April 24, 2020

A New Arsenal for Competition

Coercive Economic Measures in the U.S.-China Relationship

By Elizabeth Rosenberg, Peter Harrell and Ashley Feng

Executive Summary

The United States and China have long used coercive economic measures to advance both economic and foreign policy objectives. In recent years, however, both countries have turned to coercive economic measures as mainstream instruments of foreign policy and national security policy, and increasingly have deployed coercive economic measures against each other.

For the United States, China’s economic scale and global interconnections make it a fundamentally different type of target for coercive economic measures than the comparatively smaller and less sophisticated economies that have been primary targets of U.S. economic coercion in the past. The United States cannot simply isolate China from the global economy. Instead, it must adopt a more strategic focus on limiting Chinese actions in areas significant to U.S. national security and shoring up economic and technology arenas where the United States maintains lasting leverage.

Over the past several years, the United States has deployed an array of coercive economic measures against China. The most prominent of these have been the tariffs on approximately two-thirds of U.S. imports from China. The tariffs remain largely in place despite implementation of the Phase One trade deal that the United States and China signed in January 2020. But the United States also has developed and deployed an increasingly sophisticated set of other coercive economic tools that will play a prominent role in U.S.-China relations over the years ahead, regardless of whether the United States and China fully implement the Phase One deal and reach a broader Phase Two trade agreement. Those other coercive economic tools include export controls, restrictions on U.S. imports to secure U.S. supply chains, heightened scrutiny of Chinese investment in the United States, sanctions, and stepped-up law enforcement measures against Chinese intellectual property (IP) theft and other Chinese activities in the United States. This expanding set of measures serves a broadening array of U.S. policy goals, including economic objectives, foreign policy goals, and the maintenance of America’s technological edge.

The U.S. record of success in the use of these coercive economic measures has been mixed. While tariffs and other measures have succeeded in putting some macroeconomic pressure on China, they have not extracted fundamental concessions from Beijing. Targeted sanctions and law enforcement measures similarly have had economic impacts on some Chinese companies, but other Chinese companies have demonstrated an ability to weather U.S. economic coercion. To be effective in translating economic coercion into policy change by China, the United States needs to better integrate its coercive measures with each other and with other policies, better signal intentions and escalation, more rigorously assess impacts and costs, and galvanize allied support and coordinated action.

For its part, China appears to recognize a balancing act between limiting economic ties with foreign partners in some domains and maintaining them in others. China has sought to distance certain Chinese economic sectors, particularly high-tech manufacturing, from the United States in some areas, investing heavily in domestic capacity development. In other areas where China must rely on foreign partners for technology, IP, or manufacturing, or where China does not appear to see a clear interest in severing trade, Beijing has sought to keep trade and investment flows moving in an unencumbered fashion. As for the United States, this is a dynamic policy environment.

In recent years, both the United States and China have turned to coercive economic measures as mainstream instruments of foreign policy and national security policy and increasingly have deployed coercive economic measures against each other.

Meanwhile, China has been evolving its use of economic coercion against the United States and its allies. While China generally has been restrained in its use of coercive economic measures directly against the United States or U.S. targets, China increasingly has targeted U.S. allies, including for supporting U.S. policy priorities. For example, China imposed trade restrictions on Canada following its detention of Huawei Chief Financial Officer Meng Wangzhou in 2018, and on Australia in 2019 in response to rising tensions over several issues, including Australia’s decision to ban Huawei from Australian 5G telecommunications networks. China also has threatened economic coercion, including through downgraded economic and trading ties, against other countries that are considering whether to ban Huawei from 5G networks. Chinese coercive economic measures increasingly target individual companies and individuals in addition to countries. An example is the suspension of broadcasts in China of National Basketball Association (NBA) games last year after a prominent team official criticized China’s policy in Hong Kong.

So far, China’s record in the use of economic coercion is mixed. It has caused some of its targets to change their policies to be more favorable to Beijing’s preferences, and in other instances the targets of China’s coercion have proved relatively more resilient. Clearly, Beijing is rapidly innovating, testing different sources of leverage and modalities of economic coercion, and learning across cases. With the expanding range of circumstances in which China deploys economic coercion, the United States needs to systematically assess its vulnerabilities and develop a coherent set of policy responses.

