Diplomacy and International Institutions

  • Grand Strategy
    World Order is in a Downward Spiral
    The United States needs a grand strategy to deal with three interconnected threats to global stability.
  • China
    China’s Stockpiling and Mobilization Measures for Competition and Conflict
    Hearing co-chairs Commissioner Cliff Sims and Vice Chair Reva Price, Commission members, and staff, thank you for the opportunity to speak with you today. I commend the Commission for calling a hearing on this critical subject. My testimony today will focus on China’s attempts to develop an antidote to the West’s weaponization of the existing U.S.-led international trade and financial system against China. The escalation of U.S.-China trade tension since 2018 and G7’s sanctions against Russian entities and individuals since 2022, notably the freezing of Russian foreign exchange reserves, have prompted China’s policymaking community to strategize immunizing the Chinese economy against Western sanctions and strengthen China’s financial security. Despite Western pressure and sanctions against Russia, China continues trading with Russia. During Russian President Putin’s visit to Beijing in April 2024, Chinese President Xi Jinping and President Putin strengthened their solidarity.  While criticizing Western sanctions against Russia as having no legal basis, Beijing has been pragmatically evaluating the danger of China’s reliance on Western countries for strategic industrial inputs and technology. Unabated U.S.-China geopolitical tensions and Western governments’ industrial policies to incentivize firms to reduce supply chain dependence on China have diminished trade between China and the West and fueled concerns among Chinese policymakers and academics about further intended decoupling. The Chinese government has accelerated its development of an anti-sanction policy framework and an alternative global system to prevent China from falling victim to Western sanctions like Russia did. China’s economic growth slowdown and domestic economic wounds will not stop the Communist Party of China and the Chinese government from fortifying defense against potential Western financial sanctions. Such determination is driven by two primary factors: first, the perception of U.S. containment necessitates China’s self-sufficiency and strengthened defense against forced decoupling; second, Chinese President Xi prioritizes enhancing China’s financial security as integral to national security and aspires to build up China’s financial prowess. I. China’s Perceived Necessity to Sanction-Proof the Chinese Economy In the eyes of Chinese leaders and policymakers, the punitive economic retaliation against Russia by the United States and its allies reveals that global supply chains and the U.S.-led global financial system can be weaponized against China in extreme geopolitical scenarios. However, the economic war against Russia to punish President Putin’s invasion of Ukraine is not the only factor that raises Chinese policymakers’ concerns about the potential threat of trade and financial weaponization against China. Shortly after President Biden took office, Chinese observers already concluded that the Biden administration’s China policy would feature containment, creating demand for China’s pursuit of economic and technological self-sufficiency. One year into the Biden administration – that was before the West’s collective sanctions to punish President Putin’s war against Ukraine – Chinese academics and state media perceived U.S. policy towards China as containment. For example, in June 2021, Zhang Monan, a chief researcher at China Center for International Economic Exchanges, a public policy think tank operating under the National Development and Reform Commission, observed that “Biden’s China containment policy will go further than Trump.” In August, the Bureau of Development and Planning of China Academy of Sciences wrote that “the focus of the U.S. Innovation and Competition Act of 2021 is to contain and compete with China in science and technology, centered on digital technologies such as semiconductors and 5G.” Also in August, Xinhua, China’s leading state media, quoting Chinese academics, described the trips to Southeast Asia by senior officials in the Biden administration, such as Secretary of Defense Austin and Vice President Kamala Harris, as “the United States seeking to woo Southeast Asia to contain China” with quotes from Chinese academics. In January 2022, the Chongyang Institute for Financial Studies at Renmin University published an article arguing that containing China has become a “new normal” in U.S. policymaking calculations. In this context, Chinese policymakers have become convinced that the United States is determined to implement a full-fledged strategy of containment against China before the West’s punitive sanctions against Russian individuals and entities following President Putin’s war against Ukraine. Naturally, Chinese officials, academics, and media rhetoric increasingly talk of self-reliance and are preparing for a forced decoupling from the United States. Fang Xinghai, a vice chairman of the China Securities Regulatory Commission, proposed accelerating the yuan’s internationalization to prepare for the risk of forced financial decoupling. Even the more moderate voices have acknowledged the profound changes in U.S.-China relations behind the “decoupling theory” and called for China to “prepare for the worst but strive for the best.” Under the leadership of President Xi, the Communist Party of China made “independence and self-reliance” a centerpiece in the landmark Historic Resolution enacted in 2021. On February 25, 2022, one day after President Putin’s invasion of Ukraine, the People’s Daily published an editorial that wrote “independence and self-reliance ensure that the cause of the Party and the people will continue to move from victory to victory.”  Beijing views the Biden administration’s regional arrangements in the Indo-Pacific region as destabilizing and undermining China’s interests. For Beijing, the Indo-Pacific Economic Framework for Prosperity is the economic mirror of the Quadrilateral Security Dialogue and AUKUS, two U.S.-led security pacts that Beijing regards as anti-China coalitions. In May 2022, as President Biden embarked on his first trip to Asia since taking office to visit Korea and Japan, Xinhua characterized U.S. policies towards the Indo-Pacific region as “exhibiting new features of an integrated China containment policy across multiple dimensions” (美遏华战略呈现多领域一体布局的新特征). In June, the Ministry of Foreign Affairs characterized America’s China policy as an attempt of “comprehensive containment and suppression of China” in a statement entitled “Fallacies and Truth in America’s Perception of China” (美国对华认知中的谬误和事实真相). Beijing also views the America’s industrial policies such as the CHIPS Act and the Inflation Reduction Act, and U.S. trade and investment restrictions from export controls to inbound and outbound investment screenings as tools of economic and technological containment against China. Global Times criticized U.S. chip export restrictions as aiming to “suppress and contain the rise of Chinese technology to preserve U.S. hegemony” and quoted expert opinions saying “domestic production in related industries has already become an industry consensus in China.” Researchers at Bank of China Research Institute and China Institutes of Contemporary International Relations commented that America’s “yard and fence harm global supply chains” and that “U.S. industrial policies have China as the primary target of containment and suppression.” With ongoing hot war in Europe and cold war in economic and technology competition, a Shanghai-based academic argued that “the peace dividend is over”—hence, “it is time that China prepare for a full decoupling.” Chinese scholars and policymakers are ideologically prepared for a forced decoupling from the West despite knowing that decoupling undermines China’s interests. They have debated the necessity of reforming the dollar-based global financial system and diversifying away from dollar assets overseas. The Chinese government has taken concrete steps to develop the renminbi’s pricing power in major global commodities. The People’s Bank of China and its affiliates have been working on developing an alternative financial system with the digital renminbi at the center. China’s legislatures have designed an anti-sanctions regulatory framework to deter and penalize cooperation with foreign sanctions against Chinese entities and individuals. Besides these defensive measures, the Chinese state has also identified offensive retaliatory measures by weaponizing China’s critical position in global supply chains. II. Chinese President Xi Jinping’s Emphasis on Financial Security and Financial Power Since President Xi Jinping came to power in 2013, he has repeatedly emphasized worst-case scenario thinking to “prevent macro-risks that may delay or interrupt the process of the great rejuvenation of the Chinese nation.” From Xi’s vantage point, China’s state-owned financial institutions and enterprises must inoculate themselves in advance against more disastrous international sanctions that might be levied against them in the event of a military conflict with the West over Taiwan. That concern has only grown more urgent after China witnessed the collective sanctions imposed by the West on Russian entities and individuals to punish President Vladimir Putin for his war against Ukraine.    Financial security is a core aspect of President Xi’s “Comprehensive National Security.” When addressing a Politburo study group in April 2017, Xi Jinping, as the General Secretary of the Party, emphasized that “financial security is an important part of national security. Protecting financial security is strategic and fundamental to China’s overall economic and social development.” However, it is important to note that President Xi did not invent financial security as national security. In fact, financial security has become an indispensable part of China’s national security discourse since the 1997 Asian financial crisis. Addressing the National Finance Work Conference in November 1997, President Jiang Zemin stressed that “ensuring financial security, efficiency, and stability is a basic prerequisite for the sustained rapid development of the national economy.” Jiang warned, “if the financial system is unstable, it would inevitably affect economic and social stability.” Jiang’s speech reflected the normative impact of the Asian financial crisis on the conceptualization of national security, financial governance, and financial risk management among the third generation of the Communist Party of China’s (CPC) leadership. Awakened by the severity of the crisis, CPC leaders realized for the first time that national security could not be narrowly defined only by military competencies and defense capabilities but must also include financial security.   Under President Xi’s leadership, defending China’s financial security means not only managing market risks but also geopolitical risks. Developing alternative systems to hedge sanction risk and reduce China’s strategic vulnerabilities due to its dependence on the U.S. dollar in international trade and investment has become a priority of the CPC. At the October 2023 Central Finance Work Conference, Xi reiterated that “preventing and managing risk is a perpetual theme of financial work” and elaborated on the geopolitical challenges to China’s financial security. He observed that “a small number of countries treat finance as tools for geopolitical games. They repeatedly played with currency hegemony and frequently wielded the big stick of financial sanctions. … All these have presented new challenges to maintaining financial security under the new situation.”   