Countering Western Sanctions: Building a CES Network by Ye Yan
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Countering Western Sanctions: Building a CES Network by Ye Yan
"After the formation of a CES network, the US will in a sense be ‘digging its own grave’ by [imposing] unilateral economic sanctions.”
Dear Everyone,
Last week, Sinification looked at a recent speech by Yang Ping (杨平), head and editor-in-chief of the influential Beijing Cultural Review (文化纵横). During his address, Yang advocated building a new international system led by countries in the Global South, including China, in response to the divide that increasingly characterises China’s political relations with the West. For those of you who may have missed it, I would suggest simply reading through the first few introductory paragraphs from this post, which should help provide some context to this week’s piece:
Today’s article is entitled “Economic sanctions and international cooperation to counter them” and was published last month in “Foreign Affairs Review” (外交评论), a well-known academic publication run by China Foreign Affairs University. It has since seen been crossposted by a couple of notable outlets including Yang’s Beijing Cultural Review. Its author, Ye Yan (叶研) is a senior economist at the international R&D arm of China National Petroleum Corporation (CNPC) and an adjunct professor at China’s Southwest University of Political Science & Law. The following is a summary of Ye’s arguments:
Summary
· The increasing use of economic sanctions (both primary and secondary) and export controls by the US and its allies pose a threat to China’s economic development.
· The internationalisation of the RMB and boosting the development of China’s tech industry are effective countermeasures that need to be pursued, but they will not protect China in the short-to-medium term.
· Acknowledging that a power gap still exists between China and the US, Beijing should avoid adopting tit-for-tat responses to US sanctions when it can, otherwise it risks harming itself.
· Ye’s solution: Building an international alliance of businesses (hereafter, CES network) that could help neutralise the impact of Western sanctions.
Members: Companies that have already been sanctioned as well as those businesses that are after a “risk premium” and that are not afraid of being sanctioned.
Dynamics: The more the West uses economic sanctions, export controls and other coercive measures, the more businesses from across the world will be encouraged to join such a network and thus the more powerful this network would become.
Advantages:
The CES network would be an inter-business, not an inter-country, alliance. This would help avoid tedious intergovernmental negotiations and the risk of diplomatic clashes.
The network would help shore up supply chains, reduce the isolation felt by sanctioned businesses and provide new opportunities for Chinese businesses to develop and prosper through trading with sanctioned entities both within China and across the world.
It would help enhance China’s global economic and political influence.
The constitution of a CES network could become a “bargaining chip” when negotiating with the US and other Western countries.
In the short term, the establishment of such a network could help prevent a complete decoupling of the US and Chinese economies.
The success of the CES network would blunt Washington’s sanctions weapon and could even lead to the collapse of the US’s global political and economic hegemony.
Disadvantages:
It would take time to develop and would initially require the strong support of governments from across the world.
Its emergence could precipitate the formation of two opposing camps. However, this would be the direct consequence of the US’s own actions (sanctions, protectionism etc.), not China’s.
Additionally: China's non-sanctioned multinational companies should be encouraged to comply with US sanctions, provided that by doing so they are not harming China's core national interests.
A special thank you to Chris R. Lanzit and Dr. Graeme Ford for translating today’s excerpts. Short bios are included at the end of this post.
“The international community today is in the midst of its biggest change in a century. The US and Western countries are engaged in unilateralism. Through the abuse of unilateral economic sanctions and long-arm jurisdiction, they are isolating China and countries friendly to it economically. This affects China's economic development negatively.”
“US sanctions against Xinjiang and other regions have caused significant losses to China's photovoltaic and cotton industries. At the same time, severe US sanctions against countries friendly to China, such as Iran, Russia and Venezuela, have hampered economic exchanges between China and those countries.”
“In response to these challenges, General Secretary Xi Jinping pointed out in his report to the 20th Party Congress that we should improve our national security system and establish mechanisms to counter sanctions, interference and ‘long-arm jurisdiction’ [‘长臂管辖’] on the one hand, while promoting a high level of openness to the outside world and building a new ‘dual-circulation’ economic development structure on the other.”
