Sanctioning the Dragon: Using Statecraft to Shape Chinese Behavior

Editor's Note: Sanctions on China are again in the air as policymakers look on Beijing's provocative regional policies with dismay. Although many experts argue that sanctions would achieve little and might even backfire, Zack Cooper and Eric Lorber, at CSIS and the Financial Integrity Network respectively, argue that limited and targeted sanctions can make China more hesitant to engage in aggressive behavior.

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Over the last five years, Washington’s responses to Beijing’s increasingly assertive activities—ranging from economic espionage to artificial island construction—have been largely ineffective. Yet U.S. leaders are now considering a new option: economic sanctions. Conventional wisdom holds that the U.S.-China economic relationship is “too big to fail” and that Washington, therefore, has little economic leverage with Beijing. Although extensive sanctions against China would be unwise and infeasible, certain limited, conduct-based sanctions may succeed in shaping Chinese behavior at an acceptable cost.

A push to use sophisticated economic tools against China has gained traction over the last year. President Barack Obama issued an executive order providing the Treasury Department authority to sanction state and nonstate actors—including Chinese entities—engaging in malicious cyber activity. Last year, the administration threatened to impose sanctions on a number of Chinese persons in the lead up to President Xi’s state visit. Likewise, various presidential candidates have suggested that the United States impose sanctions against Chinese agencies or businesses involved in cyber attacks against economic targets.

Yet effectively using extensive sanctions to deter Chinese economic espionage and maritime assertiveness is likely to prove difficult. First, imposing extensive sanctions would be difficult. Most U.S. policymakers recognize that China’s rise presents many opportunities for the United States. China’s economic dynamism has pulled hundreds of millions out of poverty and energized regional and global economies, and Beijing’s growing political influence could help alleviate shared problems such as climate change and nuclear proliferation. For these reasons, the Obama administration has attempted to focus its relationship with China on shared interests rather than divergent perspectives.

Although extensive sanctions against China would be unwise and infeasible, certain limited, conduct-based sanctions may succeed in shaping Chinese behavior at an acceptable cost.

Second, building international support for extensive sanctions would be challenging. U.S. efforts to pressure Iran to the negotiating table were successful in large part because they were international. Similarly, U.S. sanctions on Russia have caused significant economic pain because they are multilateral. In both cases, European and Asian allies and partners coordinated with the United States to bring economic pressure to bear. Given China’s large economy and political importance, many of these countries would be unwilling to impose sanctions under anything but the most extreme circumstances.

Third, the Chinese economy is inherently more resilient than smaller or more sector-specific economies like those of Russia and Iran. China’s economic weight alone, including its extensive trade with economies around the world, means that across-the-board sanctions would not only take a bite out of Chinese growth, but would damage the global economy.

Fourth, China would bite back, and the economic consequences would be damaging. Unlike Russia or Iran, China could severely harm U.S. economic interests and those of U.S. allies and partners, both in the region and around the world. Beijing could impose sanctions on U.S. companies or make it significantly more difficult for certain U.S. companies to do business in China. Numerous U.S. businesses have already encountered political challenges to operating in China, which have caused some, like Google, to withdraw from mainland China despite its huge market. Similarly, in recent months, China has threatened to impose so-called secondary sanctions on U.S. defense manufacturers that provide arms to Taiwan as part of a newly announced U.S. package, cutting these companies off from Chinese markets.

Unlike Russia or Iran, China could severely harm U.S. economic interests and those of U.S. allies and partners, both in the region and around the world.

