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Risky Business: Keeping an Eye on Chinese Investment

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Politico.eu, 26 July, 2017

If money talks, Chinese money is particularly loud these days. In the past five years, Chinese investment abroad — largely dominated by the country’s giant state-owned enterprises — has tripled. Today, China accounts for nearly 10 percent of global foreign direct investment outflow.

In an era of austerity, influxes of investment are often appreciated. But not all Chinese money receives a warm welcome — as evidenced by Germany’s recent decision to limit investment into its strategic infrastructure. This is especially true when it comes to granting China access to Western infrastructure and sensitive telecoms and high-tech companies.

Western countries are right to pay careful attention to what Chinese companies do with their money. The trouble, however, is there is no agreed-upon standard for determining when an investment poses a security risk — and no coordination even among the closest Western allies in deciding which investments should be blocked. As Chinese money continues to flow westward, the future of European and North American security could depend on governments in those regions coming up with a common policy on where that money can be spent.

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The Interpreter, 26 July, 2017

The recent exposure of Chinese influence-peddling inside the Australian political system is just one example of China’s growing influence and willingness to act in Western states. In these days of austerity for many Western nations, money speaks loudly and in recent years Chinese investment into Western liberal democracies has surged.

Chinese foreign direct investment is shifting from commodities in the developing world to high-tech acquisitions, equity stakes and mergers in advanced economies. In Europe alone, Chinese investment increased 44% between 2014 and 2015, when it reached €20 billion. For the most part, these funds have been welcomed by cash-strapped Western states seeking to reinvigorate their economies. However, there are also risks associated with Chinese investment in telecommunications and other mainstays of modern commerce.

Research carried out by the Henry Jackson Society suggests that Chinese investment in national infrastructure is taking on critical proportions, and Western states – particularly the five countries involved in the Five Eyes intelligence alliance – are responding in piecemeal fashion with each screening investments in different ways. A number of incidents in recent years have underlined the need for better co-ordination between nations, particularly those that share intelligence, and improved understanding of China’s investment strategy into the West.

In 2016, for example, a Chinese consortium that included a subsidiary of the Chinese defence industrial giant AVIC, bought a large stake in the UK’s largest data centre operator, Global Switch. Whitehall approved the deal, only to see the Australian Department of Defence pull out of future business with Global Switch, citing the AVIC buy-in. Then came the Canadian government’s approval of a Chinese takeover of the Canadian satellite communications company, Norsat.  After the Trudeau administration confirmed that change in ownership, the Pentagon announced it would have to re-examine its contracts with the Vancouver firm.

MERICS research suggests China’s state owned enterprises (SOEs) accounted for more than 60% of China FDI in Europe in 2015. While this is not as high as it has been, the trend is upward which adds to the argument that much of the investment surge is strategic in nature. Beijing has also recently announced its intention to become the global leader in artificial intelligence (AI), a cutting-edge technology upon which the defence of the West will depend. One can see China’s intentions in its Made in China: 2025 strategy that was announced in 2014. The strategy involves subsidising Chinese firms targeting acquisitions and mergers of Western AI, IT, and telecoms firms and using non-tariff barriers to provide a sanctuary for Chinese firms inside China so they can advance safely away from the harsh glare of competition. The goal is to give China strategic dominance in the technologies of future warfare.

Such goals are alarming, and it’s not just policy analysts who think so.The Trump administration, for example, demanded an investigation in Chinese investment into Silicon Valley start-ups and the resulting report indicates that many of the Chinese firms operating in this field have state support and direction.

The recent decision by Berlin to restrict Chinese investment into parts of its digital economy and infrastructure is another indicator of how critical this issue has become. As one of the West’s most open economies, this action demonstrates Berlin is taking the situation very seriously indeed. While London mulls over a body similar to the Committee for Foreign Investment in the United States or Australia’s Foreign Investment Review Board to supplement its current ad hoc system, it is imperative that the Five Eyes alliance members systemically overhaul the range of sectors open to Chinese investment. Some practices that could assist include:

  • Instituting a regular Five Eyes meeting between the heads of their investment review boards.
  • Use this process to build a ‘common operating picture’ of Chinese investment practices and targets.
  • Sharing more information on what Chinese firms are doing in each of the Five Eyes economies, their ownership structures, and any past instances of serving Chinese national security objectives.
  • Considering an overhaul of the Five Eyes working groups in telecoms and AI, giving them greater prominence than they now have, and creating stronger links between private sector actors and security agencies.
  • Developing better monitoring by Ministries of Economy; presently, governments capture statistics without giving much background. They can and should provide more information to regulatory bodies.

