The role of defence countertrade in Chinese geoeconomic diplomacy

ABSTRACT

Since the launch of the Belt and Road Initiative, many studies have analysed Beijing’s geoeconomic diplomacy. However, analysis has principally focused on the investment and financial aspects, ignoring the strategic dimensions of military technology exports and the means of financing them. This paper seeks to fill this scholarship gap by critically exploring Chinese defence countertrade deals, especially barter and offset, as a component of geoeconomic diplomacy. The findings suggest that while China’s geoeconomic diplomacy reflects traditional Western mercantilist goals, it also displays uniquely Chinese characteristics.

KEYWORDS:

• China geoeconomic diplomacy
• defence countertrade
• barter
• guns-for-oil
• offset
• technology transfer

Introduction

The arms trade is a challenging field of endeavour. There is a high degree of government intervention and control, and while it is intensely competitive, including many forms of non-price competition, paradoxically, the arms market structure is severely imperfect. At the national level, the market reflects a mix of monopoly supply and monopsony demand, while internationally it is a complex amalgam of oligopsony supply and oligopoly demand. In defence, lots of buyers and sellers do not exist. Moreover, major procurement contracts are ‘lumpy’, occurring infrequently and often taking years to close. The result is a global arms market, defined as an excess of supply over demand, obliging defence contractors to scrap intensely over a relatively small number of major arms deals. This, in turn, creates parallel markets where procuring states leverage their market power by demanding offshore vendors offer alternative and additional trading arrangements, including reciprocal offsetting investments in order to secure the defence contract. Welcome to the nether-world of countertrade, which extends from the transactions-based environment of barter, where no money changes hands, to what is termed offset, where the primary defence contract is linked to a quid pro quo technology transfer response. Countertrade is a murky and mystical world, where data are elusive and sensitive, and thus, on the one hand, vendors are reluctant to reveal their marketing edge in a non-price competitive environment, and on the other, recipient offset authorities are shy of disclosure: fearful of public and political recrimination if policies fail to deliver. Academic enquiry is therefore challenging, even in the relatively transparent Western context, but for Communist states, such as secretive China, the difficulties are magnified.

There is thus a lack of scholarship on the revealed strategic intent, processes and impact of Chinese countertrade, and this creates a challenge to academic enquiry. The purpose of this paper, then, is to make a modest contribution to the scholarly literature on China’s engagement with this non-conventional trading mechanism. The research methodology was centred on gaining privileged access to the specialist and ‘closed’ CounterTrade & Offset (CTO) archival database, partially overcoming the sparsity of data. CTO is a British subscription-only publication that provides trade and offset-specific intelligence to defence professionals worldwide, including defence companies and ministries of defence. Drawing from open source published material and interviews, CTO holds four decades’ worth of archives, and because of its unique focus, it is the go-to resource for scholars researching defence offsets. The archival database is only available for internal use by CTO reporting staff, and as one of the authors was such a staff member, CTO granted approval to access the data. Unrestricted access to the database enabled evaluation of Chinese countertrade operations, especially those relating to defence, across the extended period from 1999 to 2022. However, the applied narrative of Chinese countertrade deals was focused on the period since 2013, rationalised on the basis that this was when President Xi came to power and robustly drove the Belt and Road Initiative (BRI). In addition, to the CTO archival database, extensive secondary data were sourced via google scholar and other defence-related search engines. The data obtained afford critical assessment of China’s countertrade processes through analysis of mini case studies revealing the reality of its barter and offset deals aimed at facilitating arms and technology exports.

Following this introductory section, a historical comparative evaluation of superpower arms transfer strategy is offered. Importantly, this highlights the Soviet Union’s use of barter trade during the Cold War as a means of ‘pre-emptive’ arms selling to break Western strategic alliances, especially in so-called Third World states. This provides the building blocks for assessment of China’s contemporary geoeconomic diplomacy and countertrade activities, as conceptualised through the investigative prism of Ensnare, Entrench and Entrap. Ensnaring refers to China’s creation of economic dependencies among its trading partners. This is pushed through the offer of, for example, generous loan capital often in exchange for access to commodities and arms sales. Entrenching takes economic diplomacy to a higher, all embracing, level of engagement via China’s massive infrastructural investment through the BRI in strategically sensitive civil-military sectors, such as ports, dams and the mining of critical minerals. The purpose and indeed relevance of the BRI is that it has been the vehicle for projecting Beijing’s financial muscle and diplomatic influence across the globe. The BRI represents the central thrust of a broader Chinese geoeconomic diplomacy model, in which countertrade plays a role in facilitating overseas strategic investment and trade. Finally, entrapment relates to the ‘debt traps’ that invariably impact developing country loan beneficiaries, where investment project revenue streams are relatively low and unpredictable. Inevitably, during the bad times this will cause financial distress and payment arrears, leading asset ownership to transfer to Beijing. Although the process of countertrade is a consideration in each of the three stages, this paper is principally focused on the first two fields of Ensnarement and Entrenchment. Here, Chinese investment and trading engagement are ‘paid’ for by beneficiary countries offering mining concessions, access to the local arms market and various forms of commodity barter, such as oil and critical minerals.

A conclusions section closes the paper by highlighting the principal implications from the research findings. Fundamentally, countertrade opportunities are linked to the increase in China’s defence sales, and these will be expected to grow further in the future, given the collapse of Russia’s arms exporters. Beijing views foreign arms sales as a core component of geoeconomic diplomacy strategy, developing markets and allies simultaneously. The approach is embroidered into the two key elements of countertrade, barter and offset. In terms of barter, this paper has revealed the extent of China’s involvement in the bartering of guns-for-butter; or in contemporary parlance, the trading of military equipment for oil, gas, other commodities, such as rice and rubber, and critical minerals, including gold and copper. Beijing targets developing countries, where there is an abundance of natural resources, and also represent ‘captive’ markets, given that Western defence contractors do not engage in barter arrangements. Accordingly, China has a free pass to promote friendship deals, gaining influence in the process. Offset is used sparingly and cautiously, because as with Western suppliers, Chinese arms exporters jealously protect their intellectual capital. Moreover, as most of the customers fall into the category of low/middle income states, the low level of arms production capability forestalls the possibility of meaningful technology transfer. A child of its time, maybe, but presently it is an approach that works well, garnering friends, markets and diplomatic leverage.

Arms transfers: Vehicle for geoeconomic influence

Prior to exploring China’s contemporary defence countertrade activities, it is helpful to profile the historical context of 20^th arms transfers. Gerner’s 1983 framework facilitates this analysis through examination of the arms trade drivers and impacts by reference to six phases.¹ The starting point was the pre-WWI era characterised by what were termed the ‘merchants of death’, small unregulated private arms traders unconcerned about the ethics and effects of their deadly business. The second phase reflects interwar arms sales, which transitioned to become the principal domain of governments, including their efforts to control weapons exports to assuage the emergence and spread of conflict. The third phase was the period just prior and during WWII, when a new pattern of arms sales behavior arose, focused on the use of arms transfers as an instrument of foreign policy. The fourth stage (1945-50s) ushered in the beginnings of economic diplomacy, whereby Western governments recognised the critical role played by the arms trade in forging closer international relations, particularly with developing countries. Gunboat diplomacy had been replaced by less confrontational trading strategies, including military aid, training and arms transfers. Post-WWII, Great Britain and the US simply gave away surplus military equipment; in the case of the former, to ex-colonies, and in case of the latter, to gain or maintain influence.

The fifth phase, 1960–73, is especially significant for a study of Chinese defence-related countertrade strategy, for two reasons. Firstly, the period heralded the surge in arms exports to the Third World, showcasing the increased policy emphasis on pre-emptive sales.² Pre-emptive arms sales represent a core element in the rationale explaining how arms supply can act to reinforce hegemony: firstly, through the strengthening of recipient country armed forces to support the interests of supplier states; secondly, through inducement of military dependency, where, for instance, logistical sustenance of foreign equipment invariably becomes dependent on life-cycle spares supply; and, thirdly, through opportunities to leverage ‘influence’.³ This fifth phase was a period of intense competitive rivalry between the two superpowers, the US and the Soviet Union, in their respective pursuit of hegemony. The onus was on achieving foreign policy goals, with the West, and particularly the US, promoting liberalism via arms sales rather than direct military intervention. Moreover, in the post-1969 Nixon doctrine era characterised by military autonomy among friendly nations, arms sales and military aid to reinforce client state relations were far cheaper options than direct military intervention.⁴

