2 Gustaaf Geeraerts is director of BICCS and Professor of International Relations at the Vrije Universiteit Brussel.

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Introduction Strategic hedging is used by states in an effort to counter potential risks in the case of uncertainty. It involves two contradictory trends: (1) balancing by building and strengthening economic and military capacity, (2) maintaining mutual relations and avoiding a head-on collision. Second-tier states often use strategic hedging to improve their relative positions vis-à-vis the system leader. They are most likely to do so in unipolar systems that are experiencing power diffusion3, and it involves the improvement of both military and economic capability while at the same time avoiding a direct confrontation with the system leader4. The concept of strategic hedging addresses a wider range of strategies than traditional hard power approaches and also has a much stronger connection to system structure than the soft balancing approach5. It is different from hard balancing in that it refers to behavior that explicitly avoids direct confrontation with the system leader; it is also distinct from soft balancing as it prepares the hedging state for possible confrontations with the system leader6. Summing up, strategic hedging by second-tier states has three basic characteristics: (1) Improvement of economic competitiveness, including achieving significant economic growth and dispensing subsidies that are provided by the system leader, (2) expansion of military capability in anticipation of possible confrontations with the system leader in the future, and (3) avoidance of outright provocation of the system leader7. These qualities distinguish strategic hedging by second-tier states from the broader concept of hedging. Under unipolarity, the leading state seeks to consolidate its dominating position and to counter any attempt to change the conditions of the current world, fearing its relative power decline. Strategic hedging increases the ability to respond to threats and opportunities that may appear with the relative decline of the system leader. The main threat to the second-tier state is a possible confrontation with the system leader. Such confrontation may take the form of an economic blockade, a boycott diplomatic, or even an armed confrontation. Strategic hedging serves to minimize these threats by improving the leverage of the hedging state in regard to a possible dispute with the system leader. This kind of behavior is called Type A hedging. Type A hedging involves strengthening the military capabilities while avoiding engagement in the internal or external hard balancing. It also includes improving the economic capacity through various means such as the diversification of energy sources, an increase in the number of the trading partners 3

Strategic hedging is not limited to be against a waning unipolar power, but there are other types of hedging lay outside the scope of inquiry in this study. 4 Brock F. Tessman and Wolfe Wojtek, “Great Powers and Strategic Hedging: The Case of Chinese Energy Security Strategy,” International Studies Review 13, no. 2, (2011): 214-240; and Brock F. Tessman, “System Structure and State Strategy: Adding Hedging to the Menu,” Security Studies 21, no. 2, (2012): 192-231. 5 See Tessman and Wolfe, “Great Powers and Strategic Hedging,” 220. 6 Tessman, “System Structure and State Strategy,” 208. 7 See Tessman and Wolfe, “Great Powers and Strategic Hedging,” 220.

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and the acquisition of advanced technology8. On the other hand, the system leader offers several economic and military aids to the second-tier states, particularly for its allies, such as providing public goods, protecting shipping lines, supporting the international monetary system, and combating terrorism9. These subsidies may stop as a result of the increasing burdens borne by the system leader in conjunction with the decline in its relative abilities, something which threatens the long-term security of the recipient countries in the future. Hedging against these threats is called Type B hedging. Type B hedging could involve the search for alternative sources of subsidies and the initiating the formation of new alliances to face the uncertainty associated with the change of the international system. The best way to distinguish between Type A and Type B hedging is to determine the motives of this behavior: Type A hedging is driven by fear of a possible clash that could happen with the system leader as a result of the significant gap in capabilities (by exploit the vulnerabilities of the hedging state), while Type B hedging aims to address the shortage that may occur as a result of declining public good or security benefits provided by the system leader10. Consequently, Type A hedging is attractive to emerging powers that do not enjoy comparatively warm relations with the system leader; this could be due to various reasons such as competing interests, insecurity dilemma, etc. Conversely, the major powers allied to the system leader may be more attracted to Type B hedging. Significant changes in the distribution of capabilities have redrawn the features of the existing world order. These changes have turned strategic hedging into an attractive alternative for other strategies such as balancing, bandwagoning, and buckpassing, especially for second-tier states11. For instance, China’s spectacular economic growth in the 1990s and the 2000s has led to Beijing’s emergence as a major power on the international scene, where China has become a crucial partner to Washington in several important international issues such as tackling terrorism and the North Korean nuclear issue12. Due to the ineffectiveness of the soft balancing behavior against the United States and the inability to engage in successful hard balancing behavior 13, China has pursued strategic hedging as a valuable option and seems likely continue to do so for the foreseeable future; it is the best choice to avoid direct confrontation with the system 8

Tessman, “System Structure and State Strategy,” 204. See Joseph S. Nye, “United States Leadership and 21st Century Global Public Goods,” Hampton Roads International Security Quarterly 9, no. 2 (2009): 49–52; and Inge Kaul, Isabelle Grunberg, and Marc A. Stern, Global Public Goods: International Cooperation in the 21st Century (New York: United Nations Development Program, 1999). 10 Tessman, “System Structure and State Strategy.” 11 Ibid, 192. 12 Elena Atanassova-Cornelis, “Reshaping the East Asian security order US-China hedging and the EU’s strategic choices,” Ritsumeikan International Affairs Journal 10, (2011): 219-242. 13 See Stephen G. Brooks and William C. Wohlforth, World out of Balance, (Princeton: Princeton University Press,2008); Tessman and Wolfe, “Great Powers and Strategic Hedging,” 216-218; Wojtek M. Wolfe, “China's Strategic Hedging,” Orbis 57, no. 2, (2013):301; and William C. Wohlforth, “The Stability of a Unipolar World,” International Security 21, no. 1, (1999): 5–41. 9


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leader in the short term, while at the same time improving the hedging state’s capability for a possible confrontation in the long run14. Several scholars have attempted to develop different aspects of the strategic hedging concept in the context of international relations literature. Evan Medeiros (2005/2006) pointed out that strategic hedging could be used in the relations between great powers because of the uncertainty of the future, as in US-China relations in light of the uncertainty generated by the rise of China in the Asia-Pacific15. Robert Art (2004) reviewed the practice of hedging amongst the great powers in order to maintain stability and more specifically presented the case of EU support for NATO in anticipation of the emergence of potential risks to security of EU countries16. Evelyn Goh (2005, 2007/2008) observed that hedging could be used by small states as a strategic choice to maximize gains and to avoid dependency on one of the great power poles17. Tessman and Wolfe (2011) offered a more specific definition of strategic hedging as a new structural theory for explaining competitive behavior between great powers under unipolarity. They developed a four stage mechanism for detecting strategic hedging behavior in the international system18. Tessman (2012) made another attempt to corroborate the strategic hedging hypothesis by examining empirical evidence of secondtier states such as China, Russia, Brazil, and France. Tessman argued that strategic hedging is the most effective strategy for second-tier states against potential security threats in unipolar systems19. Wolf (2013) confirmed this hypothesis by showing that China’s behavior is a strong example of strategic hedging and, further, that this has enhanced China’s power and allowed it to achieve several successes without directly challenging the system leader. But as it comes at a high cost, it could be seen “as an insurance policy (that) carries a high financial and diplomatic premium”20. In a new step to develop the strategic hedging concept, Salman and Geeraerts (2013) have sought to study the impact of this behavior on the foreign politics of hedging states. They found that while China uses strategic hedging to improve its relative position vis-à-vis the United States, it also plays an important role in the Sino-Middle East relations and this has led to the rapid development of China’s economic relations with the oil producing

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Wolfe, “China's Strategic Hedging,” 300-313. Evan S. Medeiros, “Strategic Hedging and the Future of Asia-Pacific Stability,” The Washington Quarterly 29, no. 1, (2005 ⁄ 2006): 145–167. 16 Robert J. Art, “Europe Hedges Its Security Bets,” in Balance of Power: Theory and Practice in the 21st Century, eds., T.V. Paul, James J. Wirtz and Michel Fortmann (Palo Alto, CA: Stanford University Press, 2004). 17 Evelyn Goh, Meeting the China Challenge: The United States in Southeast Asian Regional Security Strategies, Washington, D.C.: (East-West Center Washington 2005); Evelyn Goh, “Great Powers and Hierarchical Order in Southeast Asia: Analyzing Regional Security Strategies,” International Security 32, no. 3 (Winter 2007/2008): 113–57. 18 Tessman and Wolfe, “Great Powers and Strategic Hedging,” 214-240. 19 Tessman, “System Structure and State Strategy,” 192-231. 20 Wolfe, “China's Strategic Hedging,” 300-313. 15

