Europe’s Next Problem: U.S. Sanctions Against China

BERLIN—During the last two weeks, it has been widely reported that the U.S. government has been developing a package of unprecedented economic sanctions against Chinese companies and individuals it alleges have benefited from cybertheft by their government. There seems to be a consensus in the United States behind a tougher response to Chinese hackers — five of whom were already indicted in May 2014. But, according to several reports, there were differences within the administration about whether or not to announce the sanctions before Chinese President Xi Jinping’s visit to Washington, which begins on September 22. While the State Department wanted to delay the announcement — one official quoted in the Financial Times said it would “crater” the visit and there has even been speculation that China could cancel the visit if sanctions were imposed beforehand — law enforcement officials want to send a message that the United States was serious.

If the United States does go ahead with this tough new approach, it may create a dilemma for Europeans analogous to the one they faced after the United States imposed economic sanctions in response to the Russian annexation of Crimea last year. Although the sanctions the United States is now considering imposing on Chinese companies and individuals are not as extensive as the sanctions imposed on Russia, they suggest that the U.S. government could be prepared to apply a hard “geo-economic” approach to China despite the economic interdependence between them. It is easy to see how sanctions could be extended and expanded in future — China itself may retaliate and prompt a further escalation. In any case, although the United States may not expect EU member states to impose similar sanctions of their own, its sanctions will force banks operating in the United States to cease doing business with sanctioned companies and individuals and will therefore also affect European banks as sanctions against Iran did. Last July, for example, BNP Paribas was fined $8.97 billion and banned from dollar clearing operations for a year for violating U.S. sanctions against Iranian companies and individuals.

In some ways, it could be even more difficult to maintain transatlantic unity over sanctions against China than it was to do so over sanctions against Russia. While the annexation of Crimea and destabilization of Ukraine was widely seen as a clear threat to the European security order, even in those countries such as Germany that were generally in favor of close co-operation with Russia, the European interest is much less clear in this case — not least because revelations about U.S. National Security Agency surveillance have left some Europeans worried about U.S. cyber spying. Though European companies are also concerned about cybertheft, the temptation will be strong for European governments to stay out of what some may see as a bilateral dispute between China and the United States. While EU member states are not dependent on China for energy as they are on Russia, they are increasingly dependent on China as an export market and as a source of investment. For example, Germany’s exports to China are almost double its exports to Russia. Meanwhile the U.K.’s focus on making the City a center for renmimbi trading led one U.S. official to accuse it of “constant accommodation toward China.”

Thus the new U.S. sanctions illustrate once again the potential that the rise of China has to undermine the transatlantic relationship. In a conversation with Australian Prime Minister Kevin Rudd in 2009, Secretary of State Hillary Clinton famously asked: “How do you deal toughly with your banker?” It is striking that, since then, the United States seems to have found a way to do exactly that. But Europeans now increasingly face their own version of Clinton’s question. For some EU member states, particularly exporters like Germany, the question will be: How do you deal toughly with your customer? For other member states, particularly the countries of the eurozone “periphery,” it will be: How do you deal toughly with your investor? Unless EU member states can find answers to these questions, China could again divide the West as it did over the Asian Infrastructure Investment Bank.

Hans Kundnani is a senior transatlantic fellow with GMF’s Europe program, based in Berlin. Follow him @hanskundnani