China: Economic Sanctions
Released: 2016-08-22T00:00:00

Introduction

United States-China relations, since 196 9, when the process of normalization began under President Richard M. Nixon, have advanced to a point that relatively few restrictions affecting trade remain. This report summarizes the United States' economic sanctions on China, including

limits on U.S. foreign assistance and State Department programs; limits on U.S. support for China's requests for funding in the international financial institutions; prohibitions on the exportation of defense articles and defense services to China; prohibitions on the importation of munitions and ammunition from China; limits on exports to China of goods and services controlled for national security or foreign policy reasons, including a prohibition on exports to specific Chinese entities of goods that have a military end-use; limits on import/export and procurement contracts for specific Chinese entities found to be engaged in weapons proliferation activities; and restrictions on access to U.S.-based assets and ability to enter into transactions with U.S. persons, imposed on specific Chinese persons for reasons ranging from weapons proliferation, illicit narcotics trafficking, international terrorism, and engagement with others against which the United States imposes sanctions (i.e., entities in Iran, Russia, North Korea, Belarus).

Economic sanctions may be defined as coercive economic measures taken against a target to bring about a change in policies. They typically include measures such as: trade embargoes, restrictions on particular exports or imports, denial of foreign assistance, loans, and investments, or control of foreign assets and economic transactions that involve U.S. citizens or businesses. The decision to apply economic trade and aid sanctions can be based, to some extent, on a country's record with respect to human rights, religious freedom, international terrorism, terrorist financing, proliferation of weapons of mass destruction, disruption of regional stability, treaty violations, international narcotics trafficking, trafficking in persons, trafficking in protected natural resources and endangered species, child abduction, interference with democratic processes, war crimes, corruption, cyber espionage, and money laundering. The Departments of State, the Treasury, and Commerce are primarily responsible for administering the use of economic sanctions in U.S. foreign policy and national security policy, though the entire interagency has a role.

U.S. Sanctions Imposed in Response to Tiananmen Square Events

In the immediate wake of the government of China's crackdown against pro-democracy protesters on June 4, 1989 in and around Tiananmen Square, President George H.W. Bush suspended U.S. foreign aid, government-to-government arms sales and military exchanges, commercial arms sales, high-level government exchanges, export licenses, and support in international financial institutions for loans and grants to China.

Congress followed up by enacting three bills that continued the President's initial steps and added a few other restrictions (in order of enactment):

The Departments of Commerce, Justice and State, the Judiciary, and Related Agencies Appropriations Act, 1990, prohibited funds from being "used to reinstate, or approve any export license applications for the launch of United States-built satellites on ... Chinese-built launch vehicles.... " The International Development and Finance Act of 1989 prohibited the U.S. Export-Import Bank from financing trade, making loans, credits, credit guarantees, or issuing insurance or reinsurance to China. The Foreign Relations Authorization Act, Fiscal Years 1990 and 1991, continued the President's suspension of Overseas Private Investment Corporation (OPIC) financing for China and export licenses for defense articles and defense services and satellites with an end-use in China, and required the President to suspend U.S. Trade and Development Agency (USTDA) funding and export licenses for crime control equipment for China.

The President could terminate any of the restrictions, those extending his initial actions and those creating new restrictions, if he reported to Congress:

(1) that the Government of the People's Republic of China has made progress on a program of political reform throughout the country, including Tibet, which includes—

(A) lifting of martial law;

(B) halting of executions and other reprisals against individuals for the nonviolent expression of their political beliefs;

(C) release of political prisoners;

(D) increased respect for internationally recognized human rights, including freedom of expression, the press, assembly, and association; and

(E) permitting a freer flow of information, including an end to the jamming of Voice of America and greater access for foreign journalists;....

Alternatively, the President could find it in the U.S. national interest to resume financial programs, export licensing, and nuclear cooperation.

Incrementally, all but two of the Tiananmen Square sanctions have been waived, either on a case-by-case basis or more broadly removed, or have been made obsolete by other circumstances. The remaining sanctions—a suspension of OPIC funding and restrictions on export licenses for U.S. Munitions List (USML) items and crime control equipment—are incorporated in the paragraphs addressing foreign aid and trade, below.