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countries21. More recently, Van Jackson (2014) provided a deeper theoretical concept for the reasons of hedging strategies in Asia by offering “three different lenses for making sense of this phenomenon: power transition theory, mistrust under multipolarity, and complex networks”22. All these studies deal with the first stage of strategic hedging without paying attention to the structural changes that could occur in this behavior as a result of changes in international circumstances with the passage of time. Therefore, we will now attempt to shed light on these changes in the structure of strategic hedging and to use the example of China as an illustrative example to further explore our hypothesis. Conceptually, this manuscript makes its argument at the intersection of research in three areas: the politics of unipolarity, China-US relations, and foreign policy strategy. The core of this manuscript is the further development of “strategic hedging” as a concept relevant to all three research areas. As previously mentioned, the most interesting aspect of this study is that it treats the key concept (strategic hedging) as an independent variable. Instead of engaging in conceptual clarification (Art 2004; Goh 2007/2008; Tessman and Wolfe 2011; Tessman 2012, Jackson 2014) or providing additional case studies (Medeiros 2005; Tessman 2012; Wolfe 2013, Jackson 2014), this paper addresses the outcomes of strategic hedging in the international system: How does hedging evolve over time? When second-tier states engage in hedging, how are power relations with the leading power affected? How does the leading power perceive strategic hedging behavior by the second tier state? In this paper, we argue that a new world order has begun to emerge in which the relationship between the two main contenders – the US and China - is characterized by economic bipolarity and military unipolarity. More specifically, we explore how strategic hedging by a major second-tier state, China, is changing the unipolar system. In an attempt to track how the strategic relationship between the US and China might evolve, we divide strategic hedging into two phases. The assumption is that as the main hedging state’s (China) economic capabilities come to equal those of the system leader (US), the hedging state will move to the second phase of strategic hedging behavior, namely, by focusing on improving military capability and fading fears of upsetting the system leader as the power difference between them decreases. This paper has four sections. First, we examine the current situation of the international system and present the most significant global events that have profoundly changed the distribution of power in recent years. Second, we develop the theoretical foundation of the strategic hedging framework by providing a mechanism describing the evolution to the second phase of strategic hedging. This mechanism consists of four stages, which could be seen as a series of filters that allow the analyst to sift out the level 21

Mohammad Salman and Gustaaf Geeraerts, “The Impact of Strategic Hedging on the Foreign Politics of Great Powers: The Case of Chinese Energy Strategy in the Middle East”, paper presented at China Goes Global Conference, Jacobs University Bremen, Germany, (September 25-27, 2013). 22 Van Jackson, “Power, trust, and network complexity: three logics of hedging in Asian security,” International Relations of the Asia-Pacific 14, no. 3, (2014): 331-356.


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of transformation. Third, we discuss the case of China as an illustrative example of the transition to the second phase of strategic hedging and employ this example to corroborate our hypothesis. Finally, we discuss the results and conclude the study by indicating seven basic propositions to be tested in future research. A New International System Since the end of the Cold War, the United States has solidified its status as the world’s sole superpower23. This prestige is based on two pillars (1) overwhelming military power and (2) preponderant economic capacity. Washington has the most powerful army in the world with a defense budget approximately equivalent to 40% of global military expenditures24. This army has naval power and nuclear capabilities superior to all other armies, as well as the largest defense research budget and unmatched global powerprojection capabilities25. In addition, the U.S. economy is the largest national economy in the world with nominal GDP estimated at US$16.6 trillion26. In fact, its advantages, including military, economic, technological, and geographical capabilities, have established the U.S. as the only true superpower in the world an unprecedented phenomenon in the modern world27. Washington has used these assets to increase its position vis-à-vis potential rivals and has sought to consolidate the hegemony by a variety of means, including providing assistance as leverage to compel recipient state cooperation28. U.S. hegemonist strategy has relied heavily on both fixed and flexible coalitions29 with second-tier states30. The United States has also supported its hegemony over the world by creating a series of rules and standards in the global system to serve its 23

Samuel P. Huntington, “The Lonely Superpower,” Foreign Affairs 78, no. 2, (1999): 35-49. Stockholm International Peace Research Institute, Military expenditure, Stokholm: SIPRI, http://www.sipri.org/research/armaments/milex/milex_database 25 Nuno P. Monteiro, “Unrest Assured Why Unipolarity Is Not Peaceful,” International Security 36, no. 3, (2012): 9. 26 International Monetary Fund (IMF), http://www.imf.org/external/data.htm. 27 Huntington, “The Lonely Superpower” 35-49; and G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars, (Princeton: Princeton University Press, 2001). 28 Kai He, “Undermining Adversaries: Unipolarity, Threat Perception, and Negative Balancing Strategies after the Cold War,” Security Studies 21, no. 2, (2012): 154-191; Kai He and Huiyun Feng, “If Not Soft Balancing, Then What Reconsidering Soft Balancing and U.S. Policy Toward China,” Security Studies 17, no. 2, (2008): 363-395; Robert Jervis, “The Compulsive Empire,” Foreign Policy, (July–August 2003): 83–87; Patricia L. Sullivan, Brock F. Tessman, and Xiaojun Li, “US Military Aid and Recipient State Cooperation,” Foreign Policy Analysis 7, no. 3, (2011): 279; and Stephen M. Walt, Taming American Power: The Global Response to U.S. Primacy, (New York: Norton, 2005), 23. 29 The United States has relied on fixed coalitions with some second-tier states such as United Kingdom and Japan. And it has used flexible coalitions with other second-tier states such as Russia, China, France, and Germany. 30 Huntington, “The Lonely Superpower” 35-49; Elke Krahmann, “American Hegemony or Global Governance Competing Visions of International Security,” International Studies Review 7, no. 4, (2005):543; and Stephen M. Walt, “Alliances in a Unipolar World,” World Politics 61, no. 1, (2008): 119-120. 24

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interests and propagate its values, including the use of moral values such as democracy and human rights31. On the other hand, it appears that U.S. hegemony on the international resolution has led to the erosion of its prestige and its dominance32. For instance, the financial crisis has revealed the fragility of the U.S. economy and has showed the dangers of the global dependency on this economy33. Moreover, the Iraq war has affected the credibility of the U.S. and its military reputation as it showed Washington’s willingness to challenge the international community for the sake its own national interests. Although there were clearly other factors involved, this factor in particular is what made the second war in Iraq so shocking for the international community, and which has lead to the undeniable realization that the UN system is not able to prevent the use of force by Great Powers34. Emerging powers have recently appeared on the international scene, a prime example being China which seeks to build itself into a great power with new characteristics that give priority to maintaining national security through supporting a strong state, achieving stable economic growth, and advancing the indicators of human development while at the same time remaining suspicious of Western concepts such as human rights, democracy, and unregulated markets35. These new powers are changing the distribution of capabilities and influence in the international system, and these changes are also clearly felt within major international organizations. For example China’s capacity growth has reflected positively on Beijing’s relationship with the United Nations, where China’s role 31

