Sino-European Free Trade and Investment Agreements in the Emerging Bipolar Era
A Comparative Case Analysis of the Foreign Policy Implications of European States Expanding Economic
Relations with China
Martin Fosse
Master’s Thesis in Political Science Department of Political Science
University of Oslo
Spring 2021
Word Count: 32 093
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Abstract
This thesis sets out to analyze the effects of free trade and investment agreements with China for European countries' foreign policy in light of increasing rivalry between the United States and China. European states now confront similar challenges in balancing between the economic opportunities closer ties to China entails, while maintaining a good relationship with its most crucial ally, the United States. As the world is moving towards bipolarity, the guiding assumption is that European states will confront more dilemmas and increasingly be disposed to pick sides on various issues, while attempting to not cause dismay in either Washington or Beijing in the process. Key factors for explaining these dilemmas are the effect of economic dependence and formal alliances. While China’s influence in Europe today should not be exaggerated, findings reveal that their influence has increased in tandem with their economic growth.
This study takes the form of a comparative case analysis which considers the implications of geoeconomic forces and alliance commitments. Four cases will be put under the limelight, starting with the China-Iceland and China-Switzerland free trade agreements, which were both signed in 2013 and entered into effect in 2014. Next, the EU-China bilateral investment treaty, signed in 2020 but yet to be ratified, will be examined. The final case to be analyzed is that of the China-Norway free trade agreement which has been at the negotiation stage since 2008. Synthesizing empirical and theoretical finding, a conclusion on the foreign policy effects of European states entering into free trade and investment agreements with China will be presented.
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Acknowledgment
I would like to extend my deepest thanks and gratitude to all the people who have
supported me throughout my journey as a student of Political Science and helped make this thesis a reality. The road leading up to this point has been winding, at times stressful, but more than anything exciting.
First of all, thank you to my supervisor Øystein Tunsjø at the Institute for Defense Studies (IFS). His guidance, constructive feedback and outstanding China knowledge were of great assistance in pinning down a topic and keeping me on the right track. I would also like to thank my co-supervisor Dag Harald Claes for helpful comments, especially at the demanding end-phase of the thesis.
Furthermore, I would like to express my gratitude to my wonderful friends at Blindern for their companionship. I feel privileged to have had you by my side, keeping me motivated and serving as moral support though ups and downs. Last but not least, I am tremendously grateful to my family for supporting me every step of the way, and for always rooting for me regardless of which path I have chosen to pursuit in life.
The responsibility for all errors or shortcomings in this thesis is entirely my own.
Martin Fosse Oslo, 13.06.2021.
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Content
1. Introduction and Research Question ... 1
1.1. Background and Context ... 3
2. Research Design ... 5
2.1. Comparative Case Study ... 5
2.2. Case Selection ... 6
2.3. Methodological Challenges ... 8
2.4. Sources and Data Collection ... 10
3. Theoretical Framework ... 12
3.1. Geoeconomics ... 12
3.1.1. Geoeconomics From Theory to Practice ... 17
3.2. Alliance Politics ... 19
3.2.1. Alliances From Theory to Practice ... 21
3.3. Balancing Economic Opportunities and Alliance Obligations ... 22
The Effect of Economic Dependence ... 22
The Effect of Formal Alliances ... 24
The Effect of Emerging Sino-American Bipolarity ... 25
4. Analysis of Sino-European Free Trade and Investment Agreements ... 26
4.1. The China-Switzerland and China-Iceland Free Trade Agreement ... 27
4.1.1. Balancing and Maintaining Maneuverability ... 32
Switzerland: Caught in a Squeeze ... 32
Iceland: Hedging their Bets ... 36
4.1.2. Analysing Trade and Investment Patterns ... 38
4.1.3. Summary ... 43
4.2. The EU – China Comprehensive Investment Agreement ... 45
4.2.1. Coordinated Sanctions, Halting Ratification ... 50
4.2.2. European Disunion ... 51
4.2.3. The EU’s Outlook in a World Headed Towards Bipolarity ... 53
4.2.4. Summary ... 55
4.3. The China-Norway Free Trade Agreement ... 56
4.3.1. Sino-Norwegian Relations – A Story of Engagement and Disengagement ... 58
4.3.2. Assessing the FTA ... 64
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4.3.3. Geoeconomic Implications ... 68
4.3.4. Navigating Foreign Policies with Emerging Bipolarity ... 70
4.3.5. Confronting Dilemmas and Increased Pressure ... 75
4.3.6. Summary ... 78
5. Findings and Conclusion... 80
The Effect of Economic Dependence ... 80
The Effect of Formal Alliances ... 81
The Effect of Emerging Sino-American Bipolarity ... 82
Conclusion ... 83
Appendix ... 85
References ... 86
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List of Acronyms
BIT Bilateral Investment Treaty BRI Belt and Road Initiative
CAI Comprehensive Agreement on Investment CCP Chinese Communist Party
EC European Commission
EEA European Economic Area
EFTA European Free Trade Association
FDFA Federal Department of Foreign Affairs Switzerland FDI Foreign Direct Investment
FTA Free Trade Agreement MOFA Ministry of Foreign Affairs
NHO Confederation of Norwegian Enterprise POE Privately Owned Enterprise
PRC People’s Republic of China
PST Norwegian Police Security Service SOE State-Owned Enterprise
SWF Sovereign Wealth Fund
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1. Introduction and Research Question
«We are part of Western Europe, geographically, economically and culturally. Recognizing and acting on these circumstances does not, and should not, hinder us in maintaining a good relationship with, and extend our economic relations to, the Soviet Union and other Eastern European countries” (Lange, 1952, p. 61). This quote, dating back to 1948, was worded by former Norwegian Minister of Foreign Affairs, Halvard Lange. To him, it was about striking a balance between being a part of the Western framework, while at the same time extending trade relations with a geopolitical rival. This task, however, turned out to be an arduous one. As the iron curtain hardened during the latter half of the 1940s and
beginning of the 1950s, Norway found itself in an increasingly constrained and awkward position. In the end, Norway had virtually no options but to cut its economic ties to the Eastern Bloc (Førland, 1986, p. 358).
Fast forward to 2020, and current Norwegian Minister of Foreign Affairs, Ine Eriksen Søreide (2020), states that “We, for our part, have to be pragmatic. Norway is cooperating more closely with likeminded countries. But in key areas such as climate or trade, we should not be averse to also cooperating with other countries, like China, when they have a similar interest in finding constructive solutions”.
Norway is just one such example – one pawn in the greater European theater in which America have vested interest in maintaining their allies close. With the dawn of a new bipolar era, Western European nations are yet again working to strike a balance between the US and a rising competitor, this time within an extensively interconnected global economy. A balance "between cooperation and competition. Between security and prosperity” to quote Søreide (2020).
