How the US can counter China’s economic coercion

In recent years, China’s threat of economic coercion has loomed large, and Washington’s allies and partners have seen entire sectors threatened by Beijing as punishment for certain political stances.The most meaningful Chinese threat often targets exports to China, exemplified famously by tariffs against Australian wine producers and embargoes against Lithuanian meat and dairy producers.

For a Western company, the immediate loss of the Chinese market directly corresponds to a loss in profitability that is difficult to replace. To many in Washington, this type of coercion appears to give the Chinese an unusual degree of power in foreign affairs. And because it is so effective, larger-scale instances of China wielding its economic weapon appear to be a matter of when, not if. 

At present, Chinese coercion is met largely with a playbook of defensive measures. The Chinese are able to choose the time and location of their action, and the recipient country busies itself scrambling to contain the fallout. China therefore has the initiative, while the targeted country — often in conjunction with the U.S. — mostly tries to mitigate the impact.

As a result, it’s tempting to assume that China holds more cards than it actually does. And it’s equally easy for the U.S. to forget the extent of its own leverage over China in the exact same manner.

A significant source of deterrence lies in America’s recognition of just how much the Chinese economy relies on supplying U.S. companies. China’s confidence in using the economic coercion card far outstrips the nature of its true position, and two can play at that game. After all, China’s single largest trading balance by far is with the United States, which nearly equals the entirety of the EU and ASEAN balances. China’s suppliers receive roughly $3 from the U.S. for every $1 that its end markets spend on U.S. products.

As a result, American policymakers can gain a significant advantage by making clear that they have far more room to maneuver in relative terms — and that they know it. 

Some experts have called for limiting exports headed to China in order to punish its coercion. While such action could be effective, the willingness to limit China’s own exports could be even more potent, because doing so would leverage the unique imbalance in China’s export relationship with the U.S.

For the American private sector, changing commercial suppliers to alternative partners in places like Mexico or Vietnam is often costly in the near term. But by and large, particularly for the types of goods that comprise the bulk of China’s exports to the U.S., the shift is much less detrimental for the buyer than it is for the original supplier. Aiding this phenomenon is the fact that average labor costs in Mexico and Vietnam are by some measures competitive with or even lower than those observed in many parts of China. 

Chinese companies, by contrast, don’t have this advantage. For the corresponding Chinese supplier, the loss of business is often difficult to replace, and its orders (and therefore future sales) can be expected to suffer. What’s more, a supplier’s use of debt — its capital structure — is frequently predicated on an assumption of steady future sales. Large declines in orders can call its solvency into question. Even if a Chinese company could move production abroad, the loss in mainland Chinese jobs would be unavoidable.

That, in turn, would put Beijing in a difficult position. If confronted with such a scenario, the best option for China’s government would involve stepping in to heavily subsidize newly unprofitable companies. This subsidization would come at a most inconvenient time, when Chinese tax revenues are even lower due to the very impacts that the subsidies were meant to remedy. In the worst possible scenario, entire swaths of China’s coastal provinces would suffer steep job losses and business closures. 

This type of shift has taken place before, prompted by the Section 301 tariffs first levied during the Trump administration. The impact has been undeniable. In recent years, thousands of factories have shuttered, hit hard by declining orders from abroad. The lesson is clear: Decisive American action that prompts companies to drop China as a supplier can have effects even heavy subsidies cannot soften. 

This general asymmetry is something that the U.S. can harness to its advantage in negotiating with China. Preventing coercion — not just against U.S. companies, but also against those of allies and partners — will depend on American willingness to use the same technique in the other direction. Such action, moreover, need not take place to have the intended effect. It’s enough for Beijing to believe that Washington is both able and willing to do so.

Andrew Liang is a fellow at the American Foreign Policy Council in Washington. He has been a private equity investor and investment banker focusing on the global industrial sector.