Constricting the Means of Production: Ally-Centric Cooperative Economic Deterrence

There is clear evidence that China has historically used its economic might to punish U.S. allies for stances that the Chinese Communist Party (CCP) disapproves of. China’s economic statecraft also has profound national security implications as the world contends with a more global and assertive China. The United States and its network of allies and partners should now work to leverage their collective economic might to deter China’s coercive agenda and provide policymakers tools short of armed conflict. Developing economic leverage through limiting China’s ability to produce goods and maintain its infrastructure could shift China’s behavior through a deterrence by punishment approach. The key, however, lies in Thomas Schelling’s broad definition of deterrence “to prevent from action by fear of consequences.” For China to be deterred, the consequences must be clear, credible, and overwhelming, which requires the United States to work with allies and partners around the world.

There is serious and growing concern about the military dimension of competition between the United States and China, whether that be China’s aggressive actions in the South China Sea or increasing concern over Taiwan, as China continues to invest in and develop its military capabilities. The United States and its allies and partners are comparatively well-positioned to meet this threat. Alliance networks have been carefully nurtured over decades but have been postured towards armed conflict—the worst-case scenario. Where the United States and its allies and partners have less experience working together is in countering specifically coercive behavior in the economic domain. Consensus there has been far harder to reach as allies compete economically; however, a shared threat and common purpose could help overcome these barriers in specific circumstances.

There are hosts of possible economic tools to deter and target the CCP. Tools like financial sanctions are significant measures that the United States can often take unilaterally. Additionally, the U.S. government could continue to pressure the World Trade Organization to force China to meet its obligations. These relatively broad economic tools may not be as successful in deterring China against attacking the economies of the United States and its allies than more tailored effects. Targeted export restrictions that impact China’s ability to manufacture goods or impact key Chinese government priorities could be a valuable new tool in shaping how China perceives the risk and consequences of its actions. 

While China’s dominance in some areas of manufacturing is well understood—particularly in its dominance of rare earths processing, China is reliant on the West for key technologies that support Chinese society and manufacturing. These dependencies emerge in almost every sector, whether that be high speed rail, power generation, or semiconductor manufacturing. Almost universally, these vulnerabilities are the result of China’s limitations in high precision, complex manufacturing. 

To overcome the limitations of China’s industrial base, China has turned to the West to bridge the technology gap and support the means of production in Mainland China. In the semiconductor industry, for example, the most advanced production equipment is built by the Dutch company ASML, and the export of this technology into China is heavily regulated. While forthcoming CSIS Defense-Industrial Initiatives Group research will analyze China’s dependencies more broadly and the export tools needed to leverage them, there is currently vital work to do in building a network of partners and allies who are prepared to economically deter China. 

A handful of U.S. allies control the vast majority of the market for numerous types of precision equipment that China is importing at scale. Germany, South Korea, Japan, and Taiwan control the lion’s share of the global market for these types of goods. Working across all these alliances allows for a deterrence by punishment approach, in which China’s access to key goods can be curtailed if they attempt to target western economies. Only by working together can the United States and its allies successfully control China’s access to goods that power Chinese manufacturing and the Chinese military industrial complex.

Clear signaling about the consequence of a given action is a necessary component of deterrence, and these have been developed in mutual defense agreements. However, they are almost always limited to deterring kinetic acts of aggression. To economically deter actors, the United States and its allies would need to agree on economic mutual defense agreements. When China restricts access to rare earth minerals, for example, a network of allies could rally together to limit China’s ability to access foreign manufacturers. For this signal to be an effective deterrent, the consequence should be clear, meaning that the network of allies behind it and the policy mechanisms they will use should be decisive and credible. 

Laying the groundwork for economic deterrence by defining consequences in advance is necessary to ensure that China understands the costs of their economic statecraft. The United States should lead the way in building these relationships and defining when they ought to be used. Several steps are necessary to make these signals credible. The U.S. Department of Commerce may need to announce draft rules in the Federal Register, the State Department will have to make clear the lines in the sand and the trigger points for action. Congress may have to grant authorities to build this network and compel an administration to act. Deterrence works when it is credible, and it will take a deliberate and careful approach to make economic deterrence a viable tool of statecraft. 

Alexander Holderness is a research assistant with the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Cynthia Cook is the director of the Defense-Industrial Initiatives Group and a senior fellow with the International Security Program at CSIS.