China is flexing its trade and military muscles. What does it mean for the West?

In the world of prized metals, dysprosium lacked a certain star power. It lies deep in the so-called f-block of the periodic table—that free-floating part near the bottom you never used in high school chemistry—along with the other so-called rare-earth elements with tongue-twisting names like neodymium and lutetium. No one ever set out with mule and pick-axe to find dysprosium. It occurs only as a constituent part of other mineral compounds, which explains why its name derives from the Greek for “hard to get at.”

But in recent months, dysprosium has shed its obscurity to prove that, like oil or diamonds, it can serve as leverage in an international dispute. Its debut took place shortly after Sept. 7, when Japan seized the crew of a Chinese fishing boat that had rammed two Japanese coast guard vessels near the Senkaku Islands, a string of barren rocks jutting from the East China Sea that has been a source of tension between the two countries for centuries. Infuriated by Tokyo’s refusal to turn over the skipper of the trawler, Beijing retaliated in a way no one expected: it cut off Japan’s supply of dysprosium, along with 16 other rare earth metals. Dysprosium and its chemical cousins are the lifeblood of Japan’s vaunted high-tech industries, used in everything from iPhone screens to the electric motor of the Toyota Prius. China, it turns out, produces 93 per cent of the world’s supply of them, having gotten into the market 25 years ago, then flooded the globe with cheaply mined product during the late 1990s. Today, if you want a shipment of dysprosium, you buy it from China.

The results of its embargo were impressive, if frightening. Within days, executives with some of Japan’s biggest manufacturers were warning production could grind to a halt if the two sides didn’t resolve their differences. Tokyo quickly capitulated, freeing the Chinese trawler captain and calling a commission to identify alternative sources of rare earth elements. On Sept. 28, China turned the dysprosium tap back on.

Crisis averted—for now. But China’s power play was the latest in a string of moves that have rattled its neighbours and forced Western leaders to recalibrate assumptions about the trustworthiness of the world’s next superpower. China’s threats of trade sanctions against Norway over the awarding of the Nobel Peace Prize to imprisoned dissident Liu Xiaobo, along with its recent use of its rare earth metals monopoly to raise diplomatic pressure on the U.S., have called into question its past pledges to keep international politics separate from trade. So too has its steadfast refusal to revalue its currency upward, a move that might ease pressure on U.S. manufacturers, but more importantly engender goodwill among American lawmakers. But most troubling of all has been Beijing’s increasing aggressiveness in territorial disputes with neighbours like Vietnam—and its heated rhetoric when Washington has spoken up on their behalf. When the U.S. announced in August it would insert itself into Beijing’s talks with Southeast Asian nations, aimed at creating a dispute-resolution framework for these increasingly bitter turf battles, Chinese Foreign Minister Yang Jiechi flat out accused the Americans of “an attack on China.”

These developments would be less unnerving were they not unfolding against the backdrop of a military expansion the likes of which hasn’t been seen since the Cold War. Beijing’s annual spending on its armed forces has almost doubled since 2003 to reach $150 billion, according to the most recent estimates published in an annual Pentagon report to Congress, and its navy is now the largest in Asia, with 60 submarines and some 214 surface vessels, including 74 destroyers and frigates. Much of its arsenal is arrayed across the strait from Taiwan. Yet China’s new naval base on Hainan Island speaks to a renewed desire to control international shipping traffic on the South China Sea. Among other things, it features a James Bond-style underground port, which allows submarines to come and go undetected.

To James Holmes, a professor of strategy at the U.S. Naval War College, the implication is clear. “They’re building up sufficient military force to change thinking in Washington in times of crisis,” he says from his office in Newport, R.I. “If they can credibly threaten to thwack the U.S. Navy as it’s trying to rush units into the region, that really changes things for President Obama, or whoever’s making the decisions. Getting into a tussle in the western Pacific, and coming up on the short end, is one of the few things that could cost us our superpower status in an afternoon.”

Thwack? Tussle? Losing superpower status? Two years ago, when the Beijing Olympics were ending amid toasts to multilateralism, it seemed churlish to even raise such scenarios. China was now a full-fledged member of the World Trade Organization and a charter member of the international system; Confucius Institutes were springing up across the Western world to foster understanding of Chinese values—a sure sign the People’s Republic was mastering the art of soft power. Even long-time Sino-skeptics like Prime Minister Stephen Harper were tempering their complaints about spying, greenhouse gas emissions and human rights abuses in the belief that China was accepting its new role as a responsible player in the world order.