The surge of Chinese SOE-led interest into Western infrastructure and high-tech can help bridge the gap between supply and demand for investment dollars. However, we need to be realistic about Beijing’s own industrial goals and objectives and the nature of its investment strategy. A common assessment system for the Five Eyes allies would assist in safeguarding our interlinked telecommunications and high-tech sectors.


Pushback: Why the Five Eyes Intelligence Alliance Should Keep Chinese Investors at Bay

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The National Interest, 25 July, 2017

There has been a dramatic shift of investment into the West, which may have a deep impact on U.S. security and the country’s future way of life. According to a report recently published by the Henry Jackson Society, China is making massive investments into Western digital and critical national infrastructure, and Western states are not reacting in a coordinated or rational way. This article argues that those states can and should coordinate a collective reaction through the Five Eyes intelligence alliance. The Five Eyes—arguably one of the strongest and long-lasting intelligence coalitions in history—consists of five of the most robust liberal democracies in the West: the United Kingdom, Canada, Australia, New Zealand and the United States.

Bound by strong cultural links, these five states have seen off authoritarian communist dictatorships and global conspiracy theories from a range of directions. Following the collapse of the Soviet Empire and its satellites, the men and women who worked in the shadows to keep us safe during that time turned their attention toward failed and failing states. They also began defending us from corporate espionage and, now, the rise of domestic-based Islamist terrorism. While the members of this shadow group still work on those issues, a new one has presented itself, and from an unusual and unlikely direction—Chinese malicious investment.

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HJS Report: Safeguarding our System: Chinese Investment into the UK’s Digital and Critical National Infrastructure

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Henry Jackson Society, 18 July, 2017

China’s investment into Western advanced economies – including that of the UK
– is increasing and changing in scope surging from EUR 14 billion in 2015 to EUR
20 billion in 2016, a 44% jump since 2014. More than 60% of the value of deals has been by state-owned enterprises, indicating this push is led by state strategy than commercial
interests.
• In 2016, China invested $11.15 billion into the UK. More than double the amount in
2015 and the most in any one year going back to 2005.
• China’s economic strategy, Made in China: 2025, might threaten the long-term
survival of UK businesses unless some sort of government protection is afforded to
them or unless China affords British businesses more access to China’s home market.
• Because of cyber vulnerabilities, critical national infrastructure will be at the forefront
of any future war.
• The current review system could be improved and rationalised:
– It has allowed access to the UK’s digital and critical infrastructure with elements
of China’s defence industrial concerns
– It has allowed deals that have affected the UK’s closest military allies
– It allows for domestic and foreign pressure on the government of the day
• A formal investment screening regime is both necessary and desirable to protect the
UK’s economic interests and its national security.
• A new regime should be built, which is adequately resourced to carry out the difficult
task of tracking foreign direct investment (FDI) into the sensitive parts of the UK’s
economy.
• The new regime should begin to coordinate more closely with the UK’s closet military
and intelligence-sharing allies, including the Five Eyes partners and NATO member
states.
• Any new regime should carry out its review process in a judicious but swift manner so
that foreign investment in the UK is not hampered or harmed. This report suggests
that the regime should be sufficiently able to pass its decisions within 30 days of
receiving an inquiry.
• Ideally, any regime should be overseen by a special committee in Parliament to ensure
that it is sufficiently funded and resourced to carry out its activities, and that it is
carrying them out in a legal, expedient and sufficient manner

To read the full report, please click here.


Is America Still the Anchor of European Defense?

