Fever to Fear: China’s Economic Statecraft and Its Impact on Foreign Businesses

• In Event: Economic Instruments of Foreign Policy

Abstract

The use of economic instruments to advance foreign policy goals, or economic statecraft, has long been a staple of great-power politics. To better understand the role of economic statecraft in the world’s interdependent trade networks, this paper takes a close look at the example of China. As a country that suffered economic sanctions from the West during the Cold War era, China is known for its opposition to foreign governments’ political and economic interference in other countries’ domestic affairs. Yet, China has increasingly resorted to economic statecraft to advance its strategic goals as the second largest economy, the factory of the world, and the center node of the global supply chains, which intensifies the nexus between economy and politics. While China has exercised economic leverage to induce positive behaviors through economic incentives in developing countries (purchasing diplomacy), like many world powers, it is also unafraid of utilizing exclusive and coercive measures to sanction other states for certain diplomatic decisions or penalize multinational companies (MNCs) for business choices (coercive diplomacy).
This paper theorizes the analytical frameworks surrounding the characteristics of Chinese coercive diplomacy, and its impact on foreign businesses, across different sectors at the corporate level. Unlike legislated American sanctions, China’s sanctions are unilateral and informal, including subtle exclusion of foreign firms’ access to the Chinese market, unofficial state-led boycotts, and cyber-nationalism. This allows the Chinese government to deny the existence of top-down and state-led retaliation. Instead, government representatives maintain that they are representing the voice of the people against foreign entities that do not respect the Chinese people or regulations. While such unofficial economic sanctions provide the Chinese authorities with plausible deniability, foreign countries and companies struggle to devise immediate responses. At the national level, the targeted states are unable to appeal to the World Trade Organization in the absence of clear regulatory changes, which limit the use of trade restrictions as a political tool. At the corporate level, MNCs find it difficult to recover from such sanctions and damaged consumer perceptions without an official channel to reverse them. Additionally, MNCs are increasingly pressured to make official statements regarding politically sensitive issues from value-driven western audiences while worrying about retaliation from the Chinese authorities and patriotic consumers. Why do the Chinese authorities increasingly rely on unofficial economic sanctions? How does China’s way of weaponizing its market and consumers, either top-down or bottom-up, affect MNC operations across different sectors and industry profiles?
To address such inquiries, this study examines four instances of China's coercive economic statecraft: 1) South Korean case in 2017 over Seoul's decision to deploy the United States' Terminal High-Altitude Area Defense (THAAD) missile system, 2) American and European apparel companies in 2021 over allegations of human rights violations in Xinjiang, 3) Australian case in 2021 with Australia's ban on Huawei and calls for an investigation into the origin of Covid-19, and 4) Lithuania’s Decision to open a diplomatic office for Taiwan in 2021. Through these case studies, the paper aims to establish an analytical framework for understanding Beijing's choice of sanctions and assess the impact on the targeted companies. This paper argues that a company’s brand competitiveness, visibility, and substitutability of its products have a huge impact on the extent corporates suffer from short-term consumer boycotts. The complimentary and competitive trade structure, as well as the strategic importance of industries to China, affect whether Beijing links economic sanctions—such as subtle exclusion of foreign firms’ access to the Chinese market—with industrial policy measures for nurturing local champions, which poses mid- to long-term barriers.
To be sure, China is not the only country that deploys an array of unofficial economic sanctions to leverage asymmetric economic interdependence. Yet, along with authoritarian institutions and pervasive nationalism, Beijing is likely to further utilize economic statecraft to advance its geopolitical objectives. The political and business risks will also increase as Chinese companies catch up with rivals and achieve technological self-sufficiency with Beijing’s extensive industrial policy measures. When the complementarity of a trade relationship erodes, middle and small powers and MNCs will be more vulnerable to Chinese sanctions, turning China fever into China fear. Through a corporate-level analysis, I hope to contribute to the existing literature on the nexus between international business and political tensions by illuminating the various ways in which economic interdependence can be weaponized and shed light on strategies for MNCs to manage the risks deriving from political tensions.

Author

• Seung-Youn Oh, Bryn Mawr College