Current U.S. Economic Restrictions on China

Foreign Assistance and State Department Funds

The United States provides foreign assistance to China, in the form of programs that assist Tibetan communities, provides HIV/AIDS and other infectious disease intervention, and funds a Resident Legal Advisor who operates out of the U.S. Embassy in Beijing to "provide expertise on criminal law and procedure to Chinese officials, jurists, and academics.... " Since 1993, the U.S. Peace Corps has deployed volunteers to China, mostly to serve as English teachers in China's secondary schools and universities.

Foreign operations and State Department appropriations for FY2016 provide that:

None of the funds provided for the State Department's Diplomatic and Consular Programs may be used to process licenses for the export of satellites of U.S. origin to China (including commercial satellites and satellite components) without prior notification to the Committees on Appropriations. The President, already required by foreign aid authorities to "adopt regulations and establish procedures to insure that United States foreign aid is not used in a manner which, contrary to the best interests of the United States, promotes or assists the foreign aid projects of any country that is a Communist country," is further required to apply such conditionality to projects or activities "by any entity that is owned or controlled by" China's People's Liberation Army (PLA). The Secretary of State, furthermore, is required to prohibit the use of funds appropriated or otherwise made available in the FY2016 foreign operations and State Department appropriations to "finance any grant, contract, or cooperative agreement with the PLA, or any entity that the Secretary of State has reason to believe is owned or controlled by, or an affiliate of, the PLA." Funds appropriated for public diplomacy are to be used "to counter the influence of" China. Any foreign aid made available for a "business and human rights program" must be matched by sources other than the U.S. government.

U.S. funds to the U.N. Population Fund (UNFPA) are prohibited for use in China. The UNFPA must keep U.S. contributions separate from its other funds, and must document its expenditures in China. The United States reduces its contribution to UNFPA by the amount the organization budgets for China.

The Overseas Private Investment Corporation's China program was suspended in days following the Tiananmen crackdown and remains suspended. The purpose of OPIC is to "facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from nonmarket to market economies" by providing political risk insurance, project and investment funds financing, and other services. China's economic development in the 25 years since Tiananmen Square nearly, but not quite, graduates the country out of the qualifying range for OPIC investment.

The United States generally continues to abstain from or vote "No" in the international financial institutions when loans for projects in China are considered. In May 2016, the month on which the U.S. Department of the Treasury has most recently reported, the World Bank's International Finance Corporation and General Environmental Facility, and the Asian Development Bank considered eight requests for various projects in China (including one regional project and one no-cost project), totaling some $209.4 million. Of these, the United States abstained from voting in six instances. The U.S. executive directors to the banks are required by law to vote "No" or abstain on human rights grounds, unless the project supports basic human needs. The United States also takes into account a range of other factors, including potential environmental degradation, worker rights, trade distortion, and conditions in Tibet. Once a project is brought up for a vote, however, no one country holds singular power to block a loan or grant.

Other Restrictions in Appropriations

In addition to the restrictions on appropriations related to foreign assistance and State Department programs,

Section 1673, National Defense Authorization Act for Fiscal Year 2016 ( P.L. 114-92 ; 129 Stat. 1130), prohibits the use of defense appropriations "to integrate a missile defense system of the People's Republic of China into any missile defense system of the United States." Section 515, Commerce, Justice, Science, and Related Agencies Appropriations Act, 2016 (division B, P.L. 114-113 ; 129 Stat. 2326), prohibits the use of appropriations for the Departments of Commerce and Justice, NASA, or the National Science Foundation to acquire a "high-impact or moderate-impact information system" unless that system meets a number of assessments related to supply chain risk, risk of cyber-espionage, or sabotage, "including any risk associated with such system being produced, manufactured, or assembled by one or more entities identified by the United States Government as posing a cyber threat, including but not limited to, those that may be owned, directed, or subsidized by the People's Republic of China." Section 531, Science Appropriations Act, 2016 (division B, title III, P.L. 114-113 ; 129 Stat. 2330) prohibits the use of appropriations for the National Aeronautics and Space Administration (NASA) or the Office of Science and Technology Policy (OSTP) "to develop, design, plan, promulgate, implement, or execute a bilateral policy, program, order, or contract of any kind to participate, collaborate, or coordinate bilaterally in any way with China or any Chinese-owned company unless such activities are specifically authorized by a law enacted after the date of enactment of this Act." It further prohibits NASA from hosting official Chinese visitors unless specific conditions are met relating to national security, economic security, and human rights. Section 730, Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations, 2016 (division A, P.L. 114-113 ; 129 Stat. 2279), prohibits the use of appropriations to procure processed poultry products from China for use in various federal school meal programs.