The sanctioned person’s dilemma
“When economic sanctions are imposed and counter-sanctions then implemented, there is a ‘sanctioned person's dilemma’ [被制裁者困境] in which economic sanctions are usually imposed by a stronger country on a weaker and economically more vulnerable one. If the weaker country does not adopt measures to counter these economic sanctions, its economy will be harmed. If it does adopt such measures, its isolated response will often be ineffective due to the asymmetrical nature of economic sanctions. The countermeasures taken will usually cause even more harm to the [weaker] country’s economy (and the extent of this harm may be even greater than that suffered by the country that initiated these sanctions). Thus, objectively [speaking], whether or not the sanctioned country adopts measures to counter economic sanctions, it will be put at an even greater economic disadvantage and some of the measures it adopts may even exacerbate the economic disparity [between both sides], thereby creating a ‘vicious circle’.”
Defining a strategy: what China should keep in mind
“When China formulates its counter-sanctions strategy, it needs to consider the following factors fully:
First, [we] should fully recognise that there is still a gap between China and the US in terms of economic aggregates and in terms of comparative advantages in such fields as finance and tech. Therefore, China's anti-sanctions measures should be focused mainly on mitigating their impact, rather than on counterattacking [以应对措施为主，反制措施为辅], and we must endeavour to break the ‘sanctioned person’s dilemma’ [被制裁者困境].
[Comment: Ye defines ‘应对措施’ as ‘if you hit me, I’ll minimise the damage myself’ (你打我，我自行减少损害) and ‘反制措施’ as ‘if you hit me, I’ll hit you back’ (你打我，我就打你). What Ye is emphasising here is that China should currently be prioritising a softer approach over a tit-for-tat one.]Second, the US strategy of joining with its Western allies to impose an economic siege on China should be considered seriously. However, alliances with other sanctioned countries should be made with caution. China should continue to adhere to its current political diplomatic stance of ‘non-alignment, non-confrontation, and non-targeting of third parties', avoid falling prematurely [过早] into a full-scale confrontation with the US and other Western countries and leave room for flexibility in China's future foreign policy.”
“Third, [our strategy] should be based on the reality that China is not currently subject to comprehensive sanctions by the US and the West. China is only subject to US regional sanctions relating to Hong Kong and Xinjiang as well as to specific sanctions on issues such as high-tech and the South China Sea. The impact of such sanctions on China's economy is much smaller than on the economies of countries such as Iran, which have been subject to comprehensive US sanctions. The establishment of all-round cooperation to counter economic sanctions between China and those sanctioned countries will not be as significant for China's economy as it will be for theirs.”
“[Finally,] as the security-related landscape around China worsens, we cannot rule out the possibility that China will be subject to comprehensive sanctions by the US and the West. Should China [ever] be subject to such sanctions, the need for a fully fledged alliance between China and countries that are friendly [to us] will surely increase sharply. At a time when international relations are in flux, it is of high strategic importance for China to make worst-case-scenario economic arrangements [经济的底线安排] to prepare for potentially extreme situations that could occur in the future by first promoting international cooperation against economic sanctions at the corporate level [i.e. by establishing the CES network].”
“[Additionally,] promoting the building of a new international economic order [国际经济新秩序] is both a short-term response and a long-term countermeasure [to the threat of sanctions]. Since economic sanctions are a ‘struggle’ [斗争, in its Marxist sense] carried out by countries using their comparative economic advantage, weakening or eliminating this comparative advantage is the key to solving the problem. For example, the US mainly relies on its dollar and technological hegemony to implement financial sanctions and export controls, thus breaking that hegemony is the way to fundamentally blunt [the impact of] US economic sanctions. The internationalisation of the RMB and support for high-tech industries such as chips, which China is currently vigorously promoting, is part of that … [However,] the construction of a new international economic order is demanding both in terms of time and investment, and has poor short-term results.
