China’s Lockheed Martin sanctions reveal limited options in fighting economic war with US

·7-min read

China’s announcement that it will impose sanctions on American firm Lockheed Martin for its involvement in the United States’ arms sale to Taiwan has highlighted a harsh reality for Beijing: it has far fewer choices to inflict pain on American businesses than Washington does against Chinese firms in the escalating conflict between the world’s two biggest economic powers.

Lockheed Martin, the world’s largest military contractor, is the first US company that the Chinese government has officially targeted for punishment since US President Donald Trump moved into the White House. However, Beijing has not released details of the sanctions.

The naming of Lockheed Martin marks a step further in Beijing’s careful strategy of hurting US businesses while trying to avoid damaging its own interests.

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Yet, more than a year after Beijing warned that it was compiling an Unreliable Entity List of firms whose actions hurt China – in apparent response to the US Commerce Department’s Entity List that Washington has used to sanction a number of Chinese firms, Huawei in particular – the Chinese government has yet to publish which foreign businesses will be on the list or what punishments they will face.

[It] is good for China to keep the sanction details vague. If not, future actions against the US will be predictable, and that will make China passive in strategy and tactics

Shi Yinhong

Official state media, including the nationalistic Global Times tabloid, hinted last year that Honeywell, Oshkosh, General Dynamics and its Gulfstream Aerospace subsidiary, were being targeted. However, Beijing has never officially confirmed the list.

And as the US turns the screw on Chinese companies such as Huawei, China is continuing to court the US business community. President Xi Jinping last week issued a letter to a group of multinational executives, pledging that Beijing will continue to pursue needed reforms and will open up the domestic market further.

This highlights Beijing’s dilemma: if it penalises US businesses, it risks short-circuiting the inflow of foreign investment that it depends on to help boost its economy, especially now as it seeks to overcome the damage caused by the coronavirus pandemic.

So sanctions that Beijing imposes on US businesses, if there are any at all, are expected to be targeted and moderate, according to analysts.

Shi Yinhong, an international relations professor at China’s Renmin University and an adviser to China’s State Council, the government’s cabinet, said it is hard to guess what other US companies China will target for sanctions after Lockheed Martin, because the two powers are not neck and neck when it comes to economic and technological leverage.

The announcement of sanctions against Lockheed Martin is part of China’s “reciprocal measures to counter the US’s all-around tough policies towards China”, Shi said.

Relations between the world’s two largest economies have plunged into a deep freeze over a sea of issues, including the trade war, the coronavirus pandemic, territorial disputes in the South China Sea, the new national security law in Hong Kong, and arms sales to Taiwan.

Beijing has been trying to match Washington’s measures targeting Chinese individuals. After the US labelled five Chinese state media outlets as “foreign missions”, China kicked out reporters working for US newspapers; and when the US sanctioned four Chinese officials for involvement in alleged human rights violations in Xinjiang, China announced sanctions against four US officials and congressmen.

But the story is different in the business field. China is in dire need of support from the US business community to maintain its position in global value chains and to balance the “hawkish” views in Washington.

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China’s sanctions could be tempered, as was the case with Boeing, one of the two key suppliers of passenger jets for Chinese airlines but also a major US defence contractor.

In 2010, China announced that it would sanction Boeing over its involvement in an arms deal with Taiwan – the first time the Chinese government had ever issued such an announcement. But Boeing has continued to sell commercial aircraft to China and is deeply intertwined with China’s commercial aviation industry.

Analysts have suggested that any sanctions against Boeing would have backfired because China is highly reliant on imported components for its own commercial aircraft.

China has a litany of other regulatory tools at its disposal should it want to target foreign companies

Jake Parker

China did not spell out how its new sanctions of Lockheed Martin will work in practice. Lockheed, like Boeing, has strong civilian product ties with China, selling helicopters through its subsidiary Shanghai Sikorsky Aircraft.

“Given this discrepancy, it is good for China to keep the sanction details vague. If not, future actions against the US will be predictable, and that will make China passive in strategy and tactics,” Shi said.

Jake Parker, senior vice-president of the US-China Business Council, said the group’s conversations with Chinese government officials and other stakeholders after the announcement of the Unreliable Entity List initiative indicated that the Chinese government is still having internal discussions about the legal rationale for creating the list.

In an interview with People’s Daily, the Communist Party’s mouthpiece, Cui Fan, an adviser to the Commerce Ministry, said companies that comply with US export controls could be seen by Beijing as abusing market dominance in China – an offence that can be punishable under China’s anti-monopoly law.

But Parker said this avenue for sanctions may not be on firm ground, given that the anti-monopoly law includes no language on how restricting access to technology for non-market reasons is an abuse of market dominance.

“Many of our members are anxious about the potential implementation of the Unreliable Entity List, but China has a litany of other regulatory tools at its disposal should it want to target foreign companies: ‘social credit system’ blacklists, new cybersecurity reviews, anti-monopoly law enforcement, merger and acquisition review delays, increased customs scrutiny and the like,” he said.

China has to take some action, but it doesn’t want to escalate the situation either

Andy Mok

In addition to these regulations, this year China also sharpened economic espionage penalties in response to US accusations of trade secrets theft. As part of a wider amendment to the country’s criminal code, the draft amendment, on which the government is now seeking public comment, stipulates more severe punishments for stealing Chinese trade secrets to benefit a foreign entity than for domestic trade secret theft.

Andy Mok, a senior research fellow at the Centre for China and Globalisation, a Beijing think tank, said China will only sanction or take other punitive actions against American companies when it is “forced by the US”, because some of the measures would be “very costly” to China itself.

“But the other side of that coin is that US technology companies are very dependent on China. Look at Intel, Qualcomm and Nvidia, all of these semiconductor companies. For some of them, more than 50 per cent of their sales come from China,” he said. “So, without those sales, these companies would not be able to fund investment in their next generation of technologies.

“China has to take some action, but it doesn't want to escalate the situation either. The hope is that, by first signalling that this is being contemplated, it might give the US a reason to reconsider and maybe be less hostile.”

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