With these considerations in mind, Switzerland and Iceland entered free trade agreements (FTA) with China in 2014, while the Norwegian government has put words into action by negotiating a similar FTA since 2008. The European Union for its part signed a bilateral investment treaty (BIT) with China in 2020, known as the Comprehensive Agreement on Investment (CAI), which is yet to be ratified. Meanwhile, their arguably closest ally, the US, is openly engaged in a trade war and seeking to decouple their economy from the same nation.
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This raises the question of which signals Bern, Reykjavik, Oslo and Brussels are sending to Washington. Are the Europeans chasing an imprudent strategy that could place them in a constrained position, similar to the one outline above, or are they simply adapting to a shifting international environment and seizing an economic opportunity? Modern FTAs, and BITs to some extent, tend to cover a significant range of commitments, which could possibly lead to unforeseen ramifications down the line. Given that the European market has a liberalized investment regime and low tariffs on imports from China, it is not farfetched to imagine the FTAs and the BIT as part of a grander strategy for Beijing.
The public debate concerning the implications of increased capital flow and cooperation with China have been absent for many years and only gained more traction in recent years in line with broader global trends (Sverdrup-Thygeson & Mathy, 2020). It has notably come into light after a broad collation of Western states imposed sanctions on China in March of 2021, with countersanctions following suit. It is arguably an understudied field (Blackwill &
Harris, 2016, p. 23), and more contemporary research on the topic is thus required. By conducting a comparative case study of Iceland, Switzerland, Norway and the EU, this thesis will strive to answer the following research question:
What are the effects of free trade agreements and bilateralinvestment treaties with China on the foreign policy of European states in the context of an emerging bipolar era?
There are particularly two factors that will guide the analysis for attaining a resolute answer to this inquiry, namely the implications of trade dependence with China on one side, and formal alliances with the US on the other. The underlying assumption is that the more confined a European state is by these factors, the more challenging it will be for them to navigate its foreign policy encountering a renewed bipolar system.
This thesis aims to contribute to the emerging field of academic literature on China’s influence through economic means and the alignment of states. By connecting empirical findings to salient international relations theories, geoeconomics and alliance politics, the study will shed light on the challenges European states are confronting.
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1.1. Background and Context
The international system has been characterized by unipolarity with the US as a hegemon since the collapse of the Soviet Union (Tunsjø, 2018). For the US, the rise of China now constitutes its most pressing and important foreign policy challenge (Blackwill & Harris, 2016, p. 179). This in turn has led to a heated debate across Europe on how to appropriately respond to amplified Sino-American rivalry in an increasingly complex landscape, presumed to be “among the greatest challenges in our time” (Solheim, 2021).
What is new in the great power rivalry of today is the way it is executed, with the Cold War’s pyrrhic threat of nuclear destruction being downplayed and the role of economic means in meeting geopolitical ends being more prominent than ever. But there are certainly
similarities between the eras as well. More than anything, the Cold War was a competition for allies (Walt, 1987, p. 3), a game that is set to once again dominate international politics in decades to come.
It is particularly in the field of economics that Beijing finds itself less outmatched by Washington, with China being the most important trading partner of some 130 countries (Kefferpütz, 2021). Beijing has in recent years stepped forth as a firm proponent of a liberalized trade and investment regime, having entered 22 bi- multilateral FTAs since 2009 with more to come (China FTA Network, n.d.). Chasing the US for the economic top spot, it is commonly understood that China’s capacity to flex geopolitical muscles will grow in tandem. Conscious of this threat, the US launched a trade war with China in 2018, creating a more fragmented global economy in the process (Evans, 2019, p. 47). While it is expected that Sino-American relations will operate under more traditional norms under President Biden, he has strongly encouraged allies to mobilize and “build a united front […] to confront China’s abusive behaviors” (Biden, 2020). Provided this backdrop, it is likely that many nations will experience being placed in a crossfire when attempting to navigate between the US and the emerging powerhouse that is China.
Norway, Iceland and Switzerland, all European Free Trade Association (EFTA) member standing on the outside of the EU, are to varying degrees tethered to Washington and Brussels for their security and prosperity. Owing to this fact, their respective governments will have to operate within a complex international landscape to align objectives with its
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most crucial partners. This effectively offer them less foreign policy maneuverability. But due to mostly overlapping priorities and objectives, this can be understood as a tolerable sacrifice as it provides more stability and predictability. The question then is whether increased economic cooperation with China can attach yet another string to their foreign policies, further limiting their room of maneuvering in a time of rising tension and rivalry.
For the EU, dilemmas between economic opportunities and allegiance already represent a pressing issue. The row of sanctions adopted in March 2021 halted the CAIs ratification process, potentially serving as an omen for what is to come. With the US likely to increase pressure on its allies to fall in line with its China policy, European states could once again be headed towards a squeeze attempting to balance economic and security considerations.
With this preface in mind, this thesis will strive to gain a theoretical and empirical insight of how FTA/BIT agreements with China affect the foreign policy of European states.
This thesis is divided into six parts, with this chapter having presented the research question and introduced the topic at hand. Chapter 2 will put forth the research design and outlines the comparative case as the guiding methodological framework. Moving to chapter 3, geoeconomics and alliance politics will be thoroughly illuminated as the thesis’ theoretical foundation. Chapter 4 is devoted to the analysis, examining the development pre- and post- FTA in the case of Iceland and Switzerland, while the subsequent parts will consider the contemporary context in which Norway and the EU find themselves. Finally, chapter 5 will synthesize findings to support a conclusion on the foreign policy effects of free trade and investment agreements with China.
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2. Research Design
In building a solid foundation for this thesis, it is important to use a method that provides it with the tools for making inferences, which based on empirical information should be the ultimate goal of all research endeavours (King, Keohane, & Verba, 1994, p. 75). It is therefore vital to have a general analytic strategy for collecting, presenting and analysing data in a consistent and fair manner.
This thesis will take the form of a comparative case study seeking to provide insight on the balancing act occurring within Europe between economic opportunities and security concerns in light of growing bipolarity. This is an inductive study, which will make use of an interpretive approach. A document analysis will be utilized for understanding the
agreements in question. The research will additionally analyse trade and investment patterns.
This chapter will start by explaining comparative case study as a method, before outlining the case selection process. Then, the methodological challenges connected to the research design is presented, along with how to properly mitigate these challenges. Finally, the process in which sources and data has been collected to support findings will be highlighted.
2.1. Comparative Case Study
A case can be understood as a spatially delimited phenomenon analyzed at either a given point in time or over a specific time span (Gerring, 2007, p. 19). The case study allows for an intensive and in-depth focus of a specific phenomenon, while calling attention to the larger universe of the phenomena. Yin (2003, p. 1) affirms that using the case study as an empirical inquiry is particularly appropriate when “the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context”. Hence, it is a highly relevant approach for describing, explaining and illustrating complex events, illuminating the reader. Provided the topic of this thesis and the question posed, a most- similar, comparative case study was chosen as the guiding framework.