President Xi’s recent speech suggests that he views improving the renminbi’s international status as an indispensable component of strengthening China’s financial security. In January 2024, President Xi urged leading cadres at provincial and ministerial levels to strengthen China’s financial power and listed “powerful currency” as the top priority among several core financial factors. He called on Chinese officials to promote China-governed financial infrastructures that are safe and efficient to improve China’s financial autonomy. III. China’s Strategies to Reduce its Strategic Vulnerability to the Dollar Hegemony In response to Chinese policymakers’ anxieties over the country’s financial security, China in recent years has accelerated its development of an alternative global financial system independent of the dollar to fortify its economy against potential sanctions. The Chinese government has pursued three primary strategies to push for reforming the existing U.S.-led system while developing an alternative. One strategy has been to support and expand regional and multilateral currency and financial cooperation through various non-Western partnerships. The second strategy has been to increase the broader use of the renminbi in international trade and investment while promoting renminbi-based international financial infrastructure. The third strategy is to improve the role of the renminbi in global commodities pricing, especially in the context of the clean energy transition.  1. Promote Regional and Multilateral Currency and Financial Cooperation The 1997 Asian financial crisis drove demand for a regional currency arrangement to address short-term liquidity difficulty for regional members and reduce reliance on the International Monetary Fund (IMF). Japanese finance authorities proposed to establish an Asian Monetary Fund (AMF) but failed due to the U.S. government’s opposition. In May 2000, ASEAN+3 (China, Japan, and South Korea) managed to launch the Chiang Mai Initiative (CMI), the first regional currency swap arrangement, as an incremental step and laid the foundation for continued regional currency cooperation. The CMI is composed of the ASEAN Swap Arrangement among ASEAN countries and a network of bilateral swap arrangements among ASEAN+3 countries.   A decade later, in May 2008 amid the 2007-2008 global financial crisis, ASEAN+3 (China, Japan, and South Korea) finance ministers agreed to establish a regional foreign exchange reserves pool with a minimum amount of $80 billion, which later increased to $120 billion with China and Japan each contributing $38.4 billion (each 32%) and South Korea $19.2 billion (16%). In December 2009, an Asian regional foreign exchange reserves pool was launched, a step closer to an AMF. In March 2010, ASEAN+3 finance ministers and central bank governors meeting clarified that countries could implement local currencies – U.S. dollar swaps in the $120 billion collective regional foreign exchange reserves pool. In May 2012, the size of the regional foreign exchange reserves pool increased to $240 billion.  In dealing with the economic shocks of the COVID-19 pandemic, at the G20 meeting in February 2022, PBoC Governor Yi Gang said that China would work with Asian countries to promote the use of local currencies in trade and investment to strengthen regional financial security and resilience against external shocks. In June, the PBOC and the Bank for International Settlement launched an RMB Regional Liquidity Arrangement, with the participation of Bank Indonesia, the Central Bank of Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, and the Central Bank of Chile. This arrangement has since become an additional liquidity support for participating central banks in times of market volatility.   The Chinese government has actively cooperated with non-Western multilateral partnerships, such as the Shanghai Cooperation Organization (SCO) and BRICS, to develop a non-dollar-based financial system and promote the use of local currencies in trade and investment. Following the West’s punitive sanctions against Russian entities and individuals to punish Putin’s war against Ukraine, the Chinese government has sought to capitalize on concerns among members of the Global South over the West’s sanctions, especially the freezing of Russian reserves. An important agenda behind China’s support of the expansion of non-Western regional and multilateral partnerships, such as the SCO and BRICS, has been to accelerate the expansion of a non-dollar-based system. For example, at the September 2022 SCO Summit, Chinese President Xi Jinping proposed to expand the shares of local currency settlements to promote regional integration, strengthen the development of local-currency cross-border payment and settlement systems, and promote the establishment of an SCO development bank. SCO members agreed on a “roadmap” to expand trade in local currencies. Iran – whose regime has been coping with severe western sanctions and firmly in favor of de-dollarization– has joined the SCO as its ninth full member. Iranian President Ebrahim Raisi made it clear that Tehran sees SCO membership as a way to help thwart American unilateralism and bypass sanctions.  China’s expressed interest in using the SCO framework to promote the use of local currency for bilateral trade and settlement already emerged before the launch of the Belt and Road Initiative in 2013. Following the 2007-2008 global financial crisis, promoting the use of local currencies in bilateral trade has become an important issue in China’s partnership with SCO members, which has received support from SCO members. For example, at the 2012 SCO Business Forum, Vice Premier Wang Qishan stressed that SCO members should promote using local currencies in trade settlement, advance bilateral currency swaps, strengthen regional financial cooperation, and develop new financing models.   2. Promote the cross-border use of renminbi and renminbi-based financial infrastructure Besides collaborating with regional and multilateral groups to pursue the development of a non-dollar-based system, the Chinese government also attempted to improve the cross-border use of renminbi since the 2007-2008 global financial crisis. In July 2009, Chinese financial regulators and central government agencies promulgated “Administrative Rules on Pilot Program of Renminbi Settlement of Cross-border Trade Transactions,” allowing qualified Chinese enterprises designated by the state to settle cross-border trade in renminbi. The Rules marked China officially taking the first step to promote greater international use of the renminbi, with the goal of ultimately establishing the Chinese currency as an international reserve currency alongside the U.S. dollar and the euro.   The Chinese government has put resources into developing renminbi-based financial infrastructure to facilitate the cross-border use of the renminbi. Launched in 2015, CIPS has become a proprietary financial infrastructure that could allow sanctioned entities to plumb into global markets, although dodging sanctions was not the original motivation for its introduction. Initially developed as a critical piece of financial infrastructure to promote yuan internationalization, the Shanghai-based CIPS is increasingly seen as China’s alternative to SWIFT even before Russian banks were recently kicked off SWIFT. CIPS allows global banks to clear cross-border renminbi transactions onshore instead of through offshore renminbi clearing banks, providing a one-stop alternative to the combination of the SWIFT messaging system and the New York-based Clearing House Interbank Payments System. However, CIPS is not a complete departure from SWIFT and still uses SWIFT’s standards to connect with the global system. It has adopted the ISO 2022 international payments messaging standard in order to make it interoperable with other payment systems as well as with correspondent banks around the world. The adoption of the existing cross-border messaging standards serves China’s interest in making CIPS a critical piece of financial infrastructure to promote the international use of the renminbi. According to the CIPS website, CIPS currently has 139 direct participants, 100 of which are in Asia, 23 in Europe, 6 in Africa, 5 in Oceania, 3 in North America, and 2 in South America. In 2023, CIPS’s annual business volume reached RMB123 trillion. By January 2024, CIPS’s average daily transaction volume reached RMB666.8 billion ($93.6 billion).   The Chinese state has accelerated the development of alternative financial infrastructure as a hedging strategy due to mounting concerns over being isolated from the U.S.-led global financial system as tensions between the United States and China have escalated since 2018. The PBoC has cooperated with SWIFT to get localized services, which in theory could mitigate the impact of sanctions. In August 2019, SWIFT set up a wholly foreign-owned unit in Beijing that uses renminbi for its services and products in China and provides the Chinese financial community with localized and customized services. In January 2021, the PBoC and SWIFT launched a €10 million ($12 million) joint venture named Finance Gateway Information Services (FGIS), shortly after the United States, the European Union, U.K., and Canada sanctioned several Chinese officials for human rights abuses against the Uyghurs. FGIS will build a local network for financial messaging services and establish a localized data warehouse to store, monitor, and analyze cross-border payment messaging information. Notably, the CIPS and Digital Currency Research Institute are FGIS shareholders. Their presence suggests that FGIS is empowered to promote the use of digital yuan in cross-border transactions. Once materialized, this could be another damage control mechanism if major Chinese banks were de-SWIFTed.   It is currently unclear whether a localized messaging network combined with a localized data warehouse would be sufficient to achieve netting settlement services for cross-border payments and thereby help China circumvent U.S. sanctions. However, the participating Chinese shareholders can reveal the technical potential of this joint venture. Apart from SWIFT’s €5.5 million investment for a 55% stake, the joint venture’s primary Chinese shareholder is China National Clearing Center, which invested €3.4 million euros for a 34% stake. Other Chinese shareholders include CIPS (Cross-border Interbank Payment System), DCRI (Digital Currency Research Institute), and PCAC (Payment & Clearing Association of China, an industry self-regulatory agency under the PBoC). The participation of CIPS and DCRI accentuates the potential of the joint venture to promote a renminbi-based financial system and boost the cross-border use of the digital renminbi. In January 2023, the Ministry of Commerce and the PBoC jointly issued a policy notice to encourage Chinese firms engaging in international trade and investment to use renminbi in their cross-border settlement and investment. The policy notice also encouraged Chinese banks to extend overseas renminbi loans. Over thirty countries have started to use the renminbi for cross-border trade and settlement. Major Chinese oil suppliers, such as Russia, Angola, Venezuela, Iran, and Nigeria, now accept renminbi in their oil trade with China.   3. Improve the renminbi’s commodities pricing power.   Although China has laid down the renminbi-based financial infrastructure for the international use of the renminbi and has achieved settling commodities trade using the renminbi with over thirty countries, the renminbi’s commodities pricing power remains limited. The major commodity pricing centers are in New York, Chicago, and London, with the U.S. dollar dominating about 90 percent of the pricing of major commodities in global markets. Chinese policymakers have publicly expressed their concerns about the renminbi’s limited pricing power over commodities.  