China’s Doghouse Is Smaller Than It Looks
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China’s Doghouse Is Smaller Than It Looks

Originally published in Bloomberg Opinion

All eyes in the trade world are fixed on the U.S. and China, with the world’s two largest economies locked in negotiations that could shape the contours of global commerce into the next decade.

The issues on the table – technology transfer, intellectual property, cloud computing and the push by the U.S. to gain a bigger foothold for their financial and high-tech service industries – encompass the big battlefields of the 21st century economy. But a more telling look at the future of world trade might be found elsewhere, in disputes involving mundane commodities currently besetting Australia and Canada.

Both have had very public political battles recently with China. They now have something else in common: some of their key exports are being shunned by Chinese buyers. In recent months, ports in the country have been turning away Australian thermal coal, on vaguely worded environmental grounds. China’s importers last month started banning canola shipments from Canadian processors, citing contamination worries. Traders fearing similar restrictions on yellow pea exports have driven prices of the crop in Saskatchewan down 7 percent since March.

It’s hard to find anyone in the Australian and Canadian governments and their respective business communities who believes these actions are motivated by anything other than politics. The Chinese themselves barely bother to deny it either.

That illustrates two, seemingly contradictory, things: how willing Beijing is to use blunt economic coercion in political disputes, and, paradoxically, the constraints it faces in leveraging its market power.

In recent months, China has threatened many countries with economic punishment over political issues. 

Either in official statements or through state-run media, Beijing has warned countries as diverse as Australia, Canada, New Zealand, Germany and Spain over the consequences of keeping Huawei Technologies Co., the Chinese telecommunications giant, out of their next-generation 5G networks. Beijing issued veiled threats to the U.K. after Britain announced it would send an aircraft carrier into the South China Sea. With Turkey, it was more explicit, saying economic and commercial ties would be hit if Ankara kept criticizing Beijing’s mass internment of Uighurs in Xinjiang

Compared to the flurry of intimidation, though, cases of direct intervention are mostly confined to the Canadian and Australian examples. 

Beijing has a well-worn track record of using economic threats as a lever in diplomatic disputes. Norway had its salmon imports blocked after the Nobel Peace Prize was awarded to the dissident Liu Xiaobo in 2010. Mangoes from the Philippines were left to rot after Manila won an international court case against Beijing on the South China Sea in 2016.

The biggest set of sanctions were imposed on Seoul in the same year, when Beijing limited tourism to South Korea and harassed the country’s businesses inside China after its neighbor agreed to deploy a U.S. anti-missile battery. Although the two countries normalized relations in late 2017, some unofficial restrictions still remain for Chinese travelling to South Korea.

Still, for all the recent noise, China is selective in using trade to bully its adversaries, for several reasons.

The ongoing trade war with the U.S. is one: while battling Washington, its peer adversary, Beijing doesn’t want to be fighting on other fronts. China’s weakening economy is an important constraint as well. Sanctions imposed by Beijing invariably bring blowback inside China, imposing extra costs on producers forced to source more expensive imports and on the local partners in joint venture companies with out-of-favor countries.

Beijing also has to be careful about beating up on democracies like Australia and Canada. In a way that they weren’t even a few years ago, democratic countries in the west and Asia are swapping notes about China, largely in private, in ways they never have before.

That’s helping to build an “alliance of multilateralists”, a term coined by Germany’s foreign minister Heiko Maas at a speech in Japan last year. If these governments see China punishing other countries for decisions any sovereign nation might take, the hawks in their own systems looking for ways to push back harder against Beijing will only be strengthened.

Canada and Australia are being targeted largely because of clashes over Huawei, the Chinese telecommunications giant. Australia placed itself in the firing line early on with Huawei, by keeping it out of two major projects, the National Broadband Network in 2012, and the upgrade to the new 5G mobile network in 2018. In Canada’s case, the country’s police arrested Meng Wanzhou – Huawei’s chief financial officer and the daughter of its founder – in Vancouver in late 2018 on a U.S. warrant, and refused Beijing’s demand that she be released. Beijing then detained two Canadian citizens in China, alleging violations of national security.

The way that China has allowed parts of the anti-South Korea sanctions to linger bodes ill for these cases.

The application to extradite Meng to New York to face fraud charges could be stuck in the Canadian and U.S. courts for years. Australia and China had an official meeting last December to rebuild their relationship, but that seems to have achieved little, with China scaling back coal imports anyway.  

The lesson so far seems clear. China’s bark is, so far at least, worse than its bite on threats of trade sanctions. Not as many counties as you might think get put in the Chinese doghouse – but once you are there, getting out can be a lengthy, painful process.

Areas of expertise: China’s political system and the workings and structure of the communist party; China’s foreign relations, with an emphasis on ties with Japan, the two Koreas, and Southeast Asia; Australia’s relations with Asia.