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See Samantha Blum, “Chinese views of US hegemony,” Journal of Contemporary China 12, no. 35, (2003): 239-264; Martha Finnemore, “Legitimacy, Hypocrisy, and the Social Structure of Unipolarity,” World Politics 61, no. 1, (2008): 83-84; Rosemary Foot, “Chinese strategies in a US-hegemonic global order: accommodating and hedging,” International Affairs 82, no. 1, (2006): 82; and Erik Voeten, “Resisting the Lonely Superpower: Responses of States in the United Nations to U.S. Dominance,” The Journal of Politics 66, no. 3, (2004): 729–754. G. John Ikenberry, Michael Mastanduno and William C. Wohlforth, “Unipolarity, State Behavior, and Systemic Consequences,” World Politics 61, no. 1, (2009): 1-27; G. John. Ikenberry, “Democracy, Institutions, and American Restraint,” In America Unrivaled: The Future of the Balance of Power, edited by G. John. Ikenberry, (Ithaca, NY: Cornell University Press, 2002); Joseph S. Nye, The Paradox of American Power: Why the World’s Only Superpower Can’t Go It Alone, (New York: Oxford University Press, 2002); Robert A. Pape, “Soft Balancing against the United States,” International Security 30, no. 1, (2005): 7-45; T. V. Paul, “Soft Balancing in the Age of U.S. Primacy,” International Security 30, no. 1, (2005): 46–71; Voeten, “Resisting the Lonely Superpower” 747; Stephen M. Walt, “Keeping the World Off Balance: Self-Restraint and U.S. Foreign Policy.” In America Unrivaled: The Future of the Balance of Power, edited by G. J. Ikenberry. (Ithaca, NY: Cornell University Press, 2002); Walt, “Taming American Power”; and Scott Wolford, “Theorizing Multilateralism in a Time of Unipolarity,” International Studies Review 15, no. 2, (2013): 295. Christopher Layne, “This Time It’s Real: The End of Unipolarity and the Pax Americana,” International Studies Quarterly 56, no. 1, (2012): 203; and Wu Xinbo, “Understanding the Geopolitical Implications of the Global Financial Crisis,” The Washington Quarterly 33, no. 4, (2010): 155. Tim Dunne and Klejda Mulaj, “America after Iraq.” International Affairs 86, no. 6, (2010): 1287; and Robert E. Kelly, “Security Theory in the New Regionalism.” International Studies Review 9, no. 2, (2007): 225. Gregory Chin and Ramesh Thakur “Will China Change the Rules of Global Order?” The Washington Quarterly 33, no. 4, (2010):122.


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has increased significantly in UN-led humanitarian efforts and UN peacekeeping operations including Haiti, Lebanon, Liberia, and the Sudan36. The emergence of new economic powers has generated a process of power diffusion undermining U.S. economic superiority and thereby threatening the stability of the present global system37. These emerging powers no longer accept U.S. control over world politics based on some grand narratives such as “capitalism is better than socialism” and “democracy is better than dictatorship”38. These developments pose a serious question: How will unipolarity come to an end? This question has preoccupied several researchers in international relations field over the past two decades. Most of these scholars believe that unipolarity is a passing phase on the way to extinction, and that specific types of balancing behavior are actually occurring39. We also believe that a unipolar system will not last long. There are several factors that support this expectation: (1) an increasing dissatisfaction with U.S. dominance in the global system by second-tier states40, (2) a changing distribution of the global national income as a result of rapid economic growth in a number of emerging countries such as 36

Chin and Thakur “Will China Change the Rules,” 128; Avery Goldstein, Rising to the Challenge: China’s Grand Strategy and International Security, (Stanford, CA: Stanford University Press, 2005); Bates Gill, Rising Star China’s New Security Diplomacy, (Washington, DC: Brookings Institution Press, 2007); Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East, (New York: PublicAffairs, 2008); and Robert S. Ross and Zhu Feng, Eds. China’s Ascent: Power, Security, and the Future of International Politics, (Ithaca, NY: Cornell University Press,2008). 37 Randall L. Schweller, Realism and the Present Great Power System: Growth and Positional Conflict over Scarce Resources. In Unipolar Politics: Realism and State Strategies After the Cold War, edited by Ethan B. Kapstein and Michael Mastanduno, (New York: Columbia University Press, 1999), 37; Tessman, “System Structure and State Strategy,” 203; and William R. Thompson, “Systemic Leadership, Evolutionary Processes, and International Relations Theory: The Unipolarity Question,” International Studies Review 8, no. 1, (2006): 20. 38 Bruce. W. Jentleson and Steven Weber, “America’s Hard Sell,” Foreign Policy, no. 169, (2008): 43; and Voeten, “Resisting the Lonely Superpower” 729–754. 39 See Shaun Breslin, “China and the Global Order Signalling Threat or Friendship,” International Affairs 89, no. 3, (2013): 615-634; Christopher Layne, “The Unipolar Illusion: Why New Great Powers Will Rise,” International Security 17, no. 4, (1993): 5–51; Christopher Layne, “US Hegemony in a Unipolar World: Here to Stay or Sic Transit Gloria?” International Studies Review 11, no. 4, (2009): 784–787; Layne, “This Time It’s Real” 203-213; Keir G. Lieber and Gerard Alexander “Waiting for Balancing: Why the World Is Not Pushing Back,” International Security 30, no. 1, (2005): 109-139; Pape, “Soft Balancing against the United States” 7-45; Paul, “Soft Balancing in the Age of U.S. Primacy,” 46–71; Randall L. Schweller and Pu Xiao, “After Unipolarity China’s Visions of International Order in an Era of U.S. Decline,” International Security 36, no. 1, (2011): 41-72; Tessman and Wolfe, “Great Powers and Strategic Hedging,” 214-240; Cameron G. Thies, “The Roles of Bipolarity: A Role Theoretic Understanding of the Effects of Ideas and Material Factors on the Cold War,” International Studies Perspectives 14, no. 3, (2013): 269-288; Kenneth N. Waltz, “The Emerging Structure of International Politics,” International Security 18, no. 2, (1993): 44-79; and Kenneth N. Waltz, “Structural Realism after the Cold War,” International Security 25, no. 1, (2000): 5-41. 40 These positions have appeared so obvious through the public opposition to U.S. war in Iraq by France, Germany and Russia. Moreover, during the Syrian crisis, Russia and China have used the veto several times in the Security Council to thwart Western attempts led by the United States to legalize direct intervention in the internal affairs of Syria.

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China41, (3) a decline of the direct subsidies being provided by the system leader as a result of the global financial crisis, which has led to the decline of U.S. credibility in the international community42. At the same time, levers for change have become conspicuous including, (1) delegitimization of the system leader providing a rationale for engaging in changing the system, and (2) power diffusion as a result of the emergence of new powers capable of competing with the system leader43. China has three basic identities that make Beijing a new competitor in the international order. First, as a developing country, it has significant residual socio-economic problems from the era of Western colonialism, making Beijing a member of several organizations related to the third world countries such as the Forum on China–Africa Cooperation (FOCAC) and the Non-Aligned Movement (NAM), where China has emerged as a leader of the Third World. Second, China, as an emerging state, entered into several institutions to adjust the current world order, such as BRICS (Brazil, Russia, China, India and South Africa) and the Shanghai Cooperation Organization (SCO). Finally, China is a great power: it is a permanent member of the Security Council and a member of the G20. So Beijing has significant influence in international decision-making44. The Second Stage of Strategic Hedging We operate under the assumption that second-tier states use strategic hedging as a way to maximize gains and protect their interests along with avoiding direct confrontation with the system leader. For its part, the system leader seeks to consolidate the unipolarity and to counter attempts to change the conditions of the current world order, fearing a decline in its relative power advantage. While we expect second-tier states to operate under the constraints of the current structure, it is possible for the rules of the game in the global system to gradually transform. To the extent that such transformation occurs, the fears of upsetting the system leader will erode to the point that some hedging states will be tempted to increase their military capacity more rapidly and move toward internal or external balancing in order to protect their interests. In the rest of this article, we argue for one hypothetical, but quite plausible, scenario in which this mechanism could describe the transformation to the second phase of strategic hedging. This mechanism consists of four stages, which can be seen as a series of filters that allow the analyst to sift out the level of transformation. Transition to the second 41

According to International Monetary Fund, the United States accounted for a quarter of the world’s GDP and China just 4% in 1990. While in 2012, the U.S. share is less than one-fifth, while China’s has expanded to 15%. (See, http://www.economist.com/blogs/graphicdetail/2012/10/focus-2) 42 Breslin, “China and the Global Order,” 624-625. 43 See Schweller and Xiao, “After Unipolarity China’s Visions,” 46-47. 44 See Breslin, “China and the Global Order,” 616-617; Gustaaf Geeraerts and Jonathan Holslag, “China Engages the World,” In Contemporary Global Governance. Multipolarity vs Discourses on Global Governance, eds. Dries Lesage and Pierre Vercauteren, (Brussels: Peter Lang,2009); and Michael Lampton, The Three Faces of Chinese Power: Might, Money, and Minds, (Berkeley, CA: University of California Press, 2008).