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The National Interest, 23 February 2017

The recent Munich Security Conference once again highlighted the difference between Americans and Europeans on security matters. Unfortunately for the West, many European leaders—and even some American ones—took the opportunity to grandstand about the new American president. While it is true that the U.S. leader presents internal challenges to Western cohesion, this grandstanding ignored the very real external structural threats to the Western alliance. Those threats are really threefold: first, there is the inability of western Europe to safeguard its own border; second, there is Europe’s inability to defend its easternmost member states; and third, there is China’s ongoing effort to take control of a main artery of Europe-Asia trade in the South China Sea.

If Donald Trump and his parochial America First vision for the world present one internal threat to the cohesion of the West, then certainly the second internal threat—by no means unrelated—is that of European passivity in global affairs and a propensity to see the global order as an American construct. This is simply wrong, and ignores western Europe’s long history in creating and defending the rules-based system—including its crucial role in creating international law, the UN and NATO itself. Despite this, more and more European elites speak of China’s challenge to the American order, which neatly obviates their responsibility for its defense. While it’s true that European passivity has not precluded much diplomatic activity, over Iran, over Syria and even over Ukraine, it should be noted that power is a mixture of hard and soft power. One cannot forfeit one without forfeiting the other.

The origins and nature of European passivity are, to some, a matter of academic debate. However, whatever their feelings for the current president, the fact is that he has the ability to defend the Baltics and Poland from Russia, and they do not. This single fact says everything that is wrong with Europe at the moment. Quibbling over the NATO 2 percent rule, one forgets that the real argument is about capability. Is German able to retain troops or take care of its equipment adequately? Can France airlift its troops abroad when it wishes? Can any of the big three drop munitions on an enemy for more than one or two weeks? Can Luxembourg—a wealthy banking state paying a shoddy 0.44 percent—patrol its own airspace? Do any of the European states have the C4ISR to even carry out a modern air war? European protestations about how much they spend on development aid, institutions and refugees are merely “what about” arguments, and do not answer the core criticism about capability.

The simple fact of the matter is that if Russia decided to retake the Baltic states—states it has historic claims to and has indeed invaded in the past—Western Europe’s great powers would be unable to do anything about it. Equipped with three-quarters of a million troops, more tanks than any other nation and the world’s third-largest air force, Russia has one of the largest militaries on the planet. But it has also spent large amounts modernizing that military, so that it outnumbers Europe not only in quantity, but also in quality. In this context, aid and institutions are meaningless. Even diplomacy, with a determined enough opponent, would be meaningless without being backed by military might. Peace comes through strength, so the adage goes, not through passivity.

Europeans who are shocked by the Trump’s administration’s transactional approach toward NATO should take note that the trend began under the Obama administration, with Defense Secretary Robert Gates castigating Europe in a final speech in 2011. In an address to a think tank in Brussels, he stated, “The blunt reality is that there will be dwindling appetite and patience in the U.S. Congress—and in the American body politic writ large—to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources . . . to be serious and capable partners in their own defense.” Given those sentiments, Gates could have predicted a Trump-like figure coming to power in the American polity. This makes German leader Angela Merkel’s reaction all the more mystifying. Rejecting James Mattis’s pressure to increase spending, she insisted that NATO is equally valuable to the United States as it is to its other members. It was as if a roommate who never did the washing up insisted that you should keep doing it, as clearly everyone benefited from a clutter-free sink.

In an age that has seen U.S. allies in Asia—like Japan and South Korea—bring more to the table in terms of men and materiel, this European passivity is troubling. Displaying a penchant for misdirection that only clouded the issues, European elites persuaded themselves that the Trump administration is the primary “cause for concern” on the global stage. Simultaneously, they ignored the fact that since the Kosovo air war, western Europe has become unable to stop a conflict on its doorstep. In an age of rapidly growing global challenges and threats, European passivity and free riding are having a terrible impact on Western cohesion. Europeans should note that, due to demographic changes in the United States and economic and political changes in Asia, many in Washington are starting to see Asia as the future global center of gravity. They will no longer be able to take for granted the cultural links that saw Washington place Europe at the center of its global alliance system. In the future, Europeans will have to decide whether it is indeed a Western system or just an American system—and, if the former, one that they should seek to uphold.