A most similar system design allows for detecting causal mechanisms (Gerring, 2007, p. 44).
To detect these mechanisms, the analysis will focus around the effect of trade dependence and formal alliances, factoring in the context of emerging bipolarity. This allows for
unearthing empirical links and clarifying the causal role of individual explanatory factors
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(Bennett & George, 2005, pp. 78-79). Moreover, a study of this design allows for tracing the development pre- and post-FTA in the cases of Switzerland and Iceland to observe changes in how the respective nations has approached China from an economic and foreign policy viewpoint. Explaining and understanding patterns will then lead to well-founded underlying analytic assumptions and expectations (Levy, 2008, p. 5), which will be sketched out in the following theory chapter.
The comparative element refers to the fact that several cases are being analyzed over time with the purpose of synthesizing “similarities, differences and patterns across two or more cases that share a common focus” (Goodrick, 2014, p. 1). The method is deemed especially appropriate when attempting to produce generalizable knowledge about causal questions.
More specifically, a structured, focused comparison has been conducted, which is ideal for generating knowledge of important foreign policy issues (Bennett & George, 2005, p. 67). In line with Gerring’s (2007, p. 30) understanding of the case study, researchers utilizing this method should aim at contextualizing their findings to shed lights on a wider class of cases.
This is relevant as this thesis will strive to generalize findings to European states formally and informally allied with the US.
As for the research question, it “must be of a general nature; they should not be couched in overly specific terms that are relevant to only one case but should be applicable to all cases within the class or subclass of events with which the study is concerned” (Bennett & George, 2005, p. 86). Addressing this concern, studying the effects of free trade and investment agreements on foreign policies will be applicable to all cases and not “overtly specific”.
2.2. Case Selection
Systematic errors through case selection bias is a common methodological pitfall when conducting a comparative research design. To mitigate this risk an effort has been made to selects cases as representative as possible, while not being perfectly representative, in correspondence with Gerring’s (2007, p. 20) ideals.
The rationale of choosing Switzerland and Iceland for shedding light on the phenomena were as follows: At the time of writing, China has entered 22 FTAs with nations and
economic regions across the world (China FTA Network, n.d.). Out of these, four belongs to the Western world. Two of which however, Australia and New Zealand, sits in the Southern
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Hemisphere and already has extensive trade links with China. Switzerland and Iceland on the other hand, has levels of import to and export from China that are more comparable to the rest of Europe. Furthermore, their political economy is closely linked to Norway through EFTA, and to the EU through the EEA for Iceland and a series of bilateral treaties for
Switzerland. Although not perfectly comparable, e.g. Switzerland is not a NATO member and Iceland is a small island-nation, these cases still present themselves as suitable for providing a lead in better understanding the implications of European states entering FTAs with China.
Having been in effect since 2014, the Sino-Swiss and Sino-Icelandic FTA will be presented and analyzed side-by-side in line with Bennett and George’s (2005) structured, focused comparison, highlighting that cases should be structured as similarly as possible to draw inferences.
The analysis will continue by examining two contemporary and highly salient agreements that have yet to go into effect, but are confronted with a number of considerations, starting with the EU-China CAI, a BIT between the world’s second and third largest economy.
Although an FTA implies a greater level of economic integration compared to a BIT, the potential implications of the CAI outweigh that of the abovementioned cases due to the sheer size of the involved economies and their importance as global policy actors.
Additionally, the EU accounts for almost 70% of the EFTA countries total trade (Kocak, 2016, p. 1), implying potential economic and political spillover effects. Hence, this case study will have a somewhat different focus owing to agreement being of a different character. The main purpose of this case will be to shed light on the transatlantic alliance in the context of the CAI, as well as detecting the similarities and dissimilarities between their approach to China in a time of rising bipolarity vis-à-vis the smaller EFTA nations.
Finally, the Sino-Norwegian FTA will come into scrutiny. This will be the most comprehensive part of the analysis as it will build off findings from previous cases.
Additionally, the comprehensiveness owes to the fact that I, as a Norwegian native speaker, have access to more in-depth insight through official documents, scientific research, news etc. written in Norwegian. In compliance with the research question, the analysis will aim to understand the foreign policy effects of entering an FTA with China today. Drawing on collected evidence, findings will then be synthesized and presented in the final chapter.
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This outlined chronology of cases is appropriate given that China’s behaviour internationally and Sino-American rivalry has undergone a transformation during the last decade. As such, contemporary parliamentarians and negotiators will have to bear more considerations in mind when approaching Beijing today compared to 2013 when the Sino-Swiss and Sino- Icelandic FTA was signed.
From this selection process, this thesis has gone from a large population of potential cases to a small-N design consisting of representative cases with the smallest possible residual for its purpose. Thus, this study will identify key aspects and patterns, coherent with the
comparative case study design (Seawright & Gerring, 2008, p. 299).
Another decision that needed to be accounted for is whether to include Hong Kong when analyzing trade and investment patterns with China. On one hand, EFTA has had an FTA in place with Hong Kong since 2011, with the region acting somewhat economically
autonomous from Beijing. On the other hand, much of international trade and investments in China goes through Hong Kong, and the entity is heavily dependent on and practically subservient to Beijing. Hong Kong is also a major port in the Pearl River Delta with approximately 260 million Chinese citizens. Additionally, Beijing possess the capacity to deny other countries access to Hong Kong (Ross, 2019, p. 311). Owing to this, China and Hong Kong will act as a single market in the analysis. As for analyzing EU trade and investment data, the UK have been actively detached from the analysis as they officially withdrew from the Union in January 2020.
2.3. Methodological Challenges
It is important to be aware of potential methodological pitfalls related to the case study. To obtain sound findings, the study’s validity and reliability should be maximized (Yin, 2003, p.
19)
A distinction is drawn between two sources of validity: internal and external. Internal validity refers to the “validity of inferences about X’s relationship to Y for the studied sample, which in case study research consist of a single case or a small number of cases”
(Gerring, 2017, p. 195). As such, using updated sources and establishing a chain of evidence is crucial for making causal and internally valid claims. Another measure for constructing internal validity is the aforementioned process of identifying representative cases.
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Compared to other types of research designs, Gerring (2007, p. 43) affirms that case study research tends to have inherently strong internal validity. This is particularly true for theory- guided studies (Levy, 2008, p. 5).
