U.S. sanctions would also risk retaliation through horizontal escalation in other domains. China might adopt measures to undermine U.S. centrality in the global economic system, such as efforts to undermine confidence in the U.S. financial system or to more rapidly shift away from dollar-based trade and investment. Alternatively, China could increase the pace of land reclamation and militarization in the South China Sea or more frequently confront U.S. ships and aircraft operating in international waters and airspace. China could also become less cooperative on a host of other issues that are important to U.S. interests, from climate change to the nuclear deal with Iran.

 

ERECTING EXTENSIVE sanctions against China would be unwise and infeasible, but more limited sanctions may shape Chinese behavior with fewer negative effects. In particular, measures designed to deter internationally recognized “bad conduct” by Chinese individuals, companies and agencies—particularly those who commit economic espionage—could be effective. On the other hand, sanctions are likely to be less useful in maritime disputes involving ambiguous territorial claims.

When considering specific sanctions, policymakers should ask five questions. First, do existing authorities provide mechanisms for sanctioning the actors responsible? Second, would sanctions be sufficiently powerful to compel these or future actors to change their behavior? Third, would foreign partners cooperate in levying such sanctions? Fourth, how might the adversary respond and how damaging would these responses be? Fifth and finally, would the imposition of sanctions reinforce or undermine norms of good conduct and strengthen or weaken the long-term viability of the overall U.S. sanctions position? The answers to these questions vary depending on the specific sanctions under consideration:

Countering Chinese economic espionage: The attractiveness of carefully targeted sanctions is most clear in the cyber realm. The United States has already raised concerns about cyber espionage against private corporations and the Department of Justice has indicted five Chinese military hackers. The Federal Bureau of Investigation reported that cyber espionage increased by 50 percent in 2015. U.S. officials have pointed the finger at China for some of the most egregious attacks—including the massive hack of the Office of Personnel Management in which Chinese persons stole security-clearance information for over twenty million U.S. citizens. Although President Obama and President Xi announced a “common understanding” that neither government would engage in cyber economic espionage, early reports suggest that government-sponsored Chinese hackers have continued what has been called “the greatest transfer of wealth in history.”

Chinese actors engaged in theft of U.S. intellectual property could be designated under existing U.S. authorities, which would effectively prevent them from doing business in U.S. markets or with U.S. companies. Although this punishment might not force domestically focused Chinese companies to change their behavior, it would send a signal to companies with a U.S. presence that engaging in such activity entails significant risks. Such sanctions could be coordinated with efforts to protect trade secrets to demonstrate the seriousness of U.S. concern to Chinese leaders.

From an international perspective, targeted sanctions might prove attractive to other developed economies suffering from persistent Chinese cyber espionage. The economic damage from the sanctions themselves would be limited in developed countries because Chinese firms stealing intellectual property are hampering growth abroad. In addition, the risk of China implementing its own sanctions on economic espionage would be limited because U.S. law already prohibits this type of economic espionage. Moreover, Chinese groups already conduct sustained cyber attacks on U.S. businesses, so sanctioning a number of these actors might not substantially change the frequency or fierceness of intrusions. There is no doubt that China could take action in other domains, but targeted designations could set U.S. red lines and make clear that the United States and its partners are willing to take a more forceful stance to uphold norms of good conduct in cyberspace.

Countering Chinese economic coercion in maritime disputes: Another potential area for targeted sanctions is in response to Chinese economic coercion in disputed maritime zones. Beijing has sought to consolidate control of the South China Sea by constructing a “Great Wall of Sand” on disputed maritime features. In addition, China has used coast guard and fisheries vessels to push other claimants out of disputed waters in the East and South China Seas. Beijing has also used its own economic statecraft to limit tropical fruit imports from the Philippines and rare-earth exports to Japan in response to clashes over maritime claims. Finally, questions are mounting about whether Chinese investments, from the port of Darwin in Australia to the island of Saipan in the Commonwealth of the Northern Mariana Islands, might be intended to alter U.S., ally or partner behavior in peacetime, or change military options in a conflict.

