Xinhua/Sipa USA

China Flexes its Economic Muscles

by robert looney

bob looney teaches economics at the Naval Postgraduate School in California.

Published February 16, 2022


In his January 2021 address to the World Economic Forum, China’s President Xi Jinping proclaimed:

State-to-state relations should be coordinated and regulated through proper institutions and rules. The strong should not bully the weak. Decisions should not be made by simply showing off strong muscles or waving a big fist.

Hardly new sentiments from a Chinese leader, but ones that ring increasingly hollow. Indeed, the speech seemed a bit hypocritical, given that China has been using economic coercion for more than decade to silence its critics abroad and impose its political will on smaller economies. For example, when Chinese political and human rights activist, Liu Xiaobo, was awarded the Nobel Peace Prize in 2010, China curtailed salmon imports and froze free trade negotiations with Norway.

That same year, by the way, China blocked exports of rare earth minerals to Japan after a Chinese fishing captain was arrested when his vessel collided with two Japanese Coast Guard patrol boats in a territorial face-off near the Senkaku Islands. And in 2012, China halted tropical fruit imports from the Philippines following a confrontation over the disputed Scarborough Shoal.

Biding Time

China’s growing use of economic coercion is a relatively new phenomenon linked to the country’s economic evolution over the past four decades. From the 1980s to the late 2000s, China’s government broadly pursued what General Secretary Deng Xiaoping called a “ hide our capacities and bide our time” strategy, during which it relied on rapidly expanding manufactured exports to developed countries in order to drive growth. Export-led growth depended on a stable world trading system, and above all, good relations with trading partners, who put up with China’s rough edges in return for a cornucopia of cheap, well-made manufactures.

When the international financial crisis disrupted the global economy in 2008-09, the strategy was already exhibiting diminishing returns. China’s labor costs were increasing as the millions of underemployed workers from the countryside found productive jobs, and firms from the U.S. and other developed economies began relocating operations to lower-wage countries including Vietnam and Indonesia. To avoid economic stagnation, China shifted from reliance on mass exports to development of domestic markets and to forays into advanced technologies. Exports of goods and services, which had increased from 5.9 percent of GDP in 1980 to 36 percent in 2006, fell to 19.7 percent of GDP by 2017 (though exports continued to rise).

Flexing Muscles

China’s foreign policy became more assertive following the financial crisis — and even more so under President Xi Jinping’s leadership from 2012 onwards. China’s military spending rose to the world’s second-largest (though far below U.S. levels). Meanwhile Donald Trump’s 2016 election and subsequent rejection of alliance-based foreign policy, as made only too clear by his withdrawal from the Trans-Pacific Partnership, left a vacuum for China to exploit. And in 2017, the gloves came off when Xi officially abandoned hide and bide, declaring, “It is time for us to take center stage.”

One notable sign: the detention of two Canadian nationals on trumped-up charges of espionage in retaliation for Canada’s decision to hold Huawei’s chief financial officer, Meng Wanzhou to await extradition to the U.S. to face bank fraud charges. The Canadian hostages weren’t released until 2021, when Canada caved on Meng.

Since 2019, the Chinese government has imposed an array of unofficial economic sanctions including a boycott of beef and coal from Australia in retaliation for multiple alleged offenses. Among them: barring Huawei from serving as a supplier for Australia’s 5G network buildout, supporting an independent inquiry into the origins of Covid-19, and investigating Chinese interference in domestic Australian politics.

The economic pressure is especially intense whenever Taiwan is involved. In January 2020, a planned visit to Taiwan by Jaroslav Kubera, chair of the upper house of the Czech Republic’s legislature, resulted in an official letter from the Chinese embassy threatening to retaliate against Czech firms unless the visit was cancelled. (The crisis was averted when Kubera died of a heart attack.)

China’s measures are usually applied without acknowledgment or diplomatic negotiation. They are not even based on the pretense of following international law, but on selective enforcement of China’s domestic laws and regulations that Xi routinely uses at home to flatten opposition.

The most overt signal of transition to its new speak-loudly-and-carry-a-big-stick policy: in November 2021, after Taiwan opened an official office in Vilnius, Lithuania’s capital, China downgraded diplomatic relations with Lithuania, banned Lithuanian imports and exports and warned that China would no longer do businesswith international companies that continued to trade with Lithuania. So much for model-global-citizen China, the country long inclined to get its way by offering carrots.

Of course, China is hardly alone in engaging in coercive economic diplomacy. Trump’s trade war with Chinais a notable example, as are decades of U.S. sanctions against Cuba, Iran, Myanmar, Venezuela — and now, Afghanistan. But China’s measures differ in that they are usually applied without acknowledgment or diplomatic negotiation. They are not even based on the pretense of following international law, but on selective enforcement of China’s domestic laws and regulations that Xi routinely uses at home to flatten opposition.

Not so long ago, a country that found its trade restrained in violation of international law could file a complaint with the World Trade Organization and expect a fair ruling. But the Trump administration paralyzed the WTO’s dispute settlement mechanism by blocking the appointment of new judges to its Appellate Court, an impasse seemingly made permanent. (President Biden, in no mood to challenge protectionist sentiment within the Democratic Party, has done nothing to rehabilitate the WTO.)

Pushing Back

There has been some resistance to Beijing’s tactics. Canada and Australia, for example, now seem willing to put up a fight in spite of the economic consequences. But for smaller, poorer countries, the scope for retaliation is limited and few of them can afford to ignore the threats that are now a cornerstone to China’s economic diplomacy.

For these countries, the best hope is to ally themselves with larger countries or country groupings, such as the European Union. In a boost to Lithuania, the European Commission recently proposed a new anti-coercion regulation that would empower the commission to act against entities threatening EU members with economic sanctions. Potential responses to coercive actions include retaliatory trade restrictions.

As the EU shows signs of growing a backbone, Xi may rightly worry that the costs of China’s application of coercion may outweigh the benefits. And even if it works in the short run, it may not work in the long.

China’s inclination to use financial sticks to punish foreign firms and governments over political disagreements makes it an unreliable partner. So, while continuing to pragmatically engage with China, countries — and companies — have already begun to shift their supply chains to reduce vulnerability to Chinese pressure. Note, too, China’s unreliability could also hinder its chances of being accepted as a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the successor to the TPP.

• • •

The Chinese economy got where it is today in part because the government long supported whatever it took to sustain growth. But Beijing no longer subscribes to this philosophy. When Beijing banned Australian coal without advance notice to Chinese buyers, coal prices rose. Moreover, the government compounded the domestic trauma by preventing electric utilities from passing the added costs to customers. This is not a recipe for success in a big, complex, open economy.

Before control of the government tightened around Xi, Beijing could be counted on to gravitate to safe ground in international conflicts — at least as long as it left the Communist Party’s power and prestige intact. But now China seems prepared to play rough with no tangible payoff beyond the political. The big question is whether Xi is prepared for the slowdown in economic growth likely to come with the hardline approach.

main topic: Geopolitics
related topics: Region: China