On the contrary, the case study’s external validity, which refers to the generalization of research findings, has long been a heated debate among methodology scholars. Can a select few cases really be used to understand a wider class of phenomenon? While Bryman (2016, p. 61) points out that the case study researcher “is usually concerned to reveal the unique features of the case”, and that their purpose is not to generalize, Gerring (2007, p. 3) argues that one of its main features is to look for explanations that can be generalized to other circumstances. To make sense of this divergence it should be noted that qualitative research has been significantly more theoretically driven and methodically self-aware during the last decades, which has led a changing perception of the case study (Levy, 2008, p. 2). While the method was mainly used for understanding specific events in the past, it has in later years been used to develop and enlarge the understanding of theories. This is also in line with Bratberg’s (2019) argument that the purpose of any political science research should be to draw inferences to a wider universe of cases. While being aware of the possible limitations, this thesis will strive to contribute to a wider understanding of the theories explained in the next chapter, geoeconomics and alliance politics, by conducting the outlined comparative case study.
Any scientific study should also adhere to the principle of ensuring reliability, which is concerned with the replicability of a research. In other words, a study should yield the same results if tested by other researchers (King et al., 1994, pp. 25-26). This is among the main challenges in qualitative approaches, such as the case study, which tend to place emphasis on interpretation (Bratberg, 2014, p. 73). If a research is heavily based on interpretation, it will be more challenging to replicate the results for others to verify as various researchers might interpret data in different ways. Although there is no silver bullet to solve the issue of reliability completely, a researcher can mitigate the problem by being clear and transparent in how the study is conducted and which considerations has been made along the way (Bratberg, 2014, p. 74), which will be addressed below.
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2.4. Sources and Data Collection
One of the major strengths and key principles of the case study, as stated by Yin (2003, p.
97), is using multiple sources of evidence to support findings. The main method for collecting data is a qualitative document analysis, entailing a thorough and systematic search for relevant documents. Collection of this data has in part occurred parallel with the analysis, as with more documents having been studied and interpreted, new ones have come into light. This has in turn led to a comprehensive understanding of relevant events.
This study will therefore draw on a large collection of data, making use of primary and secondary sources. These sources include documents ranging from government publications and administrative reports to journal articles and news articles to analyze events and
policies. When scouring trough information, it is of great importance to be aware of
potential biases and agendas. To attain credible findings, information will be obtained from legitimate and trustworthy sources. However, an overtly critical viewpoint, believing that all documents contain some hidden and unmitigated truth, should not be adopted (Yin, 2003, p. 87).
Considering the case selection, it is no secret that some of the actors involved are more transparent with government documents, including roadmaps, analysis, decision-making processes etc., than others. As a consequence, more official documents from governing institutions in e.g. Norway and the EU has been used in gathering information compared to that of China, which tends to be less transparent. Additionally, I recognize that my limitation as a non-Chinese speaker has the effect of making certain sources out of reach in this
research. Owing to the contemporariness of the EU-China BIT and the China-Norway FTA, there is a limited amount of conducted research on the topics, particularly regarding long- term implications. Government documents and news articles will consequently serve as sources of much of the empirical data in these cases.
A case study does not necessarily constitute a single method, but is rather a research strategy where one can use several methods. Due to this strength and ability to triangulate methods, a quantitative analysis has also been utilized to detect whether trade and
investments patterns correlate with a state’s behavior parallel to China and the US. Trade data between 2010 and 2018 have been analyzed, which allows for interpreting
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developments pre- and post-FTA in the cases of Iceland and Switzerland, and grasping the current circumstances for Norway and the EU. The World Bank, the Organization for Economic Co-operation and Development (OECD) and Statistics Norway (SSB) will serve as databases for this analysis, as further explained in the appendix.
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3. Theoretical Framework
In analyzing behavior and patterns of power within the international system, geoeconomics and alliance politics will act as the research’s theoretical foundation. This provides a
framework for understanding the economic opportunities and alliance constraints the agreements imply in a time of growing bipolarity.
When outlining the theories in the context of the Sino-European agreements, a series of expectations and assumptions will be put forth in chapter 3.3. to serve as reference points.
Based on these, it will be explicitly identified throughout the analysis when theoretical expectations are coherent with empirical observations, and when they are not.
3.1. Geoeconomics
Since the wane of the Cold War, economic power has become an ever more defining feature of global politics. In his 2010 article, aptly named GDP Now Matters More Than Force, Leslie Gelb (2010, p. 35) argues that most nations today “beat their foreign policy drums to largely economic rhythms”. The theory that adopts this thinking and provides a conceptual
framework for understanding how states make use of economic tools in pursuing political aims is geoeconomics.
The term geoeconomics was first coined by Edward Luttwak in 1990 who, as the Cold War was coming to an end, observed that “as the relevance of military threats and military alliances wanes, geo-economic priorities and modalities are becoming dominant in state action” (Luttwak, 1990, p. 20). But the notion of an interplay between power politics and the structure of foreign trade date back much further. In his 1945 classic on the topic, Albert Hirschman sought to understand this relationship by referring to two factors – the supply effect and the influence effect. The supply effect, which has long been an influential motive in international politics, holds that by exporting excess goods and growing its economy a country enhances its capacity to wield military power (Hirschman, 1945, p. 14). Secondly, there is the influence effect which supports the argument that foreign trade can become the direct source of power and consequently supersede traditional warfare (Hirschman, 1945, p. 15). According to this argument, “economic warfare can take the place of
bombardments, economic pressure that of saber rattling” (Hirschman, 1945, p. 16). It is this effect that is the most important in this context of this thesis.
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A multitude of understandings has since been attached to the concept of geoeconomics, with many today using it as a catch-all phrase for matters relating to international economics and geopolitics. One of the theory’s most notable works, which will act as the guiding framework for this thesis, is the 2016 book War By Other Means written by Robert D. Blackwill and Jennifer M. Harris. Here, geoeconomics is defined as
“the use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results; and the effects of other nations’ economic actions on a country’s geopolitical goals” (Blackwill & Harris, 2016, p. 20).
While the theory is closely linked to geopolitics, there are certain elements that separate them. In short, geopolitics sees the interaction between geography and power, and will emphasize the role of military power in projecting authority over a given territory. Hence, if a state utilizes military power in service of strategic goals, it qualifies as geopolitics. If economic actions are embedded as an option to affect the realities of state power on the other hand, it meets the criteria of being a geoeconomic act (Blackwill & Harris, 2016, p. 24).
It is within the world of economics, it is argued, that has become the “central battleground for hegemonic rivalry between Washington and Beijing” (Kefferpütz, 2021).
The increased use of geoeconomic instruments has brought deep structural changes to the logic and operation of foreign politics as it has provided states with a new toolbox to consult when making strategic decisions (Blackwill & Harris, 2016, pp. 38-39). Many of today’s geoeconomic tools are generally seen as mostly available to authoritarian regimes who are less accountable to their citizens (Blackwill & Harris, 2016, p. 40; Luttwak, 1990, p. 21).
Hence, this form of statecraft has opened up new opportunities for states such as China and Russia in the pursuit of favorable policy goals.
Geoeconomic tools can be applied within trade, investments, sanctions, cyber, aid, monetary and energy policies (Blackwill & Harris, 2016, p. 49). The primary focus of this research will be trade and investments as they make up the most central components of FTAs and BITs, as well as sanctions given its renewed relevance in the Sino-American rivalry.
