China Sanctions Intensify, Escalating Trade Risks – Analysis

By Michael Lelyveld

Western trade and investment interests in China are facing new threats as sanctions trigger retaliation, heightening tensions over human rights, national security and territorial control.

Since the start of President Joseph R. Biden’s term in office on Jan. 20, there have been several exchanges of new sanctions announced by the United States, U.S. allies and Beijing.

Within hours of Biden’s inauguration, China’s Ministry of Foreign Affairs announced sanctions against 28 ex-officials from the Trump administration, including former Secretary of State Mike Pompeo and former trade adviser Peter Navarro.

China charged that they had “seriously violated China’s sovereignty” by interfering in China’s “internal affairs.”

As vocal critics of China’s trade policies, cybersecurity snooping, intellectual property thefts, pandemic responses and military ambitions, the former officials were barred from Chinese territory and business dealings, along with their immediate families, companies and affiliated institutions.

The sanctions were quickly followed by statements seeking to make amends with Washington.

“With cooperation from both sides, the better angels in China-U.S. relations will beat the evil forces,” Foreign Ministry spokesperson Hua Chunying said.

But if China hoped for a new path to pursue its agendas with the Biden administration, it soon found it would have no easier course.

On March 17, one day before a high-level bilateral meeting in Alaska, U.S. Secretary of State Antony J. Blinken announced sanctions against 24 Chinese officials for their efforts “to unilaterally undermine Hong Kong’s electoral system” by enacting amendments to screen legislative candidates for their allegiance to Beijing.

Although the penalties were aimed at a limited number of government and party officials, the financial sanctions could have potentially far-reaching effects.

“Foreign financial institutions that knowingly conduct significant transactions with the individuals listed in today’s report are now subject to sanctions,” Blinken said.

While the impact remains uncertain, the announcement put China on the back foot, leaving it little choice but to proceed with the talks in Anchorage and hope for the best.

“In diplomatic terms, the timing of the action was pointed and clearly intentional, continuing a testy start to relations between the Biden administration and China after a tumultuous four years under President Donald J. Trump,” The New York Times said.

The sequence of events and official statements highlighted the relatively greater importance to China of starting the long, drawn-out process of another “strategic dialogue” with the new U.S. administration. Biden aides had firmly rejected such a label for the talks.

“This is not the resumption of a particular dialogue mechanism or the beginning of a dialogue process,” said a senior U.S. official in a background briefing for reporters two days before the Anchorage meeting.

Instead, it was an opportunity for laying out positions, “getting an understanding of each other, and then taking that back and taking stock,” the official said.

Greater expectations

Statements from the Chinese side suggested higher hopes for the exchange.

“It is not a normal way of hosting guests that the United States introduced the sanctions on the eve of the Chinese side’s departure for the dialogue,” the official Xinhua news agency quoted Foreign Minister Wang Yi as saying.

The sanctions were not the only move against China in the hours before talks began.

On March 17, the U.S. Commerce Department served subpoenas on “multiple” Chinese information and communications technology companies as part of an evaluation of security risks.

“Beijing has engaged in conduct that blunts our technological edge and threatens our alliances,” said Commerce Secretary Gina Raimondo in a statement reported by Reuters.

China acknowledged the difficulty of its position in response to the U.S. moves.

“The U.S. claimed that they are attending the Alaskan dialogue from a position of strength. But as long as China decides to have a dialogue, the courtesy will go first,” said an editorial in the Communist Party tabloid Global Times.

Instead of more talks, the Anchorage meeting appears to have started a process of action and reaction.

On March 22, more sanctions on Chinese officials followed with coordinated moves by the United States, the European Union, the UK and Canada, citing “serious human rights abuses” of Uyghurs and other ethnic minorities in Xinjiang.

The EU participation overcame years of reluctance to apply China sanctions.

“Unlike the United States, the EU has sought to avoid confrontation with Beijing, but the decision to impose the first significant sanctions since an EU arms embargo in 1989 following the Tiananmen Square pro-democracy crackdown indicates a change in posture,” Reuters said.

The EU policy shift is all the more remarkable because it threatened to head off European ratification of a bilateral investment treaty with China that took seven years and 15 rounds of talks to negotiate.

China retaliated against the Western penalties on March 22 and again on March 26, slapping sanctions on 10 European Parliament members, other individuals and rights groups, as well as nine UK lawmakers and four entities associated with the Uyghur rights cause.

China’s Foreign Ministry also designated members of the U.S. Commission on International Religious Freedom, Canadian lawmaker Michael Chong and the House of Commons Foreign Affairs subcommittee on human rights for retaliatory visa and financial sanctions related to Xinjiang.

Eye for an eye

The tit-for-tat penalties may have ushered in a new phase of U.S. and allied tensions with China, threatening an escalation that may not be easily reversed.

On Thursday, Raimondo announced bans against seven Chinese supercomputer developers, adding them to the U.S. Entity List for “activities that are contrary to the national security or foreign policy interests of the United States.”

Raimondo cited the contributions of the computer makers to “destabilizing military modernization efforts.”

On Friday, Foreign Ministry spokesperson Zhao Lijian said that “China will take necessary countermeasures to resolutely safeguard Chinese companies’ legitimate rights and interests.”

Trade and economic frictions have also followed from earlier decisions by Western clothing retailers including Sweden’s H&M and U.S.-based Nike to stop selling products made with cotton from Xinjiang, blaming forced labor practices and abuse in Uyghur internment camps.

China has responded with boycotts of the foreign-branded outlets, which it claims are the result of spontaneous consumer movements rather than blacklisting by the government.

The rapid succession of sanctions has raised questions about the effects on trade and investment in China after years of continuing growth despite rights abuses and policy conflicts that have been reported for years.

The sanctions on officials and groups have relatively little impact, but the implications may be serious, said William Reinsch, a former Commerce Department undersecretary in the Clinton administration, now Scholl chair in international business at the Center for Strategic and International Studies in Washington.

“Most of the sanctions are on individual companies and entities, so the overall effect is likely to be small. Indirect effects, however, are significant,” Reinsch said.

After years of reported rights abuses, the latest conflicts over the Uyghurs have become a wake-up call for foreign investment, sourcing and supply chain decisions.

“The best example is apparel, where companies are caught in the middle between trying to disentangle themselves from Chinese components in their supply chains, like cotton from Xinjiang, due to consumer and government pressures from Western countries, and suffering Chinese retaliation if they do so,” Reinsch said by email.

“China’s overreaction to the sanctions will cost companies market share and sales in China, which in some cases is a huge market for them. If they do nothing, however, they risk the ire of activists in the U.S. and Europe,” he said.

International retailers are facing anger no matter which way they turn.

“The global brands can protect their sales in North America and Europe, or preserve their markets in China. It is increasingly difficult to see how they can do both,” The New York Times said in another report this week.

“This will accelerate a trend toward shortening supply chains that began some time ago, Companies are increasingly looking for trusted, reliable partners, and China is not one of them,” Reinsch said.

The broad range of Western policy disputes with China may mean that any one of them could raise tensions and bring relations closer to the boiling point, calling more attention to investment and sourcing decisions.

“I don’t see an easy end to this,” said Reinsch.

“China is not willing to even acknowledge its behavior or admit that there might be a problem, so I don’t see easing the sanctions to be likely,” he said.