China's new economic weapons

How to find the key insights

Introduction; The origin story

1. As China expands its trade and investment relationships, it is using economic ties to advance political and geopolitical goals; given the size and reach of China’s economy, such actions generate outsized consequences for the global economy and international politics. (p. 99)
2. In the past decade, China’s use of economic coercion has become a common and well-studied feature of its economic statecraft; since 2018 this pattern has evolved, with China’s economic statecraft and tools of coercion expanding; today China is developing, testing, and deploying new legal and regulatory tools to impose targeted costs on companies and countries for political or geopolitical purposes. (pp. 99-100)
3. China developed these tools to give it better options to retaliate against economic and technology restrictions of other countries, especially the US; all indications are that China will rely even more heavily on its new economic weapons as it seeks negotiating leverage. (p. 100)
4. China may be on the threshold of a further evolution in economic statecraft where it prepares to use these tools to achieve national economic security goals like fostering its centrality in global supply chains, among others; the Chinese government is now weaponizing numerous forms of its global economic and technological connections. (pp. 100-101)
5. China’s development and refinement of its new economic weapons have their origin in Beijing’s reaction to four events from 2019 to 2022:
   1. Washington’s 2019 placement of Huawei on the Entity List, triggering Beijing’s realization that it needed more robust means of retaliation than merely a strategy based on tariffs, and leading to the creation of China’s own Unreliable Entities List (UEL);
   2. US and EU actions related to Hong Kong and Xinjiang, leading to Beijing’s advancement of the UEL, adoption of blocking rules on foreign extraterritorial legislation, and adopting an Anti-Foreign Sanctions Law (AFSL) targeting individuals involved in formulating and implementing sanctions on China;
   3. The February 2022 Russian invasion of Ukraine and the coordinated Western sanctions response, including scrutiny of Chinese support of Russia, which led to Xi Jinping’s call for new and better tools to counter foreign sanctions; and
   4. The October 2022 US export controls on advanced semiconductors and related manufacturing equipment, a watershed moment given the breadth and depth of the export controls, galvanizing China to modify and expand its own export control regime, and catalyzing China’s shift to using export controls more proactively. (pp. 101-104)

The economic arsenal

1. After the above events, in 2018 China began developing new tools for economic competition and coercion, further refining and adding to them after Biden took over in 2021. (p. 104)
2. The Unreliable Entity List, the first and highest profile weapon was created in 2019 and immediately implemented as a retaliatory tool against a US company; no further action was taken under the UEL until 2020 when MOFCOM published provisions listing the criteria under which companies can be included on the UEL and the consequences of listing; in 2023 the list was operationalized when two US defense firms were added to the list for selling arms to Taiwan; in 2024 three more US defense firms were added, and China signaled enhanced implementation of restrictions on any companies doing business with firms listed on the UEL. (pp. 104-106)
3. In late 2024 and early 2025 China ramped up use of the UEL with thirty-eight firms currently listed, targeting firms complying with the Uyghur Forced Labor Protection Act and in response to Biden’s technology restrictions on China and Trump’s initial imposition of tariffs on Chinese exports, though the UEL is mostly used against defense companies involved in arms sales to Taiwan; China’s use of the UEL has been narrow and targeted on specific entities, such as subsidiaries, involved in the offending action, preserving space for Chinese companies to do business with US counterparts linked to the offending entity; many of the UEL listings in 2025 have been symbolic, focused on sending a message rather than imposing costs; since 2024, most listings have been triggered by a policy action not linked to Taiwan. (pp. 106-109, Chart 1)

4. In January 2021, China issued “Blocking Rules” to protect Chinese companies from the extraterritorial application of third-country laws; under the rules, the State Council can direct Chinese entities to not recognize, execute, or observe extraterritorial foreign sanctions and to sue for compensation in Chinese courts for losses from such sanctions; to date this tool lacks clear implementing rules and Beijing has not acted on it. (pp. 109-110)
5. Passed in June 2021, the Anti-Foreign Sanctions Law is now one of Beijing’s top economic weapons of choice, with room for the government to refine and expand the law in the future; the AFSL: i) provides a core legal foundation under anti-sanction measures and statutes like the UEL, ii) fills a gap in the previous two rules by giving the government broad discretion to place individuals and organizations on sanctions lists with their families and senior managers, and iii) provides a legal basis for Chinese companies and entities impacted by foreign sanctions to sue foreign companies and individuals for complying with the sanctions. (pp. 110-111)
6. Though initially drafted to respond to foreign actions China perceived as violating its sovereignty, the AFSL is increasingly used to enact broader economic goals; it eventually may be used by domestic Chinese tech firms to sue US companies complying with US export control laws for damages in Chinese courts; starting from 2021 and 2022, the AFSL has been used to sanction former US officials, research and advocacy organizations, and Europeans for their positions on Hong Kong, Tibet, Xinjiang, and Taiwan on US firms for arms sales to Taiwan; use of the AFSL accelerated in 2024. (pp. 110-111)
7. Although China has long used tariffs as an economic weapon, in 2024 China’s national legislature passed the Tariff Law, establishing the formal legal basis for Chinese authorities to impose tariffs; though the legislature holds sole legal authority over taxation, the Tariff Law gives the State Council the authority to impose tariffs on “reciprocity principles”; this change means that China is sharpening its ability to fight trade conflicts on an ongoing basis. (pp. 111-112)
8. Chinese authorities have bolstered their ability to target and penalize US companies via cybersecurity reviews and investigations, beginning with the formation of the Cyberspace Administration of China in 2014 and the release of the first Cyber Security Review regulations in 2021; in 2023, China used the cybersecurity review process against US companies in apparent retaliation against US export controls on China’s chip industry. (pp. 112-113)
9. Another important tool is China’s ability to block globally significant merger and acquisition (M&A) deals, ostensibly on antitrust grounds but often for political goals linked to US-China relations; China has blocked several pending M&A deals for political reasons; in 2024 it expanded its powers by announcing an investigation into an already concluded deal; China also revived an antitrust investigation in early 2025 in response to Trump administration tariffs. (pp. 113-114)

The economic "rules of engagement"

1. Beijing has built and used these new tools for retaliation, but their purpose may be evolving:
   1. China’s use of these weapons has largely been incremental and proportional, but in the last two years Beijing has used more tools more frequently and become more comfortable doing so; the authors expect this trend to accelerate, perhaps markedly.
   2. Despite Beijing’s bombastic rhetoric, its use of weapons has been precise, limiting the impact on US-China economic and political ties, leaving Beijing room to maneuver.
   3. Beijing liberally uses warnings and threats to preserve room to maneuver regarding potential penalties, dividing actions into multiple steps to maximize its ability to control the application of a penalty and to save room for negotiation.
   4. China’s use of new tools is shifting from reactive to proactive; China is poised not only to retaliate more often, but to use them to assert China’s global interests.
   5. A rough division of labor is emerging in China’s deployment of these weapons: it is increasingly using export controls and government reviews to penalize US companies, denying targets access to needed Chinese imports and to sell into China’s market - more frequent and broader use of these tools