The variable effectiveness of hedging strategies

Abstract

Governments often adopt hedging strategies to mitigate risks they face in international affairs. They hedge in the conventional, financial sense of the term by seeking to offset risks in global markets. They also adopt strategies to hedge against international security hazards by preserving strategic ambiguity, forging limited security alignments, and cultivating modest self-protection in case potential threats materialize. Both types of hedging typically are seen as prudent behavior. However, hedging strategies sometimes fail. Risks can be difficult to calculate, and the measures needed to hedge against them can be costly. Hedging international security risks can be particularly challenging, as governments sometimes lack access to adequate protective options at any price. This article illustrates the argument with two contrasting cases: relatively successful Southeast Asian hedging against the risk of financial calamity after the 1997 crisis and less effective efforts by some of the same states to hedge against the security risk of Chinese encroachment in the South China Sea.