Existing ways of circumventing economic sanctions
“Current Cooperative Practices Among Countries to Counter Economic Sanctions:
1. The first type is cooperative business transactions between sanctioned companies. With the frequent abuse of unilateral economic sanctions by the US, the practice of circumventing such sanctions is increasing rapidly.”
“China's Zhuhai Zhenrong Co. [a Chinese state-owned oil trading company] was placed on the Specially Designated Nationals And Blocked Persons List (SDN) in July 2019 for violating US sanctions against Iran. Since then, Zhuhai Zhenrong has continued to maintain oil deals with Iranian companies, and in 2020 its business even accounted for more than 60 percent of China's total commercial trade with Iran. Hong Kong's China Concord Petroleum Co. Ltd., also on the SDN List in 2019, has reportedly become central to China's crude oil trade logistics with Iran and Venezuela. This widespread practice in the international community shows that it will be difficult for the US to impose further restrictions on commercial transactions between companies that have already been sanctioned.”
2. “The second type is transactions between sanctioned and non-sanctioned enterprises that circumvent economic sanctions.”
“Currently, transactions between sanctioned and non-sanctioned companies are made possible mainly through the evasion of regulatory controls and by [conducting] transactions which are difficult to regulate (e.g., border trade). Western scholars refer to them as the ‘shadow economy’ [影子经济].”
“This is illustrated by the example of Hong Kong's Sanlian Petrochemical Company Limited (Sanlian Petrochemical), which the US Department of the Treasury (USDT) called an ‘international sanctions evasion network’ in 2022 … USDT asserted that Sanlian Petrochemical violated sanctions by concealing its real transactions principally through the extensive use of front companies. This included using a UAE petrochemical company to purchase oil and gas products from Iran on its behalf, using a UAE shipping company to conceal the origin of oil and gas products, using a Hong Kong company to pay for shipping costs, having various companies in the UAE collect payments on its behalf, and having various trading companies in Hong Kong coordinate the sale and transportation of its products. Despite a prolonged US crackdown on the network, its operations have continued to expand. As of July 2022, companies from this trading network that had been newly identified by the US Treasury and placed on the SDN List had already risen to several dozen.”
“Another manifestation of this shadow economy is the conduct of sanctioned business by small and medium-sized enterprises (SMEs) that do not have a US or Western presence. For example, in 2022, small private Chinese refiners received large quantities of sanctioned crude oil from Iran and Venezuela, which large Chinese companies were afraid to receive. Because these companies operate only in China, their small size and limited operations make them difficult to detect and less vulnerable to the US’s financial system. Coupled with the lack of US enforcement, sanctions are therefore far from being a constraint for them.”
“The extensive practice of economic sanctions evasion proves that effective regulation of the shadow economy is difficult because ‘few countries are able to monitor corporate networks, trade flows, and financial transactions closely [enough] to identify systematically potential sanctions violations. These sophisticated evasion strategies make sanctions heavily dependent on US intelligence-gathering capabilities.’ Such evasion, driven by economic interests, ‘damages economic sanctions and is difficult to mitigate’ [Ye is quoting other scholars here].”
3. “The third type is the establishment of specialised firms by governments or private individuals to conduct transactions securely with sanctioned entities.”
“The Russia-Ukraine conflict led to the EU and UK banning European companies from providing shipping insurance for Russian crude oil. [Furthermore,] international reinsurance companies have discontinued services for Russian oil shipping because almost all of the global shipping insurance market is controlled by the EU and UK … Reports show that as of July 2022, almost all of Russia's sanctions-related reinsurance business had been taken over by the Russian National Reinsurance Company. This is considered by the industry to be sufficient to ensure the ‘normal navigation’ of the Russian fleet in international [waters].”