Although erecting extensive sanctions against China would be unwise and infeasible, more limited sanctions may be a better means of shaping Chinese behavior. In particular, measures designed to deter internationally-recognized “bad conduct” by Chinese individuals, companies, and agencies—particularly those who commit economic espionage—could be effective, in part because they could garner international support and would signal that stealing U.S. intellectual property has financial consequences. The United States has already raised concerns about cyber espionage against private corporations, and the Department of Justice has indicted five Chinese military hackers. U.S. officials have pointed the finger at China for some of the most egregious cyber attacks in recent years—including the massive hack of the Office of Personnel Management in which Chinese persons stole security clearance information for over twenty million U.S. citizens. Although President Obama and President Xi announced a “common understanding” that neither government would engage in cyber economic espionage, early reports suggest that government-sponsored Chinese hackers have continued what has been called “the greatest transfer of wealth in history.”

Chinese actors engaged in theft of U.S. intellectual property could be designated under existing U.S. authorities, which would effectively prevent them from doing business in U.S. markets or with U.S. companies. Although this punishment might not force domestically-focused Chinese companies to change their behavior, it would send a signal to companies with a U.S. presence that engaging in such activity entails significant risks, as U.S. regulators would be able to impose hefty fines on such companies.

Targeted sanctions might prove attractive to other developed economies suffering from persistent Chinese cyber espionage. Moreover, Chinese groups already conduct sustained cyber attacks on U.S. businesses, so sanctioning a number of these actors might not substantially change the frequency or fierceness of intrusions. China could take action in other domains, but targeted designations could set U.S. red lines and make clear that the United States and its partners are willing to take a more forceful stance to uphold norms of good conduct in cyberspace.

In particular, measures designed to deter internationally-recognized “bad conduct” by Chinese individuals, companies, and agencies—particularly those who commit economic espionage—could be effective, in part because they could garner international support and would signal that stealing U.S. intellectual property has financial consequences.

Sanctions imposed on Chinese companies involved in maritime disputes may be also powerful. Beijing has sought to consolidate control of the South China Sea by constructing a “Great Wall of Sand” on disputed maritime features. At the moment, U.S. officials do not have existing mechanisms to sanction businesses engaged in this island building campaign. Yet, there are several tempting targets for sanctions, most notably China Communications Construction Company Dredging (ccccg), which conducted dredging at disputed South China Sea features, and China National Petroleum Corporation (cnpc), which moved an oil rig into waters disputed with Vietnam. Further, China has reportedly invited private or semi-private firms to invest in building the infrastructure on a number of these reclaimed islands. U.S. officials could obtain the legal authority necessary to sanction ccccg, cnpc, or other Chinese entities if the president were to declare a national emergency related to China’s destabilizing actions in the region. This would be a significant escalation.

Nevertheless, sanctioning entities involved in construction or development in disputed areas could alter their calculus, disincentive destabilizing conduct, and thereby decrease tensions in the long-term. For example, ccccg and cnpc are already listed on the Shanghai Stock Exchange and ccccg was reportedly planning a new listing on the Hong Kong Stock Exchange. However, CCCCG has delayed its initial public offering on the Hong Kong Stock Exchange, reportedly because the Exchange asked a number of questions about CCCCG’s dredging activities in the South China Sea. ccccg or cnpc could find their business partnerships damaged, as well as their ability to deal in U.S. dollars, if they were sanctioned. Such efforts might not stop Chinese coercion in the South China Sea, but they would impose a cost both on the Chinese companies involved and on Beijing’s reputation.

Even if U.S. targeted sanctions were effective in pressuring specific firms to change their behavior in the South China Sea, some major obstacles would remain. Chinese leaders could offset private losses incurred by these sanctions and China could escalate in other domains, such as rare earth exports, in which Beijing has leverage.

In considering sanctions on Chinese individuals and entities, American policymakers should be realistic about their likely limited impact. Nevertheless, a carefully calibrated economic response may be effective in altering Chinese behavior, and targeted sanctions on certain Chinese actors would demonstrate to Beijing that Washington is serious about upholding international rules and norms, and that is willing to accept some risk to do so. Beijing is already using economic leverage to change the behavior of U.S. national security and business leaders, as well as that of U.S. allies and partners. Washington shouldn't be afraid to respond in kind.

A version of this article appears in the March/April issue of The National Interest.