Magazine November 25, 2019, Issue

Mike Pompeo’s View of China

Secretary of State Mike Pompeo (left), with Greek foreign minister Nikos Dendias, signs a defense agreement in Athens, October 5. (Angelos Tzortzinis/AFP via Getty Images)
A conversation with the secretary of state, had while looking east from Greece

Signing a defense agreement between the United States and Greece during a brief ceremony at the Greek foreign ministry on a sunny Saturday afternoon in Athens, U.S. secretary of state Mike Pompeo initiated a new American strategy of contesting China’s mercantilist commercial expansion. While the agreement did not mention China, in geopolitical terms it marks a fundamental challenge to China’s ambitions in Greece, the Mediterranean, and the European Union.

The signing took place just a few miles from the port of Piraeus, which abuts the Greek capital and is the major symbol of China’s mercantile ambitions in the West. Chinese premier Li Keqiang hailed Piraeus as China’s “gateway to Europe” during a visit in 2014. By 2016, COSCO Shipping, owned by the Chinese state, had achieved majority control of the company that operates Piraeus’s port under a concession contract from the Greek government. Under the new accord, the previous requirement for annual renewal of U.S.–Greek defense cooperation is replaced by a commitment to ongoing cooperation, setting the stage for increased utilization of the Souda Bay naval facility on the island of Crete, formalizing operational cooperation and technology transfer related to drones, and, most important, committing the U.S. to participate in developing new naval and air-force facilities at Alexandroupoli, a strategically located port in northeastern Greece.

Pompeo discussed the U.S. strategy to confront Chinese commercial expansion in an exclusive interview with National Review in Athens, shortly after signing the defense pact and delivering a speech to an audience of Greek officials and business leaders in which he criticized China’s “coercive” economic practices. 

The U.S. effort is comprehensive — Pompeo says the U.S. has already helped countries that have requested assistance after encountering commercial or security issues stemming from Chinese projects — but the secretary admits that the U.S. has been late to recognize the scope of the challenge. And one aspect of China’s commercial expansion stands to make the effort to counter China more complex and prolonged — the Chinese port network that now rings the world.

By building a global maritime network, China in effect has reverse-engineered the logic of conquest. China has established a global ground presence for economic and political influence of the kind that previous great powers have achieved only after significant military victory. “It’s absolutely true,” says Pompeo. The Chinese “acquire a contract concession or they end up acquiring the real estate, the port itself, or they will become a majority shareholder in an existing facility,” he says. “They’re on the ground and dealing with local governments, and perhaps not behaving in a way that is rules-based and transparent,” he adds. “It gives them real power, real capacity.”

The new security accord with Greece, amplified by Pompeo’s subsequent speech, marked the clearest statement yet to China that the U.S. is undertaking a direct challenge to its long-running, unopposed land expansion. The new approach was on full display during Pompeo’s week-long trip to four countries in the Mediterranean theater — Italy, Montenegro, North Macedonia, and Greece. At the media briefings that followed each of his meetings with the other countries, some of which included the prime minister, Pompeo emphasized the risks of doing business with China. In Rome, for example, after a meeting with Italian foreign minister Luigi Di Maio, Pompeo warned that China’s “predatory approach” to trade and investment was a “threat” to both countries. Pompeo also said that countries need to protect their interests “when the Chinese Communist Party shows up to make an investment to gain political power or threaten a nation’s security.”

When raising the risks of accepting Chinese capital for infrastructure and technology projects, Pompeo adapts his message to the circumstances facing different allies and to the participants in each meeting. “The answer depends on the audience,” he tells NR. “In each case, we do our level best to just be honest. We don’t overblow it, we don’t overhype it, we don’t mislead. We try to identify real risks that are concrete, measurable, and that are relevant to each country’s decision-making process.”

Every country faces different risks. “Sometimes you’re with an audience that needs to have what I’d call a more commercial understanding of the risks, so you walk them through the economic risks that are being taken,” he says. “Dams that won’t work. Energy projects that never start up. Bridges that never get finished or don’t last.” One of the most significant risks: “If they have a lien on the property, you can almost bet that they have an intention to foreclose.”

