Today, the immediate question is not a life-or-death issue, but a more modest one of economic choices. Both consumers and companies crave China, either for its products or for profits from its domestic market. The combination creates nearly total indifference to a huge EU trade deficit, which is only noted with respect to job losses. These are difficult to measure and to distinguish from the overall effects of productivity gains and globalization. Our thirst for competitively priced products and the legitimate interests of our companies in the Chinese market therefore generate vulnerabilities. In the trade conflict initiated in 2017 between the United States and China, rising prices for US consumers have been debated more often than the impact on Chinese producers and exporters (who did suffer losses, although in the aggregate these were compensated elsewhere, notably with the EU).
This dilemma also hardly existed with the Soviet Union, a poor Leninist state, and it exists only for limited constituencies with Russia, a small economy that is only significant for energy and minerals. Politically and economically, China poses a challenge which can be compared with the perils from Europe’s early 1930s or from the Far East of the same era, more than with those from the Soviet Union and Cold War era. Europe in the 1930s was already very interdependent in economic terms, while the Great Depression divided democracies inside and among themselves. In the Far East, Imperial Japan’s extreme nationalism coincided with a fear of sanctions or blockades that could limit its access to global resources. This created Japan’s own preference for a security-driven self-sufficiency and a disastrous preemptive lunge into the Pacific. We have an echo of this with China’s new "dual circulation" economic strategy, and the construction of the world’s largest navy by numbers. Decoupling can become a self-fulfilling prophecy, and preemptive moves create counter moves from abroad.
It is in this context that Western efforts to link human rights issues with overall relations should be viewed. Following similar US legislation, the European Union has adopted in December 2020 a guidance for a "restrictive measures (sanctions) regime to address serious human rights violations and abuses". Pointedly, these do not include sectoral/trade bans, nor do they have much extraterritorial effect, in the sense that only EU operators are bound to implement them. Often dubbed Europe’s Magnitsky Act, this is obviously a weaker regime than the panoply available to the US government. Still, this is a concrete linkage between values and interests, an association that the EU also claims to have achieved in its negotiations with China over a Comprehensive Agreement on Investment (CAI). Japan is also currently considering legislation similar to the EU over human rights abuse: nearly a first, although Japan briefly participated in the G7 sanctions against China in 1989 and occasionally sanctioned the Burmese military junta in the 1990s.
China’s retaliation toolbox against sanctions
While the EU has adopted limited and targeted sanctions against four regional cadres over the issue of repression in Xinjiang, China has responded with wider and loosely justified sanctions against European institutions and individuals.
Separately, a boycott against H&M, a Swedish company that had vowed not to source Xinjiang cotton has sprung up, from a thinly veiled government top-down initiative. Clearly, official countersanctions against European companies would not work well for China in its overall economic relationship with the EU, given that China had a €181 billion trade surplus with the EU-27 in 2020.
But a semi-informal boycott applies well to companies that depend on China as an important market: China therefore has a lot of room to go for company-targeted sanctions. This is not the case of H&M, as China only represents around 5% of its global sales. H&M will pull through in any case, and Sweden is not a big EU member state. The present test is intended to have a "chilling effect", while not grave enough to trigger a massive reaction. Footwear and apparel companies that produce and sell in China are on notice that they should not implement American or European sanctions.
Companies are therefore likely to be taken hostage in a political tussle between Xi Jinping’s defiant regime and critical democracies. Mr. Xi himself has asked Starbucks to "play an active role in promoting US-China trade cooperation and bilateral ties" in the context of the new Biden administration. Starbucks has nearly 5,000 stores in China and aims for 6,000 by 2022. How difficult would it be to shutter them or to entice a consumer boycott? When in Berlin in 2014 and addressing Mrs. Merkel, Mr. Xi compared Sino-German relations to driving a car, "look far ahead to run safely and without hitches": as a matter of fact, the German auto industry, so present in China, is under a geopolitical threat. China promotes win-win interdependence. But on the flip side, it can sanction foreign companies in a context of increased self-sufficiency.
From this, it is clear that sanctioning China or moving against one of its state-backed interests is not going to be cost-free. However, the stronger a partner of China is, the more immune its companies may be to sanctions: throughout the trade conflict since 2017, China studiously refrained from sanctioning major US companies (major US internet platforms had already been barred, as China rejects foreign platforms to preserve its "Internet sovereignty"). It is debatable whether American agricultural exporters really suffered, but their Canadian colleagues, as well as Australia, have indeed seen sudden stops in some Chinese crop purchases. Norway - not an EU member state - saw its salmon sales to China take a hit after the attribution of the Nobel Peace Prize to Liu Xiaobo, Chinese dissident and human rights activist. European countries or firms have been occasionally threatened (a direct threat of denying medical supplies to the Netherlands, thinly veiled threats against German auto industry) but rarely hit. The H&M case presents a new situation: a similar movement had seemed to start for Carrefour in 1998, but quickly stopped. In other words, China has in the recent past been more willing to initiate sanctions that affect constituencies with some electoral influence rather than major go after investors in China.