Beijing is rapidly innovating, testing different sources of leverage and modalities of economic coercion, and learning across cases.

This report makes a number of key recommendations for U.S. policymakers in the executive branch, Congress, and the private sector. At a basic level, the United States needs to ensure that it is making key investments domestically to maintain the U.S. competitive edge. But it also needs to strengthen the coercive U.S. economic tool kit including by improving assessments of U.S. vulnerabilities to Chinese economic coercion and of the impacts of U.S. measures, by being clearer about U.S. objectives, and by signaling U.S. policy both to China and to allies. The United States needs to strengthen the government institutions that develop and deploy coercive economic measures and continue to modernize the tool kit available to policymakers. Finally, the United States needs to strengthen cooperation with allies and with the U.S. private sector, both of which are essential to the long-term success of U.S. coercive economic measures against China.

Introduction

Key Takeaways

  • Both the United States and China use coercive economic measures as a central tool of foreign policy, and coercive economic measures play an increasingly important role in the bilateral U.S.-China relationship.
  • U.S. coercive economic measures directed at China include not only the tariffs that President Donald Trump has imposed on approximately two-thirds of U.S. imports from China, but also a range of export controls, import restrictions, limits on investment, and targeted measures against individual companies.
  • Coercive economic measures have the potential to dramatically impact the bilateral economic and strategic relationship, regardless of the Phase One U.S.-China trade deal.

The United States and China have long used coercive economic measures to advance national interest and policy aims. In recent years, however, both countries have turned to coercive economic measures as mainstream instruments of foreign policy and national security policy, and, increasingly, have deployed coercive economic measures against each other.

For both the United States and China, market power, financial flows, and supply chains provide fundamental sources of leverage that undergird economic coercion. As China has emerged as the United States’ leading strategic competitor, it comes as no surprise that policy leaders in Washington and Beijing increasingly are deploying their economic muscle to advance policy goals and engage one another. China’s enormous consumer market, purchasing power, role in supply chains, and ability to provide capital afford Beijing significant sources of coercive leverage. For Washington policymakers, the size of the U.S. market, the preeminence of U.S. capital markets, a technology edge, and the U.S. role in the international financial system are vital areas of economic advantage. Policy elites in the two countries have honed in on these dynamics, which give the burgeoning bilateral competition and coercion its distinctively economic and high tech character.

This report defines coercive economic measures as restrictions—on trade, investment, and financial flows—intended to impose economic costs on a target in pursuit of strategic objectives or to influence a foreign government, group, or individual to offer policy concessions. These restrictions often complement, but are distinct from, positive economic inducements that are also used to sway policy and cultivate political leverage, such as foreign aid, development projects, and preferential trade agreements.

Over the past three years, the United States has deployed coercive economic measures against China in pursuit of economic objectives, notably the tariffs that President Trump has imposed on approximately two-thirds of all U.S. imports from China. Those tariffs enabled the United States to gain leverage for the recently concluded Phase One trade deal, and the Trump administration hopes to leverage the tariffs to reach a broader Phase Two deal in the future. But the United States also has increasingly deployed a range of other coercive economic measures against China, including trade controls, investment restrictions, and targeted sanctions, in pursuit of foreign policy and national security objectives, as well as part of a campaign to maintain U.S. preeminence across a range of critical high technologies while blocking Chinese dominance of global 5G networks. These objectives advance both U.S. economic and national security goals.

President Donald Trump and Chinese Vice Premier Lui He signed agreements of the Phase One trade deal between the United States and China, which cuts some U.S. tariffs imposed last year and commits China to purchases of U.S. farm, energy, and manufactured goods while addressing aspects of disputes over intellectual property and market access. (Mark Wilson/ Getty Images)

Between the end of the Second World War and approximately a decade ago, China deployed economic coercion primarily in pursuit of its economic ambitions, while largely adhering to a stated policy that sanctions and other economic tools deployed for foreign policy reasons should be done only in a multilateral context. Over the past decade, however, China has increasingly begun to deploy economic coercion to advance Chinese national security goals. This trend appears to have grown across the past several years.