Chinese policymakers are right to consider improving renminbi’s pricing power in global commodities markets as an essential component to boost China’s financial power. China is the world’s largest consumer of fossil fuels and dominates the supply chains of several highly sought-after critical minerals deemed critical for the clean energy transition, such as cobalt and rare earth minerals, which cannot be easily substituted by other materials using existing technology in the clean energy transition. Making the renminbi the pricing currency of major commodities powering the global economy is a crucial step to constructing a renminbi-based global commodities trading system, which could reduce China’s economic and geopolitical vulnerabilities in the global resources trade, elevate China’s influence in the global financial system, and strengthen China’s financial security. In this context, improving the role of the renminbi in global commodities pricing is not just a critical step towards renminbi internationalization but also an essential condition to reduce China’s strategic vulnerabilities.   In this context, China has developed several commodities trading platforms, such as the renminbi-denominated futures market and commodity exchanges. For example, China launched renminbi-denominated oil futures in 2018 and copper futures in 2020 on the Shanghai International Energy Exchange. It also launched the Ganzhou Rare Metal Exchange in 2019, where China’s renminbi currency is used to quote prices for spot trading of tungsten, rare earth products, and critical minerals (like cobalt) that are essential to the clean energy transition. The Shanghai crude oil futures market has already risen to the third-biggest oil futures market by trading volume, behind West Texas Intermediate and Brent but surpassing comparable offerings traded in Singapore and Dubai by a significant margin.  The commodities trading platforms and financial instruments provide marketplaces for the emergence of a renminbi-based commodities trading and settlement system. When addressing the China-Gulf Cooperation Council (GCC) Summit in December 2022, Chinese President Xi Jinping emphasized that China and members of the GCC should deepen cooperation in using the renminbi in oil and natural gas trading and settlement through the Shanghai Petroleum and Natural Gas Exchange (SHPGX). The recent expansion of BRICS supported by China, especially the inclusion of commodities majors such as UAE and Iran, opens up new avenues for members to pursue the use of local currency in commodities pricing and trading. This expansion allows China opportunities to boost the renminbi’s commodities pricing power and erode the U.S. dollar’s dominance in global commodities markets.  Since Xi’s speech, Chinese national oil and gas companies have accelerated initiatives to use the renminbi, instead of the U.S. dollar, in their international fossil fuels transactions through SHPGX. In March 2023, China National Offshore Oil Corporation — known as CNOOC, China’s largest offshore oil and gas field operator — used the renminbi to complete the transaction of importing 65,000 metric tons of liquefied natural gas (LNG) from TotalEnergies SE, a French multinational oil and gas company, through SHPGX. The LNG was produced in the United Arab Emirates, a member of the GCC, carried by a Liberian-flagged LNG tanker Mraweh, and finished unloading in May at the CNOOC Guangdong Dapeng LNG receiving station. This transaction was the world’s first cross-border LNG trade settled using the renminbi. Since then, CNOOC has executed more renminbi-settled transactions using the renminbi through SHPGX. In October, PetroChina, the largest oil and gas producer and distributor in China, settled a purchase of one million barrels of crude oil using the digital renminbi through SHPGX, marking the first cross-border oil transaction using the country’s central bank’s digital currency.    In the near-to medium-term, China could capitalize on the current energy transition to cultivate a “gas-yuan,” emulating the petrodollar. Just as oil-producing countries depend on dollar revenues that aren’t freely spendable elsewhere, gas-producing ones such as Russia and Iran could be dependent on the renminbi. In China’s “World Energy Development Report (2017),” Chinese scholars proposed the concept of gas-yuan. Given the fragmented nature of global natural gas markets and China’s leverage as a leading buyer, the emergence of the gas-yuan is not a pipe dream. Russia, Iran, and China collectively produce more natural gas than the United States and they all have non-dollar financial infrastructure in place. China has become the world’s largest LNG importer. Iran, which shares the world’s biggest gas field with Qatar, is reviving its previously sanction-stalled LNG export plan as the E.U. attempts to cut its dependence on Russian gas as a punishment for President Putin’s invasion of Ukraine. Although China has not provided material support to Russia or bluntly helped Russia dodge Western sanctions, China’s natural gas imports from Russia more than doubled in 2022 from 2021. The collective revisionist geoeconomic power of China, Russia, and Iran arguably is much stronger than that of the OPEC. Higher global demand for natural gas as a transition fuel towards Net Zero and the decoupling of gas prices from oil prices also provide a benign macro condition for the emergence of a gas-yuan.   In the medium-to-long run, China could also leverage its dominance in critical mineral supply chains and its partnership with mineral-rich countries as the global economy transitions from hydrocarbon-dependent to mineral-dependent. SCO members include major hydrocarbon and minerals exporters in Central Asia like Kazakhstan and Uzbekistan, Russia and its newest member, Iran. SCO also includes major commodities importers like China and India. Two of the world’s five largest lithium producers —China and Brazil — are members of BRICS. Iran, a member of both SCO and BRICS, announced last February the discovery of its first lithium deposits, estimated to be the world’s second-largest after Chile. Iran already possesses the world’s largest proven zinc reserves that are extractable using existing technology, the fifty-largest copper deposits, the 10th-largest uranium reserves, and the 10th-largest iron ore reserves. The Iranian regime has been coping with severe Western sanctions for decades and is firmly in favor of de-dollarization.  As a non-Western group of countries, SCO potentially represents a potent coalition of exporters and importers of commodities centered around using the renminbi to finance the entire commodities lifecycle from production to trade to consumption. Similarly, the expansion of BRICS to oil-rich nations bolsters the group’s collective economic power and influence on the clean energy transition despite introducing greater internal complexity among its members, such as regional rivalries in the Middle East, China’s rivalry with India as well as rising populism and its subsequent political unpredictability in Latin America. SCO and BRICS now share overlapping members with similar incentives for using local currencies in international trade settlement and investment. This configuration facilitates formal and informal policy efforts to implement incremental de-dollarization initiatives in energy and commodities markets, with the potential to scale up, making the two major non-Western groups attractive platforms for China to create an alternative financial system as the world moves beyond hydrocarbon.  IV. China’s Anti-Sanctions Regulatory Framework Besides developing a renminbi-based financial system to reduce its vulnerabilities to Western financial sanctions, the Chinese government has also developed anti-foreign sanctions regulatory framework to provide domestic legal basis to weaponize access to Chinese market. From Norwegian salmon, Philippine bananas, to Australian lamb, the Chinese government has often resorted to importing restrictions to punish foreign governments for their violation of what China deems as its core national interests. Escalating tensions with the United States since 2018 have led China to establish domestic legal foundations to restrict market access should foreign entities choose to comply with foreign sanctions and hurt China’s interests. In October 2018, China enacted its International Criminal Judicial Assistance Law (ICJAL) as a blocking statute to prohibit entities located in China from unilaterally cooperating with foreign civil and criminal investigations without the consent of the Chinese government. Specifically, Article 4 of the ICJAL states that “the international criminal judicial assistance shall not damage the sovereignty, security and social public interests of the People’s Republic of China, and shall not violate the basic principles of the laws of the People’s Republic of China.” This provides a broad spectrum of legal basis for Chinese entities not complying with foreign investigations. The Chinese government further weaponized access to the Chinese market by establishing the Provisions of the Unreliable Entity List, or UEL Provisions, an export controls framework issued by the Ministry of Commerce of China (MOFCOM) on September 19, 2020. MOFCOM published the UEL Provisions the next day after the U.S. Department of Commerce implemented an Executive Order to restrict the use of WeChat and TikTok, two Chinese-owned apps, in the United States. MOFCOM first announced the establishment of such an entity list on May 31, 2019, ten days following the U.S. Department of Commerce added Huawei to its entity list. The timing of these events suggests that China’s entity list is designed in response to foreign actions.  In January 2021, MOFCOM issued another sanction blocking statute, Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures, or the Extra-territorial Rules, as a countermeasure to the U.S. long-arm jurisdictions. The Rules empower aggrieved parties to report damages to MOFCOM and sue for compensation in Chinese courts. The Rules also grant Chinese authorities certain powers to block the extraterritorial application of foreign laws if deemed as unjustifiably prohibiting or restricting Chinese individuals or entities from engaging in “normal economic, trade, and related activities” with foreign entities, especially secondary sanctions and export controls. According to the Rules, the Working Mechanism comprised of MOFCOM, the National Development and Reform Commission, and other relevant Chinese authorities is in charge of determining whether the extraterritorial application of a reported foreign law or measure is unjustified. Within five months of the issuance of the Rules, the Standing Committee of the National People’s Congress enacted China’s Anti-Foreign Sanctions Law. This Law leans heavily towards countermeasures rather than blocking, as evidenced by the fact that eleven out of the twelve articles in the Law are dedicated to specifying the content, standard, and legal responsibilities of countermeasures. The Law introduces a new sanctions list known as the Countermeasure List. The Ministry of Foreign Affairs and other relevant ministries have the discretion to identify foreign entities to put on this list. This legislation came in response to the United States, E.U., and U.K. sanctioning more Chinese individuals and entities over concerns of human rights violations in Xinjian or ties to China’s military and surveillance activities. Altogether, China’s anti-sanctions regulatory framework is designed to deter and penalize cooperation with foreign actions perceived to be detrimental to Chinese business and national interests. As the enforcement of these statutes continues to flesh out, the Chinese state can force foreign companies to choose either the Chinese market or the western market. V. China’s Retaliatory