The other reason why the fifth phase of arms transfers is contextually important when studying 21^st Century Chinese arms trade is because it introduces Moscow’s use of countertrade as an element of geoeconomic strategy. Soviet statecraft before, during and beyond 1960–73 mirrored Washington’s pre-emptive arms sales framework, though here, arms exports to mostly socialist-oriented states were used as a proxy approach to avoiding direct military confrontation with the US. There were other reasons, however, why Moscow employed arms sales to Third World states.⁵ Firstly, to secure political advantage through implementation of a version of Kissinger’s ‘regional influentials’ policy, using arms sales to develop ties with key players in the Third World, regardless of whether they were ripe for Soviet-style ‘Socialist’ revolution.⁶ Secondly, the use of arms sales to achieve strategic objectives, including access to energy resources. Thirdly, for economic reasons, such as to facilitate market access. Here, arms prices were set to recover only primary costs, and cash payments in foreign currency were rare.⁷ This appealed to the poor nations, possessing non-convertible domestic currencies and minimal holdings of foreign reserves. The strategy also offered opportunities to gain influence through preemptive selling as a means of breaking the Western chain of military alliances. This was evidenced in September 1955 when the Soviet Union used fellow Communist Warsaw Treaty Organisation (WTO) state, Czechoslovakia, to sell low cost weapons, absent of political strings and with payment in cotton, to Egypt, after Cairo had baulked at US arms sales conditions.⁸ Moscow was also active in fostering defence countertrade between the Soviet Union and its satellite WTO member states, whereby weapons were exchanged for industrial and agricultural goods. Additionally, barter trade was used to facilitate trade with selected African and Asian countries, especially India.⁹ With the passage of time, however, Soviet countertrade began to diminish, even for impoverished Third World states, such as Ethiopia, as Moscow began to demand hard currency payments to fund its own arms acquisitions from Western states.¹⁰

Gerner articulates the final sixth phase (1973-present) in terms of ‘economics trumping foreign policy objectives’. Her conceptual framework was developed in the early 1980s when the primary driver for arms exports was economic, to support long production runs, reduced unit costs, expensive R&D clawback and defence-industrial viability. These economic pressures became ever more important following the 1991 implosion of the Soviet Union and the ensuing collapse of international defence spending. In the 21^st century, economics remains a principal focus of arms transfers, but in a more nuanced way. China was the new kid on the arms trading block, with its foreign sales eclipsing Russia’s erstwhile commanding global export performance. Beijing’s success was premised on the development of a ‘brand’ symbolising the three principal attributes of successful 21^st Century arms trading performance: affordability – provision of low-cost military systems; appropriateness – supply of simple yet effective modern systems, such as missiles and drones; and accessibility – the deliberate use of countertrade to leverage arms transfers as a means of expanding diplomatic influence and geoeconomic benefits, including access to critical resources. These resources, including oil and critical minerals, are mostly located in the developing nations, blighted by the lack of hard currencies and reserves. For these impoverished states, countertrade remains a viable and uncontested option, given Western, and to a lesser extent Russian, preoccupation with higher value technology-driven offset trade solutions. For China, hard currency earnings are not an issue, and Beijing can thus afford to be creative in offering inducements to gain business.¹¹ Countertrade is such an inducement, and its use is not happenstance, but rather an integral element within a sophisticated higher-level geoeconomic grand strategy.

China’s grand strategy

China’s economic diplomacy paradigm resonates with the fifth and sixth phases of Gerner’s arms transfer framework, embracing indirect defence trade considerations, such as military aid, training, exports and countertrade, primarily offset, but is distinguishable through its depiction of uniquely Chinese characteristics. While the Western approach favours channeling economic assistance to strategic allies, a form of alliance-diplomacy against a third party or common enemy, China explicitly views economic transfers as a mechanism for securing broader security goals through ‘strategic partnerships’ resulting in positive ‘win-win’ outcomes.¹² Indeed, Beijing’s contemporary view is that economic diplomacy (jingji waijiao) serves as a mechanism for obtaining overseas influence impacting on the strategic dimensions of foreign policy. It also contributes to securing economic security (jingji anquan), with outcomes equivalent to a modern-day Chinese imperial ‘tributary’ system, principally aimed at satisfying local sufficiency of supply in commodities, energy and food. The pursuit of economic diplomacy and security, in turn, fits neatly into China’s broader framework of national security (guojia anquan), emphasising power projection as a means of protecting China’s overseas interests and sea/land routes, as a strong trading power (maoyi qiangguo).

Chinese scholars, Li and Sun, posit that China’s economic diplomacy has transitioned through four stages: firstly, the 1980s ‘engagement’ or ‘inviting-in’, initiated via Deng Xiaoping’s open door policy (yinjinlai); secondly, the 1990s stage of ‘integration’ via the promotion of inward Foreign Direct Investment; thirdly, the 2000s ‘participatory’ statecraft model, emphasising free trade zones and regional trading pacts; and, fourthly, the post-2007/8 global economic crisis, and the subsequent diplomatic push for novel economic leadership roles through ventures such as the BRICS (Brazil, Russia, India, China and South Africa), BRICS + 5 (adding Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates), and huge aid and trading programmes.¹³ A fifth economic diplomacy stage is now evolving, adding a degree of complexity to the strategic landscape. It is a scenario where development convergence is leading to competition, as China’s committed goal of ‘catching-up’ with the US approaches reality.¹⁴ The narrowing of the industrial and technological gap between the world’s two mega-economic powers is the catalyst for realising Xi Jinping’s 2012 ‘Chinese dream’, represented as harmony, peace, stability and wealth creation.¹⁵

Beijing’s geoeconomic forays in the fourth and fifth stages outlined above has begun to reflect a sequence of enticing/ensnaring, entrenching and entrapping ‘partnering’ nations into interrelated trade, debt and economic dependencies, ultimately aimed at satisfying China’s economic self-interest. Its insatiable high volume demand and generous provision of loan capital are difficult to ignore. Second stage entrenchment is via Beijing’s efforts to regalvanise and expand its silk roads through ‘cross-wired’ investment into strategic sectors, such as energy, rail, dam and maritime infrastructure as well as defence-industrial projects, potentially posing national security risks to its trading partners. The final stage of entrapment is where the developing country beneficiary of Chinese loans falls into arears in servicing the debt. China’s state banks may ease loan terms but rarely write them off, even when there is little chance of repayment; a practice cynically known as ‘extend and pretend’.¹⁶ Ultimately, the loan recipient defaults, and this leads to transfer of ownership to the lender as a means of discharging the liability.¹⁷

An additional problem faced by beneficiaries of Chinese investment is the lack of local economic ‘trickle-down’. This is illustrated by the Kenyan President, Uhuru Kenyatta, chastising Beijing at the opening of Kenya’s US$4bn rail line from Nairobi to Mombasa, when he lamented that ‘while Africa opens up to give China access to African minerals, resources and consumers, China must also open up to Africa’.¹⁸ This statement highlights that China’s BRI is far removed from economic altruism through the sharing of development rewards, a view reinforced by reportedly 86% of BRI projects using Chinese contractors, diluting potential development impacts.¹⁹ Moreover, China may use its economic power to extract diplomatic concessions. For example, China has adopted a ‘carrot and stick’ approach in Latin America, as illustrated by the Dominican Republic and Nicaragua recently flipping their recognition of Taiwanese sovereignty after China had offered financial incentives; yet, at the same time, refusing trade and investment opportunities to states maintaining official diplomatic relations, resulting in only eight Latin American countries now recognising Taiwan’s independent status.²⁰

Beijing no longer views the capitalist notion of wealth creation as an ideological after-thought, but as core to contemporary deliberations on national security. Accordingly, ‘Going-out’ is held to be essential for national rejuvenation (minzu zhenxing) and effective diplomacy,²¹ and the vehicle of geoeconomic diplomacy, represents a tapestry of economic, diplomatic, political and social policy dimensions, geared towards modification and eventual replacement of the perceived unjust international system. With the passage of time, this outward-looking principle has been amplified. The Eleventh FYP 2006–10 pushes the policy boundaries by highlighting ‘going-out further’, and the Twelfth FYP 2011–15 emphasises ‘speeding up implementation of the going-out strategy’.²² Beijing’s ‘Grand Strategy’ is aimed at supremacy in the intensifying Sino-American strategic rivalry, and leveraged on the legitimacy of employing all available policy instruments to widen and deepen China’s global influence.²³ This blending of Development, Defence and Diplomacy echoes President Xi’s 2014 statement that ‘development is the foundation of security, and security is the necessary condition for development’.²⁴ Policy emphasis on the nexus between development and security is a constant theme in China’s interpretation of economic diplomacy. Zhen Bingxi elaborates by arguing that this diplomacy model embraces Chinese characteristics employing the full panoply of economic measures to protect and further China’s national interests.²⁵ Thus, China’s geoeconomic Grand Strategy includes trade, aid, investment, arms, and, indeed, any other policy mechanism, including countertrade, that promotes national security.²⁶

This outward perspective towards security has led to a dramatic expansion of overseas investment, drawing countries and regions into its sphere of politico-economic influence. The most ambitious component of this geoeconomic model is the BRI, which President Xi launched in late 2013, and since then has been the policy vehicle for dispersing a remarkable US$1tn in loans and other development funds to nearly 150 countries.²⁷ In 2022, the BRI touched 50% of the world’s population and a quarter of its GDP.²⁸ China’s BRI strategy has been widely recognised in the literature,²⁹ with analysis principally focused on the investment and financial aspects, ignoring the strategic dimensions of military exports and the means of financing them. However, this is a mistake, because Beijing’s contemporary interpretation of economic diplomacy has been broadened to incorporate arms exports as a core element of Beijing’s grand strategy of securing global power. Arms exports are aimed at forging industrial, technological, military and diplomatic relations across the world, and forms a part of a wider strategy of ‘going out’, incorporating loans, commodity exchange and infrastructural investment in strategically important sectors.