In other situations, technical considerations are paramount. “When you’re talking to intelligence professionals or even sometimes folks in foreign ministries who are familiar with the technology risks, you can share with them what it means to have the Chinese Communist Party in control of their network,” Pompeo says. “That’s also the case when I’ll speak with privacy groups that care deeply about protecting information — they’re often worried about how someone’s breaking into or hacking into a system.” While digital security is a top concern — as evidenced by the vigorous U.S. campaign to persuade other countries to ban the use of Huawei equipment in their national telecommunications and 5G networks — focusing on the risk that a Chinese-installed system might expose a digital network to Chinese intrusions misses the larger point. “If the Chinese Communist Party owns the system itself, it doesn’t need to break in,” says Pompeo. “Why do you need a back door if you own the home?” He also notes that digital vulnerabilities do not need to be exploited immediately. “If you have the key to the house, you can get in anytime you want,” he says. “You can go in a year from now, or two years from now.”

Network owners have the ability to monitor the flow of material or information across the network, as well as the opportunity to record information and analyze it for insights, which could be about consumer buying patterns, or about economic, political, or security matters. The power of networks defines the scope and nature of the Chinese mercantilist threat: China is seeking control of the three types of network that constitute the “operating system” of the modern globalized economy.

Digital networks control or mediate every stage of economic activity, from innovation and research to design, resource planning, and production control on through to logistics, e-commerce sales, and payment.

Governance networks encompass the decision-making resources of companies and countries. They employ digital networks and tools to conduct analysis, make projections, communicate in the course of making decisions, and, most important, convey those decisions to customers and citizens.

The third group, physical networks, are the hard assets of the global economy, from transportation assets such as trucks, train cars, ships, and, soon enough, drones and robots to energy-generation plants, transmission lines, and highways. A company that operates a port will win influence with the local host government. But if a company operates several dozen ports, as well as the movable assets that connect them, those sites become nodes in a physical network, giving the network owner more influence than it could achieve by having control of the digital technology that keeps goods and information flowing across the physical circuits, the company gains the ability to influence the governance network. Ports, then, are uniquely valuable facilities that connect individual assets such as ships and trains, transforming seemingly distinct businesses into a logistics system as integrated as the circuits etched onto any semiconductor. Ports are the rare-earth minerals of the infrastructure world.

China appears to understand the relationships between networks of these three types and to appreciate the role that ports could play in connecting their respective spheres of influence into a platform for geopolitical power. China also appears to have concluded that its state-owned companies in the shipping, port, energy, and transportation sectors were likely to find governments receptive to offers of capital to build or modernize aging economic infrastructure along the Mediterranean coast of the EU.

Chinese port and shipping companies have taken a long-term approach. COSCO secured majority control of the contract to operate Piraeus in 2016 after an eight-year investment strategy. The flagship of China’s geopolitical strategy of acquiring power by taking ownership or control of commercial ports and their related infrastructure networks, COSCO has expanded its influence from running a single cargo-container facility to setting Piraeus’s long-term development plan, which now will cost as much as $800 million. In the process, the Chinese shipping company became a major player in Greek political and economic affairs. As it apparently swayed Greece to scuttle an EU resolution critical of Chinese human-rights practices, COSCO’s position in Piraeus became a thorn in the side of the EU.

Earlier this year Italy signed a memorandum of understanding in which it agreed to cooperate with China in developing the Belt and Road Initiative (BRI). China’s position is now even stronger in Italy than in Greece. Italy’s commitment resulted in a reported 29 agreements, worth $2.8 billion, involving companies in the energy, finance, agricultural, energy, and engineering sectors. Port development was a major part of the agreements. China Communications and Construction Company Ltd. (CCCC), which was involved in building several of the artificial islands that China has militarized in the South China Sea, was contracted to improve the railway connections between the Italian port of Trieste on the Adriatic Sea and the rail lines into central and eastern Europe. The port authority overseeing the port of Genoa, along with the commissioner overseeing reconstruction of the Morandi bridge, which collapsed in Genoa in 2018, signed an agreement by which CCCC will provide technical support and build a new breakwater at the port. 

Endorsing the BRI was a big step — in the wrong direction, in the view of former prime minister Matteo Salvini, who said soon after the deal was signed that “China is not a democracy and has a certain spirit of imperialism and control.” But other Italian officials were all in. Michele Geraci, Italy’s undersecretary of state for economic development, who spent a decade working in Shanghai, had created a “China task force” in the ministry of economic development. He had made endorsement of the BRI a top objective. Then Luigi Di Maio, deputy prime minister at the time and now the foreign minister, also publicly committed to endorsing BRI.