Trade
From the General Agreement on Tariffs and Trade (GATT) to the World Trade Organization (WTO), a multilateral rule-based trading system was key for expanding the global economy
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post-World War II. Since the end of the Cold War, profound changes in international trade has taken place, with the emergence of global value chains and growing interconnectedness at its core. Recent developments, including the Sino-American trade war and the COVID-19 pandemic, has cast a shadow over the continuation of this trend. At the same time, China is feeling more compelled to lay the rules of the roads ahead.
As a geoeconomic tool, trade has traditionally been used as a mean to create positive incentives. However, there are many contemporary examples of it taking a more coercive form. To name some examples, China has signaled disapproval and pressured authorities of neighboring countries by restricting import of Japanese autos, let bananas from the
Philippines rot in their harbors, and banned domestic travel agencies from selling trips to Korea and Taiwan, all in an effort to curb the respective countries security policies (Blackwill
& Harris, 2016, p. 4). China has also been gaining power through trade due to the sheer size of its market. As former Singaporean Prime Minister Lee Kuan Yew once put it, “China is sucking Southeast Asian countries into its economic system because of its vast market and growing purchasing power […] it just absorbs countries without having to use force”
(Blackwill & Harris, 2016, pp. 134-135).
For European countries, a study found that hosting the Dalai Lama is closely correlated with the economic benefits they receive from China in terms of trade (Fuchs & Klann, 2013). In the case of Norway and Iceland, export of seafood is often perceived as a commodity where China could potentially halt its import if it seeks to leverage its economic might. During the 2010-2016 diplomatic freeze between Norway and China, a study found a that Chinese authorities did created a more challenging business environment for Norwegian seafood exporters as a response to what it perceived as bad behaviour (Chen & Garcia, 2016, p. 29).
Investments
As for investment policies, its geoeconomic importance has risen in recent years as 90% of all cross-border flow in 2014 were financial, a significant increase from previous eras when traditional trade dominated (Blackwill & Harris, 2016, p. 53). Similar to trade, the geographic gravity of the financial revolution has also shifted drastically, from being dominated by the West to many of today’s most significant economic hubs existing in East Asia. The
concentration of foreign direct investment (FDI) has grown particularly with states more than ever venturing abroad, often in a coordinated manner (Blackwill & Harris, 2016, p. 53).
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A key component in this regard is the role of state-owned investment funds, better known as sovereign wealth funds (SWF), which can serve as geoeconomic vessels. The importance of these funds have increased drastically in recent years, with roughly 70 SWF possessing holdings exceeding USD 1 billion today (Sovereign Wealth Fund Institute, 2020), compared to about 37 in 2013 (Blackwill & Harris, 2016, p. 55). In terms of geoeconomic relevance, Gelpern (2010, p. 24) argues that “even when they act commercially, SWFs are sovereign – profit drive them, until it does not”. Beijing is no stranger to using SWFs as means for political ends, having transferred economic bonds from SWFs to developing states across the world in return for the derecognition of the Republic of China (Taiwan) (Blackwill &
Harris, 2016, p. 56). While the Norwegian government is in possession of the world’s most valuable SWF, the Government Pension Fund Global, it is supposedly shielded from political pressure as investment decisions are carried out “independently of the Ministry” (Norges Bank, 2020).
Given China’s rising status within trade and investment, and the perception of it being a future economic epicenter (Gelb, 2010, p. 38), this analysis can expect to find that European governments are striving to maintain an operative approach towards Beijing in order to reap economic benefits.
Sanctions
The most common purpose of sanctions as a geoeconomic tool is to induce the government of the targeted state to alter their policies by using them as a bargaining chip. Similar to trade and investments, sanctions have “traditionally been a story about the perks of size”
with their effectiveness relying on domestic market size and global market share (Blackwill
& Harris, 2016, p. 58). Trade dependent states are thus more prone to have this weakness being exploited effectively (Wagner, 1988, p. 476). The use of sanctions has yielded varying results throughout the years. Among the key features for them to be successful is by
building a coalition of allies to enforce them, which is exactly what President Biden has been aiming to do in confronting China (Biden, 2020). Moreover, Gary Hufbauer at the Peterson Institute for International Economics has remarked that sanctions are most effective when they are “fairly modest and well-defined” (Wessel, 2013).
16 FTAs and BITs as Geoeconomic tools
With an export-oriented growth model, Beijing has in recent years focused extensively on liberalizing trade barriers, with the creation of FTAs being a progressively important component of this strategy.
Despite what the name implies, a modern FTA might contain an unprecedented range of commitments outside the scope of trade. In addition to streamlining trade and investment flows, they tend to including provisions on the rule of law, labor rights, environmental standards, competition policy, patent laws, the role of the state in the economy, and other fields of interest relevant for the involved actors. In some instances, FTAs can even be as comprehensive as to cement formal alliances of a political and military character (Rashish, 2015). While commitments of this extent are likely off the table for any Sino-European FTAs, they can undoubtedly include pledges for various areas of cooperation and assurances in line with China’s core interests, as will become apparent later on.
Critics of these types of agreements argue that FTAs are often being “dangled like carrots on sticks to draw countries into commitments that go beyond trade [where] partners may be expected to support each others’ political agendas in terms of territorial disputes or at multilateral fora” (Bilaterals, n.d.). Proponents will for their part often downplay the foreign policy implications, claiming that free trade is an exclusively economic matter (Hirschman, 1945, p. 7). As the following analysis will display, the latter argument has come under increased pressure in the modern era.
As for BITs, more confined to setting the conditions and terms for investments between states, their geoeconomic reach can be less explicit. That noted, the CAI certainly has a geopolitical edge in correspondence with Hirschman (1945) influence effect by the very fact that it signals economic integration in a time of impending decoupling. But owing to the circumstances with developing bipolarity and tension, it can be expected that European actors are progressively reluctant to enter into formal agreements to increase its economic cooperation with China now compared to 2013, when the Sino-Iceland and Sino-Switzerland FTAs were signed.
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3.1.1. Geoeconomics From Theory to Practice
As Luttwak (1990) observed, geoeconomic practices rose at the waning of the Cold War. But it was with the rise of China that geoeconomics has ascended to prominence as a theory to explain modern world politics. Never before in history has one government controlled this much wealth (Blackwill & Harris, 2016, p. 93). During the sweeping economic reforms starting at the end of the 1970’s, foreign trade and investments became imperative instruments for the Chinese state. Alongside this unprecedented development, Beijing’s capacity and attraction towards economic tools to meet political ends has grown
exponentially. In an era characterized by great power competition, Washington is often hailed as the champion of geopolitics. Meanwhile, it is Beijing who is held up as the leading practitioner of geoeconomics who has “been playing the new economic game at a maestro level” (Gelb, 2010, p. 38). This power has manifested itself in several ways, using both carrots and sticks in coercing states to accept a favored outcome. Having the status as the world’s largest trading nation, China holds a massive amount of leverage over other
countries by offering or denying access to its market (Tunsjø, 2018, p. 35). Or, as Leslie Gelb (2010, p. 38) at the Council on Foreign Relations apply put it, “Nations do not fear China's military might; they fear its ability to give or withhold trade and investments”. The extent of this claim can however be debated as China’s military spending has more than doubled since 2010, now posing a serious threat in East Asia.
