China Sanctions Might Ferry The UK Into Hot Water – Analysis

As the new UK Prime Minister, Liz Truss intends to designate China as a ‘threat’ rather than simply a ‘systemic competitor’. Her designation is consistent with the latest United Kingdom defence review, which calls China ‘the biggest state-based threat’ to the country’s economic security.

There have been actions to match these words. The UK government has been mandated to remove all Huawei equipment from 5G networks by 2027. It has declined a Chinese acquisition of the electronic design software company Pulsic on security grounds and is likely to block the purchase of the United Kingdom’s largest semiconductor plant, Newport Wafer Fab, by a subsidiary of the Chinese firm Wingtech.

The United Kingdom’s bid to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) by the end of the year can also be partly understood as a swipe at Beijing — an aspiring member. CPTPP provisions on ‘diagonal cumulation’ in its rules of origin could allow EU components of UK products to be treated as ‘originating’ in the United Kingdom, making them eligible for preferential treatment. This would help reduce, at the margin, economic reliance on China.

These moves against Beijing reflect not only the United Kingdom’s security concerns but also its disquiet over Beijing’s questionable human rights record. The United Kingdom has expressed concern over issues such as the treatment of Uyghurs in Xinjiang, the suppression of democratic rights in Hong Kong and the exercise of what has been dubbed ‘debt-trap diplomacy’ under the Belt and Road Initiative.

And then, of course, there is the Taiwan issue. As the former foreign secretary, Truss summoned the Chinese Ambassador to the United Kingdom, Zheng Zeguang, on 10 August 2022 to discuss Beijing’s ‘aggressive and wide-ranging escalation’ against Taipei.

In taking commercial action against Beijing, the UK government will no doubt draw lessons from Australia’s recent quarrels with China. But doing so could produce a dangerous miscalculation. Reflecting on Beijing’s reaction to Canberra’s call for an inquiry into the origins of the COVID-19 pandemic might indicate that it is better to take on China collectively, in the company of friends.

A second lesson would be that underlying mutual interests in trade and economic links can withstand political tensions, however sharp these might be. After all, the iron ore trade between Australia and China, which is of crucial mutual interest, has not been fundamentally challenged.

But such lessons may not be applicable in the context of the United Kingdom’s growing concern about the China ‘threat’. If the China rhetoric is meant to be a political distraction from the United Kingdom’s dire economic situation, there is the risk of broad strategic disquiet being conflated with action to sanction China’s trade in a way that could escalate tension and the risk of conflict.

The extreme — though not inconceivable — sanction option would be a collective effort to limit China’s access to Taiwanese semiconductors, which are highly dependent on imports of US semiconductor manufacturing equipment. This would, in effect, widen the Trump administration’s sanction that prevented the Taiwan Semiconductor Manufacturing Corporation from supplying to Huawei.

Washington has spent years steadily ratcheting up restraints on China’s ability to develop a domestic chip capacity by limiting the kinds of chip-making equipment that US firms can export to China, while enlisting friendly parties, like Japan’s Nikon Corporation and the Netherlands’s ASML (Advanced Semiconductor Materials Lithography) to join its technological blockade.

The result is that China is now dependent on Taiwan for 90 per cent of its semiconductors — the lifeblood of China’s economy. That dependence creates a vulnerability that, in an extreme scenario, could be exploited by a collectively endorsed chips embargo. The United Kingdom, already subject to US arm-twisting over Huawei and having upgraded China’s ‘threat’ status, might be persuaded to subscribe to such an embargo.

The ultimate dilemma is that an embargo on China’s access to Taiwanese semiconductors is among the more plausible triggers for a Chinese military attack on Taiwan.

The history of conflict sparked by trade sanctions is replete with precedents. Among the earliest is the embargo placed on Megara by the Athenians, which led to the Peloponnesian War in 431 BC. It is an example that resonates given recurring talk of a ‘Thucydides Trap’ emerging as China’s growing clout rubs up against the established power of the United States.

Fortunately, there are alternative ways to resolve differences with Beijing. These include the World Trade Organisation, although it lacks a fully operational dispute settlement mechanism and both the United States and the United Kingdom are among the many non-members of the Multi-Party Interim Appeal Arbitration Arrangement. In debt management for poor countries, dialogue with Beijing is possible within the ‘Common Framework’ agreement between the G20 and the Paris Club to which China is now a party.

As Tim Summers, a professor of Chinese Studies, advised in his 2020 paper for the Chatham House think tank, ‘Engagement with Beijing … not revisionism and hostility, should be at the heart of UK policy towards China’.