The primary reason was financial. At the time, Italy’s economy was expected to contract by 0.2 percent in 2019, its public debt exceeded 130 percent of gross domestic product, and it was mired in budget disputes with the EU. One analyst of Italian economic policy noted that Chinese officials had made it clear that if Italy did not sign the BRI memorandum, the commercial deals would be rescinded. In a statement at the time, the president of the Genoa port authority said that the port had little choice but to support the BRI deal: “We are on the main world maritime container route, the one that connects the Far East with Europe, but to attract traffic it is necessary to make very expensive investments.”

A road project in Montenegro illustrates how financial distress resulting from soured Chinese investments in major infrastructure can ultimately cost a country its sovereignty. In February 2014, Montenegro signed an agreement with China Road and Bridge Corp. (CRBC), part of CCCC, to build a 25-mile section of a planned 100-mile highway running south from the Serbian border to the port of Bar on Montenegro’s Adriatic coast. The project was billed as a way to stimulate tourism. A country of just about 620,000 people, Montenegro in October 2014 defied warnings from the International Monetary Fund and accepted a $944 million credit from the Import-Export Bank of China to pay for part of the road. The loan carried an interest rate of only 2 percent and did not require Montenegro to make any payments for six years. In response, the World Bank withdrew a $50 million budget-support loan to Montenegro, saying the highway deal threatened the fiscal stability of the country, which had a GDP of only about $4.5 billion in 2014. A rating agency soon downgraded the country’s credit standing.

With the first payment due in July 2021, the project remains unfinished, and Montenegro is struggling to regain control of its finances. Though finance minister Darko Radunovic has said the payment will be made from the regular budget, the government has already had to increase taxes and electricity prices, cap public-sector salaries, and cut a benefit for mothers. It has initiated the process of selling a 30-year concession contract to operate the country’s two international airports and is considering borrowing more money through a new bond issuance.

Montenegro’s travails highlight the risks that Italy is running by accepting major Chinese investments. Less obvious is why China finds Montenegro to be an attractive destination for loans. The country does not host the kind of universities, research institutes, and corporate innovation centers that generate the scientific knowledge and intellectual property China needs to feed its domestic industries. But a geological map of the EU suggests another answer. Montenegro sits on significant deposits of minerals such as bauxite and possibly rare-earth elements. Bauxite is a source of gallium, which is essential to the electronics industry. Gallium compounds, for example, are critical to highly sensitive new radar systems that the U.S. Navy plans to deploy in order to enable commanders to track high-speed weapons being developed by China and Russia.

Montenegro understands the value of its resources. In a presentation document (prepared for seminars in China in September 2016) about mineral resources in countries along the Belt and Road, geologists from Montenegro’s Geological Survey described the composition of the country’s mineral deposits and its laws governing access to minerals. In 2017 one of the presenters, Slobodan Radusinovic, led a scientific team that discovered “very strong enrichment” of rare-earth elements in the deep mineral deposits in the Niksic mining region about 35 miles north of Podgorica. Dejan Milovac, deputy director of MANS, a Montenegrin non-governmental organization, says that the terms of the loan from China not only call for disputes arising from the road project to be adjudicated in a court in China but also allow China to take control of a wide range of Montenegro’s assets to collect what it’s owed. A Chinese court might readily accept rare-earth minerals from a country unable to make its payments in cash.

The situations in Italy and Montenegro show the kind of vulnerability that China exploits. The U.S. made its position on Chinese methods clear in March 2019, in a tweet from the National Security Council: “Endorsing BRI lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people.” The U.S. is now openly confronting China’s mercantilist commercial expansion, whether in the form of BRI projects or private-market deals by Chinese state-owned enterprises. “We’re working in every forum to try and push back against that,” Pompeo says. “It always starts with recognizing the challenge and then holding every entity accountable in the same way.”

The ongoing trade talks with China are one element of the effort, as is the effort at the World Trade Organization to change China’s designation as a developing nation. “You may have been a developing nation when this all kicked off,” Pompeo says of China. “Now you’re the world’s second-largest economy, so let’s all go compete on a fair and level and reciprocal playing field.” Opposing that view, Pompeo says, is “a school of thought — and the Chinese push this school of thought — that says that the West is in decline, and China uses that to say, ‘Come with us, because we’re the ascendant model.’”

