Weaponizing Trade

William Alan Reinsch

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Using trade as a weapon is not new. Countries have been embargoing each other or selectively cutting off imports or exports for centuries. The last 25 years, however, have taken things to new heights, and the main reason is the increasing lethality of war. Until the last century, while there was often collateral damage, the main human casualties of war occurred on the battlefield. The increasing lethality of weapons, particularly nuclear weapons, and advances in their means of delivery in the twentieth century has meant that entire populations, including millions of innocent people, have become vulnerable, as countries attack infrastructure and civilian populations in addition to military targets. There is no better example than Ukraine.

The magnitude of the consequences of going down that path have caused leaders to look for more benign alternatives. Trade has become the tool of choice because it lies between diplomacy and war. It is more than words but less than violence.

Over the past 25 years, the United States, more than anyone, has refined sanctions imposition into an art form. Originally painted in broad strokes like the Cuban embargo, the George W. Bush administration developed the concept of more targeted sanctions, usually financial rather than trade-related, and often aimed at specific, named individuals, rather than entire countries or sectors. That has allowed sanctions to focus directly on the “guilty” parties rather than innocent bystanders and has made them more politically palatable in the process. Multilateralizing them has significantly increased their effectiveness, as the current sanctions on Russia demonstrate.

Western nations have tended to reserve sanctions for what they consider egregious moral behavior— support for terrorism, subverting or attacking other governments, human rights violations, developing nuclear weapons.

These actions reflect a much lower bar than for Western sanctions. The actions the other nations took cannot reasonably be regarded as threats to China, except perhaps to its international reputation, which, ironically, has only been damaged more by the Chinese response. It is also noteworthy that these actions are classic bullying—actions taken by a big country against smaller ones. China appears to believe that access to its large market is so important that other countries will subordinate their politics to China’s in order to maintain the economic relationship. While there is an element of that in Western sanctions as well, the latter are primarily focused on denying the other country the tools it needs to carry out its objectionable policies.

Do China’s tactics work? So far, it appears not. The target countries seem to be weathering the storm and have not abandoned the positions China finds objectionable. The fact that China’s actions are unilateral and that other countries have come to the defense of their bullied colleagues is probably an important factor in their failure.

Their failure to achieve their immediate objectives, however, does not mean that the sanctions have failed at home. Xi Jinping has been playing the nationalism card for some time, and these actions are part of that. China is demanding that others “bend the knee” and is striking out at those who do not. That plays into the narrative that China is emerging from its “century of humiliation” and is standing up, a message that resonates at home.

This has implications for the United States. We are big and harder to bully, but the Biden administration has been taking actions to deny China advanced technology, and more are likely on the way. Past experience shows China always retaliates—not always right away, and usually in a way they believe is commensurate with the harm it perceives being done to it, and always in a way that minimizes the cost to it and maximizes the annoyance to us. So, stay tuned for things like cutting off their exports of critical minerals to the United States or shutting down U.S. businesses in China.

Will that work? If the point is to change U.S. policy, not likely. If the point is to make life difficult for U.S. companies, then, yes. U.S. companies, particularly in the information and communications technology sector, know that China is simultaneously their best customer and their biggest threat, and that the government is focusing on the latter while they are looking at the former. That is not likely to change regardless of which party is in power in the United States. Companies will decide for themselves how to navigate the divide, but the trend toward moving away from China is clear, and the Chinese approach to trade weaponization will only accelerate that process. That will lead to a more fragmented world and will slow down economic growth and job creation, which is the inevitable price we all pay for letting politics and security into the world of economics.