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phase should be completed after all levels have been reached. As long as this is not the case, strategic hedging could continue at an even slower pace. It is important to mention that no second-tier state has yet completed the transition to the second phase. However, we expect China to enter the second phase in the next few years45. In order to be considered a case of complete transformation to the second phase of strategic hedging, the hedging state should pass all of the following stages: 1. Growing concerns of the system leader with the decline in its economic superiority resulting from the rapid economic growth by the hedging state46. It should be noted that Type A hedging aims to maximize the gains in order to reduce the capability gap with the system leader, while Type B hedging is designed to offset subsidies and services that may be lost in the future. Hence, the former is more effective and successful than the latter in terms of power diffusion and expediting the transition from unipolarity to multipolarity. As mentioned previously, emerging powers that do not enjoy comparatively warm relations with the system leader often engage in Type A hedging, which explains the rapid economic growth of these states compared with the other second-tier states47. These rising powers pose a real threat to the conditions of the current world order so they are more likely to stimulate negative balancing by the leading state. The concerns of the system leader could be attributed to the fact that economic supremacy is a necessary condition for maintaining world leadership, and any defect in this superiority may eventually lead to the restructuring of the international order, e.g., during the industrial era, the rising great powers sought to accumulate power and wealth in order to use this power in dominating or to restructure the international system 48. Moreover, U.S. economic superiority at the beginning of the twentieth century helped dramatically in making it an international leader49. Finally, the economic

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There are several expectations that China would surpass the United States as the largest economy in the world in the next few years (see, Layne, “This Time It’s Real,” 206). 46 Emerging powers relatively small using strategic hedging do not pose a threat to the leading state, even if they achieved rapid economic growth. The large gap in capabilities prevents them from passing this level in the short term, but it could happen in the long run. Moreover, these states should be fully committed to the hedging standards in the first phase including avoid any provocation of the leading state. Accordingly, these small countries are less likely to stimulate negative balancing by the leading state. 47 The second-tier states, which follow only Type B hedging, often could not achieve a high level of economic growth; therefore they stay at this level of transformation mechanism. However, these states could pass this level in case of changing the kind of hedging. 48 Cheng Gao, “Market Expansion and Grand Strategy of Rising Powers,” The Chinese Journal of International Politics 4, no. 4, (2011): 405-446. 49 Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role, (Princeton, NJ: Princeton University Press, 1998).

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foundation was the most important factor that hindered the Soviet Union’s ambition to be an international leader during the Cold War50. 2. Utilization of negative balancing strategies by the system leader through transferring military technology to the enemy of the hedging state (negative military balancing strategy), and/or through using institutions to constrain the hedging state’s behavior (negative nonmilitary balancing strategy). This stage is designed under the assumption that there are four types of balancing strategies that could be followed by the states; (1) a positive military balancing strategy, e.g., forming military alliances and increasing the military arsenal, (2) a positive nonmilitary balancing strategy, e.g., providing economic aid to the allies, (3) a negative military balancing strategy, e.g., providing military support to the enemy of the enemy, (4) a negative nonmilitary balancing strategy, e.g., using institutions to undermine the rival’s behavior. Threat level, power disparity, and economic growth comparison are the most influential factors on the state’s decision to choose the balancing strategies51. It should be noted that the use of negative balancing strategies by the system leader may not necessarily stop the economic growth of the peer competitor, but it is more likely to slow this growth gradually. 3. Threat to the national security of the hedging state, along with the decline in its economic growth (due to utilization of negative balancing strategies by the system leader). The main objective of strategic hedging is to reduce the gap with the system leader; this gap is a mixture of differences in economic and military capabilities. Slowing ability to reduce the gap in economic terms may be the most important reason for the hedging state to focus on reducing the difference in military terms by increasing military spending as part of a hedging strategy52. Access to this level is more likely to come in the event of the success of the negative balancing strategies by the system leader; it is a transitional stage paving the way for the emergence of the second phase of the strategic hedging. This stage is designed according to the Solow–Swan “economic model of longrun economic growth”53. It also adopts the threat-perception negative balancing model, “along with the increase of threat perception, positive balancing will become a preferred strategy for states”54.

50

Yi Feng, “Global Power Transitions and Their Implications for the 21st Century,” Pacific Focus 28, no. 2, (2013): 183. 51 See He, “Undermining Adversaries: Unipolarity,” 154-191; and He and Feng, “If Not Soft Balancing, Then What,” 363-395. 52 Hedging states, which follow only Type B hedging, may increase military spending as part of its hedging strategy in case of reduced security and military aid by the system leader. 53 Robert M. Solow, “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics 70, no. 1, (1956): 65-94. 54 He, “Undermining Adversaries: Unipolarity,” 191.


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4. The transition to the second phase by a stronger focus on increasing the military capacity by the hedging state, including additional efforts to achieve internal balance. Despite the similarity between the internal hard balancing and the hedging behavior in the second phase, there is a fundamental difference between the two. The difference is that the objective of hard balancing includes imposing hegemony on other states and possibly embarking on a future war against them, while strategic hedging at this stage is limited to facing risks that could be imposed on the hedging state in case of uncertainty. This stage is designed according to the security dilemma theory; the state may take measures designed to increase its security, such as increasing its military capability, in response to similar measures by other countries55. The power transition theory also suggests that the distribution of these capabilities between the great powers leads to an increased likelihood of war, and therefore the high level of threat 56. Moreover, according to the threat perception negative balancing model, the higher the threat level the greater the preference for military balancing57. Hence, the positive military balancing could be the best choice for the hedging state at this level. The transformation mechanism is depicted in Figure 1. The relation between the four levels in this mechanism is hierarchical: transition to the next level is not be possible without fulfilling all the requirements of the previous level. As the transition proceeds, it could also show a tendency to accelerate: completion of the last two levels may tend to take a shorter period of time58. It is important to note that this mechanism deviates from the basic principles of strategic hedging, specifically, as it could lead to the achievement of internal balancing and, as such, to the possibility of deteriorating relations with the system leader over time. However, these four levels may be a necessary development for the process of strategic hedging to reach it final stage.

55

Robert Jervis, “Cooperation under the Security Dilemma,” World Politics 30, no. 2, (1978): 167–174; and Robert Jervis, Perception and Misperception in International Politics, (Princeton, N.J.: Princeton University Press, 1978), 58–113. 56 Feng, “Global Power Transitions,” 170-189; Gao, “Market Expansion and Grand Strategy,” 406; and AFK Organski, World Politics, (New York, 1958). 57 He, “Undermining Adversaries: Unipolarity,” 170. 58 Especially given that the third level of the mechanism is a short transitional stage paving the way for the emergence of the second phase of the strategic hedging.

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The First Phase of Strategic Hedging Yes

Hedging policies must be intensified to achieve better results

NO

Level One: Rapid Economic Growth of the Hedging State and Decline in the Overwhelming Superiority of the System Leader.

Yes

Hedging state still does not pose a real threat to the system leader

NO

Level Three: Threat to the National Security of the Hedging State as Its Economic Growth Slows.

Yes

NO

Level Two: Utilization of Negative Balancing Strategies by System Leader against the Hedging State.

Hedging state's concerns of losing some core interests

Yes Level Four: A Major Focus on Increasing the Military Capacity and the Transition to the Second Phase of Strategic Hedging Figure 1: The Strategic Hedging Transformation Mechanism.


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This mechanism could be applicable for all states that follow strategic hedging. But due to the significant gap between the system leader and the other states, the unfolding of the transition process needs time commensurate with the capabilities of each state. The transition should take much more time for the states that follow only Type B hedging59. Moreover, several states do not follow strategic hedging at all. These reasons could explain the presence of U.S. at the top of the power pyramid for decades. However, the possibility of reducing the capacity gap between the great powers in the future and dependence more heavily on Type A hedging may lead to more turnover in terms of systemic leadership cycles in the international system.