Those assumptions weren’t so much wrong as incomplete, says Martin Jacques, author of When China Rules the World, a 2009 book that predicts China will force sweeping change on neighbours and competing powers alike. Beijing’s recent foray into soft power, he says, was merely one layer of its long-haul strategy to spread its influence throughout Asia and, eventually, the world. The only question was when it would be forced to take off the velvet glove, says Jacques, and the turning point was the economic downturn. “It forced issues to the fore that its leaders would happily have left to the next generation,” he says. “The result, you could say, has been to foreshorten China’s rise.”

The prime example is the dispute over the yuan, which by last week was threatening to trigger an all-out global currency war. While Western leaders, led by members of the U.S. Congress, voice alarm about manufacturing jobs vanishing overseas due a cheap yuan, China’s leaders see themselves hurtling toward a floating currency much faster than they’d hoped. They note that per capita income in China still lags far behind that of other industrialized countries, and are convinced that allowing the yuan to float would forestall the country’s development by driving up the price of its exports, casting millions out of work. “A sharp appreciation of the currency would cause economic and social challenges at home,” Lan Lijun, China’s ambassador to Canada, told reporters in Ottawa last week. “You will see a gradual appreciation of the currency. But we’ll do it according to China’s conditions.”

Alas, China’s conditions may prove good for no one, not even China. While Beijing’s economic brain trust has grudgingly permitted to allow the yuan to appreciate about 20 per cent over the past five years, it has intervened to keep the currency far below its real value. As a result, other countries are devaluing to ensure their exports stay competitive with China’s, a race for the bottom that economists warn could touch off a destructive trade war. In September, lawmakers in the U.S. House of Representatives passed a law enabling the White House to take trade sanctions against China unless it softens its position.

The same brinksmanship now pervades China’s approach to its territorial disputes, in which until recently it showed a spirit of measured co-operation. Two years ago, for example, Beijing signed an agreement with Japan to jointly develop potentially rich oil and gas reserves on the Senkakus, despite their centuries-old dispute over the islands, currently held by Japan. Japan’s decision to seize the Chinese trawler put that deal at risk, but even those familiar with the Sturm und Drang of Beijing’s foreign policy were caught off guard by its direct resort to crippling trade action. “It’s indicative of a willingness to ramp up, to escalate,” says Paul Evans, director of the Institute of Asian Research at the University of British Columbia. “And the negative responses on the part of other countries to [China’s] behaviour should be sending warning signals to Beijing.”

Evans, a leading authority on security issues in the Asia Pacific, sees the rare earth metals embargo as part of a series of hardball tactics, typified by China’s actions in the Spratly and Paracel Islands in the South China Sea, where Beijing is the one playing high-seas cop. Potential oil-and-gas reserves and abundant fish had led to a tangle of claims by China, Malaysia, the Philippines, Taiwan and Vietnam on both archipelagos. But the islands’ strategic position on one of the world’s vital shipping corridors has proven too attractive for China’s leaders to wait for diplomacy to take its course. They’ve claimed both chains as their own, and by Hanoi’s count have seized some 63 Vietnamese fishing vessels around the islands in the last five years, including one they released last week after holding it for a month.

Suffice to say, both these cases have illustrated how quickly Chinese assertiveness in Asia runs up against U.S. interests. Japan’s claim over the Senkakus, for one, is buttressed by the 1960 Treaty of Mutual Co-operation and Security between Washington and Tokyo, which commits the U.S. to “act to meet the common danger” should anyone attack Japanese territories. In 2009, a State Department official reaffirmed Japan’s claim to the islands, and confirmed that they are protected under the treaty. (China’s Foreign Ministry reacted angrily: “Any attempts to cover the [islands] under the treaty is absolutely unacceptable to the Chinese people,” declared a spokesman.)

Even Vietnam, which until the mid-1990s had no diplomatic relations with Washington, has rushed into the arms of Uncle Sam after getting a taste of the new Chinese aggression. In the last four months, both Secretary of State Hillary Clinton and Defense Secretary Robert Gates have paid visits to the country that, as recently as 1996, Washington designated as a “combat zone.” It was a clear show of support for Hanoi on the Paracels and Spratlys issue. But the spectacle of such strange political bedfellows was striking: these days, both sides appear more concerned by the common threat posed by China than by the wounds of the Tet Offensive.

No one is predicting a titanic battle between the U.S. and the People’s Republic, of course. Beijing requires peaceful resolution of most conflicts in order to maintain uninterrupted trade, analysts point out. But gone are the days when the West could lecture it on the art of diplomacy, or count on fear of the U.S. to keep China in check. “The shift in the global order we are witnessing,” says Evans, “is the most significant since the Second World War.”

