At the same time, the United States has increased its reliance on sanctions as a tool of foreign policy. Now, it focuses on individuals, countries and entities across the globe. These measures are put in place by the Office of Foreign Assets Control (OFAC). Their purpose is to shape behavior and advance U.S. interests. China, the other great power, has been targeted to a growing extent by these sanctions. This article looks at possible approaches China should take. It also looks at the measures the country could possibly employ in response to the U.S. blacklisting of its companies.
Understanding Sanctions
Definition and Purpose
In general, sanctions are used to inflict economic and political costs. They are unilaterally enforced by one country or a coalition of countries against an adversarial nation, group, or individual. We use sanctions, particularly financial sanctions, to combat terrorism and prevent the proliferation of weapons. These measures oppose human rights abuses and contribute to the defense against cyberattacks. These measures are not restricted to sanctions and can include asset freezes, trade embargoes, and travel restrictions. The end goal in all of this is to pressure the target to alter its practice or policy.
First, sanctions are meant to pressure the sanction target. They accomplish this by banning their targets from access to the global financial system and global trade. This is perhaps best illustrated in the U.S.’s unprecedented, sectoral sanctions against Russia for its February 2022 invasion of Ukraine. New tech sanctions Some of the new sanctions are aimed at stopping China’s technological development by preventing it from accessing key technology suppliers. These limitations have a dire effect on a country’s economy—especially if that country is as dependent on the global stage as many in the Caribbean are.
How Sanctions are Enforced
OFAC, a department of the U.S. Treasury, is the main government agency that administers and enforces sanctions. OFAC places sanctions on individuals or entities listed on the Specially Designated Nationals (SDNs) list, which is published and regularly updated by OFAC. Nearly all U.S. persons—including individuals and companies—are prohibited from participating in transactions involving SDNs. Effectively, this prohibits them from doing business, providing services or transferring any assets to these politicized entities.
Enforcing sanctions may even necessitate ongoing surveillance of every sanctioned individual’s financial transactions. It means robustly enforcing the law by probing into alleged violations and penalizing violators. Penalties may be civil and include big monetary fines and asset seizure, but can lead to actual criminal prosecution. The U.S. should engage energetically with other countries to get them to adopt comparable sanctions regimes. This collaboration multiplies the pressure brought to bear on the targeted individual or organization.
Targeting Individuals and Businesses
Impact on Foreign Entities
In practice, when the U.S. blacklists a Chinese company, the impact can be pervasive. These companies are in practice banned from accessing the U.S. market. They would find it difficult to access nearly any other international market due to the inability to bear the risk of secondary sanctions. Otherwise, they face the prospect of falling revenue, losing market share and reputational harm.
Furthermore, U.S. sanctions tend to reach well beyond direct exchanges with the targeted entity. Under U.S. law, any company that in any way does business with a blacklisted Chinese firm can be penalized by the U.S. government. Together, this raises a chilling effect. Perhaps just as important, many foreign private sector actors are now wary of doing business with Chinese companies that find themselves in the crosshairs.
Consequences for Domestic Businesses
Sanctions come with costs and blowback for the sanctioning countries themselves. In the specific case of U.S. sanctions against China, American businesses can be the target as well. Tariffs and other restrictions on trade and investment can realign and break supply chains, introduce delays, and raise costs. Third, they deny the world access to China’s market, which is the world’s largest consumer market. These sanctions continue to negatively impact producers and consumers alike in both the United States and China.
Additionally, sanctions can cause global economic uncertainty and instability. Rather, businesses can be forced to delay investments or change their strategies altogether because of the uncertain and changing nature of sanctions policy. That can result in slower economic growth and less job creation.
China’s Response to Foreign Sanctions
New Tools and Strategies
China has long been sounding out such strategies and many others as part of efforts to neutralize the deteriorating effects of U.S. sanctions. One way to do that is by strengthening and speeding up innovation here at home and making us less dependent on foreign technology. This means boosting public and private investment in R&D and creating stronger policies to support homegrown companies. Since 2014, China has dramatically increased state funding for its semiconductor industry. China has accelerated domestic innovation with more focus on basic research and market forces and has adopted new measures to accelerate domestic innovation.
A second strategy is to increase non-US trade relationships and find alternative markets for China’s goods and services. It’s time to renew our relationships with nations in Asia, Africa, and Latin America. We’ll actively publicize the Belt and Road Initiative. China has found loopholes in US restrictions. As a follow-up, domestic chips are getting more usage and testing within Chinese companies, leading to faster innovation.