Trump’s bromance with Putin will split the West in Two

CNN, December 19, 2016

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When the Financial Times and Time magazine both named President-elect Trump as their person of the year, the publications did so as less of a plaudit and more of a recognition that his election is a pivotal event for the West. Certainly, it represents a major challenge to the shared foreign and security policies of the broad community of nations known as the Western alliance. Only two years after Russia illegally occupied a sovereign nation’s territory in Crimea and then began a proxy war in eastern Ukraine, an American leader has come to power, promising to improve relations with Moscow. How will Trump’s “pivot to Russia” affect European security, and what impact will his increasingly hard line on China have on Washington’s Asian allies? Trump has revealed time and again on the campaign trail — and now, more disturbingly, over the hacking scandal — a willingness to give Moscow the benefit of the doubt.

However, despite his apparent soft spot for authoritarian leaders, Trump has not extended this friendliness to Chinese leader Xi Jinping. In the wake of the Taiwan phone call and the President-elect’s ambiguity over the “One China policy,” the Chinese have responded by flying a bomber over the South China Sea. They have also held life-fire drills on the PLA Navy’s new aircraft carrier and revealed that they are arming their illegal island bases in the South China Sea, one of the world’s busiest shipping lanes. Then, on Friday, China seized a US underwater drone in the South China Sea. The country used its state media to declare “the drone that emerged from the South China Sea is just the tip of the iceberg in US military strategy on China.” President-elect Trump has responded in the manner to which we have become accustomed, tweeting: “China steals US Navy research drone in international waters — rips it out of water and takes it to China in unpresidented (sic) act” and “We should tell China that we don’t want the drone they stole back.- let them keep it!”

Some commentators, like David Martin Jones in the Telegraph, have wondered if Trump is trying to execute a reverse Henry Kissinger by building ties with Moscow while freezing ties with China. While such a diplomatic move is technically feasible, is it probable? After all, Russian President Vladimir Putin is well positioned at the moment vis-a-vis Beijing. While China has clearly become the dominant partner, and its One Belt, One Road strategy unilaterally consolidates Beijing’s influence over central Asia at Russia’s expense, China has been careful to pay the Russians lip service and accord them the face that Moscow craves. Putin’s ties with China’s Xi Jinping are commonly described as a “bromance,” as the two have met 19 times in four years.

Trade between the countries mushroomed in the wake of Crimea-related Western sanctions against Russia, and the defense forces of the two nations are growing closer. Last September, Russian forces drilled alongside their Chinese counterparts, in apparent support of Beijing’s claims. As a consequence, any ideas Trump may have of splitting the two continental giants should be tempered by reality. We simply aren’t at the position in the Cold War where Beijing and Moscow were eyeball to eyeball and welcomed American balancing. So, if a Kissinger-style swap isn’t on the cards, what are the likely effects of Trump’s new foreign policy? Unfortunately, his policy is likely to exacerbate a tension already running through the Western alliance, in which the European allies — like the EU, NATO member states, and Sweden — balance against Russia while welcoming warm diplomatic and trade ties with China. This is the polar opposite in the Pacific, where Washington and its allies — concerned about Beijing’s intentions in the South China Sea — are attempting to balance against China while improving ties with Russia. While it may not look like much, this split is likely to divide the West in two, while doing little to worry China and Russia.

There are some very real dangers that might arise from this: Europeans might soften on the arms embargo to China, or dampen their criticism of Chinese moves in the Pacific even more than they have already done. Washington, for its part, might undo sanctions on Russia, effectively legitimizing the first territorial invasion of a state by another in post-War history. This would not bode well for the Baltic states.

So, what’s to be done? Well, first it’s a long way to January 20. Trump’s Cabinet is still being picked, and it is difficult to know how much his foreign policy tweets represent the actual future positions of his administration. Furthermore, his administration may yet be challenged– either by the hacking scandal or even by a rejection of Trump’s polices within the Washington policy establishment. US presidents are notoriously dependent on the other branches of government to implement their policies. Any number of things could collide, making Trump a sitting-duck president before he’s even hung his name up in the Oval Office. Regardless of all this uncertainty, neither Americans nor Europeans can afford to ignore the very real possibility outlined above that Trump’s attempt to split the two authoritarian states will actually split the West. Much diplomacy and intra-alliance dialogue will be necessary in the next four years. No less than the future of the liberal, rules-based global order is at stake.
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