“Nothing could be further from the truth,” Pompeo says. “The West will prevail in this.” But it won’t be easy, and the U.S., like other countries, is getting a late start. “The first step is always to identify the risk and then begin to develop options as to [how to] respond to that risk, and I think that’s where we’re at now,” he says. “Countries all around the world are awakening to this threat, and the United States was too slow to recognize this challenge as well. We now, I think, do in a comprehensive way appreciate all the risks, and we’re beginning to develop effective responses to those risks.”

Some countries now ask the U.S. to help them deal with unfavorable consequences when Chinese investments go awry. “We can say, ‘Here’s another way to approach it. You’re looking for X. We can’t give you exactly X, but we can give you something that achieves your outcome,’” Pompeo says. Results are a mixed bag. “Sometimes we’ve been able to help with alternative solutions, and we’ve done that a handful of times successfully. A handful of times we’ve, frankly, not been successful.”

Requests for U.S. assistance in remediating commercial or security problems that stem from BRI projects span a range of needs. Some countries “have come to us for technical assistance after they’ve done a deal, and asked us to try to figure out how to help them unwind from that,” Pompeo says. “Some of them from financially difficult positions, where they’ve got real commercial problems.”

In other situations, Pompeo says, “countries are looking for us to provide security for them, whether that’s security in the traditional sense of making sure that they have the capability to move their equipment around the world through a freedom-of-navigation operation, or security on a particular system, such as an IT system.” Some call when they’ve run out of options. “Countries have said, ‘Look, we’re under threat, and we feel compelled to respond by acquiescing to that threat, but if you’ll come help us, if you’ll come deliver us a solution that prevents the risks that they’re identifying for us, then perhaps we can move in a way that makes more sense.’” Still others seek assistance when they’ve found that they have a technology issue that’s beyond their capabilities to solve. “A number of countries have sought U.S. assistance after getting involved with Chinese investments,” Pompeo says. “I can’t go into too much detail,” he adds, but the “conversation often surrounds what’s happened in Djibouti.”

China in 2017 confirmed what observers in the West had long suspected about the commercial-port operation that a Chinese state-owned company runs in Djibouti, a small country strategically located on the horn of Africa, when it dispatched troops to the site and declared it China’s first overseas military base. In 2018 two U.S. airmen were injured when lasers fired from the ground in Djibouti targeted their military aircraft. The Defense Department believes that the lasers were Chinese weapons, and the U.S. filed a formal complaint with China, which to date has denied involvement in the incident.

In short, China plays hardball, usually with countries that lack the financial and technical resources to counter the leverage deployed by its representatives. Those representatives are typically state-owned, state-financed companies that enjoy regulatory protection from competitors at home while providing the government with intelligence support under China’s doctrine of civil–military fusion, which entwines commercial and security interests in a unified effort to advance Chinese power.

The new U.S. security agreement with Greece marks a major strategic upgrade for the relationship between the countries. By expanding the scope and tenure of the U.S. presence in the region, the agreement directly counters China’s rising influence in the physical, digital, and governance networks that underpin the U.S. geopolitical competition with Beijing. The document Pompeo signed in Athens with his counterpart, Greek foreign minister Nikolaos Dendias, was a protocol of amendment to the mutual-defense cooperation agreement between the countries, which dates from 1990.

The new protocol puts U.S.–Greek defense cooperation on a firmer footing, which is expected to facilitate U.S. investment in military capabilities at the port of Alexandroupoli, near Greece’s northeastern border with Turkey, and to permit the U.S. Air Force and Navy more active use of the military air base and port at Souda Bay on Crete. The new protocol also allows for increased use of the Greek airfield at Larissa as a base for U.S. MQ-9 Reaper drones, as well as permitting the U.S. to transfer technology to the Greek military and share intelligence gathered by the drones.

Bolstering the U.S.–Greek defense relationship will reframe several dimensions of the strategic picture in the Mediterranean. The most immediate implications are for the eastern Med. While the new facilities are intended primarily as logistical support for U.S. forces deployed in the region or transiting to other locations, closer relations with Greece — and an increased scope and faster tempo of operations — will bring the U.S. presence face-to-face with the growing Russian naval presence in the eastern Med. Alexandroupoli lies on the sea lane to the Bosporus Strait, which Russian naval vessels must cross to reach warm waters from their Black Sea bases. Heightened U.S. presence could also act as a check on provocative Turkish commercial behavior, such as the recent deployment of a Turkish drilling ship to an area, off the coast of politically divided Cyprus, that Nicosia claims as its territory. 