China is seemingly intent on building out its own financial infrastructure. This move is clearly designed to lessen its dependency on the U.S. dollar and the dominance of the SWIFT payment system. We advocate greater use of the Chinese yuan in cross-border trade and investment. We’re engaged in finding and promoting the development of alternative payment systems to support these expectations.
Legal Framework for Countermeasures
Simultaneously, China has been crafting a broader legal architecture for the purposes of retaliating against foreign sanctions. Chinese companies can now sue foreign entities that respect U.S. sanctions. Perhaps most significantly, the new laws seek to prevent the extraterritorial application of foreign laws. China has announced further sanctions against US arms manufacturers Lockheed Martin and Raytheon. Moreover, they targeted the US due diligence firm Mintz with a sudden, aggressive raid and launched a state investigation of the US chipmaker Micron.
In reaction, in December 2022, China brought an action against the US at the World Trade Organization (WTO). This move followed Washington’s imposition of broad restrictions this past October. Since September 2018, the US has prevented the appointment of new judges to the WTO’s Appellate Body. This action has largely frozen the WTO dispute settlement system in its tracks.
China is using its newfound clout in high-tech sectors to protect itself from Western technology bans. With the move to ban American chipmaker Micron from its critical information infrastructure on May 21, 2023, the country signaled the decisive turn toward strategic competition in global tech. This ban represents a first, important act of direct Beijing retaliation.
The Implications of Sanctions
Economic Effects on China
The positive economic impacts from U.S. sanctions on China are complicated and multilayered. Sanctions have created obstacles for Chinese firms. Beyond creating benefits, they can fuel industry-leading innovation and accelerate the development of new domestic industries. The US restrictions and its ability to bring its allies into line have been destructive to China's development in the sector of semiconductors or chips, where the West controls China's access to the most advanced technology.
China has shown success producing 14 nm chips at scale, dominating consumer electronics, cars, AI, and application processors. All that is insufficient to reach the global industry leaders in chip technology. China’s emphasis on home-grown technology has had a patchy record throughout sectors. To truly go head-to-head with global industry leaders, the country needs even more cutting-edge technology—7nm and below.
Here are the potential consequences of sanctions on China:
Disruption of supply chains
Increased costs for businesses
Reduced access to advanced technology
Slower economic growth
Global Reactions and Responses
Analysts have reacted positively and negatively to the U.S. sanctions imposed on China. The list of countries that have stood with the U.S. on this issue is short. At the same time, opponents of sanctions as a foreign policy tool have long decried their use. In fact, there are few things that make countries more worried than the precedent of sanctions upending their economies and international collaboration.
Other countries have gone so far as to introduce measures to protect their own companies from the extraterritorial application of U.S. sanctions. This means enacting blocking statutes that prevent domestic companies from having to abide by foreign sanctions laws.
Navigating the Complex Landscape
Challenges for Affected Parties
Protecting your organization from the risks posed by the ever-evolving and complex landscape of sanctions takes forethought and diligence. Any company doing business in sanctioned countries needs to have robust compliance programs in place. This is to make sure they are in compliance with all applicable laws and regulations. You’ll implement more diligent screening of customers, suppliers, and business partners. Finally, you will establish internal controls that will help keep your organization safe from banned or criminal transactions.
Businesses must be actively aware of changes to sanctions-related policies and regulations. The U.S. government is constantly adding new entities to its sanctions lists and releasing new compliance guidance. Not staying on top of these shifts can lead to heavy fines.
Opportunities for Diplomacy
Though sanctions are an important instrument for achieving foreign policy goals, they should not be used in place of diplomacy. We know that sanctions are most effective when they are coupled with robust diplomatic efforts. Jointly, they’re able to address the root causes much better.
Constructive dialogue and negotiation provide an opportunity for all parties to de-escalate tensions, build trust, and arrive at mutually beneficial solutions. Even more importantly, they can provide a framework for resolving disputes that arise and preventing future conflicts before they occur. What is necessary is that all stakeholders show a good faith commitment to healthy discussion and the pursuit of solutions that work for everyone. China has exhibited "strategic forbearance" in its response to US tech sanctions, choosing not to retaliate aggressively despite having economic weapons at its disposal.
The U.S. sanctions on China are quite the double-edged sword with global consequences. Indeed, as it’s been mulling countermeasures for some time, China has seen some of this coming. Meanwhile, it is continuing to challenge itself to think of other ways to minimize sanctions’ burdens. The future of U.S.-China relations, and indeed, the world, depends on how successfully both sides can traverse this tricky terrain. They need to focus more on seeking opportunities to work together on shared priorities important to both parties.
