China’s retaliation playbook can’t meet the US export control challenge

New semiconductor export controls the Biden administration announced on Oct. 7 present China with an unprecedented industrial policy challenge. The standard Chinese playbook for retaliating against foreign governments provides no obvious response, so here are China’s current retaliation options and what we can expect.

China’s recent history of retaliation against foreign countries reveals three consistent goals: inflicting proportionate pain; avoiding blowback to China; and preserving plausible (though often flimsy) deniability.

In this case, China could try to inflict direct, reciprocal pain by boycotting products of American semiconductor firms that depend on China revenues (a generic tactic deployed many times in the past), but that would deny China essential semiconductor technologies and thus be self-defeating. Blowback is a real possibility because the Biden administration could reply by simply increasing the severity of current sanctions, thus compounding China’s difficulties. Maintaining plausible deniability may be impossible if officials perceive Chinese public pressure to respond with visible, punitive measures.

China will, of course, continue seeking alternatives to American technologies and products while trying to circumvent the new export controls. But the standard argument that increased U.S. technology regulation is counter-productive because it encourages China to double-down on technology independence is a red herring. Chinese President Xi Jinping’s emphasis at the 20th Communist Party Congress on technology advancement and independence merely echoes longstanding central government aspirations, though perhaps with more urgency.

China’s past retaliation patterns are the best clues for predicting what to expect next.  Generally speaking, Chinese retaliation strategies are either passive or active in nature.  Passive tactics include refusal to engage in official negotiations or dialogues, or non-action on routine matters of consequence to foreign firms. 

In this case, China has waffled in recent days on previous plans for Presidents Biden and Xi to meet at the upcoming G20 meeting. Reasons for that change are unclear, but, prior to Oct. 7, China imposed full passive retaliation for House Speaker Nancy Pelosi’s (D-Calif.) visit to Taiwan by cutting off all official dialogues of consequence. Meanwhile, both the American and European Chambers of Commerce in China report that the local business climate continues to sour. China’s most effective passive option would be an export suspension of key inputs foreign firms need. Rare earths are the obvious candidate. China imposed a rare earths export ban on Japan in 2010, and, as a result, allied governments have taken steps in recent years to reduce ongoing dependence on Chinese supplies. 

China’s active retaliation options are more numerous and include (from least to most severe): 

Divide & conquer: China routinely punishes “offending” nations by isolating them from allies and transferring the offender’s current commercial sales in China to allied competitors that welcome the new business. Mindful of this divide and conquer strategy, the U.S. consulted extensively with allies before imposing the current unilateral sanctions. China will encourage third-country governments, companies and individuals to ignore the new sanctions, but Russia’s invasion of Ukraine – with Chinese support  – is facilitating unprecedented multilateral export control cooperation while deepening distrust of Chinese intentions.

Co-opt stakeholders: Chinese authorities will pressure stakeholders with business interests in China, including officials, trade associations, companies and influencers, to advocate Chinese interests. Elon Musk’s recent statements favoring China’s Taiwan policy might be an example.

Knowledge acquisition: China has for decades enticed technical talent to China with prestigious appointments, large salaries and generous benefits as well as appeals to Chinese patriotism. Chinese propaganda highlighting perceived unfairness of the new regulations will tickle patriotic sentiments to facilitate recruitment. Mergers and acquisitions, theft, espionage and other knowledge acquisition tactics will also increase.

Boycotts: China favors boycotts because they are easily tailored to specific circumstances and weaknesses. Chinese customs officials have mounted numerous de facto boycotts of key foreign exports such as Norwegian salmon in 2010 and Filipino bananas in 2012. Chinese authorities sometimes single out iconic foreign firms such as Swedish clothing vendor H&M for regulatory discrimination. China could mount such boycotts against American firms, but this common tactic may not be proportionate to the broad scope of the new U.S. regulations.

Patriotic appeals: The 2016-2017 Chinese response to South Korean deployment of American THAAD missiles is probably most analogous to the current situation. China mounted a broad campaign targeting South Korean department stores, cosmetics,  K-Pop music, tourism and cultural products. The state-run media publicized patriotic grievances, encouraging Chinese consumers to boycott a country whose leading trading partner is China. China could launch a similar state media-sponsored, anti-American propaganda campaign and boycott.

Legal crackdowns: China has crafted various legal measures specifically intended for retaliation. The Anti-Foreign Sanctions law impedes compliance with foreign regulations. China’s Unreliable Entities List provides legal cover for blatant discrimination against American firms. The Export Control Law authorizes blocking key product exports. The Anti-Monopoly Law and intellectual property laws offer other opportunities for arbitrary treatment in addition to petty harassment through tax, cybersecurity, consumer and sanitary investigations. Chinese local authorities also have a history of detaining and holding hostage foreign businessmen.

The unthinkable: Intentional or unintentional cyber or kinetic conflict are possible, though most observers assume peaceful management of increasing bilateral friction.

Xi Jinping is fond of saying that the world today is undergoing major changes unseen in a century, with the assumption that those changes favor China’s rise. The Oct. 7 regulations were probably not among the changes Xi foresaw. Whether and how China will rise above the new restrictions remains to be seen.

Jeff Moon is a China trade and government relations consultant who served previously as assistant U.S. trade representative for China affairs.