This geoeconomic diplomacy perspective adds to the existing and diffuse scholarship seeking to rationalise arms exports. Much of the literature is dominated by defence economics.³⁰ For example, there are numerous economic drivers relating to domestic revenue generation, scale considerations and of course corporate profitability.³¹ Hartley et al.³² and separately Chalmers et al.³³ argue that arms exports are essential for maintaining the health of the exporting state’s economy. In a related way, Krause points to arms exports acting as the vehicle for defraying the costs of expensive R&D through expanding the scale of production.³⁴ Yet, while arms exports certainly have positive microeconomic impacts, they also generate macroeconomic benefits, such as on the host country’s balance of payments position.³⁵ Willardson highlights the importance of exports for maintaining domestic production.³⁶ Other analysts, by contrast, adopt an international perspective on overseas defence sales. Erickson, for instance, highlights the importance of power relations and influence created through arms exports,³⁷ which is a theme further examined by Willardson and Johnson,³⁸ and Platte and Leuffen.³⁹ Arguably the starting point for this school of thought was Andrew Pierre’s classic 1982 study,⁴⁰ in which he argued that ‘any transfer of arms has political consequences for supplier and recipient countries, as well as other players in the international system’… leading to ‘a degree of influence and interdependence among the parties involved’; being regarded as ‘symbols of support, friendship, elective kinship, and a convergence of interests and views’.⁴¹ Finally, Tian, ascribes Beijing’s recent focus on arms export promotion to three factors, namely, the push to become a major producer, the urge to compete successfully against Russia, and as a foreign policy tool to gain regional influence for future economic and political interests.⁴² It is this final consideration that this paper will now analyse, particularly the association between defence exports and countertrade.

Military exports: The hard edge of diplomacy

The use of arms exports as diplomatic leverage is only feasible if defence industrial capacity exists to service the overseas demand. China’s post-independence thrust was on growing its fledgling arms manufacturing base to defend sovereignty, but before long, ‘friendship trade’ occurred. This was undertaken for ideological reasons, and translated into gratis arms sales to neighbouring states, such as North Korea, and later North Vietnam, as both countries were engaged in patriotic independence struggles.⁴³ Early ideological arms exports eventually morphed into the contemporary Chinese arms export ‘model’, shaped by a pot pourri of factors, including: projection of its self-proclaimed developing country status, empathising with the vulnerabilities of other developing states; possession of a history free of imperialism or colonialism, and demonstrating a willingness to provide aid, assistance and economic opportunity without the conditionality invariably imposed by Western donors; pursuance of a human rights, ‘no-questions-asked’, non-interventionist, sales approach, side-stepping controversial issues, such as the procuring state’s political, military and human rights record – appealing, as it reduces strategic vulnerability to arms embargoes; the provision of generous product ‘surround’ benefits, such as credit funding;⁴⁴ and last but not least, weapon systems that comprise enduring competitive price/affordability ratios. This latter consideration is particularly salient, given that today’s ‘smart’ research-intensive systems are prohibitively expensive, and China offers a ‘half-way house’ resolution to the affordability dilemma through offering relatively low prices for less sophisticated, but still acceptable, levels of technological capability. Under current taut global market conditions, China’s cost differentials hold broad appeal, whether applied to Chinese Pterodactyl drones, costing a quarter of US near-equivalents, or Chinese Main Battle Tank-3000s, boasting less operators and costing almost US$3mn less than the latest American M-1 Abrams tank.⁴⁵

China’s arms exports over the last two decades have primarily targeted Asian, African and to a lesser extent Latin American markets, where demand exists for inexpensive and rudimentary equipment.⁴⁶ There have been two phases to China’s arms export performance. The first was a period of stellar growth, with arms sales between 2000 and 2015 increasing by more than six times.⁴⁷ Indeed, across 2007–11, China became the world’s third biggest arms exporter, after the US and Russia.⁴⁸ Yet, its share of the global arms market remained small, accounting for just 6.2% of total sales during 2012–16, falling well short of the 33% US share.⁴⁹ Presently, some 55 states buy Chinese arms, with the majority coming from the developing world, including 70% from Asia, alone.⁵⁰ The second phase of China’s arms sales occurred during 2017–2021, when it suffered a contraction in demand, down by 31% compared to 2012–2016.⁵¹ There is no one reason for this decline, but over the same period, global arms exports also fell by around 5%, suggesting difficult international economic conditions, exacerbated by the COVID-19 pandemic, whose impact will likely be more damaging on China’s low-income customer demographics.⁵² Any continued in demand for Chinese arms may also be linked to the reported poor performance of Russian military equipment in the Ukraine war,⁵³ given that much of the PLA’s weaponry is either 1^st or 2^nd generation derivatives of Russian systems. Indeed, according to a 2023 SIPRI report, Russia’s arms exports have collapsed by 31% between 2013–17 and 2018–22, with global market share falling from 22% to 16% across the same period.⁵⁴

Guns-for-butter, - oil, -minerals, or anything of strategic value

In the 21^st Century, price is not the sole nor perhaps even the primary consideration in closing a defence sale.⁵⁵ There are myriad other determinants, such as comparative operational performance, life-cycle costs, systems re-export restrictions and mechanisms for overcoming customer financial illiquidity. The latter issue is particularly salient for Chinese exporters, as they principally service the military needs of developing countries, characterised by low levels of GDP, currency non-convertibility and high levels of economic risk. Barter trade offers a partial resolution to these problems, and hence has proved popular during the turbulent global economic climate of recent decades. Indeed, a feature of non-monetarised barter trade is that it rises and falls in tandem with the peaks and troughs of the international business cycle. Barter comes into its own, when money is scarce (recession), valueless (hyperinflation) or unacceptable (non-convertible). It represents a mutual exchange of wants, where transactions can be bi- or multi-lateral. Bilateral barter trade is when two states engage in a one-off, often commodity, transaction. For example, one ship-load of Romanian iron ore for one ship-load of South African coal. An exchange rate still needs to be determined: so-much coal for so-much iron ore, but no money changes hands. One-off deals happen, but a more likely form of barter is called clearing arrangements. This is also bi-lateral, but is effected over a longer time-period to enable the discharge of all liabilities. These transactions often headline as ‘guns-for-butter’ deals, where a customer country pays for extremely expensive military equipment via long-term transfers of oil, minerals or commodities; indeed, any resource deemed acceptable by the arms vendor. Oil, in particular, is regarded as the next best medium-of-exchange to money. In the Middle East, for instance, Saudi Arabia paid for the procurement of 72 British Tornado fighters by continuous shipments of Saudi crude that commenced in 1985, and ran for almost two decades.⁵⁶ Oil was also the mode of payment used by both Iraq and Iran for procurement of South African G5/G6 155 mm artillery guns during their 1980–88 War.⁵⁷ The other principal form of barter is switch-trade, where multiple countries ‘swap’ goods until the liabilities generated by the primary defence contract have been cleared. The important issue here, irrespective of the type of barter employed, is that international trade is facilitated in the absence of money.

China has exploited the trading benefits of barter to capture markets that contribute to national security goals, encompassing not just the sourcing of strategic resources, broadly defined, but also the search for geopolitical influence. China’s massive industrial transformation since Deng Xiaoping’s 1978 ‘open door’ policy was fueled by critical resources, especially oil. Indeed, China’s consumption of oil grew so rapidly that it began to outpace growth in local oil production capacity, and inevitably in 1993 China became a net importer.⁵⁸ Since then, oil has become an essential element of China’s national security, with Beijing orchestrating a global search for ‘black gold’. Oil imports have not only been sourced through conventional trade, but also through barter. An early example of the latter can be found in Africa’s 2004–06 Darfur conflict, when China supplied around 90% of Sudan’s imports of small arms and light weapons in exchange for access to the country’s oil.⁵⁹ Ghana, similarly, used oil shipments to pay the China Petroleum & Chemical Corporation to cover the cost of constructing its energy infrastructure.⁶⁰Ghana’s financial resources were stretched because it simultaneously faced foreign exchange and public debt crises, and further loans would have breached IMF debt levels.⁶¹ Thus, the Finance Minister was forced to justify this controversial and complex Chinese barter arrangement on the basis that Accra was ‘leveraging the value of [its] oil assets, not collateralising them’.⁶² In Latin America, China also offered billions of dollars in credit to cash-strapped leftist leaders in return for access to oil, food and minerals. In Venezuela, for example, Beijing offered loans worth US$4bn to finance development of the country’s gold and copper reserves, with loan repayments via crude oil from the country’s huge oil-rich Orinoco belt, with Caracas reportedly shipping 500,000 barrels of oil daily to China.⁶³ Brazil received a US$10bn bank loan from the China Development Bank to invest in the state-owned oil company, Petrobas, with the loan repaid via shipments of oil.⁶⁴

