US lawmakers are discussing a variety of new economic state powers aimed at managing strategic competition with the People’s Republic of China. Congress must quickly take certain measures, such as addressing dangerous foreign capital flows from the United States to China, but it would be a mistake to call for the total exclusion of Chinese companies from the global financial system. Dew.
The United States enjoys powerful policy tools to impose national security-based restrictions on economic activity with China. This includes export controls that stem the flow of sensitive technology, tariffs, and, in some cases, restrictions on the ability of Americans to engage in financial transactions with their Chinese counterparts. Of these, financial restrictions have been applied at a relatively low level, considering the scale of the policy challenges that the United States has with China.
One economic tool that has barely appeared in China’s discussions is its most severe financial sanctions, the Specially Designated Nationals/Blocked List. Once placed on the list, all U.S. assets of the designated person would be frozen and U.S. persons would be prohibited from doing business with that person.
Given the dominance of U.S. banks and the U.S. dollar throughout the global financial system, this designation makes it extremely difficult for anyone around the world to legally do business with the designated entity, and therefore the “nuclear option” ” is often called.
Although the United States has given the designation to Chinese people in certain cases (such as in response to human rights abuses in Xinjiang and Hong Kong, and aid to Iran), it has used this measure to manage broader strategic competition with China. I almost refrain from using it.
Some people advocate changing this. The bipartisan China Military and Surveillance Enterprise Sanctions Act of 2023, recently passed unanimously by the House Financial Services Committee, advances the granting of Special Designated National status to a list of Chinese companies with ties to the People’s Liberation Army. There is. Other lawmakers are calling for the designation of Huawei and China Semiconductor Manufacturing International Corp., expanding on the current approach that prioritizes technology regulation over financial sanctions.
Advocates argue that the United States needs to take a tougher stance toward China, expressing legitimate concerns about the growing economic and national security risks posed by the country. But reaching for the nuclear option now costs the United States critical coercive power, which may be needed even more in the future.
A recent study published by the Center for a New American Security found that the United States’ options to sanction China in the event of a conflict are severely limited. One area where the United States enjoys a clear advantage is in financial sanctions, but the need for concerted action with allies and China’s ability to develop alternatives to the U.S.-dominated global financial infrastructure. Growth complicates even this advantage.
To maximize the power of US financial sanctions, the US should continue to deeply integrate China into the current structure of the global financial system, rather than strengthening China’s incentives to flee. Even in today’s tense geopolitical climate, China conducts most of its trade in dollars and holds most of its foreign exchange reserves in US dollars. China’s dependence on the US dollar serves as both a lever and a deterrent, and it is in the United States’ interest to maintain both.
A further argument for restraint now is that the list of specially designated nationals is escalatory in nature. Even in recent flare-ups, such as China’s reconnaissance balloon flights over the United States, prioritizing technology sanctions (these days around 10 cents) over sanctions on specially designated nationals has helped prevent further economic deterioration. It is possible that Spiral of human relationships. A shift in US policy towards more frequent designations risks triggering widespread sanctions retaliation, something China has indicated it will actively engage in.
Advocating restraint in financial sanctions does not justify inaction, and there are important steps Congress should take now.
First, significant resources will be needed to enable the Departments of State, Commerce, and Treasury to prepare for future sanctions scenarios involving China, maximize the effectiveness of economic tools, and promote the integration of economic options in interagency planning. increase should be provided. . Congress should also pass new authorities prohibiting certain U.S. investments in China in critical technology sectors to complement U.S. export control objectives.
Sanctions against specially designated nationals may amount to a whack-a-mole approach due to the specific nature of the actors, and are an insufficient substitute for a long-term strategy to prevent the flow of critical technology and know-how to China.
Congress should also require the administration to identify specific triggers that justify the use of the designation. There may soon come a time when the United States will need to unleash the most powerful tools in its economic arsenal, such as if the security situation around Taiwan deteriorates. Financial sanctions can play an important role in imposing costs on China for acts of aggression, but they must be carefully planned in advance, integrated with military and other sector options, and closely coordinated with international partners. limited to cases where
If tensions with China worsen, calls for restraint could weaken. However, now is not the time to impose harsh financial sanctions on China.
Emily Kilcrease is a senior fellow and director of the Energy, Economics, and Security Program at the Center for a New American Security.
John Hughes is an adjunct senior fellow in the Energy, Economics, and Security Program at the Center for a New American Security.
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