Capacity Through Export Controls and Controls of Overseas Ports Strengthening the international role of the renminbi, developing an alternative financial system, and building an anti-sanctions regulatory framework are defensive in nature. If China were forced to decouple from the dollar-based global system, such defensive measures could provide some relief for China but cannot fully immunize China from collective Western sanctions. However, in the worst-case scenario of a financial war, Beijing would not confine itself to financial defense. It would likely retaliate against Western sanctions with offensive measures. Beijing could respond with two detrimental retaliatory measures: China could impose export controls on some controlled items, including but not limited to rare earth minerals; it could also deny foreign access to critical infrastructure, especially ports, around the world controlled by China. In October 2020, China promulgated its Export Control Law. The ECL is the first Chinese law that establishes a comprehensive and integrated export control regulatory regime to protect China’s national security and interests. It has a provision on “reciprocal measures,” which states that China may take reciprocal measures against any country or region whose abuse of export control measures endangers China’s national security and interests as assessed by Chinese government agencies. In December 2021, the State Council published a white paper on China’s Export Control that states the government strives to build an export control system commensurate with China’s international status and in line with the state’s national security and interests. The ECL and the follow-up white paper suggest that Chinese policymakers have formed a more mature view of how to strategically leverage China’s critical status in global supply chains to protect China’s national interests and retaliate against foreign restraints when necessary. China’s export control framework may give the Chinese government a new opening to restrict rare earth exports under a national security exception to WTO rules against restraints on free trade. Deng Xiaoping said in 1992 that “the Middle East has oil; China has rare earths.” China produces 60 percent of all rare earth elements used as components in high-tech devices and controls about 80 percent of the global supply. China has also maintained a near-monopoly over the complex refining process, controlling about four-fifths of global rare earth refining capacity. Beginning in 2007, China has set rare earths production limits, export quotas, and cut down the number of export enterprises to meet diverse policy objectives ranging from reducing pollution and increasing fiscal revenue to the development of processing sectors. Beijing believed these restrictions were justified under the WTO’s General Agreement on Tariffs and Trade Article XX on General Exceptions for the conservation of exhaustible natural resources and the protection of human health. However, the WTO ruled in July 2011 that China violated international trade rules by restricting the exportation of raw materials, refuting Beijing’s claim that these restrictions were based on environmental grounds. China rejected the WTO ruling, arguing that it was unfair and subjective, exposing the insufficient representation of developing countries in the WTO and its inability to understand developing nations’ problems. The ECL could provide a legal foundation to empower the Chinese government to ban exports of rare earths and refining technology to countries or corporations it views as a threat to China’s national security. If isolated from the US-led global financial system, China could possibly retaliate by restricting exports of rare earths that are crucial for the manufacture of high-tech consumer electronics and sophisticated American weaponries, including F-35 fighter jets, to the United States and U.S. allies. China supplied 80 percent of U.S. rare earth imports between 2014 and 2017. Beijing reportedly has been exploring such an option in 2019, following deteriorating Sino-US relations and an emerging technology war between the two countries. Imposing export control over certain rare earths has been a frequently used tool in China’s economic statecraft repository. The reported threat of retaliation against the United States mirrors China’s ban of rare earths exports to Japan in 2010 following the detention of a Chinese fishing boat capital who rammed Japanese patrol boats in disputed waters near the Senkaku/Diaoyu Island. Besides its dominance over rare earths, China’s critical position in global supply chains also rests on its emergence as a leading commercial maritime power. Domestically, China has more shipping ports than any other country in the world. Globally, China invested in 101 port projects by 2019, including 37 in Asia, 33 in Africa, 11 in Europe, 9 in South America, 6 in North America, and 5 in Oceania. Three Chinese port operators, COSCO Shipping Ports, China Merchants Port Holdings, and Qingdao Port International Development, had already held stakes in 16 European ports as of 2018. Chinese port operators controlled 10 percent of European shipping throughput in 2021. COSCO, a leading ports operator in the world that carries one-tenth of global seaborne trade with its one-eighteenth of the entirety of global shipping capacity, has stakes in some of the world’s largest ports, including a 67 percent stake in the Piraeus Port Authority. It owns 100 percent of Peiraeus Terminal, 85.5 percent of Zeebrugge Terminal, 51 percent of Valencia Terminal, and minority shares in several other European ports. To date, central-government-owned port operators, such as COSCO Shipping Port and CMPort, and central-government-owned constructors and builders, such as China Communications Construction Group and its subsidiaries, remain the primary participants in overseas port projects investment and construction, sometimes with financial participation from Chinese sovereign funds such as China Investment Corporation and policy banks such as Export-Import Bank of China and China Development Bank. Besides investing in commercial ports, China has also pursued a strategic strongpoint approach to developing dual-use port facilities, which has been a cause for concern in the West. Chinese naval deployments have followed Chinese investments in the ports of Djibouti, Sri Lanka, and Pakistan. While there is no public record of China’s plan to turn European ports into Beijing’s military bases, a Chinese navy fleet’s visit to Greece’s Piraeus port in 2017 did raise the eyebrows of some European policymakers. Chinese port acquisitions grant the Chinese government greater control over global shipping and commercial flows, which may pose risks to the ability of foreign governments to secure supply chains.  VI. Assess China’s Existing Ability to Defend Against Financial Sanctions and Issues for Congress to Consider Despite China’s intention to hedge against sanction risk, plenty of evidence suggests that China does not have the capability to fully neutralize Western sanctions. The renminbi is far from being a global currency, let alone posing a credible threat to the dollar’s hegemonic power. China’s proprietary financial infrastructure has limited international coverage compared with SWIFT. Additionally, China’s CIPS still relies on interoperability and integration with SWIFT if it wants broader participation of leading global financial institutions. China’s anti-sanctions regulatory regime could force Western companies to choose either China or the West. However, it lacks concrete enforcement mechanisms. Finally, the PLA does not have combat experience commensurate with China’s prominent commercial maritime power.  While China has been attempting to mobilize a de-dollarization coalition to defend against the dollar-based system weaponized against China through non-Western partnerships such as SCO and BRICS, such a coalition at present remains a vision and cannot provide China with substantive material support to mitigate Western financial sanctions, especially secondary sanctions. The reason is that commodity-exporting countries from which China imports resources to fuel its economy depend on the dollar-based system to price and trade their commodity exports. Their banks remain reliant on the SWIFT-CHIPS system for international payment settlements. However, the basic infrastructure for mitigating sanctions has come into existence. If China could expand the renminbi-based financial infrastructure to cover its major trading partners and convince them to use the renminbi for cross-border settlements, its ability to shelter the Chinese economy from Western financial sanctions would be much higher.  Chinese policymakers have witnessed that Europe’s dependence on Russian energy has not prevented the European Union from sanctioning Russia for Putin’s invasion of Ukraine. Therefore, from Beijing’s vantage point, the West’s dependence on China may not stop the United States and its allies from slapping stringent sanctions on the Communist Party of China and Chinese entities in reaction to dramatic events, such as a militarized conflict over Taiwan or in the South China Sea. Beijing views that the risk of Western sanctions against China may increase if the West reduces its economic dependence on China. Members of the U.S. Congress need to consider that if China and the West were to engage in economic warfare within the next decade, the cost to the entire global markets would be enormous. The United States would not be exempted from the losses. According to a U.S. Chamber of Commerce-Rhodium Group report, if half of the U.S. investment in China were abandoned, it would cost American companies $25 billion annually in lost profits, on top of a $500 billion hit to the U.S. gross domestic product. Members of the U.S. Congress also need to consider that supply chain diversification cannot be achieved overnight, and hastened policies to bring manufacturing back to America cannot achieve its desired goals but raise inflationary pressure at home while increasing protectionist concerns among U.S. allies and partners. It takes time and effort for people to move houses; supply chain diversification is much more complicated than moving houses. If the United States and China were pulled into a financial war before Western companies could be sufficiently independent of Chinese suppliers and markets, the costs to U.S. companies and American consumers would be enormous, disrupt American people’s ordinary lives, and end globalization. While it is hard to determine whose loss would be greater, a forced decoupling of China from the existing global system would put a definitive end to globalization. I encourage the U.S.-China Commission and members of the U.S. Congress to consider the following policy recommendations aiming at strengthening U.S. financial leadership and keeping China embedded in the U.S.