Barter trade’s tentacles move well beyond oil, and are enmeshed in China’s ‘going-out’ strategy focused especially on transportation and commodity infrastructure as well as arms sales. For instance, China has become a prolific investor in railways across a broad swathe of nations located in different continents, with financing often through barter arrangements. For instance, in Thailand, China’s 2013 high-speed railway investments were paid through shipments of one million tons of rice and 200,000 tons of rubber.⁶⁵ In Pakistan, China built a US$50mn steel plant, with its output repaying the investment cost under Beijing’s BRI programme.⁶⁶ In Iran, China’s Nonferrous Metal Mining Group agreed a payment-in-kind deal to supply modern technologies for production of aluminium ingots and, in cooperation with Iranian companies, for extraction of gold, copper, lead and zinc.⁶⁷ China was also prepared to accept barter goods, especially beef, as payment by Hungary and Serbia for high-speed rail networks, 4 G systems and nuclear-, hydro-, wind- and solar-power technologies.⁶⁸ In Kenya, the China Road and Bridge Corporation constructed 487 km of railway, with 40% of the total cost covered by local goods and services.⁶⁹ In Nigeria, China signed an MoU to transfer skills and technologies to modernise the West African state’s extractive industries in exchange for access to raw materials.⁷⁰ On the other side of the world, China offered multi-billion dollar improvement loans to upgrade Brazil’s railway infrastructure in return for commodities.⁷¹ A number of states, including Nigeria, Pakistan, Venezuela, Bolivia, Laos, Sri Lanka, Bolivia, the Democratic Republic of Congo and Nicaragua have taken, or will take, delivery of Chinese Dong Fang Hong geostationary telecommunications satellite buses, with payment via barter arrangements.⁷²

Moreover, barter lends itself to creative trade solutions as evidenced by Tajikistan’s offer to allow China licensing rights and eventual ownership of gold mines as payment of a US$200mn debt.⁷³ Less conventional, but equally creative, is Zimbabwe’s shipment of a menagerie of safari animals, including 35 elephant calves, eight lions, a dozen hyenas and a giraffe, to a Chinese wildlife park to clear a debt for military boots and uniforms.⁷⁴ Equally remarkable was Venezuela’s offer of a 64.4square km Caribbean island to clear its US$50bn debt with China, based seemingly on the precedent set in 2009 when Citgo Petroleum Corporation, a Venezuela state-run company, transferred sovereignty of Petty Island to the state of New Jersey.⁷⁵ Moreover, in a more conventional but mega Nicaraguan project, China is presently constructing and funding a US$40bn canal that will likely rival the US-built Panama Canal, with debt repayment reportedly through access to the Latin American state’s natural resources.⁷⁶

Barter also features heavily in China’s arms trade. China has grown to become one of the world’s biggest defence exporters, and barter is lauded as the principal reason behind this expansion.⁷⁷ In Latin America, for example, China has exported tank fire control systems, ground-based air-defence radar systems, transport aircraft and large surface ships to Venezuela, and oil was used for partial payment.⁷⁸ Buenos Aires proposed bartering Argentinian wine and beef as part payment for co-production of the Chinese Chengdu Aircraft Corporation’s FC-1/JF-17 multirole combat aircraft.⁷⁹ In early 2014, Boliva’s first Tupac Katari (TKSat)-1 telecommunications satellite was successfully launched into geostationary orbit on a Chinese Long March 3B rocket, with 85% of the US$295mn cost financed through a fifteen-year loan from the China Development Bank; the associated repayment of the loan capital and interest charges of Libor plus 2.7% being covered by 40% cash and 60% via steel production from Bolivia’s El Mutun iron ore facility.⁸⁰ In South East and Central Asia, China agreed to accept 200,000 tons of Malaysian palm oil, worth around US$145mn, in exchange for defence and civilian equipment from Poly Technologies, a subsidiary of the China Poly Group Corporation – China’s biggest state-owned defence company.⁸¹ Armoured vehicles have been sold to Thailand in return for dried foodstuffs,⁸² and FD-2000 long-range air defence missile systems transferred to Uzbekistan and Turkmenistan in exchange for natural gas.⁸³ In Africa, Zimbabwe has agreed numerous barter arrangements to pay for Chinese arms. For example, in 2009, its MoD procured twelve K-8 jet-trainer aircraft and paid in minerals, worth US$240 m.⁸⁴ Zimbabwe also reportedly granted the Chinese defence contractor, Norinco, mining rights to platinum, gold, copper and diamonds at several Zimbabwean sites, in exchange for military equipment.⁸⁵

Yet, there may be limits to China’s tolerance for barter deals. This was evidenced by Iran’s recent interest in procuring 36 Chinese J-10C lightweight fighter aircraft at the competitive unit price of US$40mn.⁸⁶ Tehran sought to pay through shipments of oil and gas, but Beijing rejected the proposal, on the basis that it already had sufficient reserves of both these commodities, and wished to avoid holding reserves of assets whose prices were declining.⁸⁷ Iran’s interest followed an earlier Chinese ‘guns-for-oil’ sale of 24 J-10 fighter jets in exchange for 20-year access to the giant Iranian Azadegan oil field; the ultimate irony being that the J-10 is a derivative of Israel’s Lavi prototype project, which was terminated in the 1980s due to escalating cost, with the design and technology speculated to have later been transferred to China.⁸⁸

For the select few, offset …

Offset is viewed as the most important form of countertrade, principally because it carries the potential for transforming incipient, plateaued and/or dependent defence industrial bases into a higher level of indigenous technological capability. The offset is where the exporter transfers production packages, assembly and technology transfer to the importing country’s defence industry. Examples abound, from South Korean and Taiwanese licensed assembly of US F-16 combat aircraft⁸⁹ to Japan’s licensed manufacture of parts on US Patriot 2 missiles and F-15E fighters.⁹⁰A particularly successful offset was where a British company won the offset contract to produce the propellers for the US C-130J aircraft to be used by the Royal Air Force – the work proving so competitive that subsequently all C-130Js sold anywhere in the world would have British made propellers.⁹¹ Such offset opportunities arise due to the existence of a buyers’ arms market, where constrained demand enables procuring countries to exert leverage on foreign defence contractors to extract civil and military benefits over and above the weapons transfer. Procurement scale is an additional explanatory variable, determining the extent and quality of the offset that offshore defence contractors are prepared to offer during negotiations. Offset may well form part of a wider countertrade package, comprising both intellectual and physical technology transfer, including blueprints, designs, assembly work, with the package possibly combined with barter trade arrangements.

Offset can be divided into direct and indirect reciprocal investment activities. Direct offset is directly related to the primary defence contract, with the aim of accelerating and deepening the process of indigenous defence industrial development. While the concept of direct offset is clear, the practicalities of implementation are challenging. This is because, self-evidently, foreign OEMs do not want to give away their technological inheritance, accumulated from generations of expensive R&D investment. Thus, the ‘quality’ of offsetting investment can, and often does, represent a sticking point, not just during initial contractual negotiations, but subsequently in the implementation of the actual technologies transferred. Indirect offset, by contrast, reflects investments unrelated to the primary defence contract. This type of offset offers a wider spectrum of opportunities, from promoting new commercial industries in, for instance, dual-use civil technology domains, such as aerospace, cyber, Artificial Intelligence and other sectors that might include desalination plants and sustainable development projects.

China’s defence-related offset programmes are geographically dispersed though primarily located in Asia and the Middle-East, and will normally apply to states that possess the intent and basic industrial infrastructure to accommodate technology transfer; however, the ‘quality’ of technologies transferred will likely calibrate with the recipient nation’s stage of industrial development. The most important destination of Chinese offset programmes is Pakistan. Since the 1972 signing of the Sino-Pakistan Strategic Alliance Pact, Beijing has enjoyed a long and close strategic relationship with Pakistan, proving a trusted and reliable ally during the three Indo-Pak wars (1947, 1965 and 1999). While Islamabad has certainly gained from Chinese military and diplomatic support, equally Beijing’s bolstering of Pakistani defence capability acts as a second front with India, its arch-foe, diverting the latter’s stretched military resources away from the disputed Sino-Indian North-West border territories. Beijing has supplied huge amounts of military equipment to Pakistan, and has increasingly agreed local production as part of the procurement deals. Technology transfer to Pakistan was modest to begin, but over time both product and process sophistication has expanded and deepened. In land systems, for instance, Sino-Pak collaboration progressed from the initial 1990 joint development of the Al-Khalid tank, to the 2008 contract to locally develop, produce and assemble components for anti-tank missiles.⁹² More recently, Chinese offset programmes are to be found in Pakistan’s aerospace and maritime sectors.