Applying the Transformation Mechanism to the Second Phase For second-tier states, strategic hedging could be the optimal alternative for other strategies such as balancing, bandwagoning, and buckpassing under condition of unipolar system. Consequently, it is most prevalent among several second-tier states such as China, Russia and Brazil60. This is especially the case with China, which is considered a strong example of using strategic hedging in order to improve its relative position vis-àvis the United States. Examples are China’s strategic relation with Russia, its energy security strategy, and its efforts at military modernization61. In fact, we have chosen China as a case study because it is the most likely peer competitor to the United States in terms of economic capacity and military spending. Moreover, China does not enjoy comparatively warm relations with the US, so it is most likely to engage in Type A hedging. A crucial question then is whether China is entering the second phase of hedging. In the rest of this paper, we will apply the transition mechanism developed earlier to find out which level of strategic hedging China has reached at present. Level One: Rapid Economic Growth of the Hedging State and Decline in the Overwhelming Superiority of the System Leader: China has achieved spectacular growth in the last two decades; it is now the second largest economy in the world, after the United States. This growth has led to significant changes in the distribution of authority and influence within the major international organizations such as the G2062, the World Bank, and the International Monetary Fund 59

Reliance on Type B hedging could ease the burden on the system leader in providing subsidies to other states, and thus contribute to the preservation of its relative superiority and prolong the unipolarity period. In return, Type A hedging helps to power diffusion and expedite the transition from unipolarity to multipolarity. 60 Tessman, “System Structure and State Strategy,” 192-194. 61 See Tessman, “System Structure and State Strategy,” 192-231; Tessman and Wolfe, “Great Powers and Strategic Hedging,” 214-240; and Wolfe, “China's Strategic Hedging,” 300-313. 62 China is the second largest economy in the Group of Twenty Finance Ministers and Central Bank Governors.

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(IMF). Arguably, the world economy has become really “multipolar”, and global economic influence is flowing to Asia, implying a loss of prestige for the United States and Europe63. The financial crisis in 2008-2010 constituted a significant turning point in the global economic system as a result of the relative decline in the Washington’s share of global GDP and the rise of China’s share in the same period. The U.S. has relied heavily on financial support from developing economies to overcome the crisis, particularly from China, which provided the best performance during the crisis and took the lead in reviving the global economy64. The rise of the Chinese economy has dramatically impacted several important issues in international politics. Beijing is now a major force in determining global economic trends. China’s foreign policy is crucial for the maintenance of the stability of the global trading system. Growth of the Chinese economy has also boosted China’s influence on several non-economic issues. China is now an unavoidable actor in the management of key issues in the global system, including environmental issues, nuclear nonproliferation, energy issues, and improving the governance in the developing world65. Moreover, China tops the list of creditor nations in the world with the largest reserves of foreign exchange, especially the U.S. dollar66. It could convert this financial strength into strategic power to achieve its regional and international ambitions, e.g. these reserves could be used to resolve a dispute with the U.S. government on certain strategic issues in the China Sea, or to provide loans and financial assistance for developing countries in order to ensure the subordination of these countries to Beijing67. China’s embrace of multilateralism has emerged as an attempt to shape a new international system by preparing favorable conditions while avoiding direct confrontation with Washington68. In the meantime, China has pursued an effective policy based on “participation, engagement, pushing for cooperation in areas that would serve Chinese interests, avoiding excessive responsibilities, blocking initiatives that would harm its interests, and

63

Layne, “This Time It’s Real” 203; Mahbubani, “The New Asian Hemisphere”; Robert H. Wade, “Emerging World Order? From Multipolarity to Multilateralism in the G20, the World Bank, and the IMF,” Politics & Society 39, no. 3, (2011): 347-378; and Fareed Zakaria, The Post-American World, (New York: W. W. Norton, 2008). 64 Xinbo, “Understanding the Geopolitical Implications,” 156; and William C. Wohlforth, “How Not to Evaluate Theories,” International Studies Quarterly 56, no. 1, (2012): 219. 65 Robert S. Ross, “The Rise of Chinese Power and the Implications for the Regional Security Order,” Orbis 54, no. 4, (2010): 544. 66 In June 2013, China's foreign exchange reserves have reached 3,557 trillion U.S. dollars. It is estimated that China has 30.2% of global foreign exchange reserves and exceeds the value of all the gold reserves held by the world in the balance sheets of all countries. According to reports issued by the Bank for International Settlements, the U.S. dollars represent 70% of Chinese reserves. 67 James Kurth, “Confronting a Powerful China with Western Characteristics,” Orbis 56, no. 1, (2012): 5556. 68 Schweller and Xiao, “After Unipolarity China’s Visions,” 66.


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refraining from making grand proposals”69. At the same time, U.S. efforts to maintain its international dominance have become very expensive, all the more so as Washington is still mired in the largest debt in its history and is suffering the effects from the biggest economic crisis since the Great Depression. Additionally the recent partisan standoff between Republicans and Democrats has led to the weakening of the ability to find a compromise for basic issues70. These developments have raised U.S. concerns about China’s growing economic influence. First, China will soon become the largest economy in the world, surpassing the United States, a development that will involve significant geopolitical changes. Such changes carry the danger of instability and war as was demonstrated by the rise of new powers in early twentieth century (such as Japan, Germany, and U.S.) which led to two world wars71. Second, China could use its large economic surplus to improve its military force and to achieve its political ambitions72. Third, China’s growing capabilities could lead to U.S.’s loss of control on the East Asian region, ending its absolute dominance since 194573. Finally, the U.S. might wish to stick to unilateralism as it produces quicker results in advancing its security interests, while multilateralism involves high transaction costs in reaching policy compromises with partners74. Level Two: Utilization of Negative Balancing Strategies by System Leader: In recent years, the U.S. government has taken a strategic decision to protect its national security interests by increasing commercial and military presence in the AsiaPacific. U.S. President Barack Obama declared this decision in November 2011: “As a Pacific nation, the United States will play a larger and long-term role in shaping this region and its future”75. At the same time, the United States has strengthened its security ties with the Asian countries, including traditional allies (such as Japan, South Korea, and Taiwan), and has created new relations with emerging powers (such as India, Indonesia 69

Mingjiang Li, “Rising from Within: China's Search for a Multilateral World and Its Implications for SinoUS Relations.” Global Governance: A Review of Multilateralism and International Organizations 17, no. 3, (July-September 2011): 331. 70 See Michael Beckley, “China’s century Why America’s edge will endure,” International Security 36, No. 3, (2012): 77; Robert A. Pape, “Empire Falls,” National Interest 99, (2009): 21–34; Lara Brown, “Nobody ‘Won’ the Shutdown” U.S.News, http://www.usnews.com/opinion/blogs/larabrown/2013/10/17/neither-democrats-or-republicans-won-the-debt-ceiling-shutdown-standoff, accessed October 17, 2013; and Robert Schlesinger, “Get Rid of the Debt Ceiling” U.S.News http://www.usnews.com/opinion/blogs/robert-schlesinger/2013/10/17/with-the-shutdown-crisisover-lets-get-rid-of-the-debt-ceiling, accessed October 17, 2013. 71 Layne, “The Unipolar Illusion,” 5–51. 72 Zakaria, “From Wealth to Power”. 73 Steve Chan, “An Odd Thing Happened on the Way to Balancing: East Asian States’ Reactions to China’s Rise,” International Studies Review 12, no. 3, (2010): 408; and Layne, “This Time It’s Real” 206. 74 Layne, “US Hegemony in a Unipolar World,” 785; Pape, “Soft Balancing against the United States” 45; and Wolford, “Theorizing Multilateralism in a Time of Unipolarity,” 295. 75 David W. Barno, Nora Bensahel, and Travis Sharp, “Pivot but Hedge: A Strategy for Pivoting to Asia While Hedging in the Middle East,” Orbis 56, no. 2, (2012): 158.

