CHAPTER 1 : THE THREAT OF CHINA’S ECONOMIC COERCION
Chien-Huei Wu (Academia Sinica)
Mao-Wei Lo (Stanford University)
Abstract
This chapter examines the characteristics of China’s use of economic coercion and assesses its effectiveness. We use four key indicators: policy changes or other responses to the measures; the trade volume between China and the targeted sector; the total volume of trade between the targeted country and China; the trade volume of the targeted sector with the rest of the world. We find that the effectiveness of Chinese economic coercion depends on a number of factors: power asymmetry; trade dependence; the elasticity of China’s demand; and the capacity of the targeted sector or country to swiftly diversify export markets. We argue that trade diversification is the first essential step to avoid economic dependence on China and becoming vulnerable to coercive measures. A collective response by like-minded countries also plays a critical role in helping targeted sectors and countries. Joint action can be undertaken to challenge the legality of China’s coercive measures at forums such as the WTO dispute settlement system. The EU’s recently adopted countermeasure – the Anti-Coercion Instrument - also serves as a good example for countries considering legislation to deter China.
In the past few decades, the People’s Republic of China (PRC) has maximized its efforts to isolate Taiwan from international relations. One of its policy instruments is the use of economic statecraft, which aims to lure Taiwan’s diplomatic partners with economic benefits or coerce them to behave in a given manner for diplomatic and strategic purposes. China may offer economic benefits, such as foreign aid and trade preferences, with a view to persuading states that recognize Taiwan to switch diplomatic relations. On the other hand, it may resort to economic coercion in order to change their behavior and shape the direction of policy making. Whether the promise of economic benefits materializes, or whether coercion is effective, demands careful analysis.
This chapter complements following chapters that examine in more depth the economic impact on countries that switch diplomatic relations or establish representative offices in Taipei. It aims to illustrate how China uses its economic might to pursue strategic and diplomatic objectives by shaping the behavior of third countries, and in some cases competing with Taiwan for diplomatic partners. The chapter first examines the policy instruments available for China’s economic statecraft in general, and assesses its use of economic coercion in particular, and then highlights their characteristics. The chapter then considers the effectiveness of China’s use of economic coercion based on four indicators: 2 the trade volume of the targeted sector into the Chinese market; the total trade volume of the targeted country with China; the trade volume of the targeted sector with the rest of the world; and finally, the responses of countries that have been targeted in terms of changed behavior. After assessing the effectiveness of China’s use of economic coercion and examining the response of the targeted sectors/countries, this chapter offers suggestions on how to ameliorate the impact of Chinese coercion and how to preserve policy autonomy.
Introduction