“Another example is that in order to resist US secondary sanctions against Iran, many European countries, including Britain, France and Germany, set up a special purpose company – the Instrument in Support of Trade Exchanges (INSTEX) – in Paris in 2019 to provide payment and clearing services for Iran, which is under US financial sanctions. In practice, such companies specialising in sanctions avoidance services can also be controlled by private entities under certain circumstances, including through strategic cooperation agreements. They can first grow by engaging in non-sanctioned activities while taking advantage of US and Western technologies, and then specialise in providing services to sanctioned entities … For example, Western media have suggested that Shenzhen-based start-up Pengxin Micro Integrated Circuit Manufacturing Co. may use such a strategy to provide chip technology services to the US-sanctioned Huawei.”
4. “The fourth type is the circumvention of sanctions by sanctioned companies through business restructuring and divestiture.
“Sanctioned companies that have restructured and divested [themselves of some of their assets] can continue to engage in sanctions-related business under the first three models, while non-sanctioned companies that have restructured and undertaken divestiture can choose whether or not to continue to engage in business which is subject to sanctions according to market demand … Thus, in theory, sanctioned SMEs could circumvent sanctions by frequently dissolving and creating new companies. However, this strategy would be detrimental to the corporate image of large companies and would be difficult to work were the parent company or even the ultimate beneficiary to be sanctioned.”
What is a CES network?
“A ‘business network to counter economic sanctions’ [反经济制裁企业网络, hereafter CES network] is in theory an ideal form of international cooperation to counter economic sanctions. It is a type of countermeasure in the face of unilateral economic sanctions. It is an organisation of mutual economic assistance formed by sanctioned businesses and firms that are not afraid of being sanctioned from across the world.”
“The members of this network would be companies, not countries, and would be mainly made up of businesses in various countries that have been sanctioned by the US and the West. Small and medium-sized companies would be encouraged to join and large companies would be welcomed.
Advantages of a CES network
“Such a network could [easily] expand its membership, reshape industrial and supply chains among members, foster economic circularity [within this network] and provide trading opportunities, policy support and protection for specific industries.”
“It is of practical significance that since the economic sanctions imposed by the US on developing countries have grown in breadth and depth in recent years, such a network would not only not suffer from ‘homogeneity’ [‘同质性’] with regards to intra-network cooperation, but could actually form better supply chains both upstream and downstream, [thus] helping businesses avoid the negative effects of economic sanctions.”
“Take for example Chinese high-tech enterprises sanctioned by the US. On the one hand, some of the Western high-tech firms that join this network would risk being sanctioned and would [therefore] provide high-tech services to Chinese enterprises in order to obtain a ‘risk premium’ [风险溢价]. This would solve the upstream tech supply chain problems faced by our enterprises. As this network develops and expands, the number of Western companies willing to provide services to it would grow and its momentum increase.”
“In 2021, German software company SAP was accused of reselling US-origin technology and services to Iran in knowing violation of US sanctions. And according to Western media reports, small private Chinese refiners have reaped excess profits from their reception of large amounts of cheap sanctioned oil from Iran and Venezuela in recent years.”
“As for US companies, despite being fully bound by US sanctions rules, some still break these rules to obtain a higher ‘risk premium’. US multinationals like Halliburton, Coca-Cola and General Electric have made big profits evading US sanctions against Iran through their overseas companies.”
“A CES network would weaken the effects of isolation precisely through building an alternative business network. By establishing standardised information sharing and communication mechanisms among network members and [by providing] special policy support mechanisms and other measures to businesses, ‘internal circulation’ [内循环] within the alliance’s economy would be encouraged and the stranglehold faced by the [network’s] allied enterprises when they have been isolated would be alleviated.”
“On the other hand, the more the US uses economic sanctions, the more businesses will be moved to join such a network and the stronger this network will become. More trading opportunities will be available within it, which will in turn attract more businesses to join, thus forming a virtuous circle of mechanisms to counter economic sanctions.”
“First, it is a scheme that does not require political compromises to be made and does not require political negotiation with the countries that initiate sanctions. It can weaken the effects of economic sanctions by the US and Western countries solely on the basis of the strength of developing countries themselves, without requiring them to make concessions and sacrifice political interests. It could even become a bargaining chip in political negotiations with the US and the West.”