Countermeasures have already been applied in several of these cases. For example, the United States, the European Union, and Japan brought and won a case at the World Trade Organization arguing that China had applied export quotas on rare-earth elements in 2010. Meanwhile, the United States has criticized construction on disputed features and operated platforms within twelve nautical miles of some features. Nevertheless, the pace of construction has accelerated in recent months.

At the moment, U.S. officials do not have existing mechanisms to sanction businesses engaged in bad behavior in maritime disputes. Yet, there are several tempting targets for sanctions, most notably China Communications Construction Company Dredging (CCCCG), which conducted dredging at disputed South China Sea features, and China National Petroleum Corporation (CNPC), which moved an oil rig into waters disputed with Vietnam. Further, China has reportedly invited private or semiprivate firms to invest in building the infrastructure on a number of these reclaimed islands. U.S. officials could obtain the legal authority necessary to sanction CCCCG , CNPC or other Chinese entities if the president were to declare a national emergency related to China’s destabilizing actions in the region. This would no doubt be seen as a significant escalation.

Nevertheless, sanctioning entities involved in construction or development in disputed areas could alter their calculus, disincentive destabilizing conduct and thereby decrease tensions in the long-term. Detailed understandings of these firms and their domestic political connections within China would be required, but there are reasons to believe that they might be responsive to outside pressure. For example, CCCCG and CNPC are already listed on the Shanghai Stock Exchange, and CCCCG was reportedly planning a new listing on the Hong Kong Stock Exchange. However, CCCCG has delayed its initial public offering in Hong Kong, allegedly because the Exchange asked a number of questions about dredging activities in the South China Sea. CCCCG or CNPC could find their business partnerships damaged and their ability to deal in U.S. dollars curtailed if they were added to the Office of Foreign Assets Control’s Specially Designated Nationals List. This would in turn harm the companies’ value, affect their ability to raise funds and impact their operations. Such efforts might not stop Chinese coercion in the South China Sea, but they would impose a cost both on the Chinese companies involved and on Beijing’s reputation.

However, even if U.S. targeted sanctions were effective in pressuring specific firms to change their behavior in the South China Sea, some major obstacles would remain. First, other countries in the region have previously engaged in similar activities, so it might be difficult to build robust international support to impose truly biting sanctions. Additionally, the United States would have to decide whether to impose similar sanctions on other countries’ firms operating in disputed waters. Moreover, Chinese leaders could offset private losses incurred by U.S. sanctions, which would limit their effectiveness. Furthermore, China could respond asymmetrically by escalating in other domains in which Beijing has more leverage.

 

BEIJING’S INCREASINGLY assertive behavior is triggering a global debate about potential responses. Unfortunately, diplomatic and even military measures have thus far appeared largely ineffective at deterring destabilizing Chinese activities in cyberspace and maritime zones. Washington’s growing debate about applying other foreign-policy tools, including sanctions, is therefore inevitable. Indeed, the mere discussion of sanctions could itself prove a valuable deterrent.

In considering sanctions on Chinese individuals and entities, American policymakers should be realistic about their likely effectiveness. Applying an extensive international sanctions regime on China would be unwise and infeasible, so sanctions would have to be more limited and targeted. Moreover, unlike the recent sanctions on Russia and Iran, which were relatively low risk, sanctioning China carries substantial risk of damaging political and economic blowback. Nevertheless, a carefully calibrated economic response may be effective in altering Chinese behavior, and targeted sanctions on certain Chinese actors would demonstrate to Beijing that Washington is serious about upholding international rules and norms, and that is willing to accept some risk to do so. Beijing is already using economic leverage to change the behavior of U.S. national security and business leaders, as well as that of U.S. allies and partners. Washington shouldn’t be afraid to respond in kind.

Zack Cooper is a fellow at the Center for Strategic and International Studies, a doctoral candidate at Princeton University, and a member of the Center for Sanctions and Illicit Finance board of advisors. Eric Lorber is a senior associate at the Financial Integrity Network, an adjunct fellow at the Center for a New American Security, and a senior advisor at the Center for Sanctions and Illicit Finance.