As such, Beijing have used a range of “economic instruments to promote and defend national interests, and to produce beneficial geopolitical results” (Blackwill & Harris, 2016, p. 20). But in the study of China’s influence, conceptualizing different parameters of how economic power translates into political sway maintains a challenge. Especially assessing intensions has proven itself difficult to gauge (Kastner & Pearson, 2021, p. 20). Nevertheless, there is little doubt that the PRC is actively promoting international economic activity for various reasons. Kastner and Pearson (2021, p. 21) distinguish between three not mutually exclusive aims; (1) advancing foreign policy and geostrategic goals, (2) strengthening the national economy, and (3) advancing commercial interests of particular firms. These aims will come under scrutiny during the analysis to understand the purpose and effects of the different agreements in the context of a new emerging bipolar era.
18 China’s Heavy-Handed Strategy Towards Australia
Beijing use of geoeconomic means to reach political ends have so far been most
prominently displayed in East Asia. But Western countries, notably Australia, has also fallen victim of their geoeconomic pressure. With 34.7% of Australia’s total export going to China, they represent a significant case of trade dependence. When supporting a US initiative to investigate the origin of COVID-19, an outraged Beijing responded by imposing vast tariffs on Australia’s goods, and their economy has been experiencing the ramifications as a result.
(Stanghelle, 2020).
This might very well be a pawn in a bigger geopolitical scheme, serving as a warning shot to the rest of the developed world. Nevertheless, it is clear that it has become increasingly challenging for Canberra to balance its economic and security interests, and reversing their economic pull from Beijing is unlikely as it “would take a colossal act of state intervention”
(Wesley, 2016, p. 15). While mostly confined within Asia and Oceania today, European nations should take note and keep their eyes peeled as coercion efforts could increase in geographic scope in tandem with China’s economic growth and amplified rivalry with the US.
Western Geoeconomic Reluctancy
Compared to Chinese policymakers, their American and European counterparts have been less eager to politicize trade and economic policies despite certainly having the capacity to do so. Especially the use of more hard-handed tactics as outlined above is uncommon.
While the EU-US Transatlantic Trade and Investment Partnership (TTIP), which was ultimately scrapped, was by some seen as a “perfect example of how the economic and strategic logic of US trade policy are mutually reenforcing” (Blackwill & Harris, 2016, p. 184), others vowed to keep economics and geopolitics separated (Blackwill & Harris, 2016, pp.
181-183). This showcases how institutions in liberal democracies, having a multitude of interest pulling in different directions, are less prone to geoeconomic tools breaking away from internationally set norms.
In the modern era, sanctions have been the leading geoeconomic instrument used by Western countries, spearheaded by the US. But outside of imposing sanctions, Blackwill and Harris (2016) argues that the US, along with many European states, have been neglecting
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the use of geoeconomic means in a time when their adversaries is becoming increasingly comfortable with the practice. This validating the argument that some of the foreign policy tools geoeconomics enables “are unavailable to US and other Western leaders” (Blackwill &
Harris, 2016, p. 40). As a result, many Western states, especially in Europe, are now playing a one-sided geoeconomic game, mostly adapting to defend their interests rather than using it to advance their own agenda (Kefferpütz, 2021).
3.2. Alliance Politics
Another theory that fits within the framework of this analysis is alliance politics, a
paramount component in the field of international security relations, especially in a time when world politics is arguably at its most uncertain point since the Cold War. Going back to one of the classics within international relations, Hans Morgenthau (1948, p. 201) holds that the equilibrium between nations and alliances is the “historically most important
manifestation of the balance of power”. The most rudimentary definition of an alliance is provided by Walt (1987, p. 5) stating that it is a “formal or informal arrangement for security cooperation”. Using this broad understanding will include alliances working within an
informal structure, as many states are reluctant to sign formal treaties tying them into another state or bloc’s orbit, e.g. the case of Switzerland dedication to neutrality.
Although written in a different time with another bipolar system in mind, Liska (1962, p. 3) offers another superb insights in how alliances operate, asserting that it is not reasonable to discuss international relations without referring to alliances, as they merge in all but name.
Here, alliances are defined as “an association of like-minded actors joining forces with the goal of overcoming their rivals” (Liska, 1962, p. 3). Snyder (1990, p. 104) propose an elaborated definition describing an alliance as a formal association of states for the use (or non-use) of military force with the aim of increased security against other states who might or might not be explicitly identified. Either way, Keohane (1969, p. 301) argues that all theorists seem to agree that the basic function of an alliance is to (1) aggregate power, (2) promote international order, and (3) maintaining interallied control/restraining allies.
Powerful nations, such as the US, will pursuit an alliance on different grounds compared to a smaller nation, like Norway. While the powerful will choose to enter into alliances as it can add to their own influence and withhold influence from other powerful nations, smaller
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nations are more likely to seek alliances based on security necessities (Morgenthau, 1948, pp. 201-205). They will nevertheless have to maneuver within an international context defined by anarchy and competition to ensure they maintain the capacity to carry out independent policies. While a neutral stance will increase a small state’s room for
maneuvering, it will also leave them more exposed in terms of security (Rothstein, 1968, p.
237). Vice versa, joining a security alliance will increase a small state’s security but at the same time decrease its maneuverability in pursuing its own goals. Thus, within an alliance structure e.g. NATO, a small state like Iceland will maintain a high-range security at the expense of some maneuverability elements. States positioned outside such alliance structures on the other hand, like Switzerland, will to a larger extent be able to ensure an independent foreign policy by for example keeping out of armed conflicts that does not concern them (Rothstein, 1968, p. 248).
A key element of any bi- or multilateral alliance is the dynamics of alignment being played out. In his 2007 book, Snyder (p. 2) point out that “Any interaction between states, friendly or hostile, no matter how minor, may create expectations and feelings of alignment or opposition”. What governs this alignment policy is usually determined by the dominant conflict at the time, as a sense of community and common threats tends to consolidate alliances (Liska, 1962, pp. 12, 16). Alliance politics and alignment is also a game of
dependence and unevenness, with the principle being that the more dependent state A (e.g.
Norway) is on state B (e.g. the US) security wise, the greater power state B hold over state A (Snyder, 2007, p. 168).