Arms Sales and Arms Transfers

The U.S. government prohibits exporting defense articles and defense services to China under general authorities granted to the President and the Secretary of State to control the import and export of such goods and services in the context of U.S. foreign policy, as well as pursuant to the Tiananmen-era sanctions.

The United States also prohibits the import of munitions and ammunition from China. President William J. Clinton announced the sanction on imports in May 1994, along with the announcement that he would renew Most-Favored-Nation (MFN) trade status (now referred to as "normal trade relations," NTR) for another year. Congress enhanced this prohibition in 2005, prohibiting the Secretary of Defense from procuring goods or services "through a contract or any subcontract (at any tier) under a contract, from any Communist Chinese company." Goods or services are defined as goods or services on the U.S. Munitions List (USML); exceptions are allowed for procurement in the course of a U.S. military vessel or aircraft visit to China, procurement related to testing purposes, or related to intelligence gathering. The Secretary is authorized to waive the prohibition if he finds it necessary for U.S. national security purposes and notifies the Armed Services Committees 15 days in advance.

Trade25

Generalized System of Preferences . Imports from China do not qualify for duty-free treatment afforded to certain imports from developing countries under the U.S. Generalized System of Preferences (GSP). The Trade Act of 1974, which authorizes the GSP, requires a communist country to meet certain conditions before the President may designate it as a "beneficiary developing country" to become eligible for preferential trade treatment. Among the rationales for withholding GSP beneficiary states that are applicable to communist countries include ineligibility for MFN/NTR status and nonmembership in the World Trade Organization (WTO) and International Monetary Fund (IMF). China cleared these hurdles when it joined the WTO in 2001, the United States granted it permanent NTR (PNTR) status in 2002, and it joined the IMF in 1980. The third condition to be met by communist countries is that the country in question "is not dominated or controlled by international communism." Conditions applicable to communist countries are not waivable. In addition, China may be denied for its political system or for a number of other reasons stated in the law, including intellectual property rights protection or workers' rights. Despite this, China is the United States' largest source of imports ($482 billion in 2015—up 382% from 2000 (pre-WTO accession)).

Export Controls Applied to U.S.-China Trade. Export regulations implement U.S. law and various international control regimes to which the United States is a party (i.e. , the Missile Technology Control Regime, the Nuclear Suppliers Group, or the Australia Group for chemical and biological weapons). They generally are not cast as economic sanctions because their goal is not to change the particular objectionable behavior of a targeted country but to meet U.S. legal and international obligations. The application of export controls, however, can have the same appearance and effect as an economic sanction imposed for foreign policy or national security objectives.

Several executive branch departments and two independent commissions have export control responsibilities. The lion's share, however, is assigned to the Department of Commerce's Bureau of Industry and Security (BIS). BIS promulgates the Export Administration Regulations (EAR). The EAR include the Commerce Control List (CCL), which categorizes all goods, services, and technology for which export licenses are required for a range of national security and foreign policy reasons.

An export license is required for commercial goods, services, or technology intended for China for reasons of: chemical and biological weapons proliferation, nuclear proliferation, national security, missile technology, regional stability, and crime control. This means that exporting most items on the CCL to China would require a license. For some goods and services, further guidance is provided in the form of license exceptions.

Computer equipment, assemblies and components, for example, are controlled for national security reasons, but trading partners are sorted into two groups or tiers. China is listed in the more restricted Tier 3, for which a computer may be sold and shipped if it is a slower processor, if the end-user is clearly identified, and if the end-use does not pertain to nuclear, chemical, biological, or missile activities. Each license application is thus scrutinized by the Department of Commerce, and may also be reviewed by the Departments of State, Defense, or Energy.

