A New Arsenal for Competition Coercive Economic Measures in the U.S.-China Relationship

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A New Arsenal for Competition Coercive Economic Measures in the U.S.-China Relationship APRIL 2020 A New Arsenal for Competition Coercive Economic Measures in the U.S.-China Relationship Elizabeth Rosenberg, Peter E. Harrell, and Ashley Feng About the Authors Acknowledgments Elizabeth Rosenberg is a Senior Fellow The authors would like to thank Loren DeJonge Schulman and Director of the Energy, Economics, for her review of this report and Johnpatrick Imperiale and Security program at the Center for his research support. They also thank Aaron Connelly, for a New American Security (CNAS). Zack Cooper, Bonnie Glaser, David Rank, Derek Scissors, Previously, she served as a Senior and Martijn Rasser for their valuable ideas and feedback Advisor at the U.S. Department of the during the drafting of the report. Finally, they would like to Treasury on international illicit finance acknowledge Melody Cook and Maura McCarthy for their issues, helping senior officials develop assistance with the production of the report. financial sanctions and formulate anti– money laundering and counterterrorism financing policy. About the Energy, Economics & Security Program Peter E. Harrell is an Adjunct Senior Fellow at CNAS, advises companies The Energy, Economics & Security Program analyzes the on sanctions compliance matters, changing global energy and economic landscape and its and previously served as the Deputy national security implications. From the shifting geopolitics Assistant Secretary for Counter Threat of energy to tools of economic statecraft, such as trade Finance and Sanctions at the U.S. State and investment policy and sanctions, the program develops Department. strategies to help policymakers understand, anticipate, and respond. This program draws from the diverse expertise and Ashley Feng is a research associate in backgrounds of its team and leverages other CNAS experts’ the Energy, Economics, and Security strengths in regional knowledge, technology, and foreign program at CNAS, where her work policy to inform conversations at the nexus of markets, focuses on U.S.-China economic industry, and U.S. national security and economic policy. competition and the intersection of trade and investment controls and national security. Previously, she was a research associate for China Studies at the Council on Foreign Relations. America Competes 2020 America Competes 2020 is a Center-wide initiative featuring cutting-edge CNAS research, publications, events, and multimedia aimed at strengthening the United States’ strategic advantages at home and abroad. TABLE OF CONTENTS 01 Executive Summary 04 Introduction 09 Trends in U.S. Coercive Economic Measures Against China 22 Trends in China’s Use of Coercive Economic Measures Against the United States 35 The Place of Economic Coercion in the U.S.-China Strategic Competition 39 Policy Recommendations 52 Conclusion Executive Summary 1 @CNASDC he United States and China have long used translating economic coercion into policy change by coercive economic measures to advance both China, the United States needs to better integrate its T economic and foreign policy objectives. In recent coercive measures with each other and with other years, however, both countries have turned to coercive policies, better signal intentions and escalation, more economic measures as mainstream instruments of rigorously assess impacts and costs, and galvanize allied foreign policy and national security policy, and increas- support and coordinated action. ingly have deployed coercive economic measures For its part, China appears to recognize a balancing against each other. act between limiting economic ties with foreign partners For the United States, China’s economic scale and in some domains and maintaining them in others. global interconnections make it a fundamentally dif- China has sought to distance certain Chinese economic ferent type of target for coercive economic measures sectors, particularly high-tech manufacturing, from than the comparatively smaller and less sophisticated the United States in some areas, investing heavily in economies that have been primary targets of U.S. domestic capacity development. In other areas where economic coercion in the past. The United States cannot China must rely on foreign partners for technology, IP, simply isolate China from the global economy. Instead, or manufacturing, or where China does not appear to see it must adopt a more strategic focus on limiting Chinese a clear interest in severing trade, Beijing has sought to actions in areas significant to U.S. national security and keep trade and investment flows moving in an unencum- shoring up economic and technology arenas where the bered fashion. As for the United States, this is a dynamic United States maintains lasting leverage. policy environment. Over the past several years, the United States has deployed an array of coercive economic measures against In recent years, both the United China. The most prominent of these have been the States and China have turned tariffs on approximately two-thirds of U.S. imports from China. The tariffs remain largely in place despite imple- to coercive economic measures mentation of the Phase One trade deal that the United as mainstream instruments States and China signed in January 2020. But the United of foreign policy and national States also has developed and deployed an increas- security policy and increasingly ingly sophisticated set of other coercive economic tools that will play a prominent role in U.S.-China relations have deployed coercive over the years ahead, regardless of whether the United economic measures against States and China fully implement the Phase One deal each other. and reach a broader Phase Two trade agreement. Those other coercive economic tools include export controls, Meanwhile, China has been evolving its use of restrictions on U.S. imports to secure U.S. supply chains, economic coercion against the United States and its heightened scrutiny of Chinese investment in the United allies. While China generally has been restrained in its States, sanctions, and stepped-up law enforcement use of coercive economic measures directly against the measures against Chinese intellectual property (IP) United States or U.S. targets, China increasingly has theft and other Chinese activities in the United States. targeted U.S. allies, including for supporting U.S. policy This expanding set of measures serves a broadening priorities. For example, China imposed trade restric- array of U.S. policy goals, including economic objectives, tions on Canada following its detention of Huawei foreign policy goals, and the maintenance of America’s Chief Financial Officer Meng Wangzhou in 2018, and technological edge. on Australia in 2019 in response to rising tensions The U.S. record of success in the use of these coercive over several issues, including Australia’s decision to economic measures has been mixed. While tariffs and ban Huawei from Australian 5G telecommunications other measures have succeeded in putting some mac- networks. China also has threatened economic coercion, roeconomic pressure on China, they have not extracted including through downgraded economic and trading fundamental concessions from Beijing. Targeted sanc- ties, against other countries that are considering whether tions and law enforcement measures similarly have had to ban Huawei from 5G networks. Chinese coercive economic impacts on some Chinese companies, but economic measures increasingly target individual other Chinese companies have demonstrated an ability companies and individuals in addition to countries. An to weather U.S. economic coercion. To be effective in example is the suspension of broadcasts in China of 2 ENERGY, ECONOMICS & SECURITY | APRIL 2020 A New Arsenal for Competition: Coercive Economic Measures in the U.S.-China Relationship National Basketball Association (NBA) games last year This report makes a number of key recommendations after a prominent team official criticized China’s policy for U.S. policymakers in the executive branch, Congress, in Hong Kong. and the private sector. At a basic level, the United States So far, China’s record in the use of economic coercion needs to ensure that it is making key investments domes- is mixed. It has caused some of its targets to change their tically to maintain the U.S. competitive edge. But it also policies to be more favorable to Beijing’s preferences, needs to strengthen the coercive U.S. economic tool kit and in other instances the targets of China’s coercion including by improving assessments of U.S. vulnerabil- have proved relatively more resilient. Clearly, Beijing is ities to Chinese economic coercion and of the impacts rapidly innovating, testing different sources of leverage of U.S. measures, by being clearer about U.S. objectives, and modalities of economic coercion, and learning across and by signaling U.S. policy both to China and to allies. cases. With the expanding range of circumstances in The United States needs to strengthen the government which China deploys economic coercion, the United institutions that develop and deploy coercive economic States needs to systematically assess its vulnerabilities measures and continue to modernize the tool kit avail- and develop a coherent set of policy responses. able to policymakers. Finally, the United States needs to strengthen cooperation with allies and with the Beijing is rapidly innovating, U.S. private sector, both of which are essential to the testing different sources long-term success of U.S. coercive economic measures against China. of leverage and modalities
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