The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Christopher R. O’Dea – adjunct fellow at Hudson Institute and author of the forthcoming book “Ships of State: China’s New Maritime Empire” – is the 400th in “The Trans-Pacific View Insight Series.”
How are China’s shipping companies serving the Chinese state?
Beijing’s state-owned shipping and port companies have built a new maritime empire that enables China to achieve national strategic aims that previous global empires had to achieve through military conquest.
In a tragic irony, China has used the shipping container, an American invention, to reverse-engineer the historical logic of international power and conquest, just as it has done with housewares, electronics, pharmaceuticals, solar energy, and now electric vehicles. Rather than attack Western ports and then seek to impose Chinese political control on hostile, conquered populations while rebuilding destroyed infrastructure, China has opted to use its state-owned shipping and port companies to gain effective control of critical infrastructure and then use the physical presence of those companies on the territory of dozens of developed countries to exert political influence.
China recognized that the shipping container would require construction of new infrastructure to move containers between ships and shore. Starting with its own shipping lines and ports in the late 1970s, China began to develop the ability to build ships, ports, containers, cranes, and eventually software for logistics management. By enabling the offshoring of Western manufacturing to China, the American shipping container helped China generate export earnings to pay for building what is now the world’s dominant maritime imperial network.
China has also recognized that ports embody power – ports are the sites where the physical, digital, and governance networks of the world converge. There are different channels of power projection. First, control of terminals enables Chinese SOEs to maximize the impact of Chinese manufacturing power. Second, less widely recognized but noted by some U.S. admirals, the presence of Chinese SOEs as port or terminal operators creates a cybersecurity threat to U.S. naval vessels, making most off-limits. For China, this achieves what is known as “anti-access/area denial” effects, reducing the forward power projection capability of the U.S. Navy and blunting a key element of U.S. deterrence policy.
Explain the force-multiplying role of Chinese container shipping, ports, logistics, construction, and networks in China’s maritime power projection capabilities.
China’s SOEs do not merely deliver containers. They build, install, finance, and operate an integrated system connecting any economy to the world’s logistics network. Other shipping or port-management companies operate in one or two segments of global logistics, but Chinese SOEs operate in every segment, and coordinate with each other through a variety of strategic and operational agreements. Other shipping companies deliver containers; China’s SOEs install the motherboard and Operating System of the global economy.
In strategic terms, China’s SOEs, primarily COSCO Shipping Group, China Merchants Port Holdings Company Limited, and Shanghai International Port (Group) Co., Ltd., are modern versions of the Dutch East India Company, known as the VOC for its original name, Vereenigde Oost-Indische Compagnie.
The VOC was a globally mobile infrastructure agency, invested by its 1602 Charter from the Dutch government with the powers of the Dutch state, including raising an army, building forts and ports, and entering into treaties with foreign governments. Short of raising armies, in a similar fashion this is what COSCO, China Merchants, and SIPG do: operating as agents of the Chinese state, they enter into agreements with foreign governments or with foreign government approval, typically in the form of host-country port authorities that hold governance powers delegated to them by elected governments.
Infrastructure concession agreements are the force multiplier of China’s capabilities in the maritime commercial sector. Concessions to build and operate terminals are multi-decade contracts, agreed upon with local host governments, and governed by local law. These concessions are the 21st-century equivalent of the 19th-century treaty port agreements Western powers imposed on China after the Opium Wars – they are concessions to China’s dominant position as the world’s only strategic investor in the containerized logistics platform.
Analyze how China is weaponizing the global supply chain.
China’s desire for maritime self-sufficiency is rooted in the philosophy espoused by the founders of the original Chinese state-owned company in the 1870s, China Merchants Steam Navigation Co., which was to accept that the Western powers had superior military technology and instead adopt a doctrine of economic warfare to compete against the Western imperialists and beat them at their own game using their own tools.
The term “weaponized” is overused these days. As discussed earlier, China has successfully re-invested its export earnings from offshored manufacturing to create the world’s dominant capabilities in maritime commercial logistics infrastructure, giving China a durable platform to pursue, through economic channels, and political and strategic goals that nations previously achieved by military conquest.
This multiplies the power beyond simply delivery containers, or making products in China that are shipped in containers. China runs the only global maritime delivery network that is assured of connection to China factories in the event of military conflict or a standoff with the U.S. The strategic question is how many countries will side with the U.S. if the cost is to cut off their populations from the supply lines from China? If the few countries that still maintain diplomatic ties with Taiwan are any guide to the willingness of Western and other governments to defy China, it would be prudent to assume China now possesses a powerful embargo capability.