What, then, is driving China’s new-found audaciousness? To some degree, opportunity, says Holmes of the U.S. Naval War College. Aware that the U.S. military is spread thin by the recession, and by the war in Afghanistan, Beijing has made the most of its chance to strengthen its presence in its own backyard, Holmes theorizes. That, in turn, has breathed confidence into its interactions with neighbouring countries. Most striking to Pentagon observers has been China’s investment in land-based ballistic missiles stationed on Hainan Island, which may prove the key to regulating activity in the South China Sea.

Meanwhile, China has amassed a menacing array of ships and aircraft in support of its long-standing claim on Taiwan. Last year, a study by the Rand Corporation on the military situation in the Taiwan Strait concluded that the U.S. can no longer be confident of winning a battle for the air over the key waterway—“a dramatic change,” the report noted, “from the first five-plus decades of China-Taiwan confrontation.” Yet the U.S., with its military commitments and ballooning budget deficits, has been able to afford only token moves to answer the growth of Chinese air power.

China’s lack of aircraft carriers has led military experts in the past to discount China as a true global player. But Beijing has made strides in that department, too. Its carrier program appears to centre on the Varyag, a 65-tonne hulk decommissioned by the Soviets before it was fully built and purchased by Chinese interests in 1998 from Ukraine. Today it floats almost fully refurbished in the naval port of Dalian, and may be operational in as little as a year, according to naval intelligence reports. For training purposes, crews have built a full-scale replica of the Varyag’s 300-m deck on the roof of a naval research complex in Wuhan, about 650 km inland. It is a spectacle to rival anything China built for the 2008 Summer Games, complete with an “island” turret rising 10 storeys from the roof of the building, and helicopters and jets parked on the non-skid surface of the “deck.”

Yet more important than U.S. overextension, or the calculus of submarines and rockets, may be the new generation of Communist party members who hear opportunity knocking. Many of the young leaders now assuming influential positions believe not just in China’s economic liberalization, but in its destiny of global dominance, says Evans. “They are much closer to the People’s Liberation Army, and at least one faction is made up not of reformers and business people, but of princelings. They come out of a much more defence-minded position. They are going to take harder lines on international issues.”

These so-called princelings are part of an ongoing contest within the party to determine the country’s future course, says Wenran Jiang, an expert at the University of Alberta’s China Institute. On the other side are advocates of internal reform—a freer press, greater international co-operation—who get little attention in the foreign media. “These are the debates going on inside the Communist party,” says Jiang, pointing to an open letter published last week by a group of senior party members calling for greater media freedom. Yet even those favouring internal reform maintain a strong sense that China is foreordained to shape the world, he says.

How to respond, if at all, to that sentiment is one of the most important foreign policy questions now facing Western governments. Gordon Houlden, a former director-general for East Asia at Canada’s Department of Foreign Affairs, predicts more “collisions” of power like the ones seen in recent weeks. “That’s why the G20 is going to be important, that’s why the UN Security Council is going to be important,” says Houlden, now head of the U of A’s China Institute. “Ways have to be found to manage those conflicts.”

Unfortunately, Beijing hasn’t exactly shown enthusiasm for mechanisms to manage conflict: its hostile reaction to Washington’s attempt to set up a resolution framework for China’s disputes with ASEAN nations made that clear. And when it does play by the rules, the results can come as an unpleasant surprise to Western countries. Last week in Ottawa, a conference held to celebrate 40 years of diplomatic relations between Canada and China opened amid reports that Beijing had helped block Canada’s bid for a non-permanent seat on the UN Security Council. Lan Linjun, the Chinese ambassador, denied knowledge of how his country voted. But the “special relationship” invoked throughout the conference suddenly didn’t seem so special.

Such moments, says Houlden, are just the beginning of an era in which China will flex growing muscle in international institutions like the UN and International Monetary Fund, or demand reforms to them that will give it greater clout. “They won’t get their way every time, but they can’t be ignored.” Western countries can take solace in the knowledge that the Chinese can’t simply go it alone—their myriad trade connections and need for foreign markets make Soviet-style isolationism impossible. But for now, Beijing seems prepared, metaphorically speaking, to break a few eggs.

Consider its handling of the rare earth metals controversy. Within days, Tokyo struck its commission to identify alternative sources, while in Washington, defence contractors raised alarms, warning that the minerals are key components in America’s most advanced weaponry, from helicopter blades to the tiny magnets that guide the fins of smart bombs used in Afghanistan. Yet Beijing evidently felt no compunction. Having let Japan out of its doghouse, it began squeezing rare earth exports to the United States.

It’s the sort of thing you do if you aim to send a message to the superpower on the other side of the planet. And while old China hands like Houlden predict that Beijing will soon see the error of its recent ways, they also concede that China is past the point where Western leaders could hope to contain it. One hates to think the dysprosium embargo is a sign of things to come. But if it is, there’s probably not much the rest of the world can do.

– Charlie Gillis