The Business Standard will be publishing a series of articles from its content partner Foreign Policy on the growing economic might of China in the world, authored by experts from Danish Institute for International Studies and IE University. This is the first part of the series
For decades, the United States imposed punishing economic sanctions on Sudan, Iraq, and other states it branded as rogue. Outside of military invasion, trade, financial, and diplomatic sanctions became the primary tools for America and its allies to coerce foreign leaders "to start behaving differently" and disarm weapons programs, end support to international terrorist groups, and cease widespread human-rights abuses.
Now China wants advanced democracies around the world to behave differently, too. In 2017, Beijing blocked Chinese tourists from visiting South Korean island getaways after Seoul deployed an American missile defense system. Two years later, it placed trade restrictions on Canada's agriculture exports to protest the Canadian arrest of a high-profile Chinese executive. After Australia called for an international investigation in the outbreak of the COVID-19 pandemic last year, Beijing responded with a barrage of tariffs and restrictions on its exports. More and more, Beijing is doling out its own punishment on countries that cross its political redlines. The West is learning what it is like to be on the receiving end of economic coercion.
In the face of billions of losses from China's trade measures, some may see the value in meeting Beijing's demands to stay quiet on its affairs in Xinjiang, Taiwan, and Hong Kong and stop blocking Chinese foreign investment deals in critical infrastructure. But rather than accept a future under China's thumb, there are ways to survive and even put a stop to Chinese coercive diplomacy.
First, targeted countries should be careful not to exaggerate the impact of China's economic coercion. International reporting often overdramatizes the economic damage done by China by not weighing the relative value of goods restricted with the targeted country's total trade. But the reality is that Beijing, to date, applies only limited economic pressure.
Norway is a clear example. In 2010, after the Nobel committee in Oslo awarded the Peace Prize to Liu Xiaobo, a jailed Chinese intellectual and human-rights activist, Beijing placed a six-year diplomatic freeze on Norway and cut off salmon exports from the Scandinavian country.
Norway suffered an estimated decline of as much as $1.3 billion in its exports to China between 2011 and 2013. This was a lost opportunity for Norway's fishing industry, but only amounted to an annual drop of a 0.3 percent in its total annual exports. Instead of experiencing economic hardship, Norway's trade with China paradoxically reached new highs by 2015.
In response to the arrest of Huawei executive Meng Wanzhou on an American extradition warrant in late 2018, Beijing detained two Canadian citizens and imposed trade curbs on Canadian canola, soy, peas, and pork exports. Canada's exports to China fell by $3.5 billion in 2019, but the loss only represented a tiny fraction of Canada's $447 billion total exports that year.
Even for Australia, the damage done by China's trade weapon has so far been minor. Beijing placed bans and high tariffs on selected Australian beef producers and barley, wine, and other exports. Yet, depending on how deeply Beijing's ban on coal exports ultimately bites, trade measures to date only amount to 4 percent of Australia's exports to China and 2 percent of its total exports.
Just as over two decades of American sanctions on Sudan exempted exports of gum arabic, essential for the production of Coca-Cola and other soft drinks, China also has trade and investments that it does not wish to upset through its economic coercion.
Beijing did not stand in the way when ChemChina, a state-owned enterprise, made the $2 billion purchase of a high-grade Norwegian silicon producer during its freeze in relations with Norway. Nor did China hesitate to lift pork restrictions on Canada in late 2019 as swine fever decimated China's pig population and domestic demand needed satisfying. Beijing has also shied away from blocking Australia's iron ore and natural gas, which are necessary to fuel its economic growth at home. And as researchers at the University of Technology Sydney have meticulously detailed, bans placed on Australian goods by China are often partial and short-lived.
And much like how Iraq circumvented international sanctions controlling its oil sales overseas, goods that China targets often manage to find their way into the Chinese marketplace. Norway's salmon was rerouted through Vietnam during its long-running dispute with Beijing. Chinese importers used the United Arab Emirates as a backdoor to acquire Canadian vegetable oil.
So far, China's trade weapon has inflicted more pain on individual companies and industries than entire economies. Beijing may be exerting self-restraint as part of a Confucian approach to foreign relations; demonstrating its displeasure through limited restrictions, but not hitting too hard in order to preserve the long-term relationship. Beijing knows too that even minor trade curbs can create a media spectacle and have a psychological impact on advanced democracies that provokes large multinationals and business associations to lobby their governments for foreign-policy change.
But under President Xi Jinping, China may be steadily diverting away from this approach. In the future, particularly if China is successful in its drive for economic self-sufficiency in critical industries, Beijing's willingness to apply comprehensive pressure may increase.
This is why governments must still act to diversify strong dependencies on China until its coercive behavior ends. Diversification does not entail decoupling, but pinpointing which industries are prone to Chinese pressure, and encouraging trade and investment across developed and emerging markets to decrease such strategic vulnerabilities.
China is the largest growth engine in the global economy, but it is far from the only one. Diversification strategies can lay the groundwork for capitalizing on future growth in India, Indonesia, Vietnam, and elsewhere. China's relative economic importance in the world received a boost due to its quick suppression of the coronavirus at home, but its share of the global economy will likely top out by the end of the decade, and others in Asia will boast the fastest growing markets in the world. Thanks to growing demand from Saudi Arabia, Japan, and Southeast Asia, despite China's tariffs, Australia's total barley export volumes are expected to grow by 64 percent year-on-year.
To protect vulnerable companies and industries from China's economic coercion, advanced democracies must find strength in numbers. They can support one another in cases against China in the World Trade Organization and push for reform in the international body to deter Beijing's use of its trade weapon. Since this is a time-consuming process, they can also advance the short-term fix of creating a joint fund that compensates targeted companies and industries to mitigate the adverse effects of China's economic pressure.
But before they can work together, advanced democracies must avoid profiting from one another's misfortune to limit China's options to play 'divide and rule'. After Beijing banned Canadian canola in 2019, Australia experienced a surge in its own exports to China, and when Beijing blocked Australian barley in 2020, Canadian farmers reaped the benefits.
Over time, China may come to learn from the American experience that economic coercion, although it may be gratifying, rarely produces the sought-after policy outcomes. Resisted by even the weakest of states for decades on end, American-led sanctions cause unnecessary human suffering and breed deep resentment.
Beijing may have hoped that punishing Norway would serve as a warning for other advanced democracies to avoid crossing its political redlines. Yet in the years after, neither South Korea, Canada, nor Australia seem to have taken notice.
China may also soon find out that its targets can hit back. Jake Sullivan, President-elect Joe Biden's national security adviser nominee, voiced support to Australia in face of its hostilities with China. The European Union is designing anti-coercion tools after Beijing threatened Sweden and the Czech Republic last year. Canada is in the preliminary stages of advancing a concerted effort to address Beijing's so-called hostage diplomacy.
Ending China's economic coercion is possible. It may come at a temporary financial loss, but independent foreign and security policy holds value too. If advanced democracies can find the political will to muster their collective economic strength, Beijing may soon find the response to its coercion to be resounding.
Luke Patey (@LukePatey) is a senior researcher at the Danish Institute for International Studies and the author of How China Loses: The Pushback Against Chinese Global Ambitions.
Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.