CHINAMacroReporter

China: 'Sleep Walking into Sanctions?'

A looming risk is Russia-like sanctions on China. The sanctions on Russia are causing plenty of disruptions. But those disruptions would be nothing compared to the catastrophe of Russia-like sanctions on China. The good news is that if China does violate the sanctions, the violations would likely be narrow and specific - even unintentional. So secondary sanctions - if they come at all - likely won't hit China’s economy and financial system deeply – or (fingers crossed) U.S.-China relations.
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CHINADebate

April 17, 2022
China: 'Sleep Walking into Sanctions?'
Illustration by Derek Zheng from SupChina

A looming risk is Russia-like sanctions on China.

  • The sanctions on Russia are causing plenty of disruptions.
  • But those disruptions would be nothing compared to the catastrophe of Russia-like sanctions on China.

The good news is that if China does violate the sanctions, the violations would likely be narrow and specific - even unintentional.

  • So secondary sanctions - if they come at all - likely won't hit China’s economy and financial system deeply – or (fingers crossed) U.S.-China relations.

Still the risk is there, and assessing that risk requires assessing how likely any sanctions are. The ever-terrific Neopol newsletter (subscription – and well-worth it) put out by Trivium China suggests three scenarios:

  • ‘Scenario 1: Military support = game over’
  • ‘Fortunately, we assess that such a scenario – while highly impactful – is exceedingly improbable.’
  • ‘Scenario 2: Awkward status quo prevails’
  • In our estimation, this is the most likely potential outcome.’
  • ‘Scenario 3: Sleepwalking into sanctions’
  • ‘A relatively low probability (say, less than 10%).’
  • ‘While it’s not our base case, this potentiality is the one we are most worried about.’

One casualty of Russia-like sanctions on China would be the Biden China policy.

  • Biden China policy? A persistent criticism is that the Biden administration doesn’t have a China policy.

That criticism is well-countered in Josh Rogin of WAPO’s excellent ‘Biden doesn’t want to change China. He wants to beat it’ - a must-read. (I have had this teed up to bring to your attention since it was first published in February but have had to put it off until now to cover the impact of the Ukraine invasion). Mr. Rogin writes:

  • ‘Step by step, the Biden team has put in place a tough China policy of its own design, more nuanced than Trump’s.’
  • ‘Biden officials have rained sanctions on China, reinforced the alliance diplomatically and to some degree militarily, and yet made clear that it wanted to keep channels to Beijing open.’

The aim? Mr. Rogin quotes a U.S. State Department official:

  • “Our intention is to prevail in this competition with China.”  
  • “Let’s just be very clear about it. It’s a competition, and we intend to win it.”

There are some who say that this isn’t enough.

What this otherwise good argument overlooks: Defining a U.S. endgame is tough when China has not yet defined its own. (World domination? Asian hegemony? Makes you miss the USSR where at least we knew where we stood.)

  • Until Beijing makes its aims clear, a U.S. aim just to outcompete China isn’t so bad.

And while we’re talking about U.S. policy toward China...I got a kick seeing:

As long-time readers know, whenever I thought a Trump action against China was stupid (and that was pretty often), I would invoke the mantra:

  • ‘What would Reagan do?’

President Reagan, having presided over the final strategy and actions that ended the Cold War, is my go-to for thinking about how the U.S. should deal with China.

  • (Yes, I know Mr. Reagan's role is the subject of fierce debate.)

Now the General is applying that mantra to give advice to the Biden team.

  • The Biden Administration ‘must apply Reagan’s fundamental insight — to win against a rival of China’s magnitude requires sustained pressure against the true sources of the adversary’s power.’

So far so good.

  • But his and his co-author’s recommendations look suspiciously like the current initiatives (Reaganesque?) Mr. Biden and Congress are pursuing.

Here is more on sanctions and Biden China policy ('nuff said about Mr. Reagan and China).

1 | ‘Sleepwalking into Sanctions’

In great power competition, China resembles the Soviet Union.

  • During the Cold War, the Soviet Union was the implacable enemy of the U.S. - and it worked to undermine America at every turn.

