Assessing US Sanctions on China

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Assessing US Sanctions on China

Insights from Agathe Demarais.

Assessing US Sanctions on China
Credit: Depositphotos

The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy.  This conversation with Agathe Demarais – senior policy fellow for geoeconomics at the European Council on Foreign Relations and author of “Backfire: How Sanctions Reshape the World Against U.S. Interests” (Columbia 2022)  is the 417th in “The Trans-Pacific View Insight Series.”  

Why do sanctions sometimes work but more often fail? 

Sanctions are crucial tools for Western economies to advance their geopolitical goals: these measures fill the void between (empty) diplomatic declarations and (deadly) military interventions.

History shows that the effectiveness of sanctions is mixed and depends on a range of factors, including the type of sanctions (individual measures are mostly symbolic, while sanctions targeting entire economic sectors, such as energy in Russia, are usually powerful); the target country (bigger economies like Russia typically have more financial resources to counterbalance the impact of sanctions than smaller ones like Venezuela); the breadth and depth of economic ties between those countries that impose sanctions and the targeted one (measures against an economic partner, like Russia for Europe before 2014, are more powerful than against a country that Western economies have no ties with, such as North Korea). 

The fact that the effectiveness of sanctions varies case by case highlights the fact that there is no one-size-fits-all approach with sanctions: The imposition of these measures requires a careful assessment of the target country, Western leverage vis à vis this economy and sanctions’ goals. However, it may be impossible to perform such an in-depth analysis in the heat of the moment, as sanctions are usually imposed to respond to fast-evolving events like war. 

What is the impact of U.S. export controls on China with regard to global supply chains and markets?

It is too early to say what the exact impact of U.S. export controls on China will be on global supply chains, which are complex and hard to untangle. Two early trends are emerging. First, Western economies are increasingly trying to attract semiconductor firms on their soil, showering them with vast amounts of subsidies so they agree to build fabs – as semiconductor production chains are known – outside Taiwan or South Korea (the two main producing hubs for semiconductors). 

In the U.S., the federal government announced in April that it would channel $6.6 billion in public money for TSMC, Taiwan’s leading semiconductor firm, to build a fab in Arizona. In Europe, the German government will subsidize the construction of an Intel microchip factory to the tune of 10 billion euros ($10.9 billion). 

Second, U.S. measures curbing the access of Chinese firms to advanced technology (for instance for semiconductors) are prompting China to double down on its tech self-sufficiency strategy, investing huge amounts of public money in the field. Even though Chinese firms cannot yet produce the most advanced microchips, it is probably only a matter of time before they will be able to do so. This highlights the fact that the U.S. strategy aiming at maintaining the gap between U.S. and Chinese technological capabilities intact over time will probably fail. 

Compare and contrast the effectiveness of the Trump and Biden administrations’ policies on China.

The U.S.-China rivalry is deeply entrenched and both the Trump and Biden administrations have imposed a wide range of measures on China, including financial sanctions (for example on entities linked to the Chinese army), export controls (for instance on semiconductors) and tariffs (notably on clean tech in the latest round of U.S. tariffs). In other words, the substantive policies of the Biden and Trump administrations on China are not radically different.

However, there are two notable differences in terms of the packaging of China-related policies between the Trump and Biden administrations. The first has to do with collaboration with allies – at best an afterthought for Trump, but a clear priority for Biden, for instance through the U.S.-EU Trade and Technology Council or the G-7 forum. 

The second difference deals with the intellectual framework that Trump and Biden use to deal with China: Trump appears to see the conflict with China as a trade (or business) issue that he can deal with through tough negotiations and bold decisions, focusing mostly on reducing the U.S. trade deficit. Meanwhile, the Biden administration has conceptualized a far more comprehensive and detailed de-risking strategy that aims at reducing economic reliance on the U.S. for critical goods and avoiding fuelling the advances of the Chinese military. 

Explain how U.S. decoupling could benefit China in the long run. 

The U.S. discourse has mostly moved away from decoupling to de-risking over the past year. This is because Washington realizes that a full decoupling from China would be hard to achieve (barring a conflict around Taiwan) and not necessarily desirable (U.S. imports of, say, Chinese toys do not present a serious security risk for America). In addition, a full decoupling would lead to a spike in inflation in the U.S. and, probably, shortages of manufactured goods. 

De-risking seeks to reduce economic reliance on China for economic goods and avoid fuelling the advances of the Chinese army. Yet the American perspective sometimes eclipses the fact that China may well be the world leader for de-risking ties with Western countries: be it for trade, finance or technology, China has long sought to achieve self-sufficiency and to shield itself from “unfriendly” (read: Western) countries. Over the past years, China has, for instance, reduced reliance on Western export destinations (re-orienting trade towards emerging economies), built sanctions-proof financial channels (giving Beijing a plan B if it were to be cut off from Western financial channels like SWIFT) and doubled down on tech self-sufficiency plans (notably for chips, AI, and quantum computing). 

Assess the efficacy of the EU’s de-risking approach to China vis-à-vis U.S. decoupling. 

Europe is in a much trickier spot to de-risk from China than the U.S. for two reasons. First, the bloc is far more reliant on China than most other Western economies. Despite the de-risking hype, Chinese firms are (by far) the largest suppliers of goods to Europe, accounting for around 20 percent of imports. Europe’s dependence on China is especially high for those goods that will be necessary for the bloc’s energy transition: the EU imports more than four-fifths of its lithium-ion batteries from China, for instance. 

Second, there is no consensus among European countries about how to tackle China’s aggressive behavior. On the one hand, Berlin and Paris are not China-averse, as the recent visit of German Chancellor Olaf Scholz to Beijing illustrates. On the other hand, most eastern European states have long been hawkish on China and Beijing’s support for Moscow’s invasion of Ukraine has only hardened their stance. Absent a consensus on China, getting started on de-risking will be hard for Europe.