Another effect is on sovereignty. China’s maritime logistics model seeks host-nation subservience to an internationalist empire run from Beijing. But rather than demand surrender at gunpoint, subservience is memorialized in concession agreements through which host governments retain Chinese state-owned port and shipping companies to run their logistics terminals. It is in these practical terms that countries that outsource critical logistics to Chinese SOEs through multi-decade contracts align their interests with Beijing’s.
What is the impact of recent U.S. export controls on semiconductors on China’s shipping logistics and networks?
Semiconductors and high-value electronics are small enough, light enough, require special handling, and priced high enough that they are often transported by air carriers rather than oceanic vessels, so there’s little direct impact on China’s maritime sector.
But the focus on export controls on semiconductors can create a false sense of security. China’s maritime commercial logistics and shipping SOEs are now deeply embedded in Western developed countries, posing cyber threats from the inside.
In one example, COSCO’s Greek subsidiary, Piraeus Container Terminal, was a member of an EU-funded initiative to study cybersecurity vulnerabilities in the digital systems used to operate ports and terminals and create a knowledge platform and decision tools to deal with cyber threats – and even hosted the final presentations at the PCT premises. In short, a Chinese shipping and port SOE was directly involved in a Western government-funded effort to harden digital systems, a case of the fox watching the chicken coop. Project participants included leading EU cybersecurity consultants, some with ties to major defense contractors.
A non-profit logistics software platform called LOGINK is also part of the Chinese commercial maritime platform. Originally developed to track trucks, LOGINK received funding from the Asian Development Bank and linked to public logistics platforms in Japan and South Korea in 2010. LOGINK has agreements with about 24 ports, freeport zones, and port operators outside of China, as well as a partnership with the International Port Community Systems Association (IPCSA), that could connect LOGINK to IPCSA’s “Network of Trusted Networks,” some 70 ports and 10 airports planning to share vessel and container data. China offers LOGINK free of charge, a strong incentive for smaller ports. COSCO and COSCO subsidiary shipping line OOCL are involved in LOGINK, and the LOGINK governing committee includes the Xinjiang Production and Construction Corps.
Assess how the U.S. and EU are responding to the dominance of COSCO, a Chinese state-owned shipping company, and the Ocean Alliance in the global maritime commercial shipping industry.
Admiral Raymond Spruance wrote that the basis of every successful campaign was a sound logistical plan. China has one. The U.S. does not.
The U.S. and EU response to the expansion of COSCO and the Ocean Alliance has been weak. The Ocean Alliance is an additional force multiplier for COSCO, extending shipping schedules, terminal coverage, shipbuilding, and other capabilities to additional shipping lines. It was formed in 2016, and despite objections from the U.S. Department of Justice that the alliance agreement could allow COSCO and its alliance partners to expand almost without limit into landside logistics networks in the U.S., the Federal Maritime Commission approved the alliance. Two other alliances were formed that year as the shipping industry struggled to cope with the overcapacity that resulted in the bankruptcy of Hanjin, a major shipping line. Both have since dissolved or changed, but so far the Ocean Alliance continues in force.
The other members of the Ocean Alliance are CMA-CGM, a French shipping, terminal, and logistics company that has been financially tied to China since 2013 and which has a major terminal joint venture with China Merchants; Evergreen Line of Taiwan, and OOCL, or Orient Overseas Container Line, which COSCO acquired in 2017 in conjunction with Shanghai International Port (Group) Co., Ltd.
The year 2016 was pivotal in China’s maritime commercial expansion. COSCO itself was formed from the merger of two existing Chinese SOEs, COSCO acquired control of the Piraeus Port Authority. It was also in 2016 that China rejected the decision of the Hague Tribunal that its claims in the South China Sea had no legal basis. My view is that in historical terms, 2016 marked a turning point, the beginning of a period in which the “free seas” doctrine espoused by Dutch VOC lawyer Hugo Grotius began to be rolled back.
China continued to build islands in the South China Sea – unopposed – since 2016, but despite ongoing freedom of navigation cruises led by the U.S. Navy, China has only continued its aggressive behavior in the region. At the time Grotius wrote, competing theories held that countries could claim some sort of jurisdiction over certain seas. China’s expansion has turned the commercial maritime domain into a battlespace. Unless the U.S. re-enters the oceanic commercial maritime logistics sector in a major way – and soon – that world could be returning sooner than we think.