Exploring the Domestic Foundations of Chinese Economic Sanctions: The Case of Australia

More than two years have passed since the People’s Republic of China (PRC) began imposing a broad range of restrictions on Australian trade in what is widely regarded to be a campaign of economic coercion. Despite the apparent sanctions affecting numerous Australian export industries with high exposure to the mainland market, there is now a broad consensus that Beijing’s efforts have been unsuccessful. [1] The measures had a negligible impact on the Australian macroeconomy and did not drive Canberra to make any policy concessions to address Beijing’s long list of ostensible grievances (Australian Department of Treasury, September 6, 2021).

It is well established that economic sanctions often fail to change state behavior, typically because the political demands of the sanctioning state are too high. But most sanctions still impose significant economic costs on their targets. Curiously—despite a widely held view that Australia was highly vulnerable to Chinese economic pressure (Global Times, June 10, 2020)—Beijing’s campaign fell short and appeared poorly targeted. The overwhelming majority of affected Australian industries were able to redirect their exports to other markets without significant friction.[2] The economic costs of some barriers, such as those on barley, were significantly higher for China than Australia (Australian Bureau of Agricultural and Resource Economics and Sciences, June 2020). Some of Australia’s industries that are most reliant on the Chinese market were left untouched altogether. [3]

If—as is widely assumed—China’s objective was to coerce, why did its apparent sanctions not hit the mark and asymmetrically impose politically significant costs on the Australian economy? Exploring this question can yield new insight into the dynamics shaping Chinese economic sanctions—an instrument of statecraft Beijing continues to employ regularly, including recently against Lithuania in 2021 and Taiwan in early August (PRC Charge d’affaires Lithuania, May 3; United Daily News, August 5).

Explaining the Australian Case

Existing explanations of the limited impacts of the sanctions have focused on factors external to China, such as the adjustment strategies adopted by sanctioned Australian actors and the respite afforded to those actors by positive trends in global commodity markets. [4] But what about factors on the Chinese side? Given that Chinese foreign policy initiatives are often formed by compromises between agencies and are sometimes undermined by the sub-state actors tasked with implementing them, it is worthwhile exploring how the process of introducing sanctions inside China may contribute to their apparent ineffectiveness. [5] Here, we examine open-source reporting on the Chinese actors that initiated the barriers and how those barriers were imposed in practice (see Table 1). We consider how these factors potentially shaped which Australian industries were targeted and the nature of the disruption that occurred.

How China Imposes Sanctions

Examining Chinese sanctions is complicated by Beijing’s novel approach to implementation. Most governments in world politics declare their imposition of sanctions publicly, promulgate restrictions in official regulations, and link the measures imposed to explicit objectives vis-à-vis a target country. By contrast, Beijing seldom acknowledges it is imposing sanctions, and does not state specific demands or policy objectives. Nor are restrictions imposed via formal sanctioning laws that specify what trade is restricted and which agency is responsible for enforcement. To provide scope for officials to deny that trade is being restricted for political reasons, restrictions are typically implemented via ‘informal’ means that provide another explanation for disruption such as by fomenting consumer boycotts, privately instructing firms to stop trade with a target, or citing technical legal violations—such as contraventions of sanitary and phytosanitary rules—to block trade.

Unpacking the origins of China’s sanctions therefore requires one to engage in an exercise of reverse-engineering—beginning from observed trade disruption and working backwards to uncover how it was implemented, which actors were responsible for initiation, and what their underlying motivations may have been. The Australian case suggests at least three origins.

Origin 1: Top-down

Some restrictions appear to have been directed by central authorities in Beijing. This is most evident in cases where restrictions were implemented by central agencies, and where there was apparent coordination between different actors across the bureaucracy targeting specific Australian products.

First, some barriers were initiated by China’s central-level Customs Administration (GACC). Australian coal exports were blocked at ports across China after an order was issued by GACC to all local jurisdictions (Guancha, November 25, 2020). GACC was also responsible for declining to renew export permits for 25 of 28 Australian registered forage exporters (Global Times, April 20, 2021).

Other restrictions appear to have been initiated by the National Development and Reform Commission (NDRC), another central agency, which appeared to leverage its jurisdiction over the Tariff Rate Quota (TRQ) allocation which local companies rely on to import Australian cotton and coal. Given the opacity of the TRQ system (World Trade Organization, 2021), the NDRC is in a powerful position to direct company import decisions, including country sources. In the days leading to the opening of TRQ applications for cotton (October 15, 2020) importers were verbally instructed to not buy Australian cotton (Grain Central, October 16, 2020). State-owned coal enterprises were also reported to have received verbal notice from Customs to not buy Australian coal (Sina, October 13, 2020). A month later, the NDRC increased China’s annual coal import quota, but excluded Australia (South China Morning Post, November 27, 2020).