“Second, it is a relatively ‘soft’ [柔和] scheme that can avoid direct confrontation between countries [while] balancing their economic and political needs. This CES network would be organised by the businesses themselves and states would not [need to] become directly involved by adopting confrontational measures. It could weaken the negative impact of economic sanctions on businesses quietly and avoid the escalation of conflicts between countries. It is a softer option than most other measures designed to counter economic sanctions.”
“Once it had reached a certain level of strength, it would have a fundamental countervailing effect on US and Western sanctions. It would thus also be one of the most effective long-term countermeasures.”
Disadvantages of a CES network
“Despite the above-mentioned advantages of this CES network, which are unmatched by other countermeasures, its shortcomings are also obvious.”
“On the one hand, its development would be phased. In the early stages of its development, such a network could only somewhat alleviate, rather than completely resolve, the problems faced by sanctioned businesses. Its effectiveness will depend on the number and strength of its members and it will be least effective at the beginning of its existence. Its effectiveness will only gradually become apparent as it grows and becomes stronger, which is why it particularly needs the support of national governments in the early stages of its development.”
“On the other hand, its emergence may aggravate economic divisions in the international community. This could lead to the rapid formation of two major camps: those that oppose sanctions and those that support them. Although this is not what we want, it is the inevitable result of the US first moving to ‘reverse globalisation’ [逆全球化] by imposing unilateral economic sanctions. The US was the initiator, and ‘its ultimate effect tends to isolate the US or at least divides the world into two competing power blocs, between which the middle powers negotiate their positions'.”
Relevance of building a CES network for China
“From a technical perspective, the negative impact of current US and Western economic sanctions on China has two main aspects. On the one hand, there is the negative impact of direct sanctions on China, which leads to companies from various countries not daring to conduct business with sanctioned Chinese firms. On the other, the indirect impact of sanctions against countries that are friendly towards China deters Chinese firms from doing business with companies from those countries. The formation of a network to counter [such] sanctions would be able to mitigate the negative impact on China's economy effectively in two areas:”
“On the one hand it would allow sanctioned Chinese companies to continue normal economic interaction with companies that are part of this network, [thereby] weakening the negative impact of sanctions on China's economy significantly. Domestically, Chinese companies in this network would be able to take advantage of the situation and fill the commercial gaps created by the withdrawal of foreign companies, [thereby] providing support to the sanctioned companies while capturing relevant market shares and growing stronger at the same time. Abroad, these companies would be able to cooperate fully with companies from other countries in the network in areas such as science and technology, energy, finance, trade, and services, as discussed in this paper.”
“On the other hand, the emergence of [such a network] would make economic sanctions both a challenge and an opportunity for Chinese firms. Chinese businesses in this network could trade with foreign companies sanctioned by the US and the West without fear and obtain relatively high commercial ‘risk premiums’ from these sanctioned activities, as is currently the case with Chinese companies obtaining cheap oil and gas from Russia and Iran. As the use of economic sanctions by the US and the West becomes more frequent and expands in scope, opportunities for such transactions will increase. Chinese SMEs that are less affected by US and Western economic sanctions will especially benefit from it.”
“Of greater strategic relevance is the fact that this CES network could prevent a full decoupling of the US and Chinese economies in the short term. China's economy makes up 18.45 percent of global GDP, which is substantially different from countries such as Russia (1.85 percent of global GDP) and Iran (0.24 percent of global GDP), which are subject to comprehensive US sanctions. Despite the asymmetry inherent in economic sanctions, their imposition on economically stronger countries can lead to a massive increase in costs for the initiating country and might even backfire. Western scholars consider that the sanctions imposed by the US on China in recent years have had a profound negative impact on the US economy. Thus, if the US were to impose comprehensive economic sanctions on China once the CES network has been established, the economic power of the network’s core members would soar from the current 3 percent of global GDP to over 20 percent. This would almost enable it to compete with the US’s economic power representing 24 percent of global GDP. Such a fundamental change in relative power might even lead to the complete collapse of the US’s global system of economic sanctions.”