In aerospace, Pakistan’s initial collaboration with China was on the 2008 K-8 Karakorum basic trainer but since then cooperation has expanded dramatically.⁹³ In 2018, for example, Pakistan signed a joint production contract to procure 48 Wing Loong II Chinese combat drones,⁹⁴ and in 2021, local production began of the JF-17 Block III fighter plane, an advanced version of the JF-17 Thunder that evolved from earlier Sino-Pak development work.⁹⁵ The initial JF-17 Block III workshare agreement allocated 58% of the airframe’s subassemblies, including wings, horizontal stabilizers, vertical tails and final assembly to Pakistan.⁹⁶ However, there have been recent reports that the JF-17 is experiencing technical problems, with the planes suffering from fuselage cracks and a malfunctioning canopy system; it has fuelled speculation that this was behind three JF-17 crashes, the latest in September 2020, leading to the grounding of 40% of Pakistan’s fleet.⁹⁷ Whether the problems derive from local production inadequacies is difficult to verify, but Pakistan’s technical base is still relatively limited, providing only modest offset opportunities restricted to simple parts manufacture and assembly.⁹⁸ China has also offered offset linked to Pakistan’s 2013 commissioning of its fourth Chinese supplied F-22P Sword-class frigate, generating US$750mn of technology transfer.⁹⁹ The initial 2005 agreement specified the construction of the first three F-22P ships in China, and the transfer of technology for the construction of the fourth ship at the Karachi Shipyard & Engineering Works (KSEW).¹⁰⁰ In 2015, a Pakistan tender for six maritime patrol vessels was won by China Shipbuilding Trading Co, including an offset package enabling KSEW to construct two vessels under a technology transfer arrangement, with the other four to be built in China.¹⁰¹ In the same year, Pakistan reached a US$5bn procurement deal with China for eight Hangor-class S-20AIP-equipped submarines, four of which would be constructed at the Karachi yard.¹⁰² Technology transfer was a critical component of this contract, including an agreement to establish a training centre at KSEW, facilitating skill transfer enabling the yard to undertake its workshare commitments.¹⁰³

Thailand is another Asian state growing its defence industrial ties with China. Offset agreements were signed in 2018 between the China Shipbuilding Industry Corporation (CSIC) and the Royal Thai Armed Forces, incorporating technology transfer deals, including local assembly of the advanced air-independent propulsion system for the Type 039A submarine,¹⁰⁴ procured by Bangkok for US$390mn in 2017.¹⁰⁵ CSIC will create a Bangkok-based engineering support centre for the Thai Navy as part of its after-sales support for the submarine procurement.¹⁰⁶ In 2018, Thailand and China entered into negotiations for the latter to build an arms maintenance depot for Royal Thai Army T4 main battle tanks and 8 × 8VN-1 armoured vehicles supplied by China North Industries Group Corporation. China will also assist in establishing a facility in the north-eastern province of Khon Kaen for assembly, production and maintenance of Chinese land systems for the Thai army.¹⁰⁷ An offset deal also provided funding for the training of Thai Defence Ministry personnel at China’s National Defence College.¹⁰⁸

There are pockets of Chinese defence offset investment in other Asian states, including Bangladesh and Myanmar, where there have been similar submarine deals to the ones agreed by Pakistan and Thailand – all seemingly part of China’s strategy to surround India with Sino-friendly satellite states.¹⁰⁹ Ironically, even Indonesia which is presently in a maritime territorial stand-off with Beijing over sovereignty of the Natuna Islands, is also a beneficiary of Chinese offset programmes, including potential technology transfer linked to Chinese C-705 missile sales.¹¹⁰ The proposed offset-related technology transfer process will reportedly begin with missile assembly in semi knock-down format by state aerospace company PT Dirgantara, though the high value rocket modules will be imported from China.¹¹¹ A fellow ASEAN state, Malaysia, is also in a maritime territorial dispute with Beijing, in this case over the Spratley Islands, announced in 2017 that it would procure four littoral mission ships from China’s CSIC,¹¹² with local yards receiving Chinese technology, including maintenance, repair, overhaul and logistical support.¹¹³ In the same year, a further small but significant development was the Sino-Sri Lankan agreement to overhaul Chinese-built F7 jets.¹¹⁴ The agreement includes technology transfer in the form of specialised equipment and training, representing further consolidation of China’s defence-industrial presence following the West’s minimalist diplomatic presence at the end of the 2009 Sri Lanka-Tamil conflict.

In the Middle-East, the China Aerospace Science and Technology Corp (CASC) has permitted Saudi Arabia to locally produce the CH-4 combat drone, which is almost identical to the US General Atomics’ MQ-9 Reaper. Since opening an office in Riyadh in March 2017, Beijing has cemented relations by agreeing to the construction of the first Middle Eastern factory to license produce Chinese Unmanned Aerial Vehicles (UAVs), specifically the Caihong/Rainbow-4 hunter-killer armed drones.¹¹⁵ In fact, this looks to be the start of several planned Sino-Saudi joint-ventures aimed at producing several types of UAVs, including dozens of Wing Loong, CH-4A reconnaissance and CH-4B attack drones.¹¹⁶ Such localisation is a key objective of Riyadh’s Vision 2030, aimed at achieving 50% local arms production by the end of the decade. There have also been discussions to launch a joint Sino-Saudi R&D Centre to develop UAV-related systems, including communications, flight-control, camera, radar and wireless-detection systems.¹¹⁷ An interesting side development of these offset arrangements is China’s exploitation of an inter-country client network to secure cost and technical efficiencies. This is reflected by the employment of Pakistani engineers in Saudi factories producing CH-4 and Wing Loong UAVs, given that the same systems are license produced in Pakistan.¹¹⁸ From a strategic perspective, Saudi Arabia views collaboration with China as a strategic back-up in the event of future supply embargoes by US and European governments over alleged human rights violations.¹¹⁹ The success of this Saudi diversification strategy is evidenced by the 386% stellar growth of Chinese arms exports to the Kingdom across 2016–2020 compared to 2011–2015.¹²⁰ The defence-industrial bonds between the two nations are likely to deepen in the future, given speculation that Beijing is pushing for sales of fighter planes.¹²¹

China has also drawn NATO-member Turkey into its geoeconomic web. The break-through came in 2013, when Ankara reached an agreement with the China Precision Machinery Import-Export Corporation (CPMIEC) to supply a US$3bn air and missile defence system.¹²² The Turkish government described CPMIEC’s bid as more competitive in terms of ‘price, technology, local workshare, technology transfer and credit financing’, when compared to the offerings by other major OEMs, including Raytheon, Lockheed Martin, the French-Italian consortium Eurosam and Russia’s Rosobornoexport.¹²³ Ankara emphasised that technology transfer was a firm and binding contractual requirement in order to facilitate indigenous defence industrialisation, with Ankara arguing that NATO contractors were reluctant to share technology.¹²⁴ It was claimed that China’s winning system, by contrast, would lead to joint production in Turkey, and CPMIEC would provide design information – a concession the other bidders resisted; but the decision was not welcomed by Turkey’s Armed Forces, describing the missile system as ‘second-rate, untested, and cheap’.¹²⁵ In the event, the Chinese programme did not run to plan, and, revealingly, CPMIEC stalled on its initial commitment to deliver substantial technology transfer, leading Ankara in 2015 to cancel the provisional contract.¹²⁶

China’s reluctance to transfer meaningful technology has become a recurring theme in its global activities.¹²⁷ Aside from Turkey, other ‘failed’ Chinese offset programmes have been observed in the Middle-East. In the early 2020s, Algeria experienced problems after Huawei teamed up with local company AFGO Tech to locally produce telephone equipment, with the Chinese company promising that the new production line would generate technology spillover and knowledge transfer.¹²⁸ A year into the contract, the new Algiers facility was reportedly ‘producing’ 30000 phones per month, but nearly all the components were imported, and output consisted primarily of local assembly of semi-knocked-down and completely-knocked-down kits imported from mainland China.¹²⁹ The factory’s activities were eventually suspended for ‘fictitious’ production and ‘disguised’ import, with a Huawei representative defending the company’s position by arguing that its Algerian partners did not meet Huawei’s production standards.¹³⁰ Similar problems have been experienced in Chinese defence offset projects. For example, in 2018, Egypt suffered from failed Chinese technology transfer promises, when Cairo sought to participate in China’s ‘digital silk road’. Cairo anticipated that the acquisition of Chinese UAV technology would create opportunities to upgrade infrastructure and boost skilled labour and exports.¹³¹ Four years on, notwithstanding Egyptian pressure to secure meaningful localisation of high value added activities, there is little evidence that such economic benefits have emerged.¹³² These Algerian and Egyptian cases suggest reluctance by Chinese contractors to share intellectual property and cutting-edge technologies.

China sporadically engages in defence offset in other parts of the world. In Africa, for example, one of its earliest offset ventures was controversially linked to the mid-2000’s Darfur conflict through the construction of three low technology light arms factories, including one that produced Chinese small arms and ammunition, located near the Sudanese capital, Khartoum.¹³³ More recently, in 2016, the South African company, Denel, agreed a strategic alliance with China’s Poly Defence group, comprising investment and partial ownership of the Simonstown shipyard, as well as co-production of three South African naval vessels.¹³⁴ In Latin America, there were 2015 reports of China transferring military-related technology to Venezuela for logistical support of Chinese K-8 and Y-8 aircraft as well as financing the construction of three military uniform facilities.¹³⁵ In the same year, China also agreed co-production of two Malvinas class US$50mn corvettes to be locally built in Argentinian yards, with further possible co-production deals involving ice-breakers, naval tugboats and mobile hospitals.¹³⁶ Linked to these contracts was a mooted bilateral partnership to develop Argentinian oil and gas fields, as part of a quid pro quo arrangement whereby Argentina recognises Chinese sovereignty over Taiwan in return for Beijing’s recognition of Argentinian sovereignty over the Falkland islands.¹³⁷ Finally, in what appears a rare foray into Europe, and certainly the first military technology deal between China and Serbia, the latter signed a 2018 deal to import five Chinese UAVs, with a further five to be manufactured under license in Serbia, including integration of locally produced optical-electronic systems.¹³⁸

Conclusions

The growth of Chinese arms exports has been phenomenal, notwithstanding that China’s global market share remains relatively small, and recent growth has begun to decline. The disappointing performance of Russian weapons systems in the Ukraine war will likely lead to a contraction in Moscow’s arms exports, with China exploiting emerging sales opportunities, spurring the resumption of its earlier growth trajectory. Future defence sales, as before, will inevitably be associated with increased countertrade activity, and the implementation strategy will be twin-pronged. The first prong is the ‘guns-for-butter/or anything else of strategic value’ trade, which Beijing uses to foster affinity with low-income states through the ruse that China too is a developing country, suffering the same challenges and dependencies as its customers. Barter trade has proved useful, as since 1993, China has become a net importer of oil, and to quench its rapacious thirst for oil, Beijing pursues guns-for-oil transactions, and barter deals targeting minerals and commodities. Western defence contractors do not entertain barter deals, and therefore, almost by default, China has acquired a significant competitive advantage in this uncontested segment of the arms market.