Coordination between central agencies was seen in at least two cases. As noted above, Australian coal was subject to both non-tariff barriers from Customs and quota restrictions from the NDRC. After tariffs and countervailing measures were applied to barley by China’s Ministry of Commerce (MOFCOM, see below), the GACC imposed further restrictions (citing biosecurity concerns) on barley when Australian exporters sought to circumvent the tariffs (Grain Central, October 28, 2021).

In practice, such top-down measures were most likely directed by a central body—probably within the State Council or NDRC—which coordinated the industries to be targeted, how disruption would occur, and which departments would execute them. If this is the case, there are two possible implications. First, if the objective of the sanction was to impose maximum economic costs on Australia, the barriers were poorly designed. Technical input from state units with a deep understanding of global commodity markets and Australia’s integration in them was either not sought or not taken up by decision-makers. Alternatively, it may suggest that the sanctions were motivated by other objectives.

Origin 2: Industry bodies and bureaucratic interests

A second set of restrictions appear to have originated with domestic industry groups and bodies within the Chinese bureaucracy motivated to support sanctions due to parochial interests. This applies especially to the anti-dumping and subsidy restrictions imposed on Australian barley and wine.

The investigation into Australian barley was formally initiated by the China Chamber of Commerce in 2018 and ruled upon by MOFCOM in May 2020. The barriers on barley appear to be at least partly driven by the objective of vulnerability mitigation, where China is seeking to reduce dependence for key food products from any single country and to protect domestic production (The Diplomat, June 19, 2020). The Ministry of Agriculture and Rural Affairs had large input into the case, including through a formal submission to the investigation (MOFCOM, 2020). The submission opposing the tariffs by the China Alcoholic Drinks Association (Beer Sub-association, comprised of Chinese brewers that used Australian barely) was brushed aside.

In the case of wine, the investigation was initiated by the China Alcoholic Drinks Association (Wine Sub-association) in August 2020, and subsequently ruled on by MOFCOM in November of the same year (MOFCOM, 2020). Barriers on wine can be seen as a case of orthodox protectionism to address the grievances of Chinese wine companies that have long complained that Australian imports were capturing their market share (Future Directions, February 23, 2021; Wine China, April 19, 2018). While the restrictions may have partially followed a coercive logic, there are reasons to believe that they were pushed by domestic actors who saw a chance to leverage the China-Australia dispute to advance their own causes.

The notion that certain restrictions were imposed not to maximize coercive pressure on Australia but because targeting a certain industry was consistent with protectionist or other industry policy objectives is not surprising. A rich body of academic literature demonstrates how sanctions may often end up reflecting the preferences of core domestic interest groups from the private sector or within the state bureaucracy, including in the Chinese context. [6] This may help explain the limited costs generated by the restrictions on Australian trade.

Origin 3: Bottom-up

Finally, some restrictions appear to have emerged in an ad hoc way from the bottom up. This was seen in the technical and biosecurity barriers for several commodities, which were initiated by individual local-level Customs Administrations. Australian beef and lobsters were initially held up at Shanghai Port and airport in a provincial Customs Administration known to be strict. Guangdong Customs appeared heavily involved in the initial holdup of logs (Australian Financial Review, November 8, 2020; Asia Beef Network, June 2020; World Trade Organization, 2021). In these cases, the barriers began locally before they were followed in other provinces.

While top-down imposition cannot be ruled out, the uneven rollout of the measures is more consistent with local initiative. Moreover, the types of technical breaches identified would, in normal times, be overlooked or resolved within months, which did not happen in this case. The deterioration of Sino-Australian relations in 2020-2021 occurred alongside other policy campaigns and dynamics related to China’s international trade, including  the dual circulation policy, concerns about food self-sufficiency and import diversification and a political environment where officials were rewarded for adopting nationalistically assertive and even truculent postures towards foreigners, so-called ‘wolf warrior diplomacy (NetEase, 14 July, 2021; MOFCOM, July 14, 2020; Gov.cn, April 27, 2020). This backdrop may have created incentives for local officials to initiate barriers on Australian trade to display nationalism, fealty and advance their careers. With vertical reporting lines and Party offices embedded throughout government agencies, doing so would not go unnoticed.

In such cases, the decision to target certain Australian industries may not have been specifically calculated to coerce at all. Instead, certain products may have faced barriers because a genuine – if minor – infringement was leveraged by local actors to advance their own interests, albeit conditional on the disruption being deemed acceptable by their superiors.

Implications

Our analysis suggests that the drivers of China’s barriers on Australian exports vary by commodity, that restrictions were introduced by diverse actors with multiple objectives, and that the targets were at times potentially ad hoc and ill-considered. These characteristics, arising from the somewhat ambiguous and generally poorly understood bureaucratic processes underpinning the implementation of China’s sanctions, provide additional insight into why the barriers fell short of imposing the sorts of costs necessary for compelling policy change in Canberra.