But while doing that, the USSR stayed inside the tent of the international order and abided by international law, as much anyway as superpowers do.

  • (That of course is in contrast to the USSR’s successor state, Russia – Russia broke the rules and the law and has been cast out, at least as far as the democracies representing half of global GDP are concerned. The rest of the world, including China, is another story.)

China has benefited mightily from its participation in the international order, especially its economy.

  • And while China appears to want to create a separate order favorable to its objectives, it has no interest in being kicked out of the one in place since after World War Two.

The Third Scenario.

So when Trivium China ’ Neopol ‘ game[s] out the potential likelihood that China may be in for Ukraine-invasion-related secondary sanctions,’ it is no doubt right that the first of its three scenarios, ‘Military support = game over’ is ‘exceedingly improbable.’

  • Most likely, as Trivium points out, is its second scenario, ‘Awkward status quo prevails’ – that could come straight from the Soviet Union’s Cold War playbook.

That leaves the third scenario – the one that Trivium is ‘most worried about’ – China’s ‘sleepwalking into sanctions.’

  • I’m not sure ‘sleepwalking’ best describes how China might inadvertently be sanctioned – instead China seems vitally awake to the possibility of transgressing the Russian sanctions – but it has no defense against the whims of U.S. regulators.

'Material Support' - and that means?

Still, inadvertent this third scenario would be. Because, as Trivium notes:

  • This is ‘nebulous middle ground, where China technically stays on the right side of the Western sanctions regime on Russia, but nonetheless is deemed to be offering “material support” to Vlad and the team.’
  • ‘This is more than just spitballing on our part – the Biden Administration has regularly indicated that “material support for Russia” would put China in the firing line… without clearly defining the word “material.” ’

‘This is our concern with the term “material support” when it comes to China’s position toward Russia.’

  • ‘US officials, while closely monitoring Chinese economic and financial interactions with Russian actors, have not clearly defined the thresholds at which point non-sanctioned activity crosses over into “material support.” ’
  • ‘The risk, then, is that even as Chinese officials and commercial entities appear set to continue strictly observing sanction restrictions, non-sanctioned economic activity may inadvertently spill over into yet-undefined boundaries of material support.’

‘If China unwittingly crosses a yet-undefined redline, the US government may feel compelled to apply secondary sanctions on one or more Chinese entities.’

  • ‘Goodness knows, there are plenty of US officials looking to punish China – even for the current “fence-sitting” posture – so wandering over an undefined redline could be easy.’

Magnifying Sanctions

This muddle isn’t unique to China and reflects the comments of a friend who is an expert on sanctions.

  • He told me companies pay lawyers millions a year for opinions on whether or not a proposed action would violate a given sanction - and this is a sanction-happy world.

In the end, he said, many companies just say forget it and stop all business with a sanctioned country.

  • This has the effect of magnifying the impact of specific sanctions.

And, on the flip side, when some sanctions are lifted, companies are still reluctant to resume business in the formerly sanctioned areas for fear of taking a wrong step, thus slowing the effect of easing sanctions.

  • So sanctions remain in effect even after they're gone.

It’s easy to see then why Chinese companies and financial institutions will likely continue to err far on the side of caution.

  • And U.S. officials have noted that China so far is complying with the sanction regime.

The Good News

The good news is that if China does violate the sanctions, the violations would likely be narrow and specific. (China knows, as Trivium notes: ‘Military support = game over’.)

  • So secondary sanctions – if they come at all - likely won’t hit China’s economy and financial system deeply – or (fingers crossed) U.S.-China relations and the Biden China policy.

2 | Biden’s China Policy – Yes, There is One.

Last September Jonathan Swan of Axios wrote:

  • ‘President Biden came into office with a plan for dealing with China that sounded great in theory but's failing in practice.’

And I tended to agree with him.

  • Now, not so much.

This is due in large part to ‘Biden doesn’t want to change China. He wants to beat it,’ by Josh Rogin of The Washington Post.

  • The few highlights below don’t begin to reflect the quality of both the reporting and the analysis – this is a must read.

