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China’s weaponisation of trade

Posted By on July 28, 2017 @ 12:40

China denies mixing business with politics, yet it has long used trade to punish countries that refuse to toe its line. China’s recent heavy-handed economic sanctioning of South Korea, in response to that country’s decision to deploy the Terminal High Altitude Area Defense (THAAD) anti-missile system, was just the latest example of the Chinese authorities’ use of trade as a political weapon.

China’s government has encouraged and then exploited states’ economic reliance on it to compel their support for its foreign-policy objectives. Its economic punishments range from restricting imports or informally boycotting goods from a targeted country to halting strategic exports (such as rare-earth minerals) and encouraging domestic protests against specific foreign businesses. Other tools include suspending tourist travel and blocking fishing access. All are used carefully to avoid disruption that could harm China’s own business interests.

Mongolia became a classic case of such geo-economic coercion, after it hosted the Dalai Lama last November. With China accounting for 90% of Mongolian exports, the Chinese authorities set out to teach Mongolia a lesson. After imposing punitive fees on its commodity exports, Chinese foreign minister Wang Yi voiced ‘hope that Mongolia has taken this lesson to heart’ and that it would ‘scrupulously abide by its promise’ not to invite the Tibetan spiritual leader again.

A more famous case was China’s trade reprisals against Norway, after the 2010 Nobel Peace Prize was awarded to the jailed Chinese dissident Liu Xiaobo. As a result, Norwegian salmon exports to China collapsed.

In 2010, China exploited its monopoly on the global production of vital rare-earth minerals to inflict commercial pain on Japan and the West through an unannounced export embargo. In 2012, after China’s sovereignty dispute with Japan over the Senkaku Islands (which the Japanese first controlled in 1895) flared anew, China once again used trade as a strategic weapon, costing Japan billions of dollars.

Likewise, in April 2012, following an incident near the disputed Scarborough Shoal in the South China Sea, China bullied the Philippines not only by dispatching surveillance vessels, but also by issuing an advisory against travel there and imposing sudden curbs on banana imports (which bankrupted many Philippine growers). With international attention focused on its trade actions, China then quietly seized the shoal.

China’s recent trade reprisals against South Korea for deploying the THAAD system should be viewed against this background. China’s reprisals were not launched against the US, which deployed the system to defend against North Korea’s emerging missile threat and has the heft to hit back hard. Nor was this the first time: in 2000, when South Korea increased tariffs on garlic to protect its farmers from a flood of imports, China responded by banning imports of South Korean cellphones and polyethylene. The sweeping retaliation against unrelated products was intended not only to promote domestic industries, but also to ensure that South Korea lost far more than China did.

China will not use the trade cudgel when it has more to lose, as illustrated by the current Sino-Indian troop standoff at the border where Tibet, Bhutan, and the Indian state of Sikkim meet. Chinese leaders value the lopsided trade relationship with India—exports are more than five times higher than imports—as a strategic weapon to undercut its rival’s manufacturing base while reaping handsome profits. So, instead of halting border trade, which could invite Indian economic reprisals, China has cut off Indian pilgrims’ historical access to sacred sites in Tibet.

Where it has trade leverage, China is not shy about exercising it. A 2010 study found that countries whose leaders met the Dalai Lama suffered a rapid decline of 8.1–16.9% in exports to China, with the result that now almost all countries, with the conspicuous exception of India and the US, shun official contact with the Tibetan leader.

The harsh reality is that China is turning into a trade tyrant that rides roughshod over international rules. Its violations include maintaining nontariff barriers to keep out foreign competition; subsidising exports; tilting the domestic market in favor of Chinese companies; pirating intellectual property; using antitrust laws to extort concessions; and underwriting acquisitions of foreign firms to bring home their technologies.

China regards even bilateral pacts as no more than tools to enable it to achieve its objectives. From China’s perspective, no treaty has binding force once it has served its immediate purpose, as officials recently demonstrated by trashing the 1984 Sino-British Joint Declaration that paved the way for Hong Kong’s handover in 1997.

Ironically, China has developed its trade muscle with help from the US, which played a key role in China’s economic rise by shunning sanctions and integrating it into global institutions. President Donald Trump’s election was supposed to end China’s free ride on trade. Yet, far from taking any action against a country that he has long assailed as a trade cheater, Trump is helping make China great again, including by withdrawing the US from the Trans-Pacific Partnership and shrinking US influence in the Asia–Pacific region.

The TPP, which Japanese prime minister Shinzo Abe is seeking to revive, but without US participation, can help rein in China’s unremitting mercantilist behavior by creating a market-friendly, rule-based economic community. But if the TPP is to be truly effective in offsetting the trade sword wielded by a powerful, highly centralised authoritarian regime, it needs to be expanded to include India and South Korea.

China’s weaponisation of trade has gone unchallenged so far. Only a concerted international strategy, with a revived TPP an essential component, stands a chance of compelling China’s leaders to play by the rules.

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[1] voiced: http://www.reuters.com/article/us-china-mongolia-dalailama-idUSKBN158197

[2] jailed Chinese dissident Liu Xiaobo: https://www.project-syndicate.org/onpoint/a-life-lived-in-truth-by-ma-jian-2017-07

[3] costing Japan billions of dollars: http://www.japantimes.co.jp/news/2013/08/24/national/china-japan-hurts-trade-with-words/#.UhmUPZIiqu8

[4] cut off: http://www.japantimes.co.jp/opinion/2017/07/04/commentary/world-commentary/asias-colossus-threatens-tiny-state/

[5] 2010 study: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1694602

[6] using antitrust laws: https://www.wsj.com/articles/china-using-antimonopoly-law-to-pressure-foreign-businesses-1407154916

[7] underwriting acquisitions: https://www.nytimes.com/2016/09/17/business/dealbook/china-germany-takeover-merger-technology.html

[8] trashing: http://www.telegraph.co.uk/news/2017/06/30/china-says-legally-binding-hong-kong-handover-treaty-britain/

[9] Shinzo Abe: https://www.project-syndicate.org/columnist/shinzo-abe

[10] seeking to revive: https://www.project-syndicate.org/commentary/tpp-revival-japan-us-by-koichi-hamada-2017-06