-led system so that the U.S. government can maintain the credibility of its financial deterrence in the long term. First, Congress should develop mechanisms to offset the potential negative impact of the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO Act), passed by Congress and signed into law by President Biden, on the role of the U.S. dollar. The REPO Act specified conditions in which the President may confiscate Russian official assets subject to the jurisdiction of the United States to provide aid for Ukraine. While seizing Russian assets for Ukraine aid may be seen as an optimal solution given the current geopolitical circumstances, the cost of unilateral or coordinated confiscation of Russian official assets by the U.S. government with its allies to support Ukraine is likely to lead to diminished trust in the U.S. dollar-based system as well as decreased U.S. leverage over foreign rivals in the long run. To mitigate the negative consequences, Congress should consider legislative measures to strengthen the use of the U.S. dollar in international trade and investment. To this end, Congress can consider empowering the U.S. International Development Finance Cooperation (DFC) in its ability to work with a broader range of partners and countries rather than limiting it to a restricted set of low- and lower-middle-income countries. By expanding the countries and regions where DFC can work, the United States can offer a credible alternative to China’s state-led development finance that aims to advance a renminbi-based financial system. Second, while currently there is no evidence to suggest that China can credibly augment the rudimentary renminbi-based financial infrastructure to be a full-fledged alternative to the dollar-based system, China and its partners that are concerned about Western sanctions will continue deepening their de-dollarization cooperation via new technological means and platforms, such as block-chain based central bank digital currencies. Additionally, the availability of digital assets such as cryptocurrencies and their exchangeability with other assets offer new mechanisms to bypass financial sanctions. Congress should consider legislation to enhance scrutiny of crypto asset transactions, especially stablecoins, to prevent them from being used by foreign entities and individuals to circumvent sanctions. The Financial Innovation and Technology for the 21st Century Act passed by the U.S. House of Representatives made good progress in establishing regulatory oversight of the digital asset markets in the United States. However, as it stands now, the regulation does not include clear rules on monitoring and restricting the illegal use of digital assets and cryptocurrencies for sanction evasion. Updating U.S. law to combat the illicit use of digital assets is critical for U.S. national security and for maintaining the credibility of U.S. government financial statecraft in the long term. Third, Congress needs to consider strengthening U.S. critical minerals supply chain security and resilience to support the continued U.S. leadership in a decarbonized global economic system. China currently dominates the refining and processing of key mineral resources critical for the clean energy transition. China has in the past weaponized its dominant position in rare earths minerals and rare earth processing technology to retaliate against territorial disputes and export controls, which makes U.S. dependence on China for mineral resources a national security concern. The United States depends on China for over half of its supply of 25 mineral commodities, making the U.S. economy and industries vulnerable to supply disruptions stemming from China, especially in times of geopolitical tension. As the global economy continues to move beyond hydrocarbon, China’s dominance in critical minerals supply chains combined with the Chinese government’s attempts to increase the renminbi’s pricing power in mineral resources markets could dilute the dollar’s centrality in a decarbonized global economy. So far, the United States has taken substantive measures to secure critical mineral supply chains by forging minilateral partnerships in the Indo-Pacific region through the Quadrilateral Security Dialogue, commonly known as the Quad, comprising the United States, Australia, India, and Japan. The Indo-Pacific Economic Framework for Prosperity, as outlined by the White House, also put on its agenda the assurance of critical minerals access as a means to counter China’s dominance. In addition, the Biden administration has launched a broader multilateral Minerals Security Partnership (MSP) with critical partners to “friend-shore” critical mineral supply chains. These initiatives are necessary but insufficient to boost domestic supply and secure diversified access to overseas supply in a timely manner. Congress needs to consider streamlining the permitting and licensing process and setting timelines to ensure the timely development of critical mineral projects at home. Congress also needs to consider expanding funding for research and development on alternatives and mineral resource recycling technologies. Last, Congress may wish to consider China-related legislative measures across the whole spectrum of geoeconomic competition with China to allow fair competition, avoid costly conflict, and prevent unintended escalation. A motivating factor for China to develop an alternative system to hedge against Western sanctions originates from Chinese leaders’ perceived insecurity and vulnerability in the U.S.-led global system. It is in the interest of U.S. national security and the American people that Congress takes punitive measures against the Chinese government’s unfair practices. However, an overreliance on “sticks” to punish China without offering any “carrots” to incentivize China to behave as a responsible stakeholder in the U.S.-led global system would likely only encourage China to pursue an alternative international trade and finance system further. Congress may wish to supplement its existing laws on China with issue-specific legislative measures that encourage U.S.-China cooperation in areas that do not pose national security risks to the United States while also creating jobs and bringing tangible socioeconomic benefits to communities across the United States. Three areas worth Congress’s consideration include environment and climate change cooperation, food security cooperation, and disaster relief cooperation. Neither the United States nor China can effectively deal with the worldwide challenges of climate change, food security, and disaster relief. The U.S. government cannot stop the Chinese government from developing an alternative trade and financial system to defend against Western sanction risk. The U.S. government also cannot make macroeconomic policy decisions for China. However, the U.S. government and members of Congress can take measures to encourage China to stay embedded in the U.S.-led global financial system rather than incentivizing China and its partners to divert trade settlements and financial flows outside of the dollar-based syst
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    CFR experts discuss the implications of the death of Iranian president Ebrahim Raisi, new International Criminal Court charges against Benjamin Netanyahu and Hamas leadership, and other updates from the Middle East. ROBBINS: Thanks so much, Will. And welcome, everybody. As Will said, this is on the record. I’m Carla Anne Robbins. I’m a senior fellow here at the Council. And I’m co-host the Council’s The World Next Week podcast.   We’re joined today by three Council experts and friends of mine. They’re well known to everyone, so I’m just going to give a very brief introduction.  Steven Cook is in the Eni—I can never do this one, Steven—the Eni Enrico Mattei senior fellow for Middle East and African Studies. And he’s an expert in Arab and Turkish politics and U.S. Middle East policy. He’s also a columnist at Foreign Policy magazine. And his next book is The End of Ambition: America’s Past, Present, and Future in the Middle East.   David Scheffer is a senior fellow with a focus on international law and international criminal justice. And among his many roles during the Clinton administration, he was the first-ever U.S. ambassador at large for war crimes issues and led the U.S. delegation to the U.N. talks establishing the ICC, and signed the Rome Statute of the ICC on behalf of the United States on December 31, 2000, before the George W. Bush administration pulled out. He also negotiated the creation of five war crimes tribunals.   And Ray Takeyh is the Hasib J. Sabbagh senior fellow for Middle East Studies at the Council. His area of specialization are Iran and the modern Middle East. Prior to joining CFR, he has served as a senior advisor on Iran at the State Department, a fellow at Yale University, Washington Institute for Near East Policy, and Middle East Center at University of California, Berkeley—my alma mater. And is most recently the author of The Last Shah: America, Iran in the Fall of the Pahlavi Dynasty.  Steven, Ray, David, and I will have a discussion for about twenty minutes and then open things up for your questions. So, Ray, can we start—(background noise)—who’s talking to me? So, Ray, can we start with you? How does the death of Iran’s president in this helicopter crash change the power structure in Iran? Not only was he the president, the betting was he was going to replace the ayatollah, supreme leader.   TAKEYH: Well, this certainly was a succession crisis that the regime did not anticipate. And it creates a measure of paralysis in how it works. Ebrahim Raisi was a fairly lackluster president. He lacked the imagination and the skill for that job. But he was Ali Khamenei’s ideal president because he was so in line with him with everything that he said, and so forth.   Whether he was suitable successor to the current leader I’m not entirely sure, because he lacked that sort of skill and cunning that you need for that job. But he was—certainly would have been part of the structure that would appoint the new supreme leader. So in that particular sense, that particular structure—which is fairly opaque—has to be reconsidered anew, and perhaps a new member added to the commission that was already investigating that possibility and vetting various candidates. He could very well have come up to that job, given the fact that the Islamic Republic is sort of a grading on a grade inflation basis these days.   In terms of the—and, obviously, they have to have a new president. That opens up the possibility of election within fifty days. That opens up a lot of old wounds about who’s going to allowed to be run, who’s not going to run, and who will actually be anointed to become the next president. So it will create some sort of a division within the elite once more. Those divisions, of course, have always been there, as the Islamic Republic has been so relentlessly purged of the old establishment figures in the past few years. So, once again, you begin to see those wounds be aggravated.   And then the decision will be about who should be the next president and whether you go for the younger generation that are waiting for his turn, or some of the more seasoned political figures. My guess is, it’s probably going to be one of the members of the younger generation who are a dominant faction in the parliament, and so forth. In terms of Iran’s foreign policy, it doesn’t really affect it that much. Raisi rarely, essentially, said anything about matters of international relations other than supporting whatever the regime was doing at the time. He doesn’t—he didn’t seem to take initiative, foreign policy was not an area where he was active, like his predecessor President Rouhani.   In terms of the management economy, the economy is cratering at high inflation, unemployment rates, and his policies have largely been criticized on that front. And, as I said, on the security issues he would usually be an affirmative voice for what was happening, as opposed to initiate his own—his own ideas, and so forth. So there’ll be some changes, but those changes are going to be particularly in the realm of succession about who is to succeed and what is a process of succession.  And also it will be impacted, in terms of the country has to have another election in fifty days. It can potentially go beyond that. And that will create some degree of political space where you begin to see all disagreement surface and the possibility of some degree of disquiet at home, given the fact that the Iranian people are going to be summoned to certify another choice for president that they had very little to do with. That may create some degree of popular agitation. And that’s what the regime has to be very concerned about.   