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and Vietnam)76. Consequently, Washington has raised the level of the alliance with hostile states to China, especially Japan, which is dubbed the “Great Britain of the East”77. A growing U.S. strategic dependence upon Japan has clearly been demonstrated through joint military exercises over the past decade. The United States desire for its ally “Tokyo” to become a militarily stronger has led to a rise in Japanese ambitions for a larger military capability by force projection operations78. Moreover, the United States has continued to provide arms periodically to Taiwan in order to create a “shield” to support the island’s independence from China in the future79. Meanwhile, the United States has provided substantial military support to India in order to balance China in the Asia-Pacific. In addition to an expanding program of joint military exercises, U.S. sales of advanced military equipment to India have reached approximately US$10 billion over the past decade. In 2008 Washington signed a civilian nuclear agreement with New Delhi, under which providing India with nuclear fuel and nuclear technology became possible80. The U.S. approach in the Asia-Pacific has raised questions about hidden intentions of Washington to curb China’s rise through a negative military balancing strategy. Regardless of the validity of this argument, the Chinese leaders believe that the United States is proactively instigating crises between China and its neighbors, which helps both to suppress China’s rise and to create a pretext for bringing the U.S. military into the region’s security affairs81. For example, several Chinese analysts believe that Washington has fueled tensions between China and Japan over the sovereignty of the Senkaku Islands82, which occupy a strategic position on major maritime transportation routes. These tensions began to boil in April 2010 when Tokyo Governor, Shintaro Ishihara, 76

Lara Buszynski, “The South China Sea Oil, Maritime Claims, and U.S.–China Strategic Rivalry,” The Washington Quarterly 35, no. 2, (2012): 139-156; and Ely Ratner, “Rebalancing to Asia with an Insecure China.” The Washington Quarterly 36, no. 2, (2013): 23. 77 Michael Evans, “Power and Paradox: Asian Geopolitics and Sino-American Relations in the 21st Century,” Orbis 55, No. 1, (2011): 89; and Daniel Twining, “America’s Grand Design in Asia,” The Washington Quarterly 30, no. 3, (2007): 80. 78 Evans, “Power and Paradox,” 102. 79 Avery Goldstein, “First Things First The Pressing Danger of Crisis Instability in U.S.-China Relations,” International Security 37, no. 4, (2013): 60. 80 Evans, “Power and Paradox,” 106; and George J. Gilboy and Eric Heginbotham “Double Trouble: A Realist View of Chinese and Indian Power.” The Washington Quarterly, Vol. 36, no. 3, (2013): 125. 81 Michael S. Chase and Benjamin S. Purser, “Pivot and Parry: China’s Response to America’s New Defense Strategy,” China Brief 12, no. 6, (2012): 9-12; and Ratner, “Rebalancing to Asia,” 23. 82 Senkaku Islands (or Diaoyu Islands in Chinese language) are a group of uninhabited islands located in the East China Sea, east of Mainland China, northeast of Taiwan, west of Okinawa Island, and north of the southwestern end of the Ryukyu Islands. China claims the discovery and control of these islands from since the fourteenth century. Japan occupied the islands in 1895 until its surrender at the end of World War II. These islands have undergone to U.S. administration between 1945 and 1972. Under the “Okinawa Reversion Agreement” between the United States and Japan, the islands have been returned to Japanese control in 1972. These islands are still a substantial contentious issue in the foreign relations between Japan and the China.


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announced from Washington, D.C. his intention to buy three of the islands from a private Japanese citizen. With the escalation of the crisis, U.S. officials have reiterated Secretary Clinton’s October 2010 statement that “the Treaty of Mutual Cooperation and Security, which obliges the United States to defend Japan in case of hostilities, covers the Senkaku Islands”83. The conflict over these islands has become “a time bomb planted by the U.S. between China and Japan” as described by the retired Chinese diplomat Chen Jian, who said “That time bomb is now exploding or about to explode”84. What reinforced doubts about the intentions of Washington is the U.S. policy that has sought to increase military presence in the Asia-Pacific; the U.S. Secretary of Defense, Leon Panetta, confirmed that in his speech from Singapore in June 2012, “by 2020 the Navy will re-posture its forces from today’s roughly 50/50 percent split between the Pacific and the Atlantic to about a 60/40 split between those oceans. That will include six aircraft carriers in this region, a majority of our cruisers, destroyers, Littoral Combat Ships, and submarines”85. Controlling significant points in the South China Sea, including locations of strategic importance to China’s economic and military interests, has supported suspicions about discouraging China diplomatically and economically86. On the other hand, the United States uses a negative nonmilitary balancing strategy against China, e.g., U.S. pressure on the key energy suppliers has emerged as a means to restrict oil exports to China87. China is one of the largest countries affected by the U.S. sanctions on Tehran, which led to the decline of Iranian oil exports to Beijing 88. These sanctions have affected several Chinese companies dealing with Iran, which has led to the resentment of the Chinese government89. Beijing’s anger over U.S. sanctions against Chinese financial institutions appeared in a statement to the Chinese Foreign Ministry. “China is strongly dissatisfied, is firmly opposed to it and will raise solemn 83

Ratner, “Rebalancing to Asia,” 24-25. Jane Perlez and Keith Bradsher, “Ex-/Envoy Says U.S. Stirs China-/Japan Tensions,” New York Times, http://www.nytimes.com/2012/10/31/world/asia/in-speech-organized-by-beijing-ex-diplomat-callsislands-dispute-with-japan-a-time-bomb.html?_r=1&, accessed October 31, 2012. 85 U.S. Department of Defense, “Shangri-La Security Dialogue,” Speech at Shangri-La Hotel, Singapore, Saturday, June 02, 2012, http://www.defense.gov/speeches/speech.aspx?speechid=1681 86 Wolfe, “China's Strategic Hedging,” 309. 87 Wojtek M. Wolfe and Brock F. Tessman, “China's Global Equity Oil Investments: Economic and Geopolitical Influences,” Journal of Strategic Studies, 35, no. 2 (2012): 185. 88 Erica Downs and Suzanne Maloney, “ Getting China to Sanction Iran: The Chinese-Iranian Oil Connection.” Foreign Affairs, (March/April 2011 Issue), http://www.foreignaffairs.com/articles/67465/erica-downs-and-suzanne-maloney/getting-china-tosanction-iran 89 U.S. sanctions on Tehran primarily target Iran’s key energy sector. Where, the U.S. Treasury Department has sought to cut off Iran’s Central Bank from the international financial system and has barred U.S. banks from handling any indirect transactions with all Iranian banks. The sanctions have been also used against banks that have helped Iran violate U.S. financial restrictions, e.g., these sanctions have included the Bank of Kunlun in China on July 31, 2012 (see Kenneth Katzman, “Iran Sanctions,” Congressional Research Service, (Report prepared for Member and Committees of Congress in October 11, 2013). 84

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representations to the U.S. from both Beijing and Washington”90. In the negative nonmilitary balancing context, the United States closely monitors China’s burgeoning space program in order to maintain its dominance in space. The U.S. National Security Space Strategy has sought to issue several laws and to conclude several agreements that call for transparency in space activities and for arms control in space, in a clear reference to China’s opaque politics regarding its space program91. Moreover, the U.S. criticism of democracy standards and human rights abuses in China has sparked resentment in the Chinese government; Chinese foreign ministry spokeswoman Hua Chunying expressed this position when she said “we firmly oppose those kinds of biased and malicious criticisms”92. Although China’s leadership is looking to Washington as the main threat to Beijing, senior leaders and intellectuals in China realize that it would be foolhardy to engage in a direct confrontation with Washington93. Chinese concerns of losing out on some core interests in combination with the military superiority of the United States are preventing such confrontation so far. However, a continuation of Washington’s escalatory policies in light of the current international variations could lead to a change in the attitude of the Chinese leadership in the future94: continued negative balancing strategies by the system leader (US) will tend to increase threat perceptions on the Chinese side, and thus turn the positive balancing model into the optimal choice for the hedging state (China)95. Ultimately, what is acceptable to a second-tier state at a certain level of power will not necessarily be acceptable once it reaches more equal levels of power vis-à-vis the system leader. Level Three: Threat to the National Security of the Hedging State with the Decline in Its Economic growth: Beijing realizes that China’s economic growth depends heavily on global stability and requires a stable relationship with the United States96. Chinese leadership’s interest in foreign policy appeared clearly in the statement issued by the Central Committee of the 90

Wayne Ma “China Scolds U.S. Over Iran-Related Bank Sanctions,” The Wall Street Journal, http://online.wsj.com/news/articles/SB10000872396390444320704577562330527832056, accessed August 1, 2012. 91 Mark Hilborne, “China's rise in space and US policy responses: A collision course?” Space Policy 29, no. 2, (2013): 126. 92 Stephanie Nebehay and Sui-lee Wee “West criticizes, China defends human rights record at U.N.,” Reuters, http://www.reuters.com/article/2013/10/22/us-china-rights-idUSBRE99L01220131022, accessed October 22, 2013. 93 Buszynski, “The South China Sea Oil,” 152; and Jisi Wang, “China’s Search for Stability with America,” Foreign Affairs 84, no. 5, (2005): 44. 94 Increasing pressures on the hedging state by the system leader will accelerate passing the second level of the strategic hedging transformation mechanism. In contrast, the decline of these pressures will slow down the process of transition, but will not stop it. 95 He, “Undermining Adversaries: Unipolarity,” 191. 96 Schweller and Xiao, “After Unipolarity China’s Visions,” 53.