One of the well documented rationalizations for making allies stick together is on the ground of “ideological solidarity” as phrased by Morgenthau (1948), which “feeds on selective memory of the past and outlines a program for the future” (Liska, 1962, p. 61).
Hence, the more similar states are, the more likely they are to ally (Walt, 1987, p. 33). One of the highlighted ideologies is democracy, which according to Liska (1962, p. 62) is the richest of all in regards to ideological lore. Walt (1987, p. 5) further argues that alliances based on ideology are in fact a form of balancing behavior in its own right. Justifying an alliance on the grounds of this ideology has been prominently observed recently as NATO Secretary General Jens Stoltenberg (2021) in a speech to the European Parliament asserted
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that “China is authoritarian countries that doesn't share our values”, while the EU now classifies China as a “systemic rival” (European Commission, 2019, p. 1).
Yet another defining feature of alliances is geography, with Walt (1987, p. 23) underscoring that as “the ability to project power declines with distance, states that are nearby pose a greater threat than those that are far away”. By the nature of this statement, China does not pose an imminent threat to Europe, although technological advancement during the last decades has made this argument less apparent.
3.2.1. Alliances From Theory to Practice
Translating the theory to a contemporary context, Western countries has tended to group together by highlighting concepts such as human rights and the rule of law, with the EU setting these elements as prerequisite for joining the politico-economic alliance (European Commission, n.d.). Another tangible organization that has materialized from this association of (predominantly) liberal Western democracies is NATO. With the military alliance being established on the basis of security concerns in opposition to the communist Soviet Union, its function today is less apparent. While it remains the “bedrock of Allied security”, member-states are simultaneously confronted with “unprecedented doubts” over the future of the alliance (Rynning, 2019, p. xiii). Secretary General Stoltenberg has contended this claim by arguing that China’s rise have made NATO “even more important”
(Stoltenberg, 2021). Pointing out coercive conduct, Stoltenberg told member states that
“we must not be naïve for how they operate, and there should be no doubt that we are capable of standing up for our values facing China” (Krosby & Lauten, 2021). By the looks of these statements, NATO seems to indicate that the organization is interested in taking on the role as a counterforce to China.
Returning to the case of Australia, Ross (2019, p. 318) observes that despite falling into China’s economic orbit, their defense and strategic cooperation with Washington has grown during the same period, with Canberra continuing to adopt some “unfriendly” policies towards Beijing. This is in line with Walt’s (1987, pp. 32-33) argument that aggressors are likely to provoke other states to align against them as balancing is a more common feature of international politics compared to bandwagoning. Echoing Ross (2019) and Walt (1987), Wesley (2016, p. 15) also argue that this development is likely to make Australia cleave ever
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more closely to their alliance with the US. This thesis can by this logic expect to find that European nations has increasingly started to adopt a similar mindset.
3.3. Balancing Economic Opportunities and Alliance Obligations
One of the key components for acquiring power needed to maintain and stimulate a state’s sovereignty is economic growth (Mastanduno, Lake, & Ikenberry, 1989, p. 465). As a result, the interplay and balancing act between economic opportunities and alliance constrains should not be overlooked when analyzing the scope and implications of free trade and foreign direct investment. This chapter will hence dissect the logic of the outlined theories in the context of the research question and put forth predictions for measuring the effects of the FTAs and the BIT.
The Effect of Economic Dependence
As noted by Hirschman, it need not surprise anyone that power implications in connection to political dependence arises from trade (Hirschman, 1945, p. 11). Gilpin and Gilpin (2001, p. 81) upholds that “economic ties among states almost always involve power relations”. In other words, one state’s power over another state’s market can be converted to political power (Gilpin & Gilpin, 2001). This market asymmetry is a commonly held perspective within international political economy for grasping the role between economic and political influence (Wagner, 1988).
Given that China is the largest trading partner for some 130 countries (Kefferpütz, 2021), and that most nations around the world experiences a trade deficit with them, this provides Beijing with an enlarged geoeconomic toolbox. In an idealist scenario, international trade will foster a “bond of friendship between nations”, with free trade advocates, led by classics theorists such as John Stuart Mill (cited in Hirschman, 1945, pp. 7-10), conveying terms such as mutual interests, interdependence, and inextricable networks of markets. But in China’s case, when trading with relatively small or even miniscule economies, this dependence will become heavily skewed. In Liang et al.’s (2019, p. 15) research on the evolution of
geoeconomic patterns between China and its neighbors, they found that Beijing’s position has radically transformed in its favor during the last decades as bordering countries are now experiencing a massive economic dependence on China. But they also point out that, for the most part, “China’s peripheral geoeconomic strategy focuses on cooperation rather than
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competition” as one of the aims of geoeconomic “is the pursuit of joint economic benefits”
(Liang et al., 2019, p. 15). But with economic dependence being heavily skewed in the case of China’s trade and investment with almost every other state, the focus on cooperation can easily be turned into one of competition, especially in swaying smaller states. Hence,
economic dependence with China today is widely perceived as a vulnerability. Furthermore, by asserting a significant role in global value chains, the asymmetric trade relationship between China and the world can be felt nearly anywhere. By this logic, measuring China’s market power over European states can yield results for understanding the balancing act between economic and security considerations.
While much of the literature on great power politics argues that there is a strict correlation between trade dependence and the realignment of states, Robert S. Ross (2019) disputes this claim by criticizing the case selection of prior literature. In his study on East Asian security affairs, findings reveal that “economic dependence of a small state on a great economic power is insufficient to influence independently small state strategic alignment preferences and that China’s rising economic power is not fungible” (Ross, 2019, p. 302). In other words, market power cannot simply be substituted with military power. This
argument is based on the observation that, as China’s market power over counties such as Singapore and Malaysia have grown substantially, these countries have simultaneously strengthened their strategic cooperation with the US (Ross, 2019, p. 318). This has also been the case with NATO members according to Søreide (2020), who in her speech on the China challenge notes that the defence organization “has tended to grow stronger and more united in the face of external challenges”.
Ross further points out that economic dependence is relative in two regards. First, it is insufficient to simply rank export markets without measuring its importance relative to other markets (Ross, 2019, p. 306). While China is Switzerland’s second most important export partner making up 14.9% of their total export, they rank significantly lower for Norway where it constitutes only 2.3%. Second, it is vital to measure the contribution of exports to a state’s total GDP (Ross, 2019, p. 302). For example, 66.1% of Switzerland’s GDP rely on export, compared to 38.4% for Norway. Knorr (1977, pp. 200-201) observes that “a high degree of control is extremely rare, because foreign markets […] are usually dispersed”,
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but as the case of Australia displays, it certainly exists. This will be thoroughly measured in the comparative case study by the use of various trade and investment data.
