China' s Strategic Response to US Sanctions

• In Event: Chinese Politics Mini-Conference: Firms, Industries, and China's (International) Political Economy

Abstract

Amidst escalating geopolitical rivalry, states may use economic sanctions not only to punish foreign firms' illegal behaviors, but also to contain the growth of rivals. This paper examines the strategic response of the target state in the context of the United States' economic sanctions against China. I argue that US sanctions reinforce China's view of sanctioned industries as core to its national security goals and prompt the government to respond through industry boosting. With an original dataset of US-sanctioned Chinese firms from 2008-2023 and their domestic competitors, I employ a triple difference-in-difference strategy by comparing sanctioned-impacted firms to not-yet-impacted firms before and after the US sanctions, as well as estimating the differential impact between directly sanctioned firms and indirectly affected domestic competitors. I find strong evidence that the Chinese government does not indiscriminately subsidize US-sanctioned firms; rather, it doubles down support only for firms in the information technology industries. Following US sanctions, China also extends support to sanctioned firms and their domestic competitors through government procurement and expedited patent approval. I show that these protective measures provide assurance to other domestic market actors and incentivize them to continue "business as usual" with sanctioned firms. These findings provide new insights into how geopolitics impact industrial policy, highlighting the dynamic interactions between states and market actors in the realm of economic warfare.

Author

• Jialu Li, Harvard University