The China Challenge: Economic Sticks and What To Do About Them

The Senate Foreign Relations Committee is holding a three-part hearing series under the 'Subcommittee on East Asia, The Pacific, and International Cybersecurity Policy' on a topic it calls "The China Challenge." The first hearing "The China Challenge, Part 1: Economic Coercion as Statecraft," was held on July 24, 2018, the second "The China Challenge, Part 2: Security and Military Developments" was held on September 5, 2018 and the third is pending.

The first hearing was attended by two witnesses, Dan Blumenthal of American Enterprise Insititute (AEI) and Ely Ratner of Center for a New American Security (CNAS). During his testimony, Mr. Ratner presented a report prepared by CNAS titled "China's Use of Coercive Economic Measures." For a better understanding of what is meant by coercive economic measures, here is part of the introduction from Chapter 1 of the report:

China has long used economic statecraft as a pillar of its foreign policy. Historically, Chinese leaders used economic inducements ranging from gifts to the promise of loans and investments to solidify relationships with foreign governments and advance Chinese influence. [...]

In 2013, China launched the Belt and Road Initiative (BRI), a potentially $1 trillion, almost 70-country global infrastructure development initiative that is likely to significantly expand Chinese influence from Asia to Europe. [...]

Over the past decade, however, China has also used the “sharp end” of its economic statecraft, turning to coercive economic measures as a tool. The authors define coercive economic measures as China’s restrictions on trade or investment intended to impose financial or economic costs on a target in pursuit of a foreign policy objective or to influence a foreign government to offer policy concessions to China. As used here, coercion indicates the use, or threatened use, of economic “sticks,” but not the use of positive inducements or other tools, as commonly included in academic definitions.

The whole report covers the following topics: introduction and background, methodology, successes and failures and the future, recommendations and conclusion, and economic coercion case studies.

Here are three of the six key takeaways from Chapter 2 "Methodology of China’s Coercive Economic Measures":

• China uses a range of coercive economic measures, including import and export restrictions, popular boycotts, restrictions on Chinese tourism, investment restrictions, restrictions on specific companies, and informal pressure on companies.
• China typically implements coercive economic measures using informal and/or extralegal measures, rather than formal financial sanctions. For example, China will selectively apply fire safety or food safety regulations on a targeted country or company, rather than placing the target on a formal, public blacklist. This gives China plausible deniability and greater flexibility to escalate and de-escalate.
• Most Chinese coercive economic measures rely on the size and importance of the Chinese market as the source of coercive leverage.

According to The Economist, the global market is highly dependent on Chinese manufacturing. "More than half of the world’s mobile phones are made in China, along with almost all of the printed circuit boards..." and "Chinese factories install two-fifths of the world’s semiconductors." CNAS' report makes a total of 19 recommendations for dealing with China's potential economic coercion. The recommendations below mention the supply chain directly.

Recommendations for the Trump Administration (1-12)

6. Explore trade policy remedies to Chinese economic coercion. There are several ways the Trump administration could use trade policy to build resilience against Chinese economic coercion. By deepening trade ties between the United States and countries vulnerable to Chinese economic coercion, the United States can offer an important alternative market. Also, over time, the United States can use trade policy to encourage the development of global supply chains and other trading flows and relationships in ways that reduce Chinese economic leverage. Moreover, in certain cases WTO and other trade policy remedies can be used to challenge Chinese coercive economic measures, though the structure of many Chinese measures can make WTO challenges relatively difficult.

9. Embrace digitization technology as a strategy for securing and diversifying trade. Lack of transparency in global trade data inhibits the full understanding of trade flows and increases the potential for China to use informal trade measures to coerce smaller trading partners, escape detection, and plausibly deny economic coercion. U.S. government officials, in particular in the U.S. Department of the Treasury, should work with East Asian allies who engage in significant trade with China, as well as the private sector active in the United States and East Asia, to establish a dialogue on digitizing trade technology, with special focus on e-records for custom documents and trade finance instruments. This dialogue should seek to bring security leaders and trade regulators on the same page about the use of this technology to understand supply chain and logistics facilitation, and to track contracts and transactions. This constituency should also seek to support broad adoption of such technologies for transparency and coordination around unfair or arbitrary Chinese trade activity. Better data collected through these processes may additionally bolster potential use of the WTO as a recourse mechanism.

Recommendations for Congress (1-5)

4. Foster U.S. leadership in critical U.S. economic sectors. U.S. leadership in transformation technologies will insulate the country from Chinese economic coercion by making the United States a key participant in international cross-border supply chains and therefore difficult for China to target with coercion. Congress should engage in targeted regulatory reform to stimulate U.S. primacy in key economic sectors. Congress should hear testimony and request strategy documents from U.S. regulatory bodies to consider tax holidays, or streamlined regulatory processes, for critical technology and financial services startup companies to stimulate their development and continued presence in the United States. Officials should focus near-term emphasis on supporting semiconductor, vehicle and industrial battery storage technology, and blockchain-based financial technology developments, among others. Investing in these sectors, where China is seeking to develop globally dominant “national champion” companies, will help reduce future Chinese coercive economic leverage.

Recommendations for the Private Sector and Nongovernmental Organizations (NGOs) (1-2)

1. Private multinational companies should ensure that they are not overly reliant on Chinese suppliers or on Chinese market. U.S. and international companies should understand the risks they face from Chinese economic coercion and should work to ensure that they have resilient supply chains and markets if targeted by Chinese economic coercion. Trade associations and chambers of commerce can take a leadership role on this, and companies should work closely with U.S. government officials to discuss and catalog specific vulnerable goods and services. Private-sector leaders should take an active role in educating U.S. government leaders about their experience with perceived Chinese economic coercion and ideas for coordination with the government on resiliency measures.

In his Senate testimony yesterday, VP & Director of Studies @elyratner referenced @CNASdc's "China's Use of Coercive Economic Measures" report by our experts @esaravalle @Energy_Liz & @petereharrell. Read it here: https://t.co/nmuhAsVHPj pic.twitter.com/qJAFzJ63f6

— CNAS (@CNASdc) July 25, 2018