The United States' trading partners are also sorted into four country groups. Country Group A is reserved, mostly, for countries that are participants in the Nuclear Suppliers Group, the Australia Group, and the Missile Technology Control Regime. The most restrictive group, Country Group E, is reserved for those countries identified by the State Department as supporters of international terrorism. China is in Country Group D for national security reasons and for determinations related to proliferation of chemical and biological weapons and missile technology. A Country Group D listing further limits the likelihood of export licenses being granted for China for most CCL items, though for China the general policy is to approve licenses except in certain, very specific, instances. For example, it is general policy "to restrict the export and reexport of items that would make a significant contribution to the military potential of any other country or combination of countries that would prove detrimental to the national security of the United States." In the case of China, however, according to Commerce Department regulations:

...there is a general policy of approval for license applications to export, reexport, or transfer items to civil end-uses. There is a presumption of denial for license applications to export, reexport, or transfer items that would make a direct and significant contribution to the PRC's military capabilities such as, but not limited to, the major weapons systems described in Supplement No. 7 to Part 742 of the EAR.

Military End-Use in China. In addition to the presumption of denial of export licenses for some goods, on the grounds described above, beginning in mid-2007, the EAR has also generally prohibited the export of goods that have a military end-use in China. The nine categories of prohibited goods range from depleted uranium, chemicals, toxins, machine tools and parts with particular application, high-performance computers, x-ray components, telecommunications equipment, sensors, lasers, navigation equipment, avionics, underwater equipment, and some aircraft. Chinese entities for which this additional scrutiny of military end-use exports is required are listed in Appendix A .

Satellites. President George H.W. Bush suspended export licenses for satellites contracted to be launched in China after the Tiananmen Square crackdown in 1989, an action re-enforced by Congress a few months later when it enacted the Tiananmen Square sanctions in 1990. The restriction remains in law but was waived on a case-by-case basis by Presidents George H.W. Bush and Clinton, who each found it in the U.S. national interest to do so. Following several controversial issuances of export licenses for satellites during the Clinton Administration, the President has been required, since 1998, to provide a detailed description and justification of each waiver applicable to satellites or related items. The State Department suspended the processing of export licenses for satellites to China in February 2000. Each year since FY2002, Congress has enacted legislation to require 15-days advance notification of any licensing for export to China of satellites or satellite components.

Proliferation-Related Sanctions. China is a party to the Nuclear Nonproliferation Treaty, a signatory to the Comprehensive Nuclear Test Ban Treaty (though it has not ratified this), the Chemical Weapons Convention, and the Biological Weapons Convention. It is a member of the Zangger Committee (pertaining to nuclear trade), and has issued export control regulations to demonstrate its commitment to follow the guidelines of the Missile Technology Control Regime. Nonetheless, entities and individuals in China have been found to be in violation of U.S. laws pertaining to proliferation of weapons of mass destruction. Over the years, Chinese entities and individuals have been linked to sales or transfers of controlled nuclear and missile technology to Iran, North Korea, Libya, Syria, and Pakistan. As a result of violating U.S. laws intended to staunch international proliferation of weapons of mass destruction, the charged Chinese entities have been denied

U.S. government contracts relating to missile equipment or technology (unlikely to occur in any event); licenses to transfer controlled materials (also unlikely in any circumstance); the right to import any products into the United States; U.S. government sales or transfers of items controlled on the USML; access to U.S. foreign assistance'; and any U.S. (government or commercial) sales or transfers of dual-use items on the CCL (for which China is already heavily restricted).

Depending on the goods or services traded or transferred, sanctions are imposed for one year, two, or indefinitely. Chinese entities on which such sanctions have been imposed in the several years are listed in Appendix B .