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Communist Party of China: “China’s foreign policy must maintain economic construction as its centerpiece, be closely integrated into domestic work, and be advanced by coordinating domestic and international situations”97. In the meantime, China has actively participated in international events and the re-drafting of international institutions as the only way to maintain economic growth and political stability on the domestic front98. In light of these policies, China has achieved the highest level of growth compared to all its competitors to become the biggest beneficiary of the current international system over the past three decades99. This begs an important question: Why would China seek to change a global system which works to its advantage? The answer is simply the fact that this system, sooner or later, will no longer work for the benefit of China. Ultimately, according to Solow’s model of theory in economic growth, China’s economic growth will slow with time100. The relative capability growth of emerging powers, such as China, passes through two distinct phases. In the first stage, the rising power achieves increasingly rapid economic growth with a period of relative calm in their foreign policy. In the second phase, growth will continue but at a decreasing rate, generating new incentives for foreign policy confrontation101. In November 2012, the report about a global economic outlook issued by the U.S. Conference Board confirmed that Chinese growth will drop dramatically over the next few years, with the rapid decline of investment returns and aging crisis hitting the country hard102. In fact, China’s economy has witnessed a slowdown in growth in recent years103. This decline can be observed by monitoring the growth rates in previous years (Figure, 2).

97

Jisi Wang, “China’s search for a grand strategy a rising great power finds its way,” Foreign Affairs 90, no. 3, (2011): 74. 98 Elizabeth Economy, “Game changer coping with China’s foreign policy revolution,” Foreign Affairs, (November/Devember 2010), http://www.foreignaffairs.com/articles/66865/elizabeth-ceconomy/the-game-changer 99 Li, “Rising from Within: China's Search,” 346. 100 Solow, “A Contribution to the Theory of Economic Growth,” 65-94; and Wohlforth, “How Not to Evaluate Theories.” 221. 101 Brock F. Tessman, “The Evolution of Chinese Foreign Policy: New Incentives with Slowing Growth,” Asian Security 5, no. 3 (2009): 296. 102 Harsh V. Pant, “The BRICS Fallacy,” The Washington Quarterly 36, no. 3, (2013): 91-92. 103 China's GDP growth in the previous three years declined to 7.8% in 2012. It is estimated to that it have fallen to the level of 7.5% in 2013, which is the lowest percentage in the new millennium.

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Figure 2: China's GDP Growth, 2000-2015 (annual%) 16 14 12 10 8 6 4 2 0

Source: The World Bank

On the other hand, U.S. policies in the Asia-Pacific raise real concerns for Chinese leaders about the national security of their country, e.g., deployment of additional missiles in southern Japan could lead to a decline in the effectiveness of China’s nuclear deterrence104. From the standpoint of the Chinese leadership, the joint missile defense system between the United States and Japan encourages Japan’s aggressive position in the Senkaku Islands dispute, which constitutes a serious threat to China’s national security105. At the same time, Chinese intellectuals doubt that the relations between Washington and Beijing are balanced as result of U.S. attempts to undermine the fundamental interests of their country, which made China into “a victim” of U.S. policies106. Wang Jisi explained the Chinese view that “the ultimate goal of the United States in world affairs is to maintain its hegemony and dominance and, as a result, Washington will attempt to prevent the emerging powers, in particular China, from achieving their goals and enhancing their stature”107.

104

Ratner, “Rebalancing to Asia,” 24-25. Thom Shanker and Ian Johnson, “U.S. AccordWith Japan Over Missile Defense Draws Criticism in China,” New York Times, http://www.nytimes.com/2012/09/18/world/asia/u-s-and-japan-agree-onmissile-defense-system.html?_r=4&, accessed September 17, 2012. 106 See Cui Tiankai and Pang Hanzhao, “China-US Relations in China's Overall Diplomacy in the New Era: on China and US Working Together to Build a New-Type Relationship Between Major Countries,” Ministry of Foreign Affairs of People's Republic of China, http://www.fmprc.gov.cn/eng/wjb/zzjg/bmdyzs/xwlb/t953682.shtml, accessed July 20, 2012. 107 See Ratner, “Rebalancing to Asia,” 22, cited from Wang Jisi and Kenneth Lieberthal, Addressing U.S./China Strategic Distrust, John L. Thornton Center Monograph Series, no. 4 (Washington, DC: The Brookings Institution Press, March 2012), 8. 105


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China will not accept the continuation of the global system in its present form forever, especially not as its earnings from this system will increasingly decline. Therefore, it is seeking to design a new world order that reflects “its interests and desires, institutional architecture, and idiosyncratic norms and rules”108. These efforts will cast a shadow over China’s hedging policies. At present, pursuing strategic hedging in the form of economic development and military modernization efforts is still the optimal choice for China109. As the Chinese economy is still achieving relatively high growth rates110, Beijing’s concerns about losing substantial economic gains are still significant, meaning that China has not yet reached all the requirements of the third level. But in the future, Beijing might attempt to protect its interests against external challenges by gradually shifting toward the second phase of strategic hedging. That being said, we do not think that China will squander its economic potential in military spending, as Japan and Germany did before World War II, but it may follow a competitive approach similar to the approach of the Cold War for global domination111.

Level Four: A Major Focus on Increasing the Military Capacity by the Hedging State: Realists’ allegations about achieving internal and/or external balance have remained away from reality so far; the overwhelming military superiority of the U.S. since the end of the Cold War is still a fact of international life that cannot be denied112. The United States retains a huge number of advantages compared to potential competitors, including China. Washington is still in a strong position to shape a new world order by setting the rules and institutions that will govern international politics in the future 113. In contrast, China as a rising power has several potentials and capabilities to become an important player in international politics, but so far it is not clear to what extent China is ready to

108

Schweller and Xiao, “After Unipolarity China’s Visions,” 51. Wolfe, “China's Strategic Hedging,” 301. 110 China still achieves the highest growth in GDP compared with other major countries, such as the United States, Japan, Germany, Russia, France and the United Kingdom. 111 Zheng Bijian, “China's 'Peaceful Rise' to Great-Power Status,” Foreign Affairs 84, no. 5, (2005): 22; See more J. Michael Cole, “Does China Want a Cold War?” The Diplomat, http://thediplomat.com/2013/11/does-china-want-a-cold-war/ accessed November 5, 2013; and Time World, “What If There Was a Cold War Between the U.S. and China?” http://world.time.com/2012/11/28/what-if-there-was-a-cold-war-between-the-u-s-and-china/ accessed November 28, 2012. 112 Chan, “An Odd Thing Happened,” 392; Robert Jervis, “Unipolarity: A Structural Perspective,” World Politics 61, No. 1, (2009): 188–213; Wohlforth, “The Stability of a Unipolar World,” 5–41; William C. Wohlforth, “Unipolarity, Status Competition and Great Power War,” World Politics 61, no. 1, (2009): 28–57; and Wohlforth, “How Not to Evaluate Theories.” 219-222. 113 Richard Maher, “The Paradox of American Unipolarity: Why the United States May Be Better Off in a Post-Unipolar World,” Orbis 55, no. 1, (2011): 68. 109