“Engagement has come to an end.”

‘Since Xi came to power in late 2012, the Chinese Communist Party has been expanding its military, intensifying internal repression and taking steps to undermine the Western-led system of free trade, rule of law and universal rights.’

  • ‘After decades of believing that China might someday fully join the multilateral economic system created after World War II, most U.S. officials no longer imagine that China can be more like us.’
  • ‘During his four years in office, President Donald Trump tried to execute a sharp pivot in U.S. policy toward China, abandoning a 45-year-old foreign policy consensus aimed at persuading China to become more like the West.’

‘To the surprise of many in Washington and Beijing, the Biden administration has largely followed Trump’s lead, keeping U.S. policy toward China on a more competitive — if not confrontational — footing.

  • ‘As the NSC’s Kurt Campbell explains: “The period that was broadly described as engagement has come to an end.” ’

‘A stable, if not exactly friendly, relationship.’

‘Step by step, the Biden team has put in place a tough China policy of its own design, more nuanced than Trump’s.’

  • ‘Biden officials have rained sanctions on China, reinforced the alliance diplomatically and to some degree militarily, and yet made clear that it wanted to keep channels to Beijing open.’

‘This stiff but mostly consistent behavior is something Beijing could at least understand.’

  • ‘Now the goal is to translate that understanding into a stable, if not exactly friendly, relationship.’

“It’s a competition, and we intend to win it.”

'In November, CNN anchor and Post columnist Fareed Zakaria characterized the Biden administration’s approach to China as a failure because Beijing had not gotten on board.’

  • “What has been achieved by this tough talk? What new trade detail have you got? What concessions has China made? What climate agreement has been reached? What has been the net effect of all of that?” he asked national Security Advisor Jake Sullivan on CNN.’

“I think it’s the wrong way to think about it,” Sullivan responded.’

  • “The right way to think about it is, have we set the terms to an effective competition where the United States is in a position to defend its values and advance its interests not just in the Indo-Pacific but around the world?”

‘An NSC spokesman said Biden’s team “is moving out in unison in executing our strategy” ’:

  • ‘Out-competing China in the long term by investing in ourselves and aligning with our allies and partners.”

And a State Department official said':

  • “Let’s just be very clear about it. It’s a competition, and we intend to win it.”

(Reading that reminded me of Thomas Wright of Brookings’ piece last June in The Atlantic, ‘Joe Biden Worries That China Might Win.’)

3 | So, what do you want?

Well, if ‘we intend to win,’ just what does winning look like?

  • At the end of the Cold War, it looked pretty obvious what winning looked like: the Soviet Union collapsed and broke up. (And we are feeling the repercussions today.)

The endgame with China, if it comes, probably won’t have that sort of moment of victory.

  • Instead, barring internal catastrophes in or dramatic changes of heart by either player, any endgame between the U.S. and China could be one prolonged affair, perhaps even a decades-long stalemate.
  • We may never have a clear ‘winner’ and a ‘loser.’

I attribute that to the difference between the U.S.-China conflict and the Cold War.

  • Some disagree.

‘Good strategies articulate a desired end state and outline how to attain it,’ writes Richard Fontaine of the Center for a New American Security in ‘Washington’s Missing China Strategy: To Counter Beijing, the Biden Administration Needs to Decide What It Wants.’

  • ‘There is a glaring omission in the new Biden China policy: an objective.’

‘Competition is merely a description of U.S.-Chinese relations, not an end in itself.’

  • ‘Conspicuously absent from the flurry of recent pronouncements is the endgame that Washington ultimately seeks with China.’

This is an important critique.

  • And the effort to define an endgame is in itself a valuable exercise.

But what makes defining a U.S. endgame tough is that China has not defined its own.

  • Don’t be misled by analyses that claim China’s aim is world domination, or that say the aim is just hegemony in Asia, or that name any other grandiose aim.
  • Each comes from selective readings of Xi Jinping’s and other officials’ pronouncements – none of which is definitive.

Until Beijing makes its aims clear, an aim just to outcompete China isn’t so bad.

More

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