June 11, 2018

China's Use of Coercive Economic Measures

By Peter Harrell, Elizabeth Rosenberg and Edoardo Saravalle

Executive Summary

China has been a practitioner of economic statecraft throughout its history, and in recent decades since Deng Xiaoping opened the country in the 1970s. Today, one of President Xi Jinping’s central foreign policy initiatives, the Belt and Road Initiative (BRI), is a potentially trillion-dollar testament to Beijing’s commitment to using loans, infrastructure projects, and other economic measures as foreign policy tools. In the past decade, China has expanded its set of such economic instruments to include sticks, not just carrots. China has punished countries that undermine its territorial claims and foreign policy goals with measures such as restricting trade, encouraging popular boycotts, and cutting off tourism. These actions have caused significant economic damage to U.S. partners such as Japan and South Korea. The measures may also have long-term effects in deterring and shaping countries’ foreign policy interests that go well beyond the short-term economic costs.

Chinese use of economic coercion is likely to shape U.S. policy options in Asia and constrain both U.S. policymakers’ and companies’ maneuverability globally. Yet, the fact that China often relies on informal or extralegal measures to implement its economic coercion, the lack of a coordinated U.S. government response, and major methodological differences between Chinese and U.S. approaches to economic coercion have resulted in relatively limited study of this tool. This report sheds light on the nature and breadth of China’s coercive economic policies. It analyzes and classifies the major features of China’s economic coercion and its implications for the United States. It also offers preliminary recommendations for U.S. policymakers and stakeholders to begin addressing the challenge.

This paper draws its conclusions primarily from nine cases of Chinese economic coercion since 2010: seven cases where China acted alone and two where it joined a broader multilateral campaign of economic pressure. The cases point to Beijing’s sophistication in its use of coercion. China learns from previous experiences, adopting tactics that work and abandoning those that do not. Additionally, Beijing tailors each coercion campaign, finding pressure points in target countries and minimizing collateral damage on its own economy and population. China also deftly combines its economic coercion with economic inducements and other tools of statecraft, pairing its sticks with carrots and diplomatic negotiations. 

"Chinese use of economic coercion is likely to shape U.S. policy options in Asia and constrain both U.S. policymakers’ and companies’ maneuverability globally."

As China’s economy and its economic statecraft become more sophisticated, Beijing is sharpening and expanding its coercive economic toolkit. Its growing set of tools looks quite different from the wide array of U.S. tools. Washington relies on formal, published sanctions, trade controls, or investment restrictions. Instead, Beijing prefers approaches that do not legally link a foreign policy dispute to the coercive measures, creating public deniability and greater optionality for escalation and de-escalation. China typically imposes economic costs through informal measures such as selective implementation of domestic regulations, including stepped-up customs inspections or sanitary checks, and uses extralegal measures such as employing state media to encourage popular boycotts and having government officials directly put informal pressure on specific companies. 

The cases also illustrate key aspects of Chinese targeting. All of the cases studied where China acted alone involve China using economic coercion against democratic countries, and Beijing generally targets politically influential constituencies capable of pushing for policy change, regardless of whether or not the targeted constituency has any involvement in the policy to which China objects.

Finally, the report sheds light on the Chinese policy interests that trigger Beijing’s use of economic coercion. When China undertakes multilateral coercive economic measures, such as sanctions, Beijing has helped to reinforce global norms—for example, nonproliferation. Yet, far more commonly, when Beijing unilaterally uses its own coercive economic measures it does so to bolster its territorial claims and national sovereignty or to advance other core interests. China has targeted countries such as the Philippines for their challenges to China’s maritime claims and Norway for its alleged intrusion in Chinese domestic politics for the awarding of a Nobel Peace Prize to dissident Liu Xiaobo. Recently, as China’s market has grown ever more important to global companies, China has also begun targeting individual corporations with coercive measures if they fail to adopt Beijing’s preferred policy positions. For example, in early 2018 U.S. airlines began to experience retaliation for listing Taiwan as a separate country.

"Xi has made clear that under his continued leadership, China will take a more assertive posture abroad. Economic coercion will be part of this."

Though economic coercion is one of many facets of Chinese economic statecraft, U.S. policymakers must better understand it. Beijing’s use of coercive measures is growing in frequency and evolving in scope. Both China’s tools and the situations in which China is willing to use them are broadening as the country’s confidence increases. In the next decade, China’s relative economic power will expand, giving Beijing additional leverage over a more diverse set of countries and companies. 

Xi has made clear that under his continued leadership, China will take a more assertive posture abroad. Economic coercion will be part of this. Coercion also serves domestic political purposes for Beijing, which has cultivated rising nationalism domestically and which can use coercive economic measures to show domestic political audiences that China is acting to punish countries and companies that fail to conform to Beijing’s wishes.

It is possible that in the midterm Beijing will formalize some of its coercive economic measures, particularly if Beijing adopts a planned Export Control Law, though China is likely to continue relying on informal and extralegal measures for the majority of its economic coercion. Whether or not the measures are formal, however, the United States and other nations will need a formal response and must begin to formulate it immediately. Threatened countries will likely experience a growing sense of urgency to respond to Chinese economic coercion. 

"As China’s economy and its economic statecraft become more sophisticated, Beijing is sharpening and expanding its coercive economic toolkit."

U.S. policymakers need to initiate a response. The Trump administration should study the phenomenon to identify specific vulnerabilities in the United States and in partner nations. Building on these efforts, the administration should increase outreach to allies. Economic coercion is a global issue that cannot be addressed without adequate international information sharing and coordination. U.S. officials abroad can play an essential role by gathering currently unavailable data and encouraging foreign partners to take preemptive measures. The Trump administration should also begin to identify trade policy tools and other tools that can be used to build the resilience of partners to resist Chinese economic coercion.

The U.S. Congress should specifically highlight Chinese economic coercion through hearings and investigations. It should consider strengthening anti-boycott statutes and authorizing funding to compensate targets of Chinese coercive measures, at home and abroad. This approach could act as a deterrent by raising costs for China’s conduct. Capitol Hill should also work to fund innovation in key economic sectors. The more the United States becomes irreplaceable in the supply chains of the future, the harder it will be for China to use coercive measures against Washington. Private-sector actors should understand their exposure to Chinese economic coercion and limit their vulnerabilities through supply chain redundancy and market diversification. Finally, nongovernmental organizations should advance government efforts by supporting research on this topic. For too long Chinese economic coercion has escaped sustained scrutiny. The goal of this report is to begin spurring a global, coordinated response.

The full report is available online.

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  • 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...

  • 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...

  • Edoardo Saravalle

    Former Researcher, Energy, Economics, & Security Program

    Edoardo Saravalle is a former Researcher for the Energy, Economics, and Security Program at the Center for a New American Security (CNAS). At CNAS his work focused on the nati...

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