China Has Landed By Christopher R. O’Dea
https://www.nationalreview.com/2018/10/china-global-maritime-commerce-ambitions-us-must-respond/
Beijing’s ambitious campaign to dominate global maritime commerce is in full swing. Here’s how the U.S. must respond.
In a speech at the Hudson Institute earlier this month, Vice President Mike Pence said that the American people deserve to know of the strategy behind China’s economic and political competition with the U.S. — and of what the Trump administration is doing to counter the Middle Kingdom’s challenge to U.S. security.
“Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States,” Pence said, and “applying this power in more proactive ways than ever before, to exert influence and interfere in the domestic policy and politics of our country.”
While the vice president was speaking of the U.S., the American people also deserve to know that China is employing the same playbook beyond our shores, with considerable success. In effect, China has landed, not only by militarizing artificial islands it built in the South China Sea, but by building or acquiring seaports, logistics terminals, and related transportation, communication, and energy assets in more than a dozen countries around the globe, including U.S. allies in the EU and Latin America.
Unlike the high-profile takeover of an American technology company by a Chinese one, the threat to U.S. security posed by China’s new maritime network is all too easy to overlook. Although 90 percent of the world’s energy, commodities, and manufactured goods are transported by ship, few consumers have any direct exposure to shipping or the logistical operations that comprise the “supply chain” of our globalized economy.
But maritime commerce is the operating system of that economy, running constantly in the background in much the same way the operating system of a smartphone powers apps. Control of the components of the system — ports, terminals, and the roads and railways that connect ships to stores — gives China significant leverage over the essential economic functions of the countries where those assets are located.
China has benefited more than any other country from the liberal economic order that the U.S. created after World War II. Open sea lanes, guaranteed by the U.S. Navy, were essential to the success of the export-oriented industries that made China the world’s second-largest economy. But having gained admission to the World Trade Organization, China has opted to rebuke the system that made its success possible. It has ignored an International Court of Justice ruling against its claims to geographic features in the South China Sea. Earlier this year, Djibouti — where China has established its first overseas military base — ignored a London court’s jurisdiction after it ejected the Emirati company operating its main port and replaced it with companies backed by Chinese capital and Chinese state-owned shipping and logistics firms.
Back in May, I described the security challenge posed by China’s aggressive development of its maritime commercial network. While Beijing’s maritime expansion often involves large loans funded by state-owned financing agencies, it is not merely aimed at creating “debt bombs” that will allow China to take possession of assets when financially weak countries are unable to repay loans. It is, rather, a new threat: a deliberate, strategic campaign to gain control of critical economic and industrial systems that provide China with sustainable political leverage over both developed and emerging-market countries where it invests, and undermine American power by indirect means while building its military in preparation for a direct conflict with the U.S., the incumbent global maritime power against which it can’t yet hope to prevail in such a conflict.
China is wasting no time in leveraging the potential of its commercial-port network to gain economic influence over U.S. allies and project military power. Earlier this year, EU ambassadors filed a protest with the Chinese government in Beijing, raising concerns that China’s development strategy, the Belt and Road Initiative (BRI), was a program to gain influence and commercial advantages for Chinese companies. But those concerns have not kept EU member nations from cutting deals that will advance the BRI in Western Europe, and help China’s Silk Road Fund find new investments.
Italy’s state railway company, for example, is building new rail lines that will connect the Greek ports of Piraeus and Thessaloniki to help China make good on its 2014 pledge to transform the former from a backwater into the western centerpiece of its Maritime Silk Road. Aware of the criticism that BRI projects benefit only Chinese companies, China points to the involvement of the Italian state company as evidence that its expanding control over Greek transport and logistics infrastructure is open to Western commercial partners. Yet Italy’s state rail company is hardly an arm’s-length commercial vendor; it is a state enterprise of Italy, where another Chinese state-owned enterprise (SOE) is developing a major port in Vado, which includes a deep-water dock and one of the largest refrigerated terminals in the EU.
Likewise, Piraeus is hardly just a commercial venture. Since 2017, it has been under the majority control of China COSCO Shipping, one of the primary architects of China’s commercial maritime network. Retired Navy rear admiral Michael McDevitt has called COSCO the leading supplier of shore-based support for the People’s Liberation Army Navy (PLAN), providing PLAN a built-in logistics network through a commercial enterprise structured to align with Chinese naval strategy. COSCO is actively building that network in the West, too: In 2017, it formed a shipping and logistics alliance with Piraeus port and Shanghai International Port Group that included cross-shareholdings approved by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), which oversees Chinese state companies.
