Smart Sanctions for China

As evidence mounts that the Chinese Communist dictatorship’s delays and deceptions in reacting to COVID-19 have cost many thousands of lives in the United States and across the world, it is time to take measures to hit back fast and hard.

But the measures should be smart, readily achievable, and targeted. The United States has a great deal of untapped economic leverage over China. China needs access to U.S. markets—including our capital markets—for its economy to function well. The United State should use its economic and financial leverage to impose costs on China’s behavior.

A model exists for what can be done—the programs of disinvestment and other economic sanctions that were brought to bear in the 1980s against apartheid South Africa. Until the Chinese Communist regime reforms, it should be treated in the 2020s as South Africa was in the 1980s.

China needs to improve its performance, especially by becoming more honest and transparent on public health issues with a global impact. Not only the latest coronavirus but also the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003 originated in China. China can no longer be allowed to impose such terrible risks of disease on the rest of the world.

What Congress and the President Can Do

China also needs to be held to higher standards in environmental protection, labor conditions, and human rights. Even setting aside the question of higher tariffs, which are among the most powerful economic tools the United States can wield, here are five immediate action items for the administration and Congress.

First, the president can instruct the Cabinet members who form the Committee on Foreign Investment in the United States (CFIUS) not to approve any acquisitions of U.S. companies by Chinese firms. The CFIUS law was amended in 2019 to better target China, but greater change is needed.

CFIUS approves acquisitions of U.S. entities by foreign-owned firms and its role is to ensure that U.S. national security is not compromised. As we recently have learned, food security is national security.

In May 2013, under the Obama Administration, CFIUS approved the Chinese acquisition of Smithfield Farms, a major meat-processing company. Concerns were voiced that year but went unheeded. According to Smithfield’s website, it is the world’s largest pork processor and hog producer. Now, a Smithfield plant in South Dakota has become “the largest coronavirus hotspot” in the United States, raising legitimate questions as to the origins of the breakout at the plant as well as Chinese corporate governance as it relates to health and safety standards.

Second, the Securities and Exchange Commission (SEC) can ramp up enforcement as to Chinese listed companies in the United States, prohibit new listings outright, and delist those that are already listed—at least until Chinese companies demonstrably comply with accounting standards that are generally accepted in the United States.

Chinese firms have proven that their accounting standards cannot be trusted. For example, a recent investigation found a preliminary $314 million accounting fraud at money-losing Chinese coffee chain Luckin Coffee—heralded by Chinese handlers as the “Starbucks of China”—which triggered a 76 percent collapse of its Nasdaq-traded shares. American investors who bought shares since its initial public offering which raised around $600 million will be hard pressed to recoup their investments.

According to the U.S.-China Economic and Security Review Commission, as of February 2019, 156 Chinese companies listed on the U.S. exchanges with a total market capitalization of $1.2 trillion. More Chinese firms are hoping to raise funds in the United States soon. Why should Chinese firms with shady accounting practices enjoy the privilege of raising money in the world’s best capital market?

Divesting from Beijing

Third, the Federal Retirement Thrift Investment Board, which manages a 401(k) style retirement plan for current and former federal employees and military members, should add a global investment option excluding Chinese investments.

Senators from both parties including Marco Rubio (R-Fla.) and Jeanne Shaheen (D-N.H.) already have opposed the investments into China. China knows this is a political game and is intent on funneling foreign capital into its markets. China’s inclusion into Morgan Stanley Capital International (MSCI) indices such as the MSCI Emerging Markets Index, which brought in billions of much-needed dollars in passive investment flows to China, was incredibly suspect. The Wall Street Journal reported that China pressured the MSCI to include China in its index.

Rather than outright stop investments into global markets, which appears to be on course, Congress and the administration should exercise their authority over the Federal Retirement Thrift Investment Board to tailor the investment option for federal employees in a way that allows current and former federal employees the option to capture the growth of the emerging markets while excluding China. Excluding China specifically would send a stronger message to the Chinese than excluding all emerging markets—which include companies listed in allied countries like Mexico, Brazil, and South Korea.

So-called “Emerging Markets Ex-China” funds are already available elsewhere. Inclusion of a global or emerging market fund without Chinese listed companies would send a strong message of condemnation to China in that it would lose a piece of the over half a trillion dollars of the largest pension fund in the United States.

Fourth, in addition to actions by the Trump Administration, Congress needs to take decisive economic action against China. Like Japan, Congress could appropriate stimulus funds to repatriate U.S. businesses operating in China, supporting American employment at a critical juncture and increasing tax revenues. These funds must be very large because the allure of China’s huge market is great, however elusive profiting from it has been for U.S. business. This provides the “carrot” to accompany the “stick” of tariffs.

Make Pharmaceuticals American Again

Fifth, the U.S.-China Economic and Security Review Commission provides a list of additional, pragmatic measures that Congress should take against China, including requiring the Food and Drug Administration (FDA) to compile a list of all drugs that are not produced in the United States, and requiring the drugs made in China currently to be made in America.

Next, U.S. government purchases should be aligned to only purchase drugs from U.S. production facilities. These measures, if phased in over an appropriate period of time, would revive drug manufacturing in the United States, a critical infrastructure need highlighted by the shortages of drugs resulting from the coronavirus outbreak.

These measures are just a start. Further actions such as more direct sanctions and tariffs, and to move manufacturing out of China, can be added to them if they are not effective in inducing needed change within China.

Before 2020, these needed reforms were held up in the hopes of a better, more prosperous economic co-existence with China. It was widely, but falsely, believed by American elites and political leaders in both parties that a wealthier China would soon become a more democratic China, or at least a responsible member of international society. But now that we have seen the mounting deaths and trillions of dollars in economic devastation that China has wrought, the perceived benefits of cooperation no longer outweigh the costs.

The time to act is now, for our own future and to exact a sufficient toll to ensure that the Chinese Communist dictatorship begins to accept the norms of civilized behavior, including taking reasonable steps to prevent the onset and spread of infectious and deadly viruses. Otherwise, it should be replaced altogether.

About Chad Bayse

Chad Bayse is a Navy Judge Advocate and former Counselor to Attorney General Jeff Sessions and attorney at the National Security Agency. The views expressed in this article are his own.

Photo: Wang Zhao/AFP via Getty Images

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