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Home » China Hardliners: Fix Symbolic and Ineffective U.S. Sanctions
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China Hardliners: Fix Symbolic and Ineffective U.S. Sanctions

i2wtcBy i2wtcJune 22, 2024No Comments7 Mins Read
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A former Trump-era U.S. trade official known as a “China hawk” said the Biden administration should strengthen sanctions and export controls against China, but that current sanctions and controls are insufficient to stop Chinese companies from exporting dual-use products to Russia or accessing U.S. technology.

In Nazak Nikahtar’s view, U.S. sanctions imposed on China can be easily circumvented because targeted companies can hide by setting up multiple layers of shell companies or by holding minority shares in their own companies.

Nikahtar, who served as Under Secretary for Industry Analysis at the U.S. Department of Commerce’s International Trade Administration (ITA) from 2018 to 2021, spoke in an interview with Asia Times.

Nazak Nikakhtar, partner in the international trade department at US law firm Wiley Rein LLP. Photo: www.wiley.law

She suggested that the US government use “sectoral sanctions” to punish those who helped support Russian military forces in Ukraine.

“You can set up shell companies to evade U.S. sanctions. But if you use the SDN list to enforce sectoral sanctions, [Specially Designated Nationals and Blocked Persons List]”That would make it a little bit more difficult,” said Nikaktar, now a partner in the international trade department at US law firm Wiley Lane LLP and head of the firm’s national security practice.

“Targeting financial institutions is a way to have broader economic impact,” she said. “If a shell company is suddenly handling tens of millions of dollars of transactions overnight, banks should be wary.”

She said these red flags allow the U.S. government to identify suspicious companies.

Sectoral sanctions

Following Russia’s invasion of Ukraine’s Crimean Peninsula in early 2014, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued a Sectoral Sanctions List (SSI List) in July of that year, adding key Russian financial and energy sector figures to the list.

The SSI list has expanded significantly since the outbreak of the Ukraine war in February 2022. Companies in which a company on the SSI list has a direct or indirect majority stake are subject to sanctions. Still, some Russians and Chinese have found ways to circumvent U.S. sanctions.

Nikahtar said the current US sanctions on Russia and China are actually too narrow and incremental, creating opportunities to create systems to circumvent the sanctions.

“I feel like the Biden administration has made a big move on sanctions against China because traditionally they don’t impose sanctions on Chinese companies,” she said. “Do these things matter? Symbolically they do. But do they have a deterrent effect in the way that we’re imposing sanctions? No.”

“The US government really needs to think about a different approach because the current approach is not as punitive and ultimately makes the sanctions less effective,” she said.

Since the trade war between the U.S. and China erupted in 2018, Washington has imposed sanctions on around 1,500 Chinese entities, accusing them of supporting Moscow’s military in Ukraine, human rights abuses in Xinjiang, supplying high-tech products to the People’s Liberation Army and launching cyber attacks.

These sanctions were imposed after a lengthy investigation: after Russia fired an Iranian-made Shahed-136 suicide drone at Ukrainian forces in August 2022, it took the U.S. Commerce Department’s Bureau of Industry and Security (BIS) a year to identify and sanction three Hong Kong companies involved in supplying drone parts.

Sanctions against Chinese banks

Treasury Secretary Janet Yellen, visiting Beijing on April 8, said the U.S. could impose sanctions if Chinese financial institutions were involved in transactions related to transport that bolsters Russia’s military.

Russian daily Izvestia reported on April 12 that four more Chinese banks have recently stopped accepting remittances from Russia, following three major Chinese banks that stopped accepting remittances from Russia in February.

On April 22, a U.S. official told Reuters the United States had no immediate plans to impose sanctions on Chinese banks.

Nikahtar said the threat of sanctions against Chinese banks was a real risk for China, especially given the country’s economic problems have so far delayed its de-dollarization plans.

“I would encourage any administration not to look at tools in the traditional way, but to think about combining tools to get the most out of them,” she said, adding that the other tools she mentioned were tariffs and import restrictions.

“The government has a lot of information about how China and Russia do business,” she said. “The government can impose sanctions on entities that may be indirectly involved in the transactions, or that are significant enough and large enough to have a real economic impact on the Chinese economy.”

For example, she said, Chinese automakers should be sanctioned if they are found to be supporting Russia’s war efforts by supplying armored vehicles to Moscow.

“Rethinking the use of sanctions and other tools can go a long way in narrow areas but have a larger, more significant economic impact,” she said. “I think the U.S. government is reluctant to think outside the box.”

Indeed, Washington has recently expanded the scope of its sanctions against Chinese companies.

Gold bars. Photo: Wikimedia Commons

On June 12, the U.S. Treasury Department imposed sanctions on Hong Kong-based logistics service provider VPower Finance Security for its involvement in the transportation of Russian gold and its conversion into fiat and cryptocurrencies through multiple companies in the UAE and Hong Kong. VPower’s clients include major Chinese banks, retail brands, and the Hong Kong government.

Chip export restrictions

The Biden administration has tightened export controls over the past few years to curb China’s semiconductor industry.

But media reports say China can still get its hands on high-performance U.S. chips through third countries or smugglers, and Semiconductor Manufacturing International Inc. (SMIC) successfully produced a 7-nanometer chip using deep ultraviolet (DUV) lithography last year. China has also been upgrading its electronic design automation (EDA) software in recent years.

On March 29, the United States amended the Export Administration Regulations to make it more difficult for China to access U.S. artificial intelligence chips and chip-making tools through third countries.

“If historically 90 percent of exports of a particular semiconductor went to China and now it’s going through a third country that doesn’t have the industry to support that volume, I think the U.S. government should think carefully about where it’s exporting to,” Nikahtar said.

“Before granting a license, the U.S. government could begin investigating the parties involved in the financial transaction, their banks, beneficiaries and account holders,” she said. “It could initially license a very limited amount of transactions and then send it to an end-use checker to look at all the institutions involved in the transaction and verify its legitimacy before granting any further licenses.”

She said there are plenty of red flags the U.S. government could look into, but unfortunately, the Commerce Department’s export control division is “more focused on export facilitation than on actual regulatory control.”

At the same time, she said the U.S. government should ease export restrictions on partners and allies and develop a roadmap for rebuilding the semiconductor supply chain.

“China has the majority of the end users of semiconductors. So what do we do in the meantime as the U.S. government aims to move the supply chain out of China? Are there other markets we can export semiconductors to? How long will it take to build them? What happens to companies’ revenues in the meantime?”

Nikahtar also said the U.S. government is currently somewhat superficial in its analysis of China’s technological capabilities and tends to underestimate the excellence of Chinese engineers.

“If a country wants to have an effective national security policy, it should always overestimate its opponent and have the stronger policy,” she said.

Read: Chinese EV companies can absorb EU tariffs: Expert

Related article: Hong Kong exports recover despite US-China trade war

Follow Jeff Pao on: Jeff Pao 3





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