Other Sanctions Regimes Affecting Certain Chinese Entities and Individuals

A number of Chinese entities and individuals are designated by the Department of the Treasury's Office of Foreign Assets Control (OFAC) as Specially Designated Nationals (SDN) for purposes of sanctions regimes relating to weapons proliferation, international terrorism, and illicit narcotics trafficking. In addition, a few are designated as SDN and "Non-SDN" because of their activities that run counter to U.S. law relating to events in Belarus, Burma, Iran, Iraq, North Korea, Syria, and Ukraine. Each of these sanctions regimes has different parameters—thresholds of activity that trigger designation and resulting requirements for U.S. citizens, financial institutions, and businesses to curtail or prohibit transactions and financial engagement—that derive from the legislation that establishes the restrictions. Generally, however, one can begin with the assumption that the 47 Chinese or China-located individuals and entities designated as SDN (as of the date of this memorandum) do not have access to any of their assets that are held in the United States and are restricted, if not fully prohibited, from engaging in trade and transactions with persons under U.S. jurisdiction. The Chinese or China-located individuals and entities designated as SDN and Non-SDN are listed in Appendix C .

Presidential Prerogative

Effective since October 1998, the President is authorized to freeze the assets of, prohibit any transactions with, and impose other restrictions (except those related to importation) afforded his office under the International Emergency Economic Powers Act on any Communist Chinese military company, or any company controlled by or affiliated with the People's Liberation Army (PLA), a Chinese government ministry, or an entity affiliated with the defense industrial base of China, that are operating directly or indirectly in the United States. To trigger this, the Secretary of Defense is required to identify the company or entity and notify Congress, the Director of Central Intelligence, the Attorney General, and Secretaries of State, the Treasury, Commerce, and Energy. There is no public information available as to whether this authority has ever been invoked.

Appendix A. Chinese Entities Identified by the Department of Commerce's Bureau of Industry and Security as Military End-Use Entities (15 CFR Part 744 Supplement 4) (as of August 3, 2016)

Supplement 4 to 15 CFR Part 744, compiled and administered by the Department of Commerce's Bureau of Industry and Security, identifies certain entities subject to license requirements for specified items under parts 744 and 746 of the Export Administration Regulations (EAR). License requirements for these entities include exports, reexports, and transfers (in-country) unless otherwise stated. The BIS revises the list on a periodic basis by adding new or amended notifications and deleting notifications no longer in effect. Supplement 4, as it appears in the EAR, includes addresses of the designated entities; this appendix retains only the references to cities and provinces, where available. Aliases of the primary designee are also retained in the table.

Appendix B. Chinese Entities Identified Under U.S. Law Relating to Illicit Trade in Goods and Services Controlled for Nonproliferation Reasons (as of August 3, 2016)

The President has delegated to the Secretary of State, who has in turn delegated to the State Department's Bureau of International Security and Nonproliferation, the authority to identify persons and entities engaged in illicit trade in goods and services controlled in furtherance of nonproliferation goals and obligations. Depending on the authority invoked (the second column in the table, below (key to abbreviations in note to table)), the entity may be denied access to U.S. government procurement contracts, foreign aid, and import and export licenses.

This list should not be considered comprehensive; infrequently, the State Department reports that it has made a determination related to weapons proliferation but publication of findings is contrary to U.S. national security interests.

Appendix C. Chinese and China-Located Specially Designated Nationals (as of August 12, 2016)

The Department of the Treasury's Office of Foreign Assets Control (OFAC) is tasked with designating Specially Designated Nationals (SDN) for a wide range of economic sanctions regimes—restricting transactions and in some instances access to assets held in the United States. This table shows the Chinese and China-located persons and entities subject to such restrictions for purposes relating to weapons proliferation, international terrorism, and illicit narcotics trafficking. In addition, Chinese and China-located persons and entities are designated as SDN and "Non-SDN" because of activities that run counter to U.S. law relating to events in Belarus, Burma, Iran, Iraq, North Korea, Syria, and Ukraine. Each of these sanctions regimes has different parameters—thresholds of activity that trigger designation and resulting requirements for U.S. citizens, financial institutions, and businesses to curtail or prohibit transactions and financial engagement—that derive from the legislation that establishes the restrictions. Generally, however, one can begin with the assumption that the 47 Chinese or China-located individuals and entities designated as SDN do not have access to their assets in the United States and are restricted, if not fully prohibited, from engaging in trade and transactions with persons under U.S. jurisdiction.