The US sanctions and China’s counters

Richard Ip February 24, 2021 08:52

Right after Joe Biden was sworn in as the 46th president of the United States. Two countries took revenge against key figures in the former Trump Administration such as Mike Pompeo and John Bolton, who had advocated tough sanctions against them. You can probably correctly guess at least one of them, which is China. The second one is Iran.

People are unaware of the Iran sanctions because Iran is economically too isolated and weak to bring any meaningful damages. But China is not. This sanction is one of a series of countermeasures recently implemented by China against the US sanctions regime. These countermeasures have a common feature - restricting access to the Chinese market and targeting assets in the country.

China’s countermeasures could present the biggest challenge to the US sanction regime that no countries and intergovernmental organisations have ever been able to achieve.

The thriving Chinese market

China has a market of 1.3 billion people, and this market has a good prospect of increasing purchasing power thanks to the government’s dual circulation strategy which aims to boost domestic consumption.

China is also the first major economy coming out of the coronavirus pandemic, and has largely resumed full production. This helps the country retain the status as the global powerhouse in manufacturing. The Organisation for Economic Co-operation and Development estimated that China will account for over a third of the predicted 4.2% global GDP growth in 2021.

Foreign corporations cannot afford to ignore the Chinese market if they want a better growth prospect. Despite continuous talks of decoupling, the fact is that foreign corporations continue to expand their operations and investments in China, making the country the largest recipient of foreign direct investment in the world in 2020, which saw an inflow of USD 163 billion.

Weaponising the Chinese market

China understands the importance of its market to foreign corporations, and has ratcheted up countermeasures against the US sanctions based upon exactly this understanding.

China introduced three policies in late 2020 and early 2021 with an aim to counter foreign sanctions. They are the Provisions on the Unreliable Entity List; the Export Control Law; and the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, also known as the blocking statute. These policies target the operations and assets of foreign companies in China. For instance, companies on the unreliable entity list will face restrictions such as investment bans in China. The blocking statute would allow Chinese companies to target China-based assets owned by foreign companies if the latter implement foreign sanctions measures which harm the interests of Chinese companies.

Corporations will help China out

The countermeasures are still nascent, but this should not stop us from making predictions on their implications. To caveat, the bottom line is that given the still dominant position of the US dollar in international business and financial activities, corporations, even including the Chinese ones with global footprints, are expected to continue to comply with the US sanctions.

But these corporations, which now have a clearer idea on what China can do against them, would not sit still just to see their business interests in China harmed. As such, they have a strong incentive to take actions against the US sanctions and other restrictive measures from taking place to penalise China. There are some ways to do this.

The least costly one is to speak for China. In fact, corporations have been doing this. Elon Tusk, whose Tesla has received massive loans from the Chinese government to run production facilities in Shanghai, recently praised the Chinese government of being “very responsive to the people, in fact, possibly more responsive to the happiness of people than in the US.” Also, Herbert Diess, the CEO of Volkswagen, recently commented that China "is moving in the right direction and that it is easier to invest in China than China is allowed to invest in Germany or other places." Diess, whose Volkswagen gets more than one-third of its sale in China, practically made a complaint to the western world on behalf of China.

If speaking openly for China may risk bad public relations in the west, corporations could go with a less open but in fact more impactful way - lobbying. Corporations spend up to USD 2.6 billion a year to lobby the US government and politicians to act in the lobbyists’ interests. Lobbyists certainly will not miss China in their campaigns. We have seen big corporate brands such as Coca Cola and Nike lobbying the US Congress to water-down the bill that would ban imports of products made by alleged forced labour in Xinjiang.

Corporations could even take more aggressive actions against the US government. For instance, in 2020, Volvo, Tesla, Ford and Mercedes-Benz are amongst over 3,000 companies that filed lawsuits against the US government with an aim to take down the tariffs imposed by the Trump Administration on imports from China. The plaintiffs, while pursuing their own business interests, benefited China in parallel.

Separately, in January 2021, the CEO of Ericsson Börje Ekholm, being concerned of potential retaliations from China, tried to pressure the Swedish government to reverse its decision of excluding Huawei and ZTE from taking part in the country’s 5G frequency auction by threatening to bring the company out of Sweden. China accounts for 8% of Ericsson’s revenue, and the country was the principal driver of the company’s 7% increase in global sales in 2020. These figures have driven Börje Ekholm to effectively mount a fight to safeguard the business interests of Huawei, even though the firm is in fact Ericsson’s biggest rival in the global telecommunication equipment sector.

A real challenge to the US sanctions regime

China has picked the correct strategy against the US sanctions regime, which is to explicitly display its arsenal of retaliatory measures against foreign corporations who choose to observe the US sanctions. Given the importance of the Chinese market, we can foresee that corporations will help China to actively challenge these sanctions down the road. China is probably the only country in the world which can call out such a massive force against the sanction regime, not Iran, not Russia.

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Richard Ip

Founder of Richard Ip Consultancy, a due diligence and sanctions compliance advisory business, the writer is a global political and compliance risk consultant with a special focus on Asia.