Hedging Strategy: Concept, Behavior, and Implications for China-ASEAN Relations

Abstract

In recent years, more and more scholars have borrowed the terminology “hedging” from financial realm to describe the behaviors of small countries. Furthermore, they defined hedging as the third strategic choices in parallel with balancing and bandwagoning. The current scholarship indicates that most concepts of hedging separate themselves from its original meaning as a financial terminology, lacking a behavioral design of lowering or avoiding uncertain risks. This article redefines hedging and further points out that hedging is in fact a strategy that transfer risks to a third party but fails to remove risks from the system. However, actors in the international system don't share a same risk appetite as investors in the futures market. Therefore, even though small countries adopt the strategy of hedging, the risks cannot be transferred. Hedging will only help countries maintain the balance of power in the region so as to lower the risks when they have chosen the side incorrectly. Hedging has thus become a strategy of deferred-bandwagoning. In practice, hedging occurs when a small country cooperates simultaneously with two great powers, resulting in the balance of power. Or it is also hedging when a small country adjusts its relationship with one great power by measuring its relationship with another. In terms of China-ASEAN relations, the concept of hedging is conducive to understanding why ASEAN countries rely on China for economy but America for security. By the same token, ASEAN countries are able to reject the hugs from great powers when adopting hedging strategy. In that case, it is rarely effective that China can promote its political influence in Southeast Asia through close economic ties, leading to inadequate mutual trust.