Based on the outlined literature, there has long been a discrepancy on the effect of
economic dependence in swaying states policies (Caporaso, 1978), a discrepancy seems to persist. This in turn begs the question of whether China’s market power over their European counterparts has led to a correlation in political sway, which will be a central component in the analysis. Based on this, the analysis will work under the assumption that the greater China’s market power over their European counterparts, the more aligned their policies will be with China’s interests.
The Effect of Formal Alliances
Historically, there has been a visible empirical connection between alliance partnership and economic activity. Based on data drawn from an 80-year period, Gowa and Mansfield (1993, p. 412) demonstrate that alliances strongly correlate with the flow of bilateral trade as “free trade is more likely within, rather than across, political-military alliances”. Results indicate that this holds especially true in a bipolar system (Gowa & Mansfield, 1993, p. 409). The argument for why this is the case echoes Hirschman’s (1945, p. 14) supply effect, which is that trade with adversaries can generate negative security externalities (Mansfield &
Bronson, 1997, p. 94). Tying into geoeconomics is the affirmation that the “most direct attraction that stronger states hold for the weaker is probably in response to trade and economic needs” (Liska, 1962, p. 14).
While this helps explain why trade between NATO members and Eastern European states were negligible in times of high tension during the Cold War, it might be less helpful in understanding the contemporary world. With the international financial and political system having gone through significant changes since the end of the Cold War, the distinction between friend and foe is not as clear cut as it was during the bipolar system led by the US and the Soviet Union. The modern global economy is deeply intertwined with global value chains and international investments at an all-time high. It is now more uncertain whether trade flows correlate with and depend on formal alliance structures, reveling the complexity of the current world economy. However, promoting an international agenda and keeping control over allies likely maintain among the key features of an alliance. This could then be a crucial factor in explaining various behaviors by European states cooperating with China in
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light of renewed bipolarity. The expectation is that the NATO member of in the analysis (Norway, Iceland and 21 EU states) will be more constrained in their approach to China compared to the non-NATO members (Switzerland and 5 EU states).
The Effect of Emerging Sino-American Bipolarity
While the international order of politics has largely been governed by the US as a sole hegemon since the early 1990s, China has steadily been rising to a challenger position. As discussed, the coming bipolar era is of a very different nature than the Cold War. As it stand today, it is unlikely that this era will cause a similar level of balancing and confrontation as was the case back then (Tunsjø, 2018, pp. 99-100). At the same time, the concept of decoupling is gaining traction, and the US has a profound interest in slowing the rate at which the Chinese economy is growing (Mearsheimer, 2019, p. 24). As a cautious warning, Luttwak (p. 40) pointed out in his 2012 book on the topic that “opposition to Chinese ascendance will manifest geoeconomically”. Whether it is Beijing vying for a top-ranking status, or Washington trying to sustain its top-ranking position, a strong economic base will certainly be needed to attract and maintain allies and to wield power. Based on this, it can be assumed that with amplified Sino-American rivalry, it will become more challenging for European states to navigate its foreign policies without causing dismay with either China or the US.
With the methodological and theoretical taxonomy in place, the analysis will follow with the outlined theories serving as a framework. The final chapter will then synthesize theoretical and empirical findings to support a conclusion.
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4. Analysis of Sino-European Free Trade and Investment Agreements
Today, the EU and China make up the world’s second and third largest economy
respectively. With China’s GDP having grown rapidly in recent decades, trade flows and geostrategic ambitions have expanded in tandem. As the unipolarity of the US is fading and China is competing for a top position, the international system in which European nations are operating within is rapidly shifting. Understanding how these structural changes affect the foreign policies of nations is thus of great interest. As such, this analysis will examine how Switzerland, Iceland, Norway and the EU balance and navigates within this structure in light of geoeconomic and alliance considerations.
The chapter will start with a thorough analysis of Switzerland and Iceland’s FTAs with China.
By examining the pre- and post-FTA period, this research seeks to understand how relations and cooperation in various areas have development over recent years, and how it has affected Bern and Reykjavik’s foreign policy. These cases will be analyzed side-by-side to fit the standard of the structured, focused comparative case study.
Continuing to the first non-ratified agreement, the case of the EU-China BIT will be scrutinized. This part of the analysis will emphasize the transatlantic alliance in view of a rising China, where focus will be given to the CAI signed in December 2020 and the sanctions imposed in March 2021. While the contemporariness of this analysis makes it challenging to assess long-term effects, it will nonetheless shed a light on the foreign policy of Brussels vis-à-vis Beijing and Washington.
The fourth and last case to be examined is that of Norway, who unlike their EFTA partners have yet to finalize the negotiation stage of their FTA with China. Again, it will be structured in a similarly manner, with emphasis on the same general questions as prior cases. This analysis will discern how Norway can navigate their economic and security policies in an increasingly polarized international landscape by building off findings from the previous cases.
Ultimately, this analysis shall provide a better comprehension of the effects of FTAs and BITs with China for European state’s foreign policy.
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4.1. The China-Switzerland and China-Iceland Free Trade Agreement
The EFTA member states, Norway, Switzerland, Iceland and Liechtenstein, has cooperated multilaterally when negotiating FTAs since the beginning of the 1990s. This has contributed to making it a more sizeable trade bloc, providing the advantage of a strengthened
competitive position, as well as making it more attractive for third countries to make
preferable trade agreements with (EFTA, n.d.; Kocak, 2016). As of 2021, this partnership has resulted in 29 FTAs with 40 partners outside the EU, including states such as South Korea, Indonesia and Canada, intergovernmental organizations like the Gulf Cooperation Council and Central American States, as well as the Chinese territory of Hong Kong (EFTA, n.d.).
While coordinating trade policies and speaking with one voice in multilateral settings, EFTA also permits member states to decide on their own individual trade policies. As such, Beijing opted to request FTA negotiations be held at a bilateral level, arguably increasing their leverage. And while Norway was directed to the ‘diplomatic freezer’ between 2010 and 2016, the negotiation with Switzerland and Iceland kept moving forward, with both FTAs being signed in 2013.
As highly developed European states there are a lot of commonalities between the EFTA members, with the promotion of multilateralism, human rights and democracy making up the cornerstones of their diplomatic efforts (Federal Department of Foreign Affairs
Switzerland [FDFA], 2017; Ministry of Foreign Affairs Iceland [MOFA Iceland], n.d.; Ministry of Foreign Affairs Norway [MOFA Norway], n.d.). At the same time, they all have unique features that guide their foreign policies which is reflected by their geographic location and membership in international organizations.
Switzerland has a longstanding history of neutrality and independence being at the bedrock of the nation’s foreign policy (Sherman, 1918, p. 780). This continues to remain at the core of their identity, with the confederation standing on the outside of Western frameworks such as NATO, the EU, the European Economic Area (EEA), and only joining the UN in 2002 after a close referendum. That is not to say that the Central European country is a stranger to international affairs, as they have thrived from the effects of economic globalization and punch well above their weight in global diplomacy, with Geneva often touted as the world capital of human rights.