Chinese sanctions: How to confront coercion and avoid a squeeze on Europe I

It could be a taste of things to come. China last week imposed personal sanctions on European policymakers and think-tanks. Among other things, the measures introduced prevent Chinese people and organisations from doing business with the European entities and individuals, and bans them from entering Chinese territory. China also inflicted economic punishment on select European companies.

Beijing could have responded reciprocally to the European Union’s recent listing of four Chinese officials with links to the repression of Uyghurs in Xinjiang province, by simply listing four EU officials of similar (local, low-level) importance. Instead, it chose an asymmetric approach, acting against the United Kingdom, Canada, and the United States, but first and foremost against Europeans (and even their families). At the end of the week Beijing also engaged in a bout of economic punishment: although there was no explicit link to the personal sanctions face-off, retailer H&M suddenly disappeared from a vast range of Chinese consumer and e-commerce apps. Alongside many other retailers from Europe, America and Canada it became faced with “popular boycotts” – an increasingly common Chinese sanctions tactic – because of a pledge it had made to stop using cotton from Xinjiang. Just as with personal sanctions, China hit European companies hardest: Adidas disappeared from app stores, too, although no one faced as harsh a punishment as H&M.  

All of this might merely foreshadow ways in which China will soon be able to exert greater pressure on Europeans than has been seen before, not least economically. The current situation lays bare the tricky strategic situation the EU finds itself in

China’s message

Last week’s move by China is likely intended to send a message to Europeans: the sanctions’ asymmetric character might be a clear warning that China will respond vigorously to even moderate European attempts to adopt stronger policies and close ranks with the US. The economic punishment of H&M and other companies comes months after they made their pledges on cotton but right after the EU’s sanctions. This drives home the point to the business community that China is ready to use economic coercion in direct response to European policy choices whether by governments or companies. At the same time, the economic damage is negligible for now, especially compared to the fallout Australia is still facing for doing less – namely, Canberra’s call in 2020 for an independent inquiry into the covid-19 outbreak, which led China to curb imports on key Australian products in 13 sectors, amounting to 10 per cent of Australian exports overall. In the recent past, China has also threatened or imposed coercive measures on Canada, Germany, the Netherlands, and Sweden.

Europe and its companies are among the most connected in the world and rely more than others on being able to simultaneously export to the American, Chinese, and other markets. This makes Europe particularly vulnerable to economic coercion, all while the EU has fewer policy tools at its disposal to shield Europeans than the US and China possess. It looks like Beijing is exploiting just that by targeting mostly Europeans, trying to pull them away from a strong joint policy with like-minded democracies such as the US.

And Beijing will be more potent in the future. Chinese sanctions have increased in magnitude in parallel to the country’s growing weight in the international arena. They are likely to continue to do so as China grows stronger. Chinese scholars are contemplating how Beijing could identify several areas, or economic networks, where it wants to occupy a critical central position in the global economy – their writings are suggestive of government thinking. This would also allow it to use chokepoints and dependencies for political advantage in much more sophisticated ways than today. If everyone needs access to the Chinese market, systems, or technologies, Beijing can try to split transatlantic partners, to water down ambitious human rights positions like the ones the German Greens want to adopt if they enter government this year, or to restrict Europeans’ freedom of trade where it views its national security threatened.

Europeans squeezed

European businesses already had cause to worry. China is able to bar companies from its market by adding them to its Unreliable Entities List on the grounds of posing a purported threat to Chinese security. But China also recently adopted a new export control law which has significant extraterritorial reach. Under this new law, European companies may have to ask Beijing’s permission to sell their products to other European firms or to third countries even if they are not for military use (as is American or European practice). China can deny re-export on national security grounds in such cases. In fact, China might already be doing this through informal pressure.

China’s efforts also include a “Blocking Statute” recently enacted by Beijing. This law prohibits companies from complying with rules or sanctions imposed by other countries without stating which rules these are. Much depends on how Beijing will apply this vague law, but the upshot is that European subsidiaries in China could now get into trouble if they comply with a European or US sanction or export control measure. Chinese companies are already obliged by law to report any third country law that prevents them from engaging in normal trade. Most importantly, European companies have to provide compensation to Chinese counterparts for damages they cause by complying with European or American laws that China identifies. H&M essentially just experienced what the Blocking Statute could do to other European firms. The company cited international supply chain standards for reconsidering its dealings in Xinjiang. Many of these standards will soon be firm rules under new laws such as in Germany that oblige firms to ensure labour and human rights are respected along their supply chain. For H&M and others, adherence to those already brought punishment in China.

Last week’s sanctions are also a reminder China can also invent new punishment without any of these tools – certainly its foreign ministry shows it can. While measures introduced by China’s Ministry of Commerce, such as export controls, come with at least some procedural clarity, the latest sanctions appeared simply as an announcement from China’s Foreign Ministry – an entity that talks about itself as engaging in “wolf warrior” diplomacy.

Europe can for now rely once more on the US as an ally. But the experience of the last four years should nevertheless remind Europeans of the need to strengthen their position against economic coercion. Washington itself wants Europe to be a more capable ally, and a more resilient Europe could better protect itself if the US cannot help it in a certain situation The events of the last few weeks should add extra urgency to their efforts.

The next part of the series will outline concrete tools Europe could build to strengthen itself against such economic coercion.