Theorizing economic hedging: the role of elite perceptions in Germany's and Italy's foreign economic policies towards China (2014 – 2021)

• Main Author: Valockova, Barbora
• Other Authors: Kei Koga
• Format: Thesis-Doctor of Philosophy
• Language: English
• Published: Nanyang Technological University 2024
• Subjects: Social Sciences; Foreign economic policy
• Online Access: https://hdl.handle.net/10356/177900
• Institution: Nanyang Technological University

Despite welcoming Chinese trade and investment and later requesting an EU foreign direct investment screening mechanism, European middle powers have responded differently to China’s economic rise. What explains this variation in foreign economic policy responses of European middle powers towards China? While existing literature analyzes the complex relationship between EU member states and China using concepts such as strategic triangle, it does not systematically explain the inconsistencies in foreign economic policy responses of European middle powers and the process of their foreign economic policy changes towards the rising power. The aim of the dissertation is thus to elucidate the factors that drive and shape foreign economic policies of European middle powers towards China. I seek to answer the following questions: (1) Why do European middle powers differ in their foreign economic policy response towards rising China? and (2) Under what conditions is a European middle power more likely to shift its foreign economic policies towards China? I argue that foreign economic policy responses of European middle powers towards China constitute economic hedging which is defined as a mixture of opposite and counteracting cooperative and assertive economic policies. Building upon insights from hedging literature and parameters from prospect theory such as framing, loss aversion, domain shift and risk propensity, I develop an economic hedging framework to support my argument. The central argument is that the degree of cooperative and assertive foreign economic policies is determined by the level of elite perceptions of gains and losses from economic engagement with China. According to prospect theory, losses hurt and loom larger than gains. Therefore, with an increasing perception of losses, elites become more risk-acceptant and willing to implement stricter foreign economic policies in order to avert further losses even though by doing so they risk alienating China that may retaliate economically. I employ a comparative case study design with process tracing and content analysis to examine the foreign economic policy responses of two European middle powers, Italy, and Germany, between 2014 and 2021. Based on both primary and secondary sources, including semi-structured expert interviews, official documents, speeches, news and policy reports, I conduct a within and cross-case comparison following Mill’s joint method of agreement and difference to investigate the similarities and differences among five Italian governments and three German governments and their respective foreign economic policies towards China. The empirical evidence validates the hypotheses. The findings show that when elite perception of gains was greater than that of losses, then soft economic hedging took place; cooperative economic policies outweighed assertive economic policies because elites were more risk-averse and wanted to keep the economic gains. On the other hand, under the governments where elite perception of gains was less than or equal to that of losses, hard economic hedging occurred; assertive economic policies exceeded cooperative economic policies because elites were risk-acceptant and sought to avoid future losses. The findings contribute to the literature on hedging, middle powers, and prospect theory. They offer a novel approach to hedging suggesting that economic hedging is a risk-management strategy, which challenges the conventional position that hedging is an alignment choice. Further studies could extend the framework beyond 2021 and apply it to small European states and other policy areas such as energy policies.