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China’s Sanctions Strategy and Its Implications
In June 2021 the Chinese government passed the Anti-Foreign Sanctions Law, allowing Chinese authorities to enact countermeasures on entities they believe have harmed China. This law marks an increasingly visible trend where China uses sanctions to communicate its unhappiness with other countries, particularly the United States and its allies. Laurel Holley spoke with Yukon Huang, a senior fellow with the Carnegie Endowment for International Peace’s Asia Program, to discuss the factors that influence China’s decisions to implement economic sanctions.
What guidelines, including written regulations and unwritten norms, does the Chinese government abide by when deciding whether to use sanctions?
Several regulations and rules have been passed in recent years. The most threatening is the Anti-Foreign Sanctions Law, which came into play around a year ago. It states that if foreign or Chinese entities implement sanctions that hurt China, then they can be subjected to penalties. A couple years ago, Beijing approved Chinese versions of several U.S. regulations—an export or trade law, an entity list—allowing China to penalize foreign companies for actions interpreted by Beijing as contrary to its interests.
In some sense, these laws are codifying powers that the Chinese government possesses anyway as an authoritarian regime. It can at any time put out a restriction on trade or cultural exchange designed to penalize a company or country. Whether there is a legal or nonlegal basis is irrelevant. In some ways, China is trying to copy legislation that the United States has largely used against China over the last five years. But more importantly, China has the authority and the willingness to sanction a country, individual, or corporation that it feels is working against Beijing’s interests.
As China dramatically increased its overall export volumes at the beginning of the 21st century and took on an increasingly central role in critical supply chains, it began to gain the clout it needed to leverage effective sanctions. What factors encouraged China to develop its sanctioning strategy and usage?
China’s use of sanctions is a policy the country has practiced for decades. Recently, this has been in the form of restrictive trade and investment measures. Historically, China often expressed what it would call “unhappiness” with government policies by banning cultural exchanges. That was built around actions perceived as conflicting with core interests, such as a foreign government receiving the Dalai Lama in a state visit or gestures involving Taiwan that Beijing thought violated its “one China” principle. Then, Beijing would take economic or diplomatic actions to signal its displeasure.
China’s sanctions became more noticeable in terms of trade measures as it became more powerful economically. It is now the largest trading nation and the second-largest recipient of foreign investment. The activities of U.S. companies operating in China are substantial. If you look at the United States’ interests, U.S. exports to China are not that significant in a financial sense. The revenues that companies earn in China are multiples higher. The real threat of sanctions in terms of U.S. interests is the ability of companies operating in China to generate sales. For example, General Motors earns a large share of its profits by selling cars in China. Most of Apple’s products are made in China. U.S. economic activity within China through franchises like McDonald’s and Starbucks is likewise enormous.
There remains a question as to whether the ability to sanction companies is actually effective in altering foreign policies. When the United States sanctions China, will China change its policies? In most cases, sanctions do not work. Russia’s invasion of Ukraine is a case in point: will Western sanctions, which are the most extreme and united that we have ever seen, fundamentally change Russia’s behavior? Right now, it would not appear to be so.
If sanctions are comprehensive and strong enough, they may have an effect. But that can take decades. When countries introduce sanctions, they are not thinking in time frames of decades. They are thinking about something that will have an effect over the next year or two.
Comprehensive sanctions can work if the burden is put on a relatively small entity that cannot do much to offset them. But sanctions on other significant powers, including middle powers like South Korea and Australia, generally do not work because countries can usually diversify to get around them. Both sides might suffer from the consequences, but sanctions do not hurt either country to the extent of provoking an actual change in behaviors.
What does China seek to achieve whenever it warns the international community that it might use sanctions?
We need to think of sanctions as a softer counterpart than the use of military force, while still being more aggressive than diplomatic measures for responding to a disagreement with a country. These measures include recalling the ambassador, sending signals of unhappiness, or cutting down cultural exchanges—all of which are normal conduct in foreign policy. If countries do not feel that the diplomatic approach will work or want to send a stronger signal while not escalating into a military issue, then countries use economic sanctions. Countries do this if they have the tools. China did not have the tools until the last decade or so, because its trade and foreign investment presence was not significant enough.
Countries rely on the most powerful sanctioning tool they have. For the United States, the first tool is access to the U.S. dollar and global capital markets. That is the most powerful sanction in the world, because it can cut off economic activity. The second U.S. tool, which it has only recently used, is the control of high-tech components and intellectual property rights, which China has been a major target of. One critical example is access to advanced semiconductors.
No country but the United States has these two powerful tools. China does not have anything comparable to them. What China has is access to its domestic market and the ability to influence trade and investment relations. This is very important for its neighboring countries, which are highly dependent on China. The United States is a major trading partner, and sanctioning trade relations can hurt. But it cannot change U.S. policy significantly. China’s sanctions have not meaningfully altered Washington’s behavior, but they have worsened public sentiments toward China. According to a Pew Research Center poll conducted this year, 82% of the U.S. public has an unfavorable view of China, based in part on its aggressive behavior and human rights concerns.
