Hedging Strategies

What is Hedging? ¹

Hedging: is the strategy of betting on multiple alternatives at the same time to act as insurance against one option failing. (from poker)
- In IR: Hedging is a set of strategies states use to avoid a situation in which states cannot decide upon more straightforward alternatives such as balancing, bandwagoning, or neutrality
- Hedging is a norm in IR as insurance policy, to preserve the maximum range of strategic options
The definite policy elements of hedging are: ²
1. Insist on not taking sides among competing powers
2. Adopting opposite or counteracting measures alongside normal measures
3. The use of the opposite measures as an instrument to preserve gains while cultivating a fallback
- Shifting from or not fitting one of these would be a different strategy such as balancing, containment, bandwagoning, buckpassing, neutrality, non-alignment
- For it to be hedging, the multiple invested options must be aiming for the exact same goal
  - Ex: US-Japan alliance + US-India quasi-alliance (territorial issues): does not have the same purpose as US-ASEAN relations for counter-terrorism

Returns-Maximizing: try to get close to rising powers to maximize rewards
1. Economic-Pragmatism: to maximize economic return from a power (ASEAN->China)
2. Binding-Engagement: to maximize diplomatic benefits by creating channels of communications (ASEAN→China)
3. Limited-Bandwagoning: to maximize political benefits without accepting a subordinate position under the power
- Selective defiance: only accepting some closeness (economic & diplomatic) while rejecting some (military)
  - Involve only political partnership
  - Work with rising power and existing hegemon
  - Avoids losing its autonomy or becoming pawn
  - Heiarchy
Risk-Contingency: to have a fall back by not getting too close (as to bandwagon) by Pursuing contingency measures: investing in the current or another upcoming power
1. Economic-Diversification: diversify trade & investment links to avoid dependency (economic hedge)
2. Dominance-Denial: minimize geopolitical risks using non-military means to cultivate multiple great power balance (political hedge)
3. Indirect-Balancing: forging defense partnerships and upgrading own military, but not targeting a specific country (military hedge)

Return-Maximizing and Risk-Contingency must be used together for it to be called hedging

Why do states hedge: States hedge because uncertain intentions of other states in the future
When do states hedge?
- Power Transition Theory: ambiguity whether a new power will over take another
- Multipolarity: uncertain about intentions of other powers
- The Complex Network Structure: high sensitivity, fluid alignment structure, hierarchy
  - Kenneth Waltz network structure is naturally derived from nature. The
- Extra
Large states usually hedge and don’t stick their neck out with offensive strategies
- Exception: Case of Large states not hedging: Cold War’s both super powers adopt world dominating strategies

Small and medium states don’t balance or hedge because its too costly ¹
Hedgers need to analyze the future of other states and its impacts on one’s own future ¹
The Small States Strategies: focus on diplomatic and economic tools of statecraft rather than just military options
Southeast Asia plans for US downfall + China’s rise
- Investing in China, but not letting it influence too much, in case China fails