The second prong of China’s arms export model has regard to Beijing’s apparent preparedness to engage in offset. As with Western companies, Chinese contractors have a commercial imperative to preserve their hard won technological capability and maintain competitive momentum, but offset engagement is increasingly a universally qualifying condition in bid submission. Large-scale procurement deals may act to induce contractors to offer more attractive offset packages, but this does not apply to China, because its arms exports have been directed to mostly low-income countries possessing limited acquisition budgets. This may change in the future, given that the costs of modern weapons systems are so high that even middle-income nations are tempted by attractive value-for-money propositions. This paper’s findings suggest that while Chinese arms packages promise technology transfer, post-contract, the technologies are rarely transferred. Beijing may experience a push-back from customer countries where Chinese offset programmes have failed due to a reluctance to transfer meaningful technology to sponsor indigenous defence-industrial development; however, other benefits of the contractual package may act to outweigh the revealed technology transfer deficiencies. The fact is, if managed adroitly, China’s countertrade strategy does appear to carry the potential of contributing to Beijing’s ‘going out’ momentum – in pursuit of its long-held imperial ambitions.

Acknowledgments

The authors wish to express their gratitude to CounterTrade and Offset (CTO) for generously allowing access to its extensive and unique database. Appreciation also to two anonymous reviewers whose comments and insights acted to strengthen earlier versions of this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Ron Matthews

Ron Matthews holds the Tawazun Chair in Defence and Security Capability at Rabdan Academy, Abu Dhabi, UAE. He is a Visiting Professor in Defence Economics at Cranfield University at the UK Defence Academy, and formerly held the Chair in Defence Economics at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

Jonata Anicetti

Jonata Anicetti is an External Fellow at the Center for Security Studies - Metropolitan University Prague (MUP), Czech Republic. Before joining MUP he was a PhD researcher at the European University Institute (Italy) and a visiting scholar at the Defence Studies Department at King’s College London (UK). Since 2021, he has worked as an analyst at Countertrade & Offset.

Notes

¹ Debbie J. Gerner, ‘Arms Transfers to the Third World: Research on Patterns, Causes and Effects, International Interactions’, International Interactions 10/1 (1983), 5–37. https://doi.org/10.1080/03050628308434605.

² SIPRI, The Arms Trade with the Third World, 1st ed. (Almqvist and Wiksell 1971).

³ SIPRI, The Arms Trade with the Third World.

⁴ Yuriy Kirshin, ‘Conventional Arms Transfers During the Soviet Period’, in Ian Anthony (ed.), Russia and the Arms Trade (SIPRI: Oxford University Press 1998), 38–70. https://www.sipri.org/sites/default/files/files/books/SIPRI98An/SIPRI98An03.pdf; See also SIPRI, The Arms Trade with the Third World, which quotes a 1969 speech by US Secretary of Defense Clark Clifford, who stated that US ‘collective defense efforts in Asia must be to assist our allies in building a capacity to defend themselves. Besides costing substantially less (an Asian soldier costs about 1/15 as much as his American counterpart), there are compelling political and psychological advantages on both sides of the Pacific for such a policy’.

⁵ Kirshin, ‘Conventional Arms Transfers During the Soviet Period’.

⁶ Robbin F. Laird, ‘Soviet Arms Trade with the Non-Communist Third World’, Proceedings of the Academy of Political Science 35/3 The Soviet Union in the 1980s (1984), 196–213.

⁷ Kirshin, ‘Conventional Arms Transfers During the Soviet Period’.

⁸ SIPRI, The Arms Trade with the Third World.

⁹ Laird, ‘Soviet Arms Trade with the Non-Communist Third World’.

¹⁰ Ibid.

¹¹ The authors are grateful to an anonymous reviewer for raising this point.

¹² Yongnian Zheng, ‘Shendu Jiedu “Yidai Yilu” Zhanlue (Understanding the “One Belt One Road” Strategy in Depth)’, Public speech at Beijing Normal University, Mar. 2015.

¹³ Wei Li and Sun Yi, ‘Lijie Zhongguo Jingji Waijiao (Understanding Chinese Economic Diplomacy)’, Waijiao Pinglun (Foreign Affairs Review) 4 (2014), 1–24. The BRICS issued six invitations, but following the December 2023 change of government, Argentina declined the invitation to join, and instead of BRICS + 6 it became BRICS + 5, see for example DH 2024. As of March 2024, Saudi Arabia is still considering the invitation.

¹⁴ Ferenc Banhidi, ‘China’s catch-up Process’, Pageo: Geopolitka, 16 Nov. 2017. http://www.geopolitika.hu/en/2017/11/16/china’s-catch-up-process/.

¹⁵ Daojiong Zha, ‘Chinese Economic Diplomacy: New Initiatives’, RSIS Policy Report, Mar. (Singapore: Nanyang Technological University 2015), 2.

¹⁶ Richard Lloyd Parry, ‘Xi Tightens Belt over China’s Global Bid to Build Influence’, The Times, 29 Sep. 2022.

¹⁷ Frankopan 2017. This was evidenced by the classic example of China’s US$1.3bn upgrading of Sri Lanka’s strategically important Hambantota port, where ambitious investment plans were flawed, leading to inadequate revenue streams, an inability to service debt interest payments, loan default, and ultimately Colombo ceding control of the facility to its Beijing creditors.

¹⁸ Tom Hancock, ‘China Encircles the World with One Belt, One Road Strategy’, Financial Times, 4 May 2017; Christian. Dargnat, ’China’s Shifting Geo-Economic Strategy’, Survival 58/3 (May 2016), 63–76. https://doi.org/10.1080/00396338.2016.1186980; Kitchen, Nicholas. ‘China’s Economic Strategy’, LSE IDEAS SR012, Jun. (2012).

¹⁹ Hancock, ‘China Encircles the World with One Belt, One Road Strategy’; Dargnat, ’China’s Shifting Geo-Economic Strategy’; Kitchen, ‘China’s Economic Strategy’.

²⁰ Patricio. Giusto, and Juan Manuel Harán. ‘Taiwan Fights for Its Diplomatic Survival in Latin America’, The Diplomat, 16 May 2022. https://thediplomat.com/2022/05/taiwan-fights-for-its-diplomatic-survival-in-latin-america/.

²¹ Evan S. Medeiros, ’China’s Foreign Policy Outlook’, in China’s International Behavior: Activism, Opportunism, and Diversification (RAND Project Air Force 2009), 7–18. https://www.rand.org/pubs/monographs/MG850.html

²² Thomas Vendryes, ’Chinese Firms “Going out”: An Economic Dynamic with Political Significance’, China Perspectives 1 (2012), 67–68. https://doi.org/10.4000/chinaperspectives.5822

²³ Beijing’s contemporary interpretation of ‘Grand Strategy’ mirrors that of Edward Meade Earle, who argues that ‘[grand] strategy … is not merely a concept of wartime, but is an inherent element of statecraft at all times. See Earle 1943.

²⁴ Jinping Xi, ‘New Asian Security Concept for New Progress in Security Cooperation’, Ministry of Foreign Affairs (PRC), 21 May 2014. http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1159951.shtml

²⁵ Bingxi Zhen, ‘Xinxingshi Xia Ruhe Baohu Guojia Haiwai Liyi (How to Protect National Interests Overseas Under New Circumstances)’, Guoji Wenti Yanjiu (China International Studies), 2009.

²⁶ See, for instance, Heath 2016, p.163. Interestingly, since 2009 Japan has been pursuing what has been described as Japan’s new economic diplomacy, comprising economics, politics and security. See, Maaike. Okano-Heijmans, ‘Japan’s New Economic Diplomacy: Changing Tactics or Strategy?’ Asia-Pacific Review 19/1. (2012), 66.

