20100112 PRC barks sanctions, but can it bite?

PRC barks sanctions, but can it bite?

Tuesday, Jan 12, 2010, Page 8

Following announcements by the Obama administration last week that sales of weapons systems to Taiwan approved by the previous administration would proceed, Beijing reacted with its usual contempt, claiming that Washington’s decision would undermine US-China ties and represented meddling in China’s internal affairs.

One thing that Beijing did differently this time, however, was up the ante by hinting that the sale could result in trade sanctions against the US firms involved. This unprecedented threat — ostensibly targeting Lockheed Martin Corp, which was awarded a contract to sell Taipei an unspecified number of Patriot missiles — was yet another sign that China now perceives itself as a “Great Power” and that it can now threaten countermeasures that hitherto had mostly been the remit of leading states like the US, or groups like the EU.

For years, the US, the EU and a handful of Western countries have relied on targeted trade sanctions against “rogue regimes,” such as North Korea and Iran, as well as China, to punish their leadership, encourage a change in behavior, exact an economic price and prevent those states from acquiring certain technologies with military applications. Since the Tiananmen Square Massacre in 1989, China has been the target of a US and European arms embargo, which has had limited success given Russia’s willingness to fill the vacuum by selling Beijing advanced military technology or providing know-how so that Beijing could develop a domestic arms industry.

After years of being on the receiving end of sanctions, China now believes it has enough clout to enter the game. On paper, the threat could make Lockheed Martin, which, among other items, sells commercial aircraft engines, sit up and pause, given that outside the US, China is the biggest market for commercial aircraft. If Beijing were to act on its threat and impose trade sanctions on the US firm, the result could be billions of dollars in losses.

Closer scrutiny of trade sanctions, however, quickly reveals the limitations in China’s threat, especially when the targeted entity happens to be a US company. The effectiveness of trade sanctions, especially when they are meant as economically punitive measures, is highly dependent on a state’s dependence on exports for its economic growth. World Bank data for 2008 shows that 35 percent of China’s GDP depends on exports (32 percent for Iran), while it is about 11 percent for the US.

Therefore, China’s trade sanctions as a means to bring about a change in government behavior are far less likely to succeed than vice-versa. Furthermore, as China does not have technologies that the US does not possess, it cannot rely on sanctions to deny the US technology that it seeks.

Furthermore, if Beijing were to resort to such countervailing measures to punish Lockheed, or the US, for selling weapons to Taiwan, the US could — and likely would — hit back with sanctions of its own, which could quickly escalate into a trade war that export-dependent China is ill-equipped to wage. As a last resort, Washington could also go to the WTO and accuse China of breaking international trade laws.

As is usually the case, China barks like a dog when it comes to weapons sales to Taiwan. Growling and foaming at the mouth notwithstanding, China remains more a poodle than a bulldog in terms of its ability to play the “Great Power” game.

This said, the fact that China now sees trade sanctions as part of its arsenal should be alarming to Taipei, which is much more vulnerable than the US to such measures and will only become more so as it increases its economic dependence on China by signing memorandums of understanding and an economic cooperation framework agreement (ECFA).