In July, at the 20th EU–China Summit in Beijing, an EU investment fund and the French public investment bank Bpifrance became part of a joint venture intended to develop “synergies between the Belt and Road Initiative and the Investment Plan for Europe,” the EU stimulus program commonly known as the Juncker Plan. The investment structure was a study in the lack of transparency that EU diplomats had complained about in the run-up to the summit. The European Investment Fund (EIF), a unit of the European Investment Bank Group, signed a Memorandum of Understanding with China’s Silk Road Fund (SRF), one of the financing vehicles established to provide funding for BRI projects. The understanding was that the two entities would work together to make investments through another program, the China–EU Co-investment Fund (CECIF).
The new partners announced their first investment in August, a stake in Cathay Midcap II, a new fund managed by Cathay Capital, a private-equity investment firm that counts as its “cornerstone investors” the China Development Bank, which is directed by China’s State Council, and Bpifrance. Reflecting that pedigree, the Midcap II fund was launched during French president Emmanuel Macron’s official visit to China at the beginning of this year.
The French connection to China’s maritime network runs deep. The primary link is CMA CGM, the Marseilles-based shipping company created in 1999 through the combination of a private-sector company with a French state-owned shipping company that was being privatized. Today CMA CGM has numerous financial ties with Chinese state-owned shipping, port, and financial companies. In 2015, the Export-Import Bank of China (CEXIM) provided CMA CGM with up to a billion dollars in loans and export-credit insurance to finance the company’s future purchases of vessels and containers from Chinese suppliers; CMA CGM also agreed to evaluate infrastructure and port-related logistics projects jointly with CEXIM. In 2016, CMA CGM joined the Ocean Alliance, one of three alliances of container-shipping companies formed to manage excess capacity through load-sharing and other arrangements. The French company had attempted to form a similar alliance with A.P. Moeller-Maersk in 2014, but that arrangement was blocked by the Chinese Ministry of Commerce — which considers Chinese industrial policy when evaluating business combinations — on the grounds that it would give the companies too much market power over routes between Asia and Western Europe. China did not object when the Ocean Alliance wound up with seven such routes, a virtual monopoly compared with the single route offered by one of the other alliances.
The dominant member of the Ocean Alliance is COSCO, the Chinese company that is the primary source of shore-based support for China’s navy. In addition to coordinating container-shipping operations, the two companies have an agreement to increase the volume of business that their ships do at each other’s logistics terminals. CMA CGM’s terminal subsidiary is part of the consortium that holds the contract from the Greek state to operate the port of Thessaloniki. More troubling is CMA CGM’s involvement in Djibouti, where China has established its first overseas military base adjacent to a commercial port built by a Chinese state-owned port company. Early this year, Djibouti terminated an Emirati port operator’s contract to manage a container terminal at the port, sparking reports that the East African government intended to turn the operation over to a struggling mid-sized Singaporean shipping line being kept afloat by a capacity-management alliance with COSCO, and appoint CMA CGM to build a new terminal.
In May, U.S. Air Force pilots flying in Djibouti were targeted by high-powered lasers that the Pentagon said were pointed by Chinese nationals. U.S. military officials lodged a formal complaint about the incident with China, and the head of U.S. AFRICOM has testified to Congress that if China restricted access to the port of Djibouti, it would carry significant consequences for Camp Lemonnier, the American base that is our military’s only African outpost.
In perhaps the most direct assessment of the threat that China’s new maritime network poses to U.S. interests, retired Navy admiral Gary Roughhead, the former chief of naval operations, has warned that U.S. military vessels might be subject to cybersurveillance if they dock at ports under the control of Chinese commercial-port and shipping companies. The need to avoid exposing U.S. military communications and weapons systems to such surveillance could restrict the scope of U.S. Naval operations, in effect allowing China to achieve one of its major military goals, “anti-access/area denial,” without directly confronting American vessels.
Such concerns have substantial foundation. Early this year, Piraeus port, which COSCO controls, commissioned Huawei Technologies S.A. to redesign and replace its IT network and communications infrastructure. A new port at Haifa, Israel, is expected to open in 2021 under the management of Shanghai International Port Group, which in 2017 appointed Huawei to provide hardware and software services — including storage, network hardware, integration servers, and cloud operating systems — for a global IT platform designed by Accenture.
Countering China’s whole-of-government campaign outside the U.S. will require a sustained effort, with cooperation from American allies, to more effectively confront the threats presented by China’s commercial maritime network.
First, the Trump administration must recognize the strategic importance of maritime commerce and logistics by making the Federal Maritime Commission a member of the Committee on Foreign Investment in the United States (CFIUS). In a globalized economy, the commercial-shipping alliances that manage the flow of goods and the operation of terminals are as important to national security as traditional military alliances. The national-security agreement that CFIUS required of COSCO suggests that the current geopolitical competition warrants increased focus on maritime commerce. The agreement requires COSCO to sell a terminal in the port of Long Beach to an unassociated entity as a condition of approving COSCO’s purchase of another shipping line. According to the Maritime Commission, the merged company will be the largest carrier of U.S. imports.
