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Geoeconomics and economic statecraft are expressions that are frequently heard. Both terms have almost the same meaning, that is, to use economic and technological power to coerce other countries to exhibit friendly behaviors or refrain from hostile activities. Thus, economic statecraft, which includes financial sanctions, has been dubbed “war by other means.”

For Japan, and many other countries, it would be preferable to counter China and alter its behavior without military action. The United States and Japan, allies of advanced economies, appear to have agile statecraft capabilities.

However, living in the age of geoeconomics or economic statecraft, we should keep in mind the negative impacts. Japan needs to be cautious to avoid becoming trapped in an economic statecraft battle between the United States and China.

It is increasingly clear that the U.S.-China rivalry is escalating in terms of economic statecraft. Recently, Carry Lam, chief executive of Hong Kong, complained in a local TV interview that she could only use cash and was unable to use her credit cards because Hong Kong’s commercial banks closed her accounts after she was placed on the U.S. Treasury’s financial sanctions list.

Financial institutions that conduct business with listed persons can potentially be punished by the United States. Lam commented that “it’s an honor to be so unjustifiably sanctioned by the U.S. government.”

The U.S. financial sanction targeting Lam was invoked after China enacted the Hong Kong security law in June 2020 to crack down on pro-democracy movements. The sanction is based on a series of U.S. laws, including the International Emergency Economic Powers Act and the Hong Kong Autonomy Act.

Although these are U.S. domestic laws, their coercive powers go beyond U.S. jurisdiction. Thus, countries that are targets of U.S. sanctions, such as Iran and Venezuela, argue that the sanctions are extraterritorial and in breach of international law.

The U.S. sanctions inflict heavy damage on targeted countries and persons. In 2015, Iran agreed to freeze its nuclear program after being hit heavily by U.S. and U.N. sanctions. Kim Jong Un of North Korea, who rarely makes foreign visits, traveled to Singapore and Hanoi to meet with U.S. President Donald Trump in the hope of getting sanctions lifted or eased.

The personal damage to affected individuals is also enormous. It is easy to understand how difficult it would be for Lam, the highest-ranking official and the most powerful politician in Hong Kong, to be unable to use a bank account or credit cards.

The Venezuelan ambassador to Japan, Seiko Ishikawa, once complained to me that a major bank in Japan declined to open accounts for him and his wife, making their lives in Tokyo very bothersome. As Venezuela is targeted by U.S. sanctions, the Japanese bank was simply following a U.S. instruction not to provide services to Venezuelan officials.

In early December 2020, the United States added 14 people to the sanctions list, including senior members of China’s National People’s Congress, because of their role in suppressing democracy in Hong Kong. The United States appears to feel confident that sanctions are working well.

Traditional embargoes that banned trade with targeted countries had loopholes and therefore proved ineffective. Goods could be smuggled to the countries clandestinely or openly by crossing land and sea borders.

Many cases of clandestine trade with Iraq occurred in the 1990s despite a trade embargo, and, currently, oil is being smuggled to North Korea via ship-to-ship transfers on the high seas.

The financial sanctions that the United States began to use in the aftermath of the 9/11 terrorist attacks, banning dollar clearances or payments, have a much greater impact.

If a financial institution violates the sanctions and provides dollar clearance services, the U.S. government could revoke the institution’s bank license. No bank wants to take this risk and, therefore, hesitates to be involved in any business perceived as dubious by the United States.

The Trump administration has been very active in using such financial sanctions, which have become an increasingly important tool in its dealings in world affairs.

However, we should not overlook the downsides of using financial sanctions. First, sanctions alone do not achieve the goal of changing the behavior that the United States wishes to suppress or alter.

For instance, North Korea has been under various sanctions for almost 20 years. Although it has come to the negotiating table several times with the aim of having the sanctions eased, North Korea has not abandoned a single nuclear bomb or ballistic missile as the United States desired. Instead, it has conducted six nuclear bomb tests and now has a formidable missile capability.

Iran has been under sanctions for 40 years since the 1979 Islamic Revolution but is still challenging the United States and Israel.

Carry Lam complains about her personal difficulties in everyday life, but it is naive to imagine that Beijing will restore freedom and democracy in Hong Kong owing to the pressure of U.S. sanctions.

Second, sanctions tend to continue for many years. As the targeted countries do not always change their behavior, often being determined to resist the pressure and pursue their own goals of building nuclear bombs or clamping down on democracy movements, the United States and like-minded countries imposing the sanctions have to retain and strengthen them. Prolonged sanctions make the lives of ordinary citizens in the targeted countries more and more miserable.

Third, it is not only the United States that imposes sanctions. China now follows the U.S. practice. It has recently enacted the Export Control Act, which has an Entity List system like that of the United States, under which exports of sensitive technology to foreign countries is prohibited.

The Chinese Hong Kong National Security Act has clauses to punish anyone worldwide who supports Hong Kong independence movements, threatening extraterritorial impacts just as the U.S. sanctions regime does.

In fact, China has been more active in economic statecraft. Recall that China was said to have slowed its rare earth exports to Japan in retaliation for the arrest of a Chinese fishing boat captain in 2010.

Now amid tensions with Australia, China is placing high tariffs on Australian wine. Beijing is never passive in the current economic statecraft battle and has many weapons, including the National Security Act.

As a result, global financial institutions, including those of Japan, find it very difficult to avoid violating the laws of China and the United States.

These two giant countries are now on the same course, introducing laws that aim to coerce foreigners and foreign companies to avoid conducting business with “the other side.”

As U.S President-elect Joe Biden must continue to confront hostile countries, he will almost certainly use financial sanctions as a key coercive measure. His policy advisers are keen to make sanctions work better by addressing the three concerns or downsides of sanctions outlined above.

Clear articulation of the purpose of sanctions is a priority. A realistic approach would focus on simple goals, such as nonproliferation of nuclear weapons and preventing rampant violation of human rights, instead of enlarging sanctions in an attempt to achieve democratization or regime change. Another priority is the coordination of sanctions with diplomacy and military pressure, as a key to successful economic statecraft.

Japan has the potential to become an economic statecraft power given its large economy, advanced technology and global banks. However, it needs to coordinate more with the new U.S. administration to strengthen the power of U.S. sanctions and avoid the unexpected negative impact on Japanese firms.

Hiroki Sugita is a columnist at Kyodo News

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