Dark
Light

Time’s up, let’s pass on punishing China with finance restrictions.

2 mins read
68 views

U.S. legislators are debating a range of new economic statecraft authorities aimed at managing the strategic competition with the People’s Republic of China. While Congress must move quickly to implement certain measures, such as those addressing risky U.S. outbound capital flows to the PRC, it would be a mistake to push for a full-scale eviction of Chinese entities from the global financial system.

Some have argued to change this. The bipartisan Chinese Military and Surveillance Company Sanctions Act of 2023 , which passed unanimously out of the House Financial Services Committee recently, pushes for Specially Designated Nationals status for a list of Chinese companies tied to the People’s Liberation Army. Other lawmakers have called for the designation of Huawei and China’s Semiconductor Manufacturing International Corporation, widening the current approach that prioritizes technology controls over financial sanctions.

The United States enjoys a robust set of policy tools for imposing national security-based restrictions on economic activity with China. This includes export controls that halt the flow of sensitive technologies, tariffs, and — in some cases — restrictions on the ability of U.S. persons to engage in financial transactions with Chinese counterparts. Of these, financial restrictions are used at a relatively low level, considering the scale of policy challenges that the United States has with China.

One economic tool that has largely been absent from China debates is the Specially Designated Nationals and Blocked Persons list , which is the harshest form of financial sanction. Placement on the list freezes all U.S. assets of a designated person and prohibits U.S. persons from engaging in transactions with them. Given the dominance of U.S. banks and the U.S. dollar throughout the global financial system, this designation is often referred to as the “nuclear option” as it makes it exceedingly difficult for anyone around the world to lawfully transact with the designated entity.

To maximize the power of U.S. financial sanctions, the United States should keep China deeply integrated in the current structure of the global financial system, rather than reinforce their incentive to flee. Even under today’s tense geopolitical conditions, China conducts most of its trade and holds most of its foreign exchange reserves denominated in U.S. dollars. China’s reliance on the U.S. dollar serves as leverage and as a deterrent, both of which are in the U.S. interest to maintain.

A further argument for restraint now is that Specially Designated Nationals listings are inherently escalatory. Even in recent flare-ups, such as China’s flight of a spy balloon over the United States, the preference for technology sanctions — which are a dime a dozen these days — in response rather than Specially Designated Nationals sanctions may have helped prevent a further downward spiral in relations. A shift in U.S. policy towards more frequent designations risks sparking a broader sanctions tit-for-tat, which the PRC has shown itself only too willing to engage in.

Arguing for restraint on financial sanctions is not a justification for inaction, and there are several critical steps that Congress should take now. First, it should provide a significant increase in resources for the Departments of State, Commerce and the Treasury so that they can prepare for future sanctions scenarios involving China, maximizing the impact of the economic tools and facilitating the integration of economic options in interagency planning efforts. Congress should also pass new authorities to prohibit certain U.S. investments in China in critical technology sectors, complementing U.S. export control objectives. Specially Designated Nationals sanctions, whose entity-specific nature can lead to a whack-a-mole approach, are a poor substitute for long-term strategies to prevent leakage of critical technology and know-how to China. Congress should also push the administration to identify specific triggers for when the use of the designations would be warranted.

There may soon come a time when the United States will need to unleash the most powerful tools in its economic arsenal, including if security conditions around Taiwan deteriorate. Financial sanctions can play an important role in imposing costs on the PRC for acts of aggression, but only if carefully designed well in advance, integrated with military and other domain options and coordinated closely with international partners. If tensions with China worsen, the argument for restraint may weaken. But it’s not yet time to impose severe financial sanctions on China.

Previous Story

FCA Tells Crowdfunding Firms: Ad Rules Are a Must

Next Story

Budget reviews: Finance Committee and Select Board tackle challenges, make reductions.

Latest from News