²⁷ Christoph Nedopil. Wang, Brief: China Belt and Road Initiative (BRI) Investment report H1 2022. Green Finance and Development Center, 24 Jul. 2022. https://greenfdc.org/china-belt-and-road-initiative-briinvestment-report-h1-2022/

²⁸ Frank Umbach, ‘How China’s Belt and Road Initiative Is Faring’, GIS Report, 8 April 2022. https://www.gisreportsonline.com/r/belt-road-initiative/

²⁹ Tom Hancock, ‘China Encircles the World with One Belt, One Road Strategy’, Financial Times, 4 May 2017; Dargnat 2016 ‘China’s Shifting Geo-Economic Strategy’; Kitchen 2012.

³⁰ Andrew T. H. Tan, The Global Arms Trade - A Handbook (Routledge International Handbooks, 2010).

³¹ See, for instance, Smith et al. 1985.

³² Keith Hartley, and Stephen. Martin, ’The Economics of UK Arms Exports’, in Peter Levine and Ron Smith (eds.), The Arms Trade, Security and Conflict (Abingdon: Routledge 2003).

³³ Malcolm Chalmers, Neil V. Davies, Keith Hartley, and Chris Wilkinson, ’The Economic Costs and Benefits of UK Defence Exports’, Fiscal Studies 23/3 (September 2002), 343–67. https://doi.org/10.1111/j.1475-5890.2002.tb00064.x

³⁴ Krause, Keith, Arms and the State: Patterns of Military Production and Trade (Cambridge: Cambridge UP 1992).

³⁵ Krause, Arms and the State: Patterns of Military Production and Trade.

³⁶ Willardson, Spencer L. ‘Under the influence of arms: The foreign policy causes and consequences of arms transfers’, PhD dissertation, University of Iowa, 2013. https://iro.uiowa.edu/esploro/outputs/doctoral/Under-the-influence-Of-arms-the/99837766034027711

³⁷ Erickson, Jennifer L., Dangerous Trade: Arms Exports, Human Rights, and International Reputation (New York: Columbia UP 2015); Platte, Hendrik and Dirk Leuffen, ’German Arms Exports: Between Normative Aspirations and Political Reality’, German Politics 25/4 (2016), 561–580. https://doi.org/10.1080/09644008.2016.1184651.

³⁸ Willardson, Spencer L. and Richard Al. Johnson, ’Arms Transfers and International Relations Theory: Situating Military Aircraft Sales in the Broader IR Context’, Conflict Management and Peace Science 39/2 (2022), 191–213. https://doi.org/10.1177/0738894221992034

³⁹ Platte and Leuffen, Hendrik and Dirk Leuffen, ’German Arms Exports: Between Normative Aspirations and Political Reality’.

⁴⁰ Pierre, Andrew, The Global Politics of Arms Sales (Princeton: Princeton UP 1982).

⁴¹ Avila, Carlos Federico Domínguez, Deywisson Ronaldo de Souza, and Marcos Aurélio Guedes, ’Arms Transfer Policies and International Security: The Case of Brazilian-Swedish Co-Operation’, Contexto internacional 39/1 (April 2017), 135–56. https://doi.org/10.1590/s0102-8529.2017390100007

⁴² Tian, Nan. ‘China’s Arms trade: A Rival for Global Influence?’ The Interpreter, Lowy Institute, 17 September 2018. https://www.lowyinstitute.org/the-interpreter/china-s-arms-trade-rival-global-influence

⁴³ Deng, Xiaoping. ‘We Have to Abandon the Idea of “Never to Be an Arms merchandiser”’, 2016. http://news.xinhuanet.com/mil/2011-04/14/c_121305081.htm; Kitano, Naohiro, ’China’s Foreign Aid at a Transitional Stage’, Asia Economic Policy Review 9 (2014), 308. https://doi.org/10.1111/aepr.12074

⁴⁴ CTO Newsletter, ’Argentina and China Move Towards Co-Production Agreements’, Countertrade & Offset 33/4 (2015), 6.

⁴⁵ Oster, Shai. ‘China’s New Export: Military in a Box’, Bloomberg Businessweek, September 2014. https://www.bloomberg.com/news/articles/2014-09-25/chinas-norinco-is-defense-giant-on-global-growth-path

⁴⁶ Banerjee, Vasabjit and Benjamin Tkach. ‘The Coming of the Chinese Weapons Boom’, Foreign Affairs. 11 October 2022. https://www.foreignaffairs.com/china/coming-chinese-weapons-boom;

⁴⁷ ’SIPRI Arms Transfer Database, States … . “China’s Exports Were US$302 Million at Constant (1990) Prices in 2000, and US$ 1,966 Million in 2015”’, Stockholm International Peace Research Institute Database, 2018. https://sipri.org/databases/armstransfers

⁴⁸ SIPRI Arms Transfer Database, States … . “China’s Exports Were US$302 Million at Constant (1990) Prices in 2000, and US$ 1,966 Million in 2015”’

⁴⁹ Ibid.

⁵⁰ Cowburn, Ashley. ‘Two Thirds of African Countries Now Using Chinese Military Equipment, Report Reveals’, Independent, 1 March 2016.

⁵¹ Wezeman, Pieter, Alexandra Kuimova, and Siemon Wezeman. ‘Trends in International Arms Transfers, 2020’, SIPRI, March 2021. https://www.sipri.org/publications/2021/sipri-fact-sheets/trends-international-arms-transfers-2020

⁵² Wezeman, Kuimova and Wezeman ‘Trends in International Arms Transfers, 2020’.

⁵³ Chew, Amy. ‘Russian Military Hardware Wrecked in Ukraine War Could ‘Lower Demand’ in Southeast Asia’, South China Morning Post, 13 May 2022. https://www.scmp.com/week-asia/politics/article/3177545/russian-military-hardware-wrecked-ukraine-war-could-lower-demand

⁵⁴ SIPRI. ‘Surge in Arms Imports to Europe, While US Dominance of the Global Arms Trade Increases’, Stockholm International Peace Research Institute Database, 13 March 2023. https://www.sipri.org/media/press-release/2023/surge-arms-imports-europe-while-us-dominance-global-arms-trade-increases

⁵⁵ For instance, in aircraft procurement tenders, Japan’s Defence Agency typically allocates weightings to bidders as per 50 points for aircraft performance, 22.5 for cost, 22.5 for domestic industrial participation, and 5 for after-sales support. See Quarterly CTO Bulletin 2023.

⁵⁶ Stephen Fidler, ‘The Saudi Foreign Policy Connection’, Financial Times, 1 July 2007. https://www.ft.com/content/2856c71c-27f2-11dc-80da-000b5df10621

⁵⁷ Vuureen 2018.

⁵⁸ Sergei Troush, ‘China’s Changing Oil Strategy and Its Foreign Policy Implications’, Brookings, 1 September 1999. https://www.brookings.edu/articles/chinas-changing-oil-strategy-and-its-foreign-policy-implications/

⁵⁹ ‘90% of the weapons for Darfur come from China’ 2008.

⁶⁰ CTO Newsletter, ’China Strikes Compensation Deals with Bolivia’, Countertrade & Offset 32/1 (2014), 8

⁶¹ CTO Newsletter, ’China’s Refined Barter Approach Includes Europe’, Countertrade & Offset 32/1 (2014), 8.

⁶² CTO Newsletter, ’Ghana Has Entered a Creative Trade Finance Arrangement with SINOPEC’, Countertrade & Offset 32/9 (2014), 8.

⁶³ CTO Newsletter, ’China Is Respecting Local Content Requirements in Kenya’, Countertrade & Offset 33/15 (2015), 3.

⁶⁴ CTO Newsletter, ’China to Provide $10 Billion in Financing for Petrobras in Exchange for Oil’, Countertrade & Offset 34/5 (2016), 12.

⁶⁵ CTO Newsletter, ’Argentinean Wine and Beef for China’s FC-1?’, Countertrade & Offset 31/14 (2013), 7.

⁶⁶ CTO Newsletter, ’China to Build Steel Mill in Pakistan SEZ’, Countertrade & Offset 39/8 (2021), 8.

⁶⁷ CTO Newsletter, ’China Agrees Tolling Structures for Iranian Commodity Extraction’, Countertrade & Offset 35/1 (2017), 7.

⁶⁸ CTO Newsletter, ’Has Venezuela Gifted a Caribbean Island to China?’, Countertrade & Offset 32/24 (2014), 8.

⁶⁹ CTO Newsletter, ’China to Build in Karachi Half of Submarines Sold to Pakistan’, Countertrade & Offset 33/20 (2015), 8.

⁷⁰ CTO Newsletter, ’China Offers Brazil Finance in Exchange for Commodity Flows’, Countertrade & Offset 31/22 (2013), 8.

⁷¹ CTO Newsletter, ’China Will Source Raw Material from Nigeria in Exchange for Technology’, Countertrade & Offset 31/10 (2013), 8.

⁷² CTO Newsletter, ’China Engages with Third World on Space Activities, but Its Commercial Return Is Unclear’, Countertrade & Offset 35/2 (2017), 5.

⁷³ CTO Newsletter, ’Pakistan to Embark on Major Naval Build Program with Chinese Help’, Countertrade & Offset 33/13 (2015), 5.

⁷⁴ CTO Newsletter, ’Pakistan Looks for Foreign Partners to Build Defence Industry at Kamra Aviation City’, Countertrade & Offset 35/15 (2017), 4.