This is only the second time the Islamic Republic has had to deal with a president who was killed before his term expired. The first time, ironically enough, was in 1981-1982, when Ali Khamenei rose to the office of presidency, because his predecessor was blown away by a terrorist. So they haven’t had that kind of experience for a long time. And now they have to deal with this issue, at a time when they’re dealing with so many other issues whether it’s in the region or at home. And this was a complication that the system certainly didn’t need.   ROBBINS: So, just really quickly, were you surprised that they so quickly attributed to mechanical failure and didn’t go for the conspiracy theory? Maybe that the Israelis were behind it, perhaps?  TAKEYH: Well, the conspiracy theories are going to be pervasive throughout the country anyways. The official explanation is never accepted. So they’re going to be attributing it to Israelis, to the Americans. They’re going to be attributing to internal political factions, this and that. So the official explanation is unlikely to be accepted, because it appears that in Iran today nobody dies of natural causes or accidents. So some conspiracy theories will find their way into the political atmosphere in that country, irrespective of the—of the official explanation. But I think the official explanation is not only correct, but also does not invite for the confrontation at this time with Israelis.  ROBBINS: I mean, I think that’s mainly why I was asking it. It seemed almost, dare we say, a responsible response on their part.  TAKEYH: Right. It would be very difficult for Israelis to build that mountain so quickly anyways. But so I think incompetence is usually the way to go on these issues. These helicopters were, I believe, Bell helicopters that the shah was building in Isfahan in 1978-79. And Javad Zarif has actually complained about the fact that the sanctions on the aviation industry has caused these mechanical failures. So for those who want to see if the sanctions work, well, they seem to have worked in this case, in an indirect way. But, you know, the existing explanation seems sufficient for their purposes at the moment.  ROBBINS: Thanks. David, the ICC prosecutor Karim Khan said today that he had requested warrants for prosecution for Israeli Prime Minister Benjamin Netanyahu, his Defense Minister Yoav Gallant, for Yahya Sinwar, Hamas’ leader within Gaza, for Mohammed Deif, Hamas’ military leader, for Ismail Haniyeh, Hamas’ Qatar-based political leader. What does that mean, a request? What comes next? And can you talk a little bit about the crimes? President Biden, I think, said all of this was outrageous. Is this it? Is this an indictment? And what do we take away from this?  SCHEFFER: Well, thanks, Carla. The procedure under the International Criminal Court is that the prosecutor must request an arrest warrant, which we would consider to be an indictment. And that has to be then approved by a three-judge panel on what’s called the Pre-Trial Chamber of judges. What’s a little unusual—and that can take weeks, it can take months. There’s varied practice before the ICC as to how quickly these judges actually arrive at these determinations. It would not surprise me whatsoever if the judges take a few months. It also would be a little surprising to me if perhaps they did not reach decision before their summer break in August. I would think they’d sort of pin that as an objective, to try to reach a decision before the August break at the court. But it certainly—unless, you know, I’m shocked—unless it’s an immediate decision by the judges, but I somewhat doubt that.   I am a little surprised that the prosecutor went public with this request to the judges. That’s somewhat unprecedented at the ICC. Typically, the prosecutor keeps this in house, gets the judicial decision, and then there’s the public announcement of the arrest warrant. In part because you don’t want the targeted individuals to flee prematurely before the arrest warrant is actually confirmed by the judges. So I think maybe an interesting question for the media with the court would be perhaps to try to ask that of the prosecutor’s office. Why is there a public announcement before the judges have actually decided?  In terms—and, by the way, nonetheless, this does not surprise me as an intensive watcher of the court. We know that this has been under investigation since late October, early November. Obviously, at some point there are going to be arrest warrants issued, given the scale of the alleged criminal conduct in the Israel-Hamas war—whether it be on the Hamas side or the Israeli side. I mean, it’s not going to be indefinitely no arrest warrants. Of course there are going to be warrants at some point. I was a little surprised at how quickly this came, but so be it.   In terms of the crimes that are actually in the arrest warrants, the arrest warrants against the Hamas individuals focus very, very much on sort of the raw crimes of war crimes and crimes against humanity—extermination, murder, sexual violence, rape, torture, holding of hostages, et cetera, cruel treatment. These are all signatures of what we’ve been reading about in terms of the Hamas actions.   When it comes to the Israeli—the arrest warrants against Netanyahu and Gallant on the Israeli side, interestingly the warrants focus pretty exclusively on the crime of starvation and the consequences of starvation with the civilian population. The prosecutor pointedly did not put any charges in that arrest warrant dealing with the bombing campaign in Gaza. And he actually says towards the end of his explanation, that remains under investigation. But this arrest warrant against Netanyahu and the other one against Gallant do not have the bombing campaign.   Now, I would also say that there are no genocide charges whatsoever in these arrest warrants. Both sides, you know, are—I mean, certainly, we know from the South Africa case in front of the world court that the charge of genocide is very central to that particular case, at the world court. And, of course, Israel could quite legitimately argue that the actions on October 7 were very genocidal in character, and that Hamas is demonstrating that genocidal intent. None of that is in these particular charges. Genocide is off the table, at least for the moment, in terms of these announcements.   And then, finally, I would just say that, from what I’ve seen this morning coming out of both Israel, Washington here, I would not have suggested that what has happened today is, quote/unquote, “outrageous.” I mean, it’s entirely predictable. No one should be surprised by this. But I would say that—you know, obviously, it would be fair to say that it’s very distressing to see these arrest warrants being applied for with respect to whatever side you want to express your distress on, particularly the Israeli side. But “outrageous” is sort of, if I may coin a term, you know, a bit over the top in terms of how one might describe this.   And then may I just finally say, Carla, very, very quickly, I think we should keep in mind how this could all play out in a negotiated settlement to the end of the war. There are lots of options that are now on the table because of what’s happened this morning that could play very critical roles in any negotiation to actually end this conflict. And there’s leverage put on the table now. And I can get into that if someone wants to question me about it.  ROBBINS: I’m sorry, can you just answer that really quickly? Which is, doesn’t this—if the court agrees with the indictments, I mean, the court doesn’t get to sit around the table and say we’re going to take the indictment off the table if you agree to a two-state solution.  SCHEFFER: No. No. No, no, of course, not.  ROBBINS: Doesn’t it mean that there’s less leverage there? Because he can’t go to 124 countries then, if he’s indicted.  SCHEFFER: No. No, that’s not the way it could work.   ROBBINS: OK.  SCHEFFER: It could work as follows, that the negotiators at the table—let’s say it’s—it’ll have to be Israel, it’ll have to be the Palestinians. I mean, at some point they have to talk to each other. And they can actually reach a couple of agreements.   One would be that, upon recognizing the state of Palestine—in other words, the end of the process would have to be a two-state settlement, of course, or solution. That when that occurs, then Israel and Palestine would enter into what we call an Article 98(2) non-surrender agreement, under the Rome Statute, whereby they would each agree not to surrender any suspects to the ICC which are in their custody. OK, for Israel and Palestine. Now, that would be a tough deal, because, you know, obviously, many would want to see the Hamas targets prosecuted someday. And then, of course, many on the other side would want to see the Israeli officials prosecuted. But that could be a deal cut in order to get to a two-state solution.   The other possibility—and I’ll stop with this—is that there could be an agreement among the permanent five of the Security Council as part of a two-state settlement or solution deal that the Security Council would vote under Article 16 of the Rome Statute to suspend all ICC investigations and prosecutions relating to the Israel-Hamas war for one year. And that would just then block the ICC from taking any further action. And then they—of course, they’d have to renew that each year, if it were to be perpetuated. I’m not advocating any of that. I’m just saying those are objective options that could be put on the table.  ROBBINS: Huh. That’s—thanks. Thank you, David, for that.   So, Steven, even before what happened with the ICC, it wasn’t—it was a pretty horrible, terrible, no-good week for Bibi Netanyahu. His War Cabinet was seen to be publicly unraveling. There was a resumption of street protests, which had been very quiet. Can you talk a little bit about what was going on before, and how this changes it or doesn’t?  COOK: Yeah. It has been not a very good period for Prime Minister Netanyahu. It obviously hasn’t been a good period for him since October 7. But, nevertheless, last week was particularly bad. And the trigger for this was the fact that the IDF was back engaged in pretty intensive fighting in the northern part of the Gaza Strip, a place that Defense Minister Yoav Gallant declared “pacified” in November.   And Gallant went public with his criticism of Netanyahu and his resistance to hammering out a day-after plan. And, also, he called upon the prime minister to say and declare that Israel has no intention of establishing settlements in the Gaza Strip. This came on the heels of a rather large protest of the settler right, which is seeking to resettle the Gaza Strip. Not an insignificant number of people and not an insignificant percentage of the Israeli public actually support the resettlement of the Gaza Strip. And Gallant, I think echoing the IDF high command which does not want to be the military administration in the Gaza Strip, was calling for, one, that declaration, as well as a day-after plan.  A couple of days later, Benny Gantz—the other member of the War Cabinet, in addition to Netanyahu—came out and said, basically, he needs a day-after plan. And he needs it by June 8, otherwise he’s going to leave the government. Netanyahu, obviously, responded and said: Our first goal is the destruction of Hamas. If Gantz leaves the government—the War Cabinet, it doesn’t really matter in terms—and the government—it doesn’t really matter, because Netanyahu’s coalition would still command sixty-four seats in the Knesset.   And the reason why Netanyahu is unwilling to comply with the demands from his defense minister, as well as his—other members of the War Cabinet, as well as the United States, is that if he spells out day-after plan that does not include settlement in the Gaza Strip, Itamar Ben-Gvir and Bezalel Smotrich, who together control fourteen seats in the Knesset, will bolt from the government, thereby bringing the government down. And then the question of Prime Minister Netanyahu’s legal jeopardy once again emerges.   