Both the United States and China have employed experimentation and creativity in their recent use of economic coercion. They have expanded their respective tool kits, with the United States resurrecting tariff tools that had been little used since the 1990s and creating new tools to restrict high-tech exports, to diversify U.S. supply chains, and to limit financial flows between the two countries. China has aggressively deployed tariffs in response to U.S. actions, expanding its weaponization of informal market access restrictions to target countries including Canada and Australia. China furthermore is taking steps toward establishing new formal policy instruments, such as an unreliable entity list and developing social credit scores, that could be weaponized against non-Chinese companies that do not adhere to Beijing’s global policy priorities.

Yet despite the rapid growth in coercive economic tools and tactics by both Washington and Beijing, U.S. policymakers have yet to develop a strategy for deploying U.S. coercive economic tools against China. While senior U.S. policymakers have coordinated the deployment of different coercive economic tools to a certain degree, they do not appear to have a coherent strategy or a practice of clearly signaling Beijing. Practitioners appear to have, at best, a loose understanding of modeling and scenario analysis about the capacity, limits, and implications of different coercive economic tools. The comparative absence of modeling and strategy across tools, combined with both countries’ aggressive and at times internally incoherent stated positions, has significant negative ramifications for U.S.-China economic competition, including economic loss, alienation of allies, diminishment of democratic values, and others.

To be sure, at times individual measures of U.S. economic coercion are defined by clear policy objectives and explicit legal parameters, such as the deployment of export restrictions on several Chinese artificial intelligence and surveillance firms over suspected involvement in China’s detention of some one million members of the Uyghur minority group. But other U.S. coercive economic measures have been deployed without consensus on the ultimate policy goal.

For example, while the legal notice announcing restrictions on exports to China’s national champion telecommunications firm Huawei suggested that the restrictions were linked to Huawei’s alleged violations of U.S. sanctions on Iran, other U.S. public rhetoric suggested the measures were linked to China’s 5G telecommunications ambitions, and President Trump himself suggested they could be resolved as part of a trade deal with China. Sanctions experts often call out ambiguity around the ultimate goal with these financial restrictions. Indeed, even with the tariffs that the administration deployed against China in the context of the trade war, the administration sometimes appeared to be divided about whether it was genuinely seeking trade concessions from China or whether it simply wanted to decouple the U.S. and Chinese economies.

Looking at Chinese economic coercion, Beijing traditionally has relied on informal and undeclared measures, carried out through bureaucratic stalling, license and visa denials, unannounced inspections, and boycotts to hamper trade flows and stoke business uncertainty. However, over the past two years, Beijing also has taken steps to formalize some coercive economic measures, even while continuing to deploy informal ones in many cases. For example, in the context of the trade war, China’s retaliation generally has taken the form of formal tariffs on imports from the United States, while China has downplayed the use of informal retaliatory measures, such as customs slowdowns, against U.S. companies. China’s social credit scores and unreliable entity list, when finalized, also will be formal measures. But China has continued to rely primarily on fabricated quality and safety concerns and other informal measures when it has applied economic coercion on other countries, such as Australia and Canada.

In many cases, policymakers in both Beijing and Washington see value in having ambiguity surround the goals for use of coercive economic coercion toward one another, and value flexibility in their implementation. This approach accommodates deniability and low levels of intergovernmental coordination. However, when the world’s two largest economies lack clarity in the purpose and modalities of coercive economic measures deployed against each other, there is an elevated potential for unintentional escalation and a heightened perception of risk. This is a natural deterrent to investment, commerce, and flow of people, and it muddles the potential for success in achieving foreign policy aims.

As an operational matter, both the United States and China frequently use economic coercion unilaterally. For the United States, the unilateral character in the use of economic coercion, which occurred to a limited extent during the Clinton, Bush, and Obama presidencies, has expanded dramatically under President Trump. In recent years, for example, U.S. unilateral coercive economic measures have had meaningful economic impacts on Iran, Venezuela, Turkey, and other smaller economies. However, when it comes to China, a near-peer economy that is the largest trading partner of dozens of countries globally, the record of unilateral measures has been more complex.