The ability to make increased use of Souda Bay will also provide the U.S. Sixth Fleet with the logistical resources necessary to support intensifying activity in the eastern Med. Sixth Fleet ships now visit Souda Bay more regularly than during any other period in history, and aircraft from the Fleet and Air Force station at Souda Bay now conduct daily air operations. 

In the longer term, could Souda Bay serve as a backup to the Sixth Fleet headquarters in Naples? Established in October 1951 to support NATO’s Allied Force Southern Europe, the massive installation — now called “Naval Support Activity Naples” — hosts more than 50 separate commands and approximately 8,500 personnel, including U.S. Naval Forces Europe-Africa and the Allied Joint Force Command Naples. Pompeo downplays the notion. “I think we’re in good shape,” he says. “The Italian government certainly assured us of that.”

But the answer suggests that the unsettling question of the long-term stability of having major U.S. and NATO commands located in a country that’s at least nominally inclined to support Chinese commercial expansion — and that is perhaps financially reliant on Beijing — came up during Pompeo’s discussions. It’s more than an academic exercise. Italy is now the only G-7 country to have publicly endorsed China’s BRI, and its current foreign minister, a vocal supporter of that endorsement, now holds both the foreign-policy and the trade portfolio, the result of a reorganization of Italian ministries and cabinet power.

And Chinese influence over Italy’s port infrastructure goes much deeper than the port investments announced as part of the BRI-accession process that Italy completed last April. The port of Vado, just down the coast from Genoa, will become Italy’s major connection to the Belt and Road network in early December. That’s when a new transport route is scheduled to open, which will enable 14 trains a day to travel directly from the container dock on the Italian coast to EU destinations serving approximately 70 million consumers in prosperous areas of Switzerland, France, Germany, and northern Italy. Technically a joint project with APM Terminals, the container-terminal subsidiary of Danish shipping firm A.P. Møller–Mærsk A/S, the Vado Gateway terminal encompasses the largest refrigerated warehouse in the EU and is 49 percent owned by COSCO Shipping Ports Ltd., the port unit of COSCO, and Qingdao Port International.

The new facility will include China’s standard lineup of port equipment and technology suppliers, which together function as a Huawei network for logistics. Blue cranes bearing the ZPMC label of their Chinese manufacturer, Shanghai Zhenhua Heavy Industries Company Ltd., will create the most automated container-stacking yard in Italy. When trucks arrive at the port gate bearing a container, both the license plate and the container number will be registered through optical character recognition. If all previously submitted documentation is complete, the truck will automatically be granted access to operating areas. Last summer, Vado Gateway replaced its terminal-operating software system with Navis 4.0, a system from Finnish conglomerate Cargotec. The Navis 4.0 system is fully integrated with all port equipment and enables real-time container tracking and integration with APM Terminals facilities around the world. In short, it provides operators from a Chinese-backed port a digital window into the logistics network of one of the world’s largest non-Chinese shipping companies.

Newspaper columnists in Vado are calling attention to delays in construction of the transportation infrastructure that will be needed to handle increased volume from the port, and they’re questioning whether the added traffic from trucks offloading Chinese mega-vessels will overwhelm the area’s highway system, leaving local trucking companies to deal with the costs of delayed shipments. Some key highway connections and tollbooths might not be completed until the second half of 2020.

The situation in Italy illustrates the difficulty of countering China’s port expansion. “Cheap financing is attractive,” says Pompeo. A rational private-sector view is to obtain as much capital as possible in exchange for giving up the least control of the company. But Pompeo points out that governments have different considerations. “The project has to be completed in a way that is satisfactory,” he says, “and governments also have responsibility to take on board the national-security concerns that flow from those projects.”

If Chinese state-owned companies fail to deliver infrastructure that’s structurally and economically sound, “the rest of the world will see that, at least the rest of the democratic world and Western world,” Pompeo says. “I think they’ll see that it’s in their best interest, if they want to take care of families — and democratic countries do — to partner with other Western companies and governments that share their values.”

Christopher R. O'DeaMr. O’Dea writes on political economy and infrastructure finance. He is working on a book about the security implications of China’s global expansion in maritime commerce and logistics.

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