So that is where things stood before this statement from the ICC prosecutor. I’ll leave it to David and others to figure out why he went outside the norm to declare that he was seeking these warrants. I’m not an expert in that area. But the Israeli response has been to criticize, obviously, the ICC for putting the prime minister of Israel and the defense minister of Israel—a country that still has a functioning judiciary—on the same plane as the terrorists of Hamas.   And in despite the fact that Netanyahu has been at loggerheads with Benny Gantz and Yair Lapid, both Lapid and Gantz have come out with scathing criticism of the ICC decision. So it may actually end up helping Netanyahu, this closing of the ranks, the perception—you know, David is quite right. You know, nothing has actually been decided here. But in Israeli political discourse, as well as American political discourse, a lot has been decided. And we know that we live in an era where narrative is the most important thing.   And so it may help Netanyahu with the Israeli public, who already feels besieged and isolated. The world is against them. Antisemitism is rife everywhere. And in may encourage the Israelis to ignore those kinds of warnings from the Biden administration, despite the president’s criticism of the ICC thing, to really go forward in a very big way in Gaza. Which I think they’re planning anyway, but then I think the outlook will be, well, we have nothing to lose anyway. No matter what we do we’ll be criticized or indicted or warrants will be sought for our arrest. And so we might as well, as Netanyahu said before the country on Israel’s independence day, if we have to go it alone, we will go it alone. We’re the only ones who know how to secure our country.  ROBBINS: With that, happy thought, I’d turn it over to our many participants.  Will, can you explain—remind people how to ask a question?  OPERATOR: (Gives queuing instructions.)  ROBBINS: Waiting for people to raise their hands. So as we do that, this could be, of course—we have an explanation in the chat about how to do this. So waiting for people to ask questions. We have reporters. Come on, you guys, ask questions. I’m a reporter. I’ll ask a question. So, Steven, just a little bit more on the—we seem to have—ah. Can you—is it Pouya Lavian? Can you identify yourself and ask your question?  Q: Hi. Good afternoon. This is Pouya Lavian from Wells Fargo. Thank you all for taking the time.   Question for Ray. Do you see any sort of change in attitude for support of proxies by the Iranian regime while they’re dealing with internal issues relate to succession? Or do you feel it’s going to be full speed ahead for what they’ve been doing, you know, to date?  TAKEYH: The proxy war strategy, the notion of axis of resistance, that is a consensus position within the state. Within the regime it’s a consensus position because it’s been so spectacularly successful. They have managed to have a multinational force that they can deploy with limited cost and has been very effective in various fronts. So I don’t see disruptions in that particular realm.   Now, in terms of their approach overall to the Israeli-Gaza conflict that is taking place, well, they have to kind of figure out what their next steps are, because their entire strategy was that they would inflame the Israeli boundaries, and they would inflame international opinion, and they would inflame the American opinion, and that would impose some restrictions on Israeli conduct of war. And that has happened. Israel has become a very isolated country internationally, as was indicated with these particular measures by the international court. It’s been increasingly division—a divisive issue within the American political system. But all of that has not led to restraints on Israel, per se. So where they go from here in terms of that strategy remains to be seen.  This is the first time that the axis of resistance strategy hasn’t worked as was intended to. And it even led to a confrontation between Iran and Israel that hadn’t happened in forty-five years and could have potentially seriously gotten out of hand. So that aspect of it has to be rethought and reconsidered, and maybe be more aggressive in terms of the rings of fire around Israel, or hopefully that somehow the international community will once again seek to impose some kind of a restraint on Israeli public. And maybe that is—that is going to happen. But it hasn’t happened thus far. But overall, in terms of using these proxies to achieve your strategic objectives, that is a position of consensus—at least within the governing elite.  ROBBINS: Steven, can you talk a little bit about the sort of regional reaction to this level of potential instability inside of inside of Iran?   COOK: Well, you know, clearly the Saudis are, you know, interested in maintaining that level of dialogue that they established with the March 2023 resumption of diplomatic relations. They’re very plain in saying that they believe that the Iranians have violated every aspect of their agreement, but that they do not—but they value the continued dialogue because they see it as a source of stability. The Emiratis view in a similar fashion and are seeking to gain some leverage with the Iranians by dint of investment in joint projects, as we’ve seen over the last couple of years or so. So there is obviously concern about instability and power struggles across the Gulf, because it would potentially impact them.   There’s obviously no love lost between the Iranian regime and these—and the leaders. Particularly unhappy about the axis of evil and the way in which Iran’s proxies have essentially been given license to spread instability around the region. And this could be yet another source of it. But there’s really—I don’t think, unlike the discourse in the United States about Iran in which there is an endless debate about moderates versus hardliners and so on and so forth, the Gulfies really don’t make those distinctions whatsoever. And I think it’s a more realistic view of Iran.   So whoever comes after Raisi will be, as Ray pointed, another affirmative voice in what the Gulf states believed to be is an aggressive foreign policy. The reason why they pulled back from a confrontation from it, is because they just don’t trust the United States would be with them. So they will continue to maintain the kind of dialogue they had to keep the Iranians away from at least undermining their stability and security.  ROBBINS: David, why do you think that there was an announcement about this request from the prosecutor? There are two ways of looking at it, as someone who is not an expert on the court at all. One was they’re trying to jam the judges. And the other one is that they see this as potentially so urgent and that they’re making a political statement, and that perhaps they can save some lives by pressuring the Israelis right now, or pressuring Hamas right now. And they want to get their political message, their deterrent message, out there as fast as possible.  SCHEFFER: Carla, those are precisely the two reasons that are in the back of my mind.   ROBBINS: Darn, I’m good.  SCHEFFER: (Laughs.) Yeah. You’re very good.   First, it’s to literally sort of put the judges on the spot. Which is unusual, because they don’t like being put on the spot like this. They’re going to be under pressure from both the Israeli and the Palestinian side before they reach a decision. There’ll be an enormous amount of lobbying—obviously, through the media, et cetera, and, you know, op-eds and whatever—to try to influence their decision. That’s why you don’t go public like this.  The other thing, of course, is the prosecutor deciding that the imperative of ending these alleged crimes is so important that he’s not going to wait for that multi-week, multi-month process before he—you know, he’s made many statements, or at least several of them, including all the way back to late October, warning parties, both sides—and in particular Israel—don’t overplay your hand. There’s still international humanitarian law that has to be complied with. No one’s questioning the right of self-defense or the just war theory. It’s the question of how you wage just war that is at issue here. And I noticed some of the Israeli comment this morning seems to think that there’s this big criticism of a just war, that somehow it’s not a just war. That is not the argument. It’s how you wage the just war that’s the argument.   Could I just pick up on one thing that Steven said, which I think is very important from the Israeli point of view? The prosecutor made it a point in his statement this morning to say, complementarity is the—is the supreme rule of the International Criminal Court. Namely, if it can be demonstrated that these issues are being dealt with at the domestic court level, then the ICC essentially backs off. That’s a central theme of the entire Rome Statute structure. What Israel could do at this point, given that it has a superb, you know, legal system, is, frankly, before these judges reach a decision, they could demonstrate that there are legitimate inquiries before the courts of some character—I mean, they’d have to figure that out—as to the compliance of their top leaders with international humanitarian law, particularly of the character identified in the arrest warrant which focuses on starvation. And that Israeli courts will take this on affirmatively, and with determination they will—they will investigate this.   Now, I know that’s tough politically. But I’m just saying that’s one way to actually—the judges could just say, well, we’re going to back off and wait until complementarity takes its course. This is exactly what happened for years between the court and the country of Colombia about the whole civil war between FARC and the Colombian forces, Colombia kept saying, back off ICC, we’re dealing with this domestically, we’re going to handle it. And ultimately, they did and the ICC definitively backed off. So it’s a tactic, but it has to be done very, very smartly in order to demonstrate that complementarity.  ROBBINS: Given the fact that—of, what, the Netanyahu government’s desire to basically dismantle the autonomy of the Supreme Court, you could imagine the relationship between the judiciary. I can’t imagine that happening. But, Steven, you know more about Israeli politics than I do. Can you imagine them doing that?   COOK: Well, they have not yet actually undermined the independence of the—of the judiciary. What was happening in Israel prior to October 7, was an effort to do that. But that has not yet been accomplished. And there was significant response from the Supreme Court itself on this issue. I think, though, in the current political environment, it seems unlikely that the Israeli courts will take it upon themselves to investigate charges by the prosecutor that, I think, the vast majority of Israelis believe to be illegitimate and politically motivated. And so I think that that’s probably unlikely. They’re unlikely to find a way to solution that way.   And I suspect—and, again, after listening to David—I suspect that the prosecutor understands that none of these people will ever really be brought to justice. And that may be a reason why, in fact, he went public so quickly with this. There will be—and I think it was a miscalculation on his part. And there’ll be consequences as a result. I don’t think it’s going to save any Palestinian lives. I think there’s going to be consequences in terms of American action, particularly congressional action targeting the ICC. So it is unlikely to do much good on the battlefield and it’s unlikely to do very good in terms of international law.  