⁷⁵ CTO Newsletter, ’Huge “Debt for Goods” Loans to South America As China Splashes the Cash’, Countertrade & Offset 32/15 (2014), 7.

⁷⁶ Ibid.

⁷⁷ CTO Newsletter, ’Details Emerge of China-Thai Shipbuilding Cooperation’, Countertrade & Offset 36/8 (2018), 8.

⁷⁸ CTO Newsletter, ’Egypt Focusing on Acquiring Missile Tech Through Offsets’, Countertrade & Offset 36/23 (2018), 8.

⁷⁹ CTO Newsletter, ’More Chinese Technology for Pakistan’, Countertrade & Offset 31/9 (2013), 10.

⁸⁰ Ibid.

⁸¹ CTO Newsletter, ’China Sinks Under Weight of Malaysian Palm Oil’, Countertrade & Offset 37/12 (2019), 7.

⁸² CTO Newsletter, ’Flexible Barters Lift China’s Arms Exports to New Heights’, Countertrade & Offset 36/6 (2018), 8.

⁸³ CTO Newsletter, ’Pakistan to Produce Chinese Combat Drones’, Countertrade & Offset 36/20 (2018), 8.

⁸⁴ CTO Newsletter, ’Negotiation Over Value of Chinese Missile Technology Delays Deal with Indonesia’, Countertrade & Offset 31/17 (2013), 7.

⁸⁵ Mathew Nyaungwa, ‘China in Diamonds for Weapons Barter Trade with Zimbabwe – Report’, Rough Polished Analytical Agency, 14 May 2010. https://www.rough-polished.com/en/news/38992.html; CTO Newsletter, ’Thailand to Open Bidding for Railway Projects’, Countertrade & Offset 31/21 (2013), 7.

⁸⁶ CTO Newsletter, ’Iran Struggles to Barter Oil and Gas for Chinese Jets’, Countertrade & Offset 39/8 (2021), 8.

⁸⁷ CTO Newsletter, ’Pakistan Launches Local Production of JF-17 Block III Jets’, Countertrade & Offset 39/2 (2021), 6.

⁸⁸ Philip Saunders, and Joshua Wiseman, ’Buy, Build or Steal: China’s Quest for Advanced Military Aviation Technologies’, in China Strategic Perspectives (Washington DC: INSS, National Defense University Dec. 2011), 30.

⁸⁹ Dean Cheng, and Michael W. Chinworth, ’The Teeth of the Little Tigers: Offsets, Defense Production and Economic Development in South Korea and Taiwan’, in in Stephen Martin (ed.)., The Economics of Offsets: Defence Procurement and Countertrade (London: Harwood Academic Press 1996), 245–98.

⁹⁰ Ashish Dangwal, ‘After Patriot Missiles & F-15 Fighter Parts, Japan’s Industry Grows to Deliver Radars to US Navy - Reports’, EurAsian Times, 9 November 2023. https://www.eurasiantimes.com/after-patriot-missiles-f-15-fighter-jet-parts-japans-industry-grows/

⁹¹ See, Ron Matthews 2014 ‘The UK Offset Model - From Participation to Engagement’, Whitehall Report, Jul. 2014, pp. 1–14.

⁹² CTO Newsletter, ’Pakistan Publishes “Impenetrable” Offset Policy, Ignores it’, Countertrade & Offset 34/4 (2011), 1.

⁹³ CTO Newsletter, ’Serbia Buys Chinese Drone, Gets Chinese Technology’, Countertrade & Offset 36/19 (2018), 8.

⁹⁴ Ibid.

⁹⁵ CTO Newsletter, ‘Pakistan Launches Local Production of JF-17 Block III Jets’,6.

⁹⁶ Ibid.

⁹⁷ Ibid.

⁹⁸ CTO Newsletter, ‘Pakistan Looks for Foreign Partners to Build Defence Industry at Kamra Aviation City’ 4.

⁹⁹ CTO Newsletter, ’Pakistan to Embark on Major Naval Build Program with Chinese Help’, 6

¹⁰⁰ CTO Newsletter, ’More Chinese Technology for Pakistan’, 10.

¹⁰¹ Ibid.

¹⁰² Panda, Ankit, ‘Chinese Submarines Will Be Built in Karachi’, The Diplomat, 8 October 2015.

¹⁰³ CTO Newsletter, ‘Pakistan Looks for Foreign Partners to Build Defence Industry at Kamra Aviation City’ 4.

¹⁰⁴ CTO Newsletter, ’Details Emerge of China-Thai Shipbuilding Cooperation’, 8.

¹⁰⁵ Ibid.

¹⁰⁶ Ibid.

¹⁰⁷ CTO Newsletter, ’China Offers Thailand Arms Maintenance Depot’, Countertrade & Offset 39/7 (2012), 8.

¹⁰⁸ CTO Newsletter, ’China Offers Thailand Arms Maintenance Depot’, 8.

¹⁰⁹ Prabhash Dutta, ‘Can China Really Encircle India with Its String of Pearls? The Great Game of Asia’, India Today, 15 June 2017. https://www.indiatoday.in/india/story/china-encircle-india-string-of-pearls-982930-2017-06-15

¹¹⁰ CTO Newsletter, ’Negotiation Over Value of Chinese Missile Technology Delays Deal with Indonesia’, 7.

¹¹¹ Ibid.

¹¹² CTO Newsletter, ’“Flip-Flopping Malaysia” Forgoes Chinese Ship Constructions Benefits’, Countertrade & Offset 37/16 (2019), 6.

¹¹³ CTO Newsletter, ’“Flip-Flopping Malaysia” Forgoes Chinese Ship Constructions Benefits’, 6.

¹¹⁴ CTO Newsletter, ’Sri Lanka Overrides Indian Objections to Defence Technology from China’, Countertrade & Offset 35/15 (2017), 5.

¹¹⁵ Spencer, Richard. ‘China to build drone plant in Saudi Arabia’, The Times, 28 March 2017.

¹¹⁶ CTO Newsletter, ’Tech Transfers Help China Penetrate Saudi Defence Market’, Countertrade & Offset 37/16 (2019), 1.

¹¹⁷ CTO Newsletter, ’China to Assist Saudi Arabia in Building Homemade Drone’, Countertrade & Offset 40/6 (2022), 6.

¹¹⁸ CTO Newsletter, ’Tech Transfers Help China Penetrate Saudi Defence Market’, 1.

¹¹⁹ CTO Newsletter, ’SAMI Plots Industrial Cooperation with China As Backup Plan to U.S. Sanctions’, Countertrade & Offset 38/3 (2020), 7.

¹²⁰ CTO Newsletter, ’China to Assist Saudi Arabia in Building Homemade Drone’, 6.

¹²¹ CTO Newsletter 2019; Saudi Arabia-Air Force: Speeding Up Talks with China on the FC-31 Program’, Tactical Report, 16 August 2023. https://www.tacticalreport.com/daily/62108-saudi-arabia-air-force-speeding-up-talks-with-china-on-the-fc-31-program

¹²² CTO Newsletter, ’China to Assist Saudi Arabia in Building Homemade Drone’, 6.

¹²³ CTO Newsletter, ’Turkey: China Wins with a Promise to Transfer Missile Technology’, Countertrade & Offset 31/19 (2013), 8.

¹²⁴ CTO Newsletter, ’Turkey: China Wins with a Promise to Transfer Missile Technology’, 8.

¹²⁵ CTO Newsletter, ’Turkish Military Blame U.S.A. for the Chinese Purchase’, Countertrade & Offset 31/22 (2013), 6 and 8.

¹²⁶ ‘Turkey confirms cancellation of $3.4 billion missile defence project awarded to China’ 2015.

¹²⁷ CTO Newsletter, ’Chinese Digital Localisation Persists Despite Mixed Results’, Countertrade & Offset 40/19 (2022), 10.

¹²⁸ CTO Newsletter, ’Chinese Digital Localisation Persists Despite Mixed Results’, 10.

¹²⁹ Ibid.

¹³⁰ Ibid.

¹³¹ CTO Newsletter, ’Egypt Focusing on Acquiring Missile Tech Through Offsets’, 8.

¹³² CTO Newsletter, ’Chinese Digital Localisation Persists Despite Mixed Results’, 10.

¹³³ Large, Daniel. ‘Arms, Oil and Darfur – the Evolution of Relations Between China and Sudan’, Sudan: Human Security Baseline Assessment, Small Arms Surve, No 7, July 2007. https://www.smallarmssurvey.org/resource/arms-oil-and-darfur-evolution-relations-between-china-and-sudan-hsba-issue-brief-7

¹³⁴ CTO Newsletter, ’Denel and China’s Poly Technologies Team Up to Build Ships’, Countertrade & Offset 34/19 (2016), 4.

¹³⁵ CTO Newsletter, ’Venezuela “Crashes the Part” As China Expands Economic Influence Over Latin America’, Countertrade & Offset 33/2 (2015), 7.

¹³⁶ CTO Newsletter, ’Argentina and China Move Towards Co-Production Agreements’, 6.

¹³⁷ Ibid.

¹³⁸ CTO Newsletter, ’Serbia Buys Chinese Drone, Gets Chinese Technology’, 8.