That raises the question of whether sanctions are counterproductive. From a Western perspective, China’s sanctioning policy has hurt more than helped China. So why does China continue to adopt this policy? There are two factors. One is that sanctions are an alternative to military action. From everybody’s perspective, it is far better for countries to rely on economic-related measures than signaling unhappiness through military confrontation. The second factor is rising nationalism. Many of China’s sanctions are not really designed to change the behavior of the foreign target, but to signal to the Chinese public the political interests of the Communist Party—namely that the party will not tolerate foreigners pressuring China in any way.
Ten or fifteen years ago, when China was not a major economic power, it operated under Deng Xiaoping’s advice to keep a low profile and try to not escalate tensions globally, because China did not yet have the means to follow through. Beijing now feels that it has the means. But those means are not really effective in altering outcomes. Promoting nationalism, in contrast, is an objective that is very important for a political system like China’s. Many sanctions are levied almost solely for that purpose.
What is something U.S. policymakers tend to overlook when it comes to Chinese sanctions?
Western sanctions levied on China often relate to one of its core interests: Taiwan, Tibet, Xinjiang, Hong Kong, and the South China Sea. China sees these concerns as internal issues to be dealt with by the Chinese people. Foreign actions targeted toward changing Chinese behavior on these issues are seen as unwarranted interference in domestic concerns. China comes out very strongly in the use of sanctions for these core interests.
When Chinese leaders look toward Western policies, they see a disconnect. There are many issues that the United States recognizes as issues that Americans need to resolve, such as racial and gender equality, voting rights, and abortion rights. Suppose a foreign country expressed discontent with U.S. policies and sanctioned the United States. Washington would find that absurd. That’s the view of Beijing, wondering why a foreign government would try to get involved in another country’s domestic issue.
China is now a major power, but it is a different kind. It is the first developing country that is a major power. It has achieved this status over the past twenty or thirty years, with a speed the world has never seen before. Major powers usually evolve over generations, not decades. Now there is a major power whose institutions and ability to deal with global issues have not matured to the extent that the West would say is needed. China also does not have alliances that might help in forging solutions. This leaves Beijing with few alternatives. Sanctions are not a preferred alternative but have evolved because of a lack of other options. The same thing is true from the Western perspective. The West has not been able to deal effectively with China’s rapid rise. Sanctions from both sides reflect an inability to create the appropriate institutions to handle these tensions.
How does the intertwined economic relationship of the United States and China affect each country’s ability to sanction effectively? Do you have any thoughts on the functionality of sanctions in an environment of high mutual dependence?
Sanctions have become an option for both China and the Western powers to express their unhappiness with the other side’s policies. Some say it is a relatively benign outcome that does not cause any deaths. Both sides have alternatives. Australia, for example, has been sanctioned a lot by China, but has managed to find other markets for its products. Still, there has been a cost: Australian companies have lost business, and prices are higher. Chinese consumers who have relied on Australian products have also suffered. Onlookers can view sanctions as a tool that signals there is a problem but does not solve it.
The consequence often is escalation. But countries do not want to escalate into military confrontation. Instead, the escalation occurs through further additional sanctions and is intensified over a broader range of commodities, so that some economic activities become prohibitive. The United States has restrictions on exports of high-tech components and chips to China, but they are not comprehensive.
Suppose, however, that it decided to stop allowing China from buying any semiconductors that incorporated U.S. technology. In China, these chips are potentially used for military or surveillance equipment that runs counter to U.S. interests regarding human rights or security concerns. But they are mostly used for normal commercial purposes. If the United States stopped exporting high-tech components to China, China would be unable to produce a whole range of consumer items destined for global markets. As a result, American consumers or producers would be unable to buy a range of products that they need. If sanctions escalated to the point where they critically harmed economic interests, both the United States and China would likely find it intolerable. The interlinkages between the two economies are too strong.
Even if sanctions were only partial, meaning that U.S. high-tech companies restrict only some exports of their products to China, China would still be hurt. It would not have the necessary components to produce, for example, high-speed computers, automobiles, or commercial aircraft. But partial sanctions would also hurt U.S. high-tech companies, which earn 30%–50% of their profits from sales to China. If they cannot continue doing so, they will not have the resources to invest in research and development activities needed to maintain the United States’ technological leadership. The growth rate of the United States is very much dependent on innovation and technology, because it is an advanced economy. This is the issue of interlinkages. One really cannot separate the U.S. and Chinese economies.
The United States must find a way to deal with the legitimate security concerns of the West while also preserving the economic benefits from continuing to interact with China. Instead, what U.S. leaders are doing is proceeding with sanctions and breeding more distrust. The ultimate outcome is that both sides will be irreparably damaged.
Yukon Huang is a Senior Fellow in the Asia Program at the Carnegie Endowment for International Peace in Washington, D.C., and a noted expert on China’s economy and its regional and global impact. He was formerly the World Bank’s country director for China and Russia. He is an adviser to the World Bank, the Asian Development Bank, the Asian Infrastructure Investment Bank, and various governments and corporations. Dr. Huang has published widely on China’s economy and related foreign policy issues, including the book Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong (2017).
This interview was conducted by Laurel Holley while an intern with the Center for Innovation, Trade, and Strategy at NBR.