Trade War and Sanctions: An Illusory Link

The signing of the first package of documents within the framework of a trade agreement between China and the United States was a serious step towards a ceasefire in the trade war between the two economic giants. Beijing accepted an obligation regarding US exports for the next two years, and Washington said it would not impose new duties. Of course, it left in force the existing ones until the signing of the next package. However, the lull in the trade war will do little to reduce the risk of the US imposing sanctions against China. After all, the trade war and sanctions are two different things. While the former concern economics, the latter primarily concern politics. The growing political contradictions between the United States and China have not disappeared. This means that the risk of sanctions will persist regardless of success in resolving the trade war.

The signing of the first package of documents within the framework of a trade agreement between China and the United States was a serious step towards a ceasefire in the trade war between the two economic giants. Beijing accepted an obligation regarding US exports for the next two years, and Washington said it would not impose new duties. Of course, it left in force the existing ones until the signing of the next package. However, the lull in the trade war will do little to reduce the risk of the US imposing sanctions against China. After all, the trade war and sanctions are two different things. While the former concern economics, the latter primarily concern politics. The growing political contradictions between the United States and China have not disappeared. This means that the risk of sanctions will persist regardless of success in resolving the trade war.

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The key difference between sanctions and trade wars is the existence of specific political goals. By introducing economic restrictions, the country which initiates them is trying to force the target country to introduce political changes or to make decisions favourable to it. Of course, trade wars can also be political. But their tools are different from sanctions. In the case of trade wars, we are talking mainly about tariffs and obligations regarding the volume of trade. In the case of sanctions we mean the prohibition of transactions with certain companies and individuals, restrictions on supplying certain goods and services supplies, financial restrictions, and other unpleasant steps. In the case of the United States, there is a clear departmental separation between trade policy and sanctions policy. Although the US Department of Commerce and its Bureau of Industry and Security are part of the sanctions machinery, most of the sanctions’ functions still belong to the Treasury Department and the State Department.

The bottom line is that the policy of sanctions should be considered in the context of political problems and requirements. To date, the United States has several such requirements for China. The first is to radically reduce or completely stop partnership with Iran in those sectors where the US has imposed sanctions. Mostly, these are the purchase of Iranian oil, as well as the supply to Iran of equipment with American components. The second is to force China to play according to American rules in the field of telecommunications, and in the high-tech sector as a whole. Third, to influence China’s policies in Hong Kong and other regions of the country through the themes of human rights and democracy. Fourth, to limit China’s ambitions in the South China Sea. Behind these demands lies the broader context of the growing rivalry between Washington and Beijing. Moreover, the emphasis on this rivalry is stated openly by the American side, while China is trying to gain time, not get involved in open confrontation and hush up existing contradictions.

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The good news for Chinese business was the exclusion of COSCO SHIPPING TANKER and six other companies from the US Treasury SDN list. The company appeared in the SDN list along with five other firms on 25 September 2019 for shipping Iranian oil. For any large international company, being in the SDN is fraught with grave consequences, even bankruptcy. In this case, the carrier runs into difficulties at every step – from bank failures to paying for services to the inability to use ports and repair infrastructure abroad. Sanctions against the Chinese company were deflected with the help of the Russian company NOVATEK, which was quickly able to resolve the problem with the use of tankers. At the same time, a number of other Chinese companies have remained in the SDN list from September last year. In particular, the COSCO SHIPPING TANKER SEAMAN SHP MGMT is not excluded from the list. There are PEGASUS 88 LIMITED, KUNLUN SHIPPING and KUNLUN HOLDING COMPANY, as well as CHINA CONCORD PETROLIUM. The partial release of Chinese carriers from the SDN list can be attributed to the positive tone of relations in January 2020. However, the relationship between sanctions and the trade deal is still very conditional. By freeing some of the companies and keeping the other part in the SDN, the United States sends an unambiguous signal to comply with the US sanctions against Iran. It is possible that the Americans will be able to achieve at least tactical success. Iranian oil supplies are beneficial to China. But they can hardly be considered a vital necessity. The damage to large companies can bring about more serious losses, compared with the benefits of cheap oil from Iran. Beijing may support Tehran for political reasons. But it is not yet clear whether China is ready to spoil relations with the United States for Iran's sake.

In the field of telecommunications, the United States sanctions attack happened in the first part of last year. The formal occasion here was also the Iranian issue. The Americans accused the Chinese companies ZTE and Huawei of supplying equipment with American components to Iran. Congress gave executive authority to impose restrictions on the purchase of Huawei and ZTE equipment by government agencies. On 15 May 2019, the US President introduced the Executive order 13873 on Securing the Information and Communications, and the Department of Commerce put Huawei on its “black lists”. Although the Department of Commerce issued a General License, which allowed companies to temporarily work with the company, Huawei suffered serious reputation damage and is still in a “limbo” state in relations with its American partners. Meanwhile, Chinese companies are also suffering a serious reputational attack by US government agencies. The trade deal has not yet affected sanctions against telecommunications companies.

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Trade agreements are unlikely to affect human rights sanctions. The sanctions laws against China signed by Donald Trump after the protests in Hong Kong are unlikely to cause great economic damage. However, they had a political resonance and are seen by China as interference in internal affairs. Currently the direct linking of democratic issues with trade is practically impossible. Sanctions on this track will live their own lives. Finally, the situation in the South China Sea remains stable and is not clouded by sanctions. However, the issue was discussed in the US expert community, and therefore sanctioned episodes may appear.

In other words, the connection between trade relations and sanctions is hardly worth overestimating. The application of sanctions is an independent direction related to political issues. China has a number of opportunities to retaliate. The aggravation of relations between such big players carries risks for the global economy, and they can affect Russia.

First published in the Valdai Discussion Club.