ROBBINS: Luis Oganes, can you identify yourself, please?  Q: Hi. Luis Oganes, JPMorgan.   My question is for Ray. You mentioned that, you know, the—what’s just happened in Iran won’t change, you know, the hardline position vis-à-vis foreign policy, because that is—there is consensus about, you know, the position of Iran. However, domestically, you know, President Raisi was very unpopular. I understand that only 30 percent of Iranians participated in the last election. And there is a process of, you know, trying to block any reformers from participating in elections. Do you think the conditions are there for a bit more of a wider opening for the next round of candidates, that actually a reformer could emerge this time around? Thanks.  TAKEYH: Well, that’s got to be the very controversial debate within the country, because there will be reform candidates signing up for participating in the election and being vetted by the Guardian Council—the Council of Guardians, which all of this has to take place in the compressed period of time of fifty days. The reform faction has long been exorcized from the body politic. I mean, even before the previous round of elections, the reform candidates were not allowed to participate. And, really, they were not allowed to participate since 2009, with the contested presidential election between former prime minister and, currently in house arrest for all these years, Mir Hossein Mousavi. So that faction is no longer relevant in terms of participation in politics at a formal level, although I think their views and pronouncements remained quite popular within the public at large.   What has happened in the previous elections that was—happened in the mid—for Assembly of Experts and the parliament, that had happened a couple of months ago, is that you have people like former President Hassan Rouhani being disqualified. The longest speaker in the history of the Iranian parliament, Ali Larijani, being disqualified, former minister of interior, and quite a killer in its own right, Mostafa Pourmohammadi being. So right now the disqualifications are no longer centered on reformists that have kind of different political ideas, but only the most reliable and ideological members of the political establishment, which increasingly are younger people in their forties and so forth that have come to political fruition, that dominant faction in the parliament today. And they’re rebelling against the old faction. And those rebellions are being successful, because they tend to be supported by Ali Khamenei.  So in this particular election, you’re going to have, my guess is, a limited number of choices, and limited number of candidates moving forward, simply because you need to fill that spot with alacrity. And you need to essentially fill it with people that are already vested in the system as it’s currently constituted and is currently—the belief structure that they all have. So I don’t see this as an opening for the reform movement, irrespective of the lack of popularity of President Raisi, as, I think, you suggested. I think in the last round—which was, to be fair, for parliament, Assembly Expert, it wasn’t 30 percent. In some of the major cities, like Tehran, it was probably 5 to 10 percent participation rate.  I don’t think the regime cares that much about that at this point. They sort of have bigger fish to fry. They’re going to suggest a greater degree of popular acclaim anyway. I think they suggested 47 percent of popular views. So I don’t see that as a new opportunity for opening the political system. The problem they’re going to have, as they’re dealing with this particular succession, is if somehow Ali Khamenei becomes incapacitated. Then I think the regime will be seriously in danger of the wheels falling off.  ROBBINS: You mean, because they’ll have a dual crisis?  TAKEYH: They’ll have a dual crisis, yeah.   Q: Thank you.  ROBBINS: Andrzej, you’ll have to identify yourself, including your last name.  OPERATOR: Andrzej, please accept the unmute now prompt.  Q: My name is Andrzej Dobrowolski. And I’m the New York correspondent for the Polish Press Agency.   I have two questions. First of all, what impact President Raisi’s death might have of Iran’s relations with Israel, Russia, other regional players, and the United States? And the second one is, how will his death affect Iran’s support for militias in the Middle East and its involvement in the Ukraine war?  TAKEYH: Those are fair questions. As I said, Ebrahim Raisi was not what you would call a foreign policy president. He wasn’t much of a domestic one, either. But at least he did—he kind of spoke about domestic affairs more so in his speeches. He talked a lot about economy and so forth, and mismanaged it rather dramatically. So he didn’t actually venture that much into providing a perspective on foreign relations, and all the issues that you spoke about, that differed from the established orthodoxy and establish pronouncement of the system. Those are not—those were not his thing. And, to be fair, his principal qualification for the job was that he was a member of the repressive state for a long time, in the judiciary and others, where he had very little problem executing people on as flimsy charges as possible.   So that was kind of his forte. That was his calling card. Now, he could comment on that if you asked him. But, you know, the intricacies of foreign relations, that was beyond him. And that was sort of beyond his foreign minister, actually. His foreign minister, who also perished in this particular accident, was also relatively lackluster in his approach. There is—what is happening in Islamic Republic, that’s been so thoroughly purged Ali Khamenei at all levels, is that you have people who are coming into the system that on a good day aspire to be mediocrities. And they don’t quite get out there, but at least aspire to that. So they don’t have a Zarif kind of a person that could charm the Westerners. They don’t have a Rouhani, who actually thought about issues differently—wrongly, it turned out.  But now you have people who kind of have their talking points, they seem to believe it, they’re authentic in terms of the revolutionary convictions. They believe, in terms of the larger international relations, that Iran has a place in the global configuration of powers, it has these global alliances with Russia and China, and all these three powers are in the same conflict with the United States and the West. And the West in this particular case is identified as Israel, as well as an adjunct of the American power and the Western imperialism in the Middle East. And they seem to think of Iran is a sort of a vanguard state within this great-power alignment. The other great power allies don’t think so. But, you know, as the 1970s song says, you should care if you’re feeling good. So, you know, they’re sort of going along with this.   That particular alignment, between Iran, Russia, and China, will change. And Iran will become more of a player, more of an equal player, when and if it gets nuclear weapons. It no longer will be satisfied with a junior partner status. As far as intervention in Ukraine, that makes no sense. It makes no national sense. It makes no ideological sense. There are no Islamist claims at stake in Ukraine. But that is the price you pay for great-power patronage. With great-power patronage also comes great-power responsibilities. And one of those is for Iran to be, at least for now, almost in an implicit war against NATO—an indirect war against NATO. That’s not in the national interest, or it doesn’t redeem any sort of ideological mission, but that is the price you pay for your great-power allies.  ROBBINS: We have—thank you for that. We have—and I’m going to remember that the great-power responsibilities for proxies as well.  So, Jessica Yellin, if you can really ask your question very quickly, identify yourself, and I’m going to let Steven, and David, and Ray have—jump in with one sentence, whether or not it answers your question. So, Jessica.  Q: Great. Hi. It’s Jessica Yellin. I’m with News Not Noise.   I’m wondering if you’d talk a little bit about the supreme leader’s son. I think is pronounced Mojtaba Khamenei.   TAKEYH: Yeah.  Q: If he were to—(inaudible)—Raisi, would you expect him to prioritize with the leadership change in any meaningful way?  TAKEYH: The Islamic Republic traditionally and historically does not do dynastic successions. That is what happens in—the Persian monarchs did that. The Arab presidents do that. That’s not what they do. Now, that doesn’t mean that the system up and down is not filled with nepo babies. Ali Bagheri is a nepo baby. His uncle was a great member of the clerical aristocracy. And he has all the smugness of arrogance of a nepo baby, if you ever met him. This system has all these nepo babies in it. You know, there’s a marriage to this, to that. But you can’t really formally have your supreme leader as a son of the former one. That’s not the way the system works.  The Islamic Republic, since its founding, has dispensed with some very essential criteria for the position of the supreme leader. You no longer have to have charismatic authority. You no longer have to have theological erudition. But you can’t be a kind of—the guy’s son and come to that post. Now, you can play a big role in the background, and so forth. And I think in that sense, Raisi may have been the right figure because he might have been a fairly passive supreme leader outside, you know, need for executions here and there. But I don’t see them doing dynastic succession.   If a dynastic succession does take place, that tells you how far the Islamic Republic has veered away from its original founding mission and its original creed and original way of doing things. As a matter of fact, most of the president’s songs, whether it’s Ahmadinejad, Rouhani, Rafsanjani, actually don’t do well in that system. Some being prosecutors, some are giving lucrative positions here and there. But in terms of ascension to the ultimate authority in the country, that would be hard to swallow, hard to justify. If they do it, that means they really have moved away and essentially abandoned the original mission of the Islamic Republic, which was some measure of egalitarianism in terms of the selection process.  ROBBINS: Thank you, Ray. It’s 2:45. Steven, twenty seconds. You got one last thought?  COOK: We could use a lot more news than noise. And I think that the that—what’s happening at the ICC is—as I said before—is backing the Israelis into a corner. And that’s not a place where I think it makes for productive negotiations or thinking about how to end this conflict.  ROBBINS: And, David, last thought to you.  SCHEFFER: Well, my last thought is just be cautious about these false equivalence arguments that we are seeing emerge now, that the Hamas side of the equation says, how dare you indict Hamas? The Israeli side says, how dare you indict the Israeli side? The court really doesn’t work that way. But I would suggest that it would have been rather remarkable if he had only issued arrest warrants against Hamas leaders. You can imagine the uproar that would have created. If he only indicted the Israelis, there would have been an uproar on that side as well. So he’s sort of trapped. And I don’t think it’s really a false equivalence. It’s just what do the facts show and where does that take you in terms of framing an actual arrest warrant?  ROBBINS: I want to thank you. Thank you for that. I want to thank David Scheffer. I want to thank Ray Takeyh. I want to thank Steven Cook. Transcript for this will be—can be found on CFR.org, additional resources on CFR.org and ForeignAffairs.com. I think Ray is going to have a piece up in a few hours, if not already up there. And thank you all for joining us.  COOK: Thank you all.  SCHEFFER: Thank you.  (END) 
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