The U.S. government will shut down the Chinese consulate in Houston on Friday, further escalating its diplomatic rift with China. Last week, the Chinese government threatened to retaliate against “U.S. entities and individuals” after the Trump administration issued an executive order to punish Beijing over the controversial national security law for Hong Kong.
Will Beijing follow through on these threats — and does the Chinese government face any restraints in using economic coercion as a diplomatic tool? Here’s what you need to know.
Beijing has increasingly relied on economic coercion
In recent years, Japan, South Korea, Norway and the Philippines have all become targets of Chinese economic retaliation during disputes over territorial claims, the deployment of theater missile defense systems and support for Chinese dissidents. Beijing has increasingly relied on economic means to deter or punish foreign governments or companies that cross Chinese interests on these sensitive issues.
When the Trump administration agreed to sell Patriot missiles to Taiwan this month, China’s Ministry of Foreign Affairs announced Beijing would impose sanctions on Lockheed Martin Corp. the U.S. primary contractor. China’s state media suggests “the sanctions will likely feature the cutoff of material supply including rare earths” — a group of 17 metallic elements essential to high-tech products, including weaponry and smartphones.
China is the largest exporter of these minerals, and it isn’t the first time Beijing has entertained the idea of weaponizing its monopoly. Many reports claimed that in the 2010 Senkaku/Diaoyudao Islands dispute, China imposed a similar embargo to coerce Japan to release the detained Chinese trawler captain. However, Japanese import data make it difficult to interpret these claims.
Why does China care so much about the South China Sea? Here are 5 reasons.
Beijing is pragmatic about its commercial clout
But the Chinese government has also been selective in applying economic sanctions. Take the case of Australia, which endorsed an independent investigation in May into the origins of the new coronavirus. In retaliation, China adopted coercive measures, including a tariff on Australian barley exports, suspension of certain beef imports and threats to prevent its citizens from visiting Australia.
China is the largest export market for Australian beef and purchases roughly half of Australia’s barley exports, making these two products ideal targets. In contrast, China has not targeted Australian minerals — probably because Australian companies supply around 62 percent of China’s iron ore imports, far more than Brazil, the second-most important supplier. Underscoring this mutual dependence is the fact that China’s post-pandemic stimulus measures probably will include new construction projects — and greater demand for iron ore to produce steel.
When China has strong leverage, indicated by the degree of market dependence, and ample substitutes for the boycotted goods, it often opts to use economic coercion. Having alternative options to satisfy domestic consumers is equally crucial. In the cases of beef and barley, China can look to Russia — China expects to import 10,000 tons of beef this year from two Russian companies.
Beijing taps into grass-roots fury
Besides state-directed sanctions, grass-roots anger can give the Chinese government flexibility to send a strong message via consumer boycotts. Chinese Foreign Ministry spokesperson Zhao Lijian cited violation of “inspection and quarantine requirements” to explain the suspension of beef from four Australian companies — while China’s ambassador to Australia threatened the “Chinese public could avoid Australian products and universities.”
How coronavirus changes the political outlook in China and the U.S.
Similarly, during tensions with Japan in 2012 over the Diaoyu/Senkaku islands, Beijing encouraged consumer boycotts against Japanese goods while giving permission for street demonstrations in which angry protesters damaged Japanese-branded companies in China. Japanese-branded automobiles suffered significant market share losses in China. Given deep-rooted anti-Japanese sentiment in Chinese society, Gao Hong, a Chinese scholar, observed, “Japan’s provocation gave rise to the Chinese public’s spontaneous boycott, and public opinion deserves respect.”
In 2020, despite rising anger and disaffection with the United States, grass-roots action against U.S. companies seems unlikely. China is more likely to rely on tit-for-tat state-led sanctions. Here’s an example. The U.S. condemned the human rights situation in Xinjiang and a new U.S. law sanctioned four Chinese officials with responsibility for policy and security in the region. Beijing’s response was to impose sanctions on four U.S. officials close to President Trump — all of whom have been critical of the situation in Xinjiang.
In recent disputes over U.S. actions against Huawei and the protests in Hong Kong, Chinese social media put out sporadic calls to retaliate by boycotting Apple. However, systematic coercion from the Chinese government appears counterproductive, at least when it comes to Apple, which is a key manufacturing partner in China. A state-directed retaliation probably would risk accelerating Apple’s move to “diversify their manufacturing base” and shift production away from China.
America weaponized the global financial system. Now other countries are fighting back.
Weaponized interdependence can backfire
Beijing takes a calculated risk in wielding economic coercion. Scholars like Daniel Drezner have long warned that the Chinese government cannot credibly threaten to exercise its financial influence — say, by slashing its holdings of U.S. Treasurys — without crippling China’s own interests in the process. Such mutual dependency poses constraints on China’s financial statecraft.
Efforts to “weaponize interdependence” can backfire by prompting countries to reduce their mutual dependence and accelerate the process of decoupling. Even when China’s economic statecraft helps advance its immediate goal, such as various apologies by multinational companies, foreign businesses may resort to risk-management strategies, including diversification of manufacturing and markets.
Weighing against Beijing’s desire to use commerce as a weapon are concerns about stabilizing the economy and preserving foreign investment. In April, foreign direct investment in China increased 8.6 percent over 2019 levels to $10.14 billion, largely driven by increased investment from Southeast Asian nations. A month later, China’s ambassador to the European Union emphasized China’s sincere efforts for reaching a comprehensive E.U. investment agreement.
Despite tensions at the national level, local governments in China still remain “very welcoming” to U.S. and other foreign investors. The Ministry of Commerce also urged local authorities to better accommodate foreign companies in their efforts to restart operations amid the pandemic. With Beijing looking at foreign investment as part of China’s pandemic economic recovery, China’s economic retaliation measures may turn out to be more symbolic than powerful.
The TMC newsletter has moved! Sign up here to keep receiving our smart analysis.
Gloria Xiong is a PhD student in the Department of Government at Cornell University. Her research focuses on China’s economic statecraft and nationalism.