For example, although U.S. tariffs contributed to an approximately 20 percent fall in Chinese exports to the United States, growth elsewhere meant that China’s overall global exports in 2019 were flat, rather than negative, compared to 2018. Similarly, Chinese telecommunications giant Huawei reported increased revenues in 2019 compared to 2018 despite the U.S. restricting exports to the company. Strong growth within China offset flat sales elsewhere. The reality is that when the United States has acted unilaterally China has demonstrated an ability to reorient supply chains and mitigate the effects of unilateral U.S. economic coercion. If the United States is able to coordinate with allies to support and complement economic coercion directed at China, the United States will be more forceful and more effective in its efforts. These dynamics appear likely to continue in the future and necessitate an evolution in political analysis and strategic planning to accommodate the new field of international competition.

For practitioners and observers of strategic competition between the United States and China, as well as for regional, legal, and economic experts, it is important to give names and definition to the tools and modalities of U.S. and Chinese economic competition. This includes explaining and socializing the various specific tools of economic coercion used by both countries, describing what they can achieve, and what they cannot, in bilateral relations. Doing so clarifies for the United States, China, and others what coercive actions are moderate and what are severe, what escalation or de-escalation may look like, and how economic coercion may be used alongside other tools of national power. This in turn will help foreign policy makers to achieve greater clarity in signaling and thus avoid unintentional or uncontrolled escalation or consequences.

Against this backdrop, policymakers in the United States, China, and elsewhere need to expand and formalize an understanding of the statecraft and strategy of contemporary economic coercion in international affairs. This report represents an effort to contribute to this policy work. It lays out an analysis of economic coercion in the U.S.-China relationship, including a description of the tools and modalities of coercion and the rationale and catalysts for use. It goes on to offer a brief assessment of the state of U.S. strategy associated with the use of economic coercion. The report concludes with an exposition of policy principles and specific recommendations for U.S. leaders to adopt to better frame the use of economic coercion in competition with China. With such policy adaptations, and foundational analysis like that offered in this report, the United States will be better placed to outline realistic and achievable policy goals, offer clearer signals to China and others about use of economic clout in the conduct of foreign policy, and improve the resiliency of the United States and its partners to Chinese uses of economic coercion in the coming years.