It might also be prudent to investigate whether existing statutory authority would enable CFIUS to conduct a review on national-security grounds of the U.S. operations of the terminal subsidiaries of Ocean Alliance members. Because the alliance is an ongoing cooperative agreement rather than a merger, the Maritime Commission is charged with continuously monitoring it. The U.S. Shipping Act of 1984 allows competing vessel operators to enter into a joint association to discuss commercial issues in a manner that would be prohibited to most businesses under U.S. antitrust laws, and terminal operators may request authority for joint operations. Terminal operations, finances, and infrastructure are all becoming more complex, and China’s aggressive expansion into the container-shipping industry and port facilities poses systemic security risks to American supply chains. Joint operations should not be extended unless the parties can clear a review that includes appropriate consideration of American national-security interests. (Of course, making these adjustments would require the administration to fill the three vacancies on the Maritime Commission, which it should do as soon as possible. Ideal appointees would bring strategic capabilities in logistics, infrastructure finance, management, and cyber/IT systems.)
Second, the administration should consider updating U.S. antitrust laws, and potentially reallocating regulatory resources, to deal with the effects of Chinese SOEs on competition in the U.S. and globally. As mentioned earlier, China has used its antitrust powers to block formation of a shipping alliance among Western companies, leading to a market structure that benefits its own commercial-shipping and port companies. Earlier this year, it enhanced those powers by creating a new agency that reports to the State Council, elevating antitrust regulation to the same level as the National Reform and Development Commission and the Ministry of Finance, in a move that U.S. antitrust lawyers viewed as step towards making antitrust law a significant weapon of economic warfare. In contrast, the U.S.-China Economic and Security Review Commission has noted that the 1982 Foreign Trade Antitrust Improvements Act limited U.S. courts’ ability to apply U.S. antitrust laws to foreign parties. Previously there were few restrictions on when and how U.S. courts could invoke antitrust laws to restrain foreign entities. In light of the recent passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expanded the jurisdiction of CFIUS on national-security grounds, it would be prudent to consider a similar update to the applicability of U.S. antitrust laws.
Two other initiatives could help reduce the leverage China extracts from its port network. The U.S. should start dialogues with allies that are involved in the network (Italy, Spain, Greece, Brazil) to point out the long-term costs of relinquishing control of critical infrastructure to the Chinese Communist Party. A similar dialogue with France is overdue in light of the laser incident in Djibouti. Though there is no evidence to suggest CMA GGM played a role in the incident, the French company’s extensive cooperation with COSCO could be construed as providing commercial support to Beijing’s geopolitical expansion, given COSCO’s ties to the PLAN. CMA CGM itself has significant Chinese funding, and one of its terminal subsidiaries is 49 percent owned by China Merchants Holdings International, a Chinese SOE that recently took over the financially distressed port of Hambantota in Sri Lanka. The French shipping line has terminal interests in Miami, Long Beach, and Houston, and is currently involved in a transaction with CEVA Logistics, a Swiss-listed company that has the largest freight network in the U.S. The U.S. should assess the national-security implications of having such a critical economic asset under the control of a Chinese-financed company that is allied with the PLAN’s primary provider of shore-based support.
Finally, the U.S. should mobilize its creativity in capital markets and work with allies to devise a global approach to infrastructure finance that enables private interests to invest in politically or economically weak countries. This might mean the U.S. and other governments accepted a greater share of risk than private institutions subject to fiduciary duties to generate competitive returns. Institutional investors, in general, are attracted to the long-term revenue streams that infrastructure can deliver. China’s BRI lending has exploited Western risk aversion. The recently-signed BUILD Act is a step in the right direction but more needs to be done. A good basis is the G20 Global Infrastructure Hub, based in Australia, which provides a clearinghouse for methods and standards to help public and private capital sources finance essential infrastructure. Some countries have begun to cancel or revise their BRI loans, but unless the West grasps the opportunity to offer a practical alternative to Chinese capital, resistance to China’s predatory investment is likely to be short-lived.
None of these efforts will be easy, some may not be politically feasible in the U.S., and China is likely to push back against all of them. Veterans of the commercial-maritime campaign now occupy top positions in President Xi Jinping’s Communist Party and several Chinese SOEs. As the acting chairman of the Maritime Commission testified earlier this year, “the invisible hand is not the only force that guides the global shipping industry.” The other force guiding the industry at the moment is the Chinese state. Its shipping and port companies have built a global network to project its influence, and we must now reclaim the commercial maritime domain before it restricts our freedom to call at any port in the world.
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