At least two implications arise from the picture we have painted. The first is that any assessment of whether Chinese sanctions have or have not ‘failed’ needs to consider the fact that the decision to sanction, and the subsequent execution of that decision, are unlikely to be precisely crafted towards the single end of maximizing economic costs on politically salient industries in target states so as to cause behavioral change. In the Australian case, other plausible objectives include achieving domestic goals related to food security and protectionism, sending deterrence signals to other countries, or even an effort by the PRC to meet the terms of the 2020 ‘Phase One’ deal with the U.S. [7] That multiple goals may exist is not controversial—and has indeed been acknowledged by sanctions scholars since at least the 1970s. [8] James Reilly notes that China’s use of economic statecraft more broadly aims to pursue multiple goals simultaneously. [9] However, the objective, origins and multiplicity of contemporary Chinese sanction episodes is seldom discussed.

The analysis also has implications for discussions of how Chinese sanctions end. Following recent reports that China was mulling the removal of the ban on Australian coal, some have speculated that other measures might also be removed because they are perceived to have been ineffective at imposing costs (Bloomberg, July 14;  News.com.au, July 15). However, one should not hold their breath. Removal may not be straightforward if actors within the Chinese system still view the restrictions to be achieving other goals.

Table 1. The domestic foundations of Chinese restrictions on Australian exports 2020/21   

Scott Waldron is an Associate Professor in the School of Agriculture and Food Sciences at the University of Queensland. He has an undergraduate degree in Asian Studies and a PhD in Agricultural Economics. He has conducted 15 projects and written eight books on agricultural development, policy and trade in China, and speaks fluent Chinese.

Victor A. Ferguson is a PhD Candidate in the School of Politics and International Relations at the Australian National University.  He researches issues at the intersection of international political economy, international law and international security.

Darren J. Lim is a Senior Lecturer in the School of Politics and International Relations at the Australian National University. His research spans the fields of international political economy and international security, with a focus on geoeconomics.

Notes

[1] See Alan Beattie, “Australia offers timely lessons in resisting Chinese trade coercion,” Financial Times, February 9, 2022; Jeffrey Wilson, “Australia Shows the World What Decoupling From China Looks Like,” Foreign Policy, November 9, 2021.

[2] Especially those that produce relatively homogenous commodities traded in bulk in global markets. See Victor Ferguson, Scott Waldron, and Darren Lim, “Market adjustments to import sanctions: lessons from Chinese restrictions on Australian trade, 2020–21,” Review of International Political Economy, July 2022.

[3] In some cases, most notably iron ore, industries were likely untouched because disrupting trade would have been very costly for Beijing. However, cost-avoidance does not explain why some other unaffected industries that asymmetrically rely on the Chinese market (such as dairy) were not targeted.

[4] Victor Ferguson, Scott Waldron, and Darren Lim, “Market adjustments to import sanctions: lessons from Chinese restrictions on Australian trade, 2020–21,” Review of International Political Economy, July 2022.

[5] Such work emerges from the long-standing literature on ‘Fragmented Authoritarianism’ in China. See Susan Shirk, “The Domestic Context of Chinese Foreign Security Policies,” in Saadia M. Pekkanen (ed.) et al. The Oxford Handbook of the International Relations of Asia, (Oxford Handbooks, 2014); Lee Jones and Shahar Hameiri. Fractured China: How State Transformation Is Shaping China’s Rise. (Cambridge University Press, 2021)

[6] See for example William H. Kaempfer and Anton D. Lowenberg, “The Theory of International Economic Sanctions: A Public Choice Approach,” The American Economic Review, Vol. 78, No. 4 (Sep., 1988), pp. 786-793; Darren Lim and Victor Ferguson, “Informal economic sanctions: the political economy of Chinese coercion during the THAAD dispute,” Review of International Political Economy, (2021): 1-24.

[7] On signaling to other countries, see Stephen Kirchner, “A Geoeconomic Alliance: The potential and limits of economic statecraft”, United States Studies Centre, September 30, 2021.  On China’s use of informal trade barriers to partially fulfill the ‘Phase One’ deal, see Tuo Chen, Chang-tai Hsieh and Zheng Michael Song, ‘Non-tariff barriers in the U.S.-China trade war’, National Bureau of Economic Research, August 2022. Australia and the U.S. compete for a number of markets in China.

[8] James Barber, “Economic Sanctions As a Policy Instrument,” International Affairs (Royal Institute of International Affairs), Vol. 55, No. 3 (Jul., 1979), pp. 367-384.

[9] James Reilly, Orchestration: China’s Economic Statecraft Across Asia and Europe (Oxford University Press, 2021).