SELECTED STATISTICS ON THE U.S.-CHINA ECONOMIC RELATIONSHIP

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  1. This definition of coercive economic measures is the same as the definition used by Elizabeth Rosenberg, Peter Harrell, and Edoardo Saravalle in an earlier work on China’s use of coercive economic measures, https://www.cnas.org/publications/reports/chinas-use-of-coercive-eco-nomic-measures.
  2. See Charles Wolf, Jr., Xiao Wang, and Eric Warner, “China’s Foreign Aid and Government-Sponsored Investment Activities,” RAND Corporation, 2013, https://www.rand.org/content/dam/rand/pubs/research_reports/RR100/RR118/RAND_RR118.pdf; Scott Kastner, “Buying Influence? Assessing the Political Effect of China’s International Trade,” Journal of Conflict Resolution, 60 no. 6 (2016), 980–1007; Axel Dreher, Andreas Fuchs, Bradley Parks, Austin M. Strange, and Michael J. Tierney, “Apples and Dragon Fruits: The Determinants of Aid and Other Forms of State Financing from China to Africa,” AidData, October 2015, http://docs.aiddata.org/ad4/files/wps15_apples_and_dragon_fruits.pdf.
  3. Peter Harrell, Elizabeth Rosenberg, and Edoardo Saravalle, “China’s Use of Coercive Economic Measures,” CNAS, June 11, 2018, https://www.cnas.org/publications/reports/chinas-use-of-coercive-economic-measures.
  4. Ely Ratner, Daniel Kliman, Susanna Blume, Rush Doshi, Chris Dougherty, Richard Fontaine, Peter Harrell, Martijn Rasser, Elizabeth Rosenberg, Eric Sayers, Daleep Singh, Paul Scharre, Loren DeJonge Schulman, Neil Bhatiya, Ashley Feng, Joshua Fitt, Megan Lamberth, Kristine Lee, and Ainikki Riikonen, “Rising to the China Challenge: Renewing American Competitiveness in the Indo-Pacific,” CNAS, January 2020, https://s3.amazonaws.com/files.cnas.org/documents/CNAS-Report-NDAA-final-6.pdf?m-time=20200116130752.
  5. Noah Barkin, “The U.S. Is Losing Europe in Its Battle With China,” The Atlantic, June 4, 2019, https://www.theatlantic.com/international/archive/2019/06/united-states-needs-europe-against-china/590887/; Charles W. Boustany, Jr. and Aaron L. Friedberg, “Answering China’s Economic Challenges: Preserving Power, Enhancing Pros-perity,” NBR Special Report 76 (The National Bureau of Asian Research, February 2019); and Charles W. Boustany Jr. and Aaron L. Friedberg, “Partial Disengagement: A New U.S. Strategy for Economic Competition with China,” NBR Special Report 82 (The National Bureau of Asian Research, November 2019).
  6. U.S. Department of Commerce, Bureau of Industry and Security, “Addition of Certain Entities to the Entity List,” Federal Register 84 no. 196 (October 9, 2019), 54002.
  7. See Cecilia Kang and David E. Sanger, “Huawei Is a Target as Trump Moves to Ban Foreign Telecom Gear,” The New York Times, May 15, 2019, https://www.nytimes.com/2019/05/15/business/huawei-ban-trump.html; Doina Chiacu and Stella Qiu, “Trump says ‘dangerous’ Huawei could be included in U.S.-China trade deal,” Reuters, May 23, 2019, https://www.reuters.com/article/us-usa-trade-china/trump-says-dangerous-huawei-could-be-included-in-u-s-china-trade-deal-idUSKCN1ST0PA; and U.S. Department of Commerce, Bureau of Industry and Security, “Addition of Entities to the Entity List,” Federal Register 84 no. 98 (May 21, 2019), 22961.
  8. Donald Trump (@realDonaldTrump), “. . . We don’t need China and, frankly, would be far better off without them . . . Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA. . . .” August 23, 2019. 10:59 a.m. Twitter.
  9. Richard Nephew, “The Hard Part: The Art of Sanctions Relief,” The Washington Quarterly, 41 no. 2 (Summer 2018), 63–77; Elizabeth Rosenberg and Jordan Tama, “Strengthening the Economic Arsenal,” CNAS, December 16, 2019, https://www.cnas.org/publications/reports/strengthening-the-economic-arsenal.
  10. Kevin Brueninger, “US does not want to ‘decouple’ from China, Vice President Mike Pence says as trade talks intensify,” CNBC, October 24, 2019, https://www.cnbc.com/2019/10/24/us-does-not-want-to-decouple-from-china-vice-president-mike-pence-says.html.
  11. Elizabeth Rosenberg, Peter Harrell, and Edoardo Saravalle in an earlier work on China’s use of coercive economic measures, https://www.cnas.org/publications/reports/chinas-use-of-coercive-economic-measures; Ketian Vivian Zhang, “Chinese non-military coercion—Tactics and rationale,” Brookings Institution, January 22, 2019, https://www.brookings.edu/articles/chinese-non-military-coercion-tactics-and-rationale/.
  12. Yuan Yang and Daniel Shane, “Huawei sees growth in revenues and 5G contracts despite US ban,” Financial Times, October 16, 2019, https://www.ft.com/content/5f3c7f68-efdd-11e9-ad1e-4367d8281195.

Authors

  • Elizabeth Rosenberg

    Senior Fellow and Director, Energy, Economics and Security Program

    Elizabeth Rosenberg is a Senior Fellow and Director of the Energy, Economics, and Security Program at the Center for a New American Security. In this capacity, she publishes a...

  • Peter Harrell

    Adjunct Senior Fellow, Energy, Economics and Security Program

    Peter Harrell is an adjunct senior fellow at the Center for a New American Security, where he focuses on the intersection of economics and national security. Research interest...

  • Ashley Feng

    Research Associate, Energy, Economics, and Security Program

    Ashley Feng is a research associate for the Energy, Economics, and Security program at the Center for a New American Security. Her research interests include U.S.-China trade ...

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