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use force to achieve its claims and how far Beijing is willing to go 114. China’s long-term intentions may not be benign and its claim of “peaceful growth” might just be a way to hide its capacities. In the end Beijing’s main objective might be to increase its wealth enough to obtain the military capabilities in order to compete with Washington for regional hegemony115. Ultimately, it is always possible for countries wishing to achieve internal balance to transfer their potential capabilities (i.e., economic, technological, social, and natural resources) into military power116. In the first phase of the strategic hedging process, the hedging state avoids increasing its military arsenal to protect its current benefits such as subsidies provided by the system leader or rapid economic growth, like in the case of China. But this deterrent will fade with the erosion of these interests. Then positive military balancing becomes a more rational choice to avoid future suffering resulting from the loss of regional prestige or decline in bargaining power with the system leader, even if the probability of defeat is high117. Nevertheless, the best way for China to achieve its goals might be the strategy of “rightful resistance”. Indeed, Beijing may seek to enhance its international standing under the existing international system and attempt to change the system and to end U.S. hegemony whenever it follows “naturally”118. This would imply a gradual change in a responsible manner to maintain the global system stability without direct collision with the United States119. Still, we believe that Beijing could focus on increasing its military arsenal to achieve internal balance in response to the decline in its economic growth and that would be the most prominent feature of the second phase of the strategic hedging. In fact, although Beijing has not yet reached the ability to confront Washington directly, it has already embarked on developing the infrastructure of its military capabilities as an ultimate deterrent against the United States, especially after the Taiwan crisis of 1995-1996120. A coherent strategy has been developed to improve the Chinese army and increase its capabilities in all areas. Beijing supports a wide range of military modernization programs, which aims to optimize its regional air and naval capabilities, including the development of space technologies and access-denial capabilities121. Military 114

John Hemmings, “Hedging: The Real U.S. Policy Towards China?” The Diplomat, http://thediplomat.com/the-editor/2013/05/13/hedging-the-real-u-s-policy-towards-china/ accessed May 15, 2013. 115 Layne, “This Time It’s Real” 205. 116 Lieber and Alexander “Waiting for Balancing,” 119; and Zakaria, “From Wealth to Power”. 117 Robert Jervis, “The Utility of Nuclear Deterrence” in R. Art and K. Waltz (eds.), The Use of Force: Military Power and International Politics (5th edn), (Lanham, MD: Rowman & Littlefield, 1999), 87–94; and Jason Rich, “Adding Some Context: The Systemic Constraints on Coercion,” Politics 33, no. 1, (2013): 42. 118 Schweller and Xiao, “After Unipolarity China’s Visions,” 50. 119 Breslin, “China and the Global Order,” 616. 120 Buszynski, “The South China Sea Oil,” 145. 121 David Lei, “China’s New Multi-Faceted Maritime Strategy,” Orbis 52, no. 1, (2008): 140; and Ross, “The Rise of Chinese Power,” 545.


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modernization has led to converting the military balance quickly in China’s favor in the Asia-Pacific122. Recently Beijing has begun increasing its military power outside the Taiwan Strait and in the South China Sea. China’s missile program has also become a threat to the U.S. air force and the U.S. navy ships in the Pacific Ocean 123. The development of China’s military capabilities is not limited to land and naval forces, but also includes strengthening its space capabilities in order to build a major capability in space. China’s space program is far from “transparent”, as it is controlled by the military124. In October 2003, China became the third strongest space power in the world. It has launched several satellites, which could provide photos and communications in order to support the military reconnaissance operations. The People’s Liberation Army has created a space-based network to confuse enemy armies in the event of conflict. This network can match the U.S. C4SRI technological superiority125. China’s ability to implement space projects autonomously could lead it to “increase commercial, military, and diplomatic opportunities at times and places of China’s choosing”126. Furthermore, although the proportion of China’s military spending of GDP is less than its U.S. counterpart, the high rates of China’s economic growth make the average annual growth in China’s defense budget higher than the U.S’. According to a study conducted by the International Institute for Strategic Studies, China might begin to spend as much as the US on defence between 2025 and 2050, although the convergence is more likely to occur after 2028127. Finally, it is important to mention that strategic hedging behavior in general does not deal with the immediate threat. The hedging state has a large horizon in which to achieve its goals, especially “when facing a powerful opponent that will require a large and long-term effort to defeat”128. In addition, the process of transition from a unipolar system to a bipolar or multipolar structure is not a simple process, and the rise of a peer competitor could encounter many challenges that are difficult to overcome129.

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Felix K. Chang, “China’s Naval Rise and the South China Sea: An Operational Assessment,” Orbis 56, no. 1, (2012): 19. 123 Doug Bandow, “Strategic Restraint in the Near Seas,” Orbis 56, no. 3, (2012): 489-490; and Buszynski, “The South China Sea Oil,” 145-148. 124 Hilborne, “China's rise in space and US policy,” 121. 125 Nigel Inkster, “Conflict Foretold: America and China,” Survival: Global Politics and Strategy 55, no. (5): 7- 28; and Lei, “China’s New Multi-Faceted,” 147. 126 Scott Pace, “How far – if at all – should the USA cooperate with China in space?” Space Policy 27, no. 3, (2011): 130. 127 Giri Rajendran, “Chinese-US defence spending projections,” IISS Voices, http://iissvoicesblog.wordpress.com/2013/03/19/chinese-us-defence-spending-projections/#more5228, accessed March 19, 2013. 128 Daniel S. Morey, “Why Powerful States Don’t Go It Alone,” International Studies Review 14, no. 3, (2012): 462. 129 David Wilkinson, “Unipolarity Without Hegemony,” International Studies Review 1, no. 2, (1999): 167– 168; and Wohlforth, “Unipolarity, Status Competition and Great Power War,” 28–57.

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Conclusion: Following the Strategic Hedging Strategic hedging behavior is used by second-tier states in order to improve their relative position vis-à-vis the system leader. It is most likely to occur in unipolar systems that are experiencing power diffusion, and it involves the improvement of both military and economic capability while at the same time avoiding a direct confrontation with the system leader. Strategic hedging takes place against the backdrop of key system dynamics that involve the diffusion of hard and soft power away from the system leader toward various second-tier states. In this paper, we have argued that strategic hedging involves a gradual, two-phased process, starting with a significant power difference between the hedging state and the system leader, and leading to a point where this difference has disappeared as a result of successful hedging policies. We provided a fourstage transformation mechanism that allows the analyst to gauge the level of transition to the second phase of strategic hedging behavior. We used China as an illustrative case study and employed this example to test a proposed four-level transformation mechanism. The results of this study show clearly that the transition to the second phase is not yet complete in the case of China, but could be so in the next few years. The structural changes of strategic hedging appear through a relative increase in military capability and a relative decrease in economic growth. Progressing through the stages of strategic hedging, fears of upsetting the system leader fade as the power difference between the hedging state and the system leader fades. Arguably, strategic hedging in the first stage is closer to soft balancing, whereas it is closer to the hard balancing in the second phase. As we look to develop a research program focusing on the development stages of strategic hedging behavior, we formulate seven basic propositions that can be tested in future research: 1. We believe that strategic hedging is a successful behavior, and it may lead to the emergence of a new world order that might not be necessarily confrontational, but it will change the current format of international relations. 2. Strategic hedging could be continued by the hedging state after reaching in competitive capabilities with the former system leader, but in other forms and new features, e.g., the erosion of the third criterion relating to avoid upsetting the system leader. 3. Reliance on Type B hedging could ease the burden on the system leader in providing subsidies to other states, and thus contribute to the preservation of its relative superiority and prolong the unipolarity period. In return, Type A hedging stimulates power diffusion and expedites the transition from unipolarity to multipolarity.


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4. The system leader’s reactions could also play an important role in speeding up or slowing down the process of transformation, especially at the second level of the mechanism. 5. Success of hedging policies may prompt other second-tier states to pursue strategic hedging behavior under the new world order. 6. Some countries might join one or the other side of the emerging bipolar equation at the top of the system, generating a global system similar to the system of the Cold War period. 7. The second phase of the strategic hedging might not limited to the pursuit of internal balance, but could include additional efforts to achieve external balance. Future research needs to establish when this would be more likely. While we are fully aware that it is not possible to develop a theory that can predict the rise and fall of a great power, we believe that strategic hedging theory describes an underlying mechanism that will make possible more realistic forecasts of great power dynamics under condition of power diffusion.