“Thus, despite repeated threats by Washington that it might impose comprehensive sanctions on China over Taiwan and other issues, once the CES network has been established, the US would have to consider carefully the destructive [颠覆性] effect that these sanctions could have on its system of unilateral economic sanctions and even on its global political and economic hegemony.”
“[This CES network] could play the most effective role in deterring US attempts to impose comprehensive sanctions on China … At the same time, this network would also encourage China's large non-sanctioned multinational companies to continue to comply with US economic sanctions rules and pro-actively maintain ‘linkages’ [挂钩] with the US economy, provided they do not harm China's core national interests.”
Conclusion
“For China today, the promotion of international cooperation among businesses, rather than among governments, to counter economic sanctions by means of [establishing] a CES network has enormous advantages when compared with other measures to counter sanctions. On the one hand, it can be implemented independently without the need for political compromise with the US and other Western countries on the issue of economic sanctions, [thus] effectively avoiding direct confrontation between China and the US and other Western countries. It would have minimal side effects, would provide the best support for Chinese enterprises, would offer the highest government input-output ratio, and would be sustainable in the long term. It would be able to balance China's economic and political needs, enhance the country’s political and economic influence internationally and increase its voice globally. On the other hand, it would be able to minimise the impact of US economic sanctions on the Chinese economy at both the macro-strategic and micro-economic levels, while minimising the [risk] of a complete decoupling of the US and Chinese economies in the short term. [The CES network] is the best option for China's current and future strategy to counter economic sanctions.”
“Through [this] analysis we can clearly see that the more frequently the US uses unilateral economic sanctions and the greater the number of countries and enterprises sanctioned by the US, the more powerful this CES network will become and the less effective the US economic sanctions will be. The growth and strengthening of this network is directly linked to the weakening of US economic sanctions and of the US’s economic hegemony. After the formation of this network, the US will in a sense be ‘digging its own grave’ [自身的’掘墓人’] by [imposing] unilateral economic sanctions.”
“While China's toolbox for countering economic sanctions is already well developed, Beijing should be more cautious in its use of sanctions laws [制裁法], blocking laws [阻断法], and anti-sanctions laws [反制裁法] as countermeasures to economic sanctions. It should limit their side effects to a level that is manageable in order to fully exploit them for foreign policy purposes. The goal of having a CES network to counter economic sanctions through international cooperation, as [already] discussed in this paper, may be the best solution for China at present.”
“Given the harsh external environment that China is currently facing, it is urgent for China to join and promote international cooperation against economic sanctions. The Chinese government should provide strong policy support to this end and promote the standardisation and improvement of the CES network so that it can become a powerful tool for countries to resist US hegemony and build a community with a shared future for mankind in the economic sense.”
About the translators: Chris R. Lanzit is a NAATI certified professional translator accredited since 2017. He has lived in Greater China for over 20 years, having served in the USAF and worked for Hughes Space & Comm, Boeing and ASME. Dr. Graeme Ford is a NAATI accredited Chinese translator. He has taught Chinese language and translating for many years and has lived, studied and worked in China. His Ph.D. research is in the history of translating at the Ming Court.
For different takes on this topic, see:
1. An article by He Xiaobei (何晓贝) entitled “China's financial security in the face of geopolitical risks needs to be given high priority” in which she assesses the impact that Western sanctions similar to those imposed on Russia might have on her country and concludes by providing several policy recommendations:
2. A column that I wrote last year for my former employer MERICS providing a brief overview of how Chinese analysts had reacted to Western sanctions against Russia following the outbreak of the war in Ukraine: “Western sanctions on Russia: challenges and opportunities for China”.
China watchers: A cup of coffee in London? I would love to hear about what you do and what motivates you to read this newsletter.
Countering Western Sanctions: Building a CES Network by Ye Yan
I believe that apart from companies, individuals should become part of the CES network. There are many people who have been to China, who have seen China with their own eyes, other than those who get their ideas only from Western mainstream media. These people can be a bridge between the cultures, and despite its growing strength, Chine will need to have international friends - and these people do exist.