Elephants in the Room

Economic Coercion, with a Chinese Twist

China has begun increasingly relying on economic coercion to pressure its neighbors and threaten U.S. interests in the Pacific.

This photo illustration taken on January 6, 2017 shows Chinese 100 yuan notes in Beijing 
China just raised the exchange rate for the yuan against the US dollar by 0.92 percent from the previous day, the biggest one-day increase in more than 11 years. / AFP / FRED DUFOUR        (Photo credit should read FRED DUFOUR/AFP/Getty Images)
This photo illustration taken on January 6, 2017 shows Chinese 100 yuan notes in Beijing China just raised the exchange rate for the yuan against the US dollar by 0.92 percent from the previous day, the biggest one-day increase in more than 11 years. / AFP / FRED DUFOUR (Photo credit should read FRED DUFOUR/AFP/Getty Images)

During the campaign and through the early days of the Trump administration, policymakers and pundits have zeroed in on the U.S. economic relationship with China, in particular whether Beijing artificially manipulates its currency and whether the terms of America’s economic engagement are “fair.”

While important, this focus misses Beijing’s foray into other, powerful forms of economic statecraft. China has begun increasingly relying on economic coercion — much in the same way the United States has in the last two decades — to pressure its neighbors and threaten U.S. interests in the Pacific. For example, in response to the prospective deployment of the United States’ Terminal High Altitude Area Defense (THAAD) missile system in South Korea — designed to protect a U.S. ally from North Korea — China has limited commercial flights to and from South Korea as a way to increase economic pressure on Seoul and signal its displeasure with the planned deployment.

This move parallels increased Chinese economic pressure on South Korean conglomerate Lotte Group, a holding company that agreed to allow the United States to use some of its property in South Korea to base the THAAD system. Subsequently, Chinese regulators launched coordinated investigations into the company’s operations in China, a move which analysts believe was designed to increase economic pressure on a major South Korean business and to cause it to rethink its decision to provide property for the missile defense system.

If this story seems familiar, it should. In recent years, China has gone to school on the impressive record of U.S. economic statecraft and sanctions and has followed suit. Yet as Peter Feaver and I noted in a report for the Center for a New American Security in fall 2015, China’s sanctions strategy is often more subtle; instead of applying blanket sanctions against target states to coerce changes in their behavior, China creates coercive leverage with regulations, purchasing decisions, the refusal to allow the import of certain goods into Chinese markets, and limiting exports of strategic materials to the markets of its adversaries.

Notable examples of Beijing’s willingness to use its economic clout for political ends include the Chinese restriction of exports to Japan of rare earth minerals in 2010 following the arrest of a Chinese ship captain after he rammed a Japanese Coast Guard vessel in the disputed maritime region; as well as a 2012 dispute with the Philippines over Chinese fishermen operating in the Scarborough Shoal, where authorities in Beijing imposed tighter measures on agricultural imports from the Philippines, and in particular on bananas. Given the importance of bananas and other agricultural exports for the Philippine economy, China’s economic pressure convinced Manila to settle the dispute quickly.

But China’s use of economic coercion — and the threats it may pose to U.S. interests — is not limited to sanctions-like measures that prevent access to Chinese markets. In recent years, Chinese direct investment into the United States has increased significantly, and while the vast majority of this investment is innocuous and ultimately a boon to the U.S. economy, there are reasons to be concerned. For one, China has tried to engage in notable purchases of property on or near U.S. military installations, such as when the Chinese-owned Ralls Corporation attempted to acquire a facility located next to a U.S. naval weapons systems training facility in Oregon. Second, Chinese state-owned companies have attempted to purchase elements of our allies’ critical infrastructure, raising concerns about leverage that Beijing could exert on our partners during crises and conflict. In one recent example, Australia blocked a Chinese state-owned enterprise’s attempt to purchase a majority share in Ausgrid, the Australian state-owned power grid. The Australian government, when reviewing the sale, concluded that in the event of a conflict, Chinese ownership of critical infrastructure could seriously undermine Australia’s national security.

In recent weeks, legislators on Capitol Hill and administration officials have begun seriously thinking through how to blunt threatening Chinese strategic investment into the United States. While the United States should broadly encourage foreign investment, it can also take additional measures to limit threatening efforts.

As suggested my recent report for the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies, the United States could adjust the scope of the Committee on Foreign Investment in the United States (CFIUS) — the interagency body tasked with reviewing the acquisition of U.S. companies for national security concerns — to impose a mandatory submission requirement for transactions involving Chinese state-owned enterprises and U.S. technology firms. (Under current U.S. law, filing information about proposed transactions to CFIUS is optional.)

Likewise, Congress could create a CFIUS subcommittee focusing specifically on Chinese foreign investment into startups and high-tech that could pose national security risks in the medium to long-term. Such a subcommittee would help blunt China’s ability to invest in U.S. companies before they either obtain the developed technology or shutter U.S. companies that may be developing defense-related technologies important for the United States.

The Trump administration should also work with like-minded countries — for example Canada, Australia, New Zealand, and the United Kingdom — to share information about China’s strategic investments, strategies, and actions, as a way to ensure that our allies and partners are not subject to future coercion.

This information sharing should not be limited to Beijing’s strategic investments, however. Congress and the administration should also pay close attention to China’s continued use of economic sanctions-like measures that are aimed at pressuring South Korea, Japan, and other countries in the region. In particular, the administration could establish a formal feedback mechanism through the State Department for countries to report formal and informal Chinese attempts to exert economic pressure.

In such cases, the United States should be prepared to assist its allies if they are threatened with measures. For example, if Beijing attempts to use economic coercion against Japan or the Philippines in the East and South China Seas, then Washington should provide these countries with or facilitate access to key materials that China has cut off, such as rare earth minerals. The United States could also incentivize the diversification of export/import markets to decrease dependence on Chinese materials. Specific policies to accomplish this might include tax breaks to export key materials to Japan, or deregulation on some export materials. Likewise, if China bans imports of some agricultural products from neighboring countries, the United States can pledge to buy previously banned imports or provide tax incentives for U.S. companies to import from these countries. In addition, Washington should consider limited economic sanctions against China for its actions.

After years of the United States developing its own tools of economic coercion, it’s time to pay more attention to defense.

Photo credit: FRED DUFOUR/AFP/Getty Images

Eric Lorber is an adjunct Fellow at the Center for a New American Security, a Senior Associate at the Financial Integrity Network, and a senior adviser at the Center for Sanctions and Illicit Finance at the Foundation for Defense of Democracies.

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