Commentary

Mitigating China's economic coercion

China this week escalated its economic coercion against Australia by imposing two tariffs on the import of Australian barley. The first is a 73.6 percent tariff on the agricultural product and the second an additional 6.9 percent arguing that the Australian government subsidizes its farmers to grow this lucrative crop.

Seen in tandem with the beef import ban on four Australian slaughterhouses, Beijing is pressuring Canberra hard to drop its calls for an independent COVID-19 investigation and enforcing economic pain on Australia for what Beijing perceives as intolerable behavior to a country that has “benefited so profoundly” from trade with China.

These actions raise serious questions for Japan and its friends. How does Japan respond to such a clear demonstration of punitive economic coercion against one of Tokyo’s closest friends in the region? What about other interested parties? Do Canadian, American and other agricultural exporters take advantage of Australia’s thorny relationship with Beijing, as Brazil did in the midst of the U.S.-China trade war by exporting soybeans and other agricultural products?

Looking at the short term, especially in the wake of economic damage caused by the COVID-19 pandemic, the logic of expediency to quickly deliver economic goods to the struggling agricultural industry is sensible.

In that scenario, those countries with amicable relations with China would fill the vacuum being created by the economic coercion against Australia. The candidates include Brazil and Russia, among others.

In the medium to long term, this sends the wrong message to states that engage in economic coercion. The message being sent here is that countries vulnerable to punitive economic measures have little choice to relent to Chinese or others' demands as other states will not collectively stand up to blatant economic coercion.

What can be done?

Japan and other liberal democratic states cannot make up for the sheer volume of agricultural and other exports that the Chinese market consumes. Even if they could open their markets as a temporary alternative, there would still be a huge gap. Nevertheless, an agreement to buy goods from a targeted state may relieve some of the economic pressure being applied by coercive states.

Duanjie Chen of Canada’s MacDonald Laurier Institute correctly points out that Beijing practices economic coercion in a sophisticated and well-worn manner, often using discreet methods to evade World Trade Organization disputes and calculated precisely for maximum impact and tailored to split Western allies.

To lessen the effectiveness of these practices, Japan and other like-minded states need to be mindful of these patterns and build multilateral mechanisms to create more resilience against punitive economic tactics.

In the first area — discreetly evading WTO disputes — Japan and other middle powers need to work collectively to close the loopholes in the WTO so they can't be exploited to deliver painful economic messages to states that are deemed to cross Beijing’s red lines.

To accomplish this task, WTO reform is crucial and that means collectively lobbying the United States to work with allies to reform the WTO such that it functions better and can protect member states from economic predation.

If consensus cannot be achieved to reform the WTO, then like-minded states should consider a scrap-and-build approach that starts with like-minded countries but aims to achieve the same objectives.

The second area Chen identified was the precise calculation for maximum impact. Japan felt this in 2010 with the rare earth embargo, which hurt its high-tech firms and automobile industry. Australia is feeling this now with its beef and barley industries. Canada felt similar measures against its canola, soybean and pork industries in the wake of the arrest of Huawei executive Meng Wanzhou. The tactics even included the hostage diplomacy of Michael Kovrig and Michael Spavor, Canadian citizens who are still detained to this day.

Mitigating this hard-line approach requires a multilevel approach and multilateral cooperation. At the first level, like-minded states need to brainstorm and commit to collective and equal reciprocation of the economic coercion. For instance, collectively stopping the export of key ingredients, components or otherwise, to China until the respective coercion stops.

Here agricultural products come to mind. The growing middle class in China also has a growing appetite for the high-quality and safe agricultural products from countries like Japan, Australia, Canada, the U.S. and the European Union. These like-minded states should find ways to collectively limit their agricultural exports when one or more of its members are subject to economic coercion. China is vulnerable in other areas as well.

Reputational costs are critical levers that should be collectively applied as well. Chen mentions withdrawing membership from the Asian Infrastructure and Investment bank (AIIB) as a possible measure. I would add memorandums of understanding signed under the Belt and Road initiative (BRI), and third-country infrastructure projects as well. These are crucial institutions that China has invested both treasure and political resources in to bolster its international credentials as a provider of global public goods.

Japan would play a key role here in that Beijing has assiduously courted Japan to join the BRI and third-country infrastructure projects as a way to build credibility for the BRI. Without partners, China’s signature initiatives cannot be internationalized and China will not be recognized as a globally admired and responsible stakeholder.

Another key initiative to be collectively adopted by Japan and other countries in their trade negotiations with Beijing is a clause that expressly forbids economic coercion on Japan or its allies. This kind of clause could be included in other trade agreements and negotiations that Beijing deems critical to its socio-economic development.

Thinking creatively, Japan and like-minded countries such as Canada, Australia and South Korea should think about ways to introduce their own “poison pill” into trade agreements. The U.S. did this with the USMCA free trade agreement with Canada and Mexico by the inclusion of a clause in which the U.S. had a veto over Canada and Mexico’s other free trade partners, in particular if either entered a free trade deal with a “nonmarket country,” i.e., China.

In this hypothetical poison pill, or let’s call it a “musketeer clause,” trade agreements would include a clause that required partners to collectively respond to economic coercion against one of its members by applying diplomatic, economic and other pressure on the offending actor. This could be a collective boycott, collective lobbying in international organizations, collective reciprocal tariff increase, etc. In short, an embodiment of the Three Musketeers' famous motto "One for all, all for one."

The third area that needs be addressed is the tactic of trying to split Western allies. The above hypothetical clause would go far in doing that by creating groupings of like-minded states interested in protecting their national and collective interests.

This will not be enough. With China being the largest trading partner of Japan, South Korea, Australia and many ASEAN states, an economic rebalancing must take place in which states collectively socially distance themselves from China. Here, the key is that they are less dependent on bilateral relations for economic prosperity and more dependent on balanced, multilateral trade relations with a collection of like-minded, rules-based countries and China.

Complete decoupling from China is not realistic considering the level of integration of our economies. It is also not in the economic or security interests of the states in questions nor the global community. What is in the interests of Japan, Australia, South Korea, Canada and other middle powers and smaller powers is finding ways to buttress a rules-based international order and to push back against a track record of punitive economic policies.

Resistance is not futile. Victims of economic coercion need to channel their own Winston Churchill and epitomize his views on never giving up in the face of force: “This is the lesson: never give in, never give in, never, never, never, never — in nothing, great or small, large or petty — never give in except to convictions of honor and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”

Stephen R. Nagy (@nagystephen1) is a senior associate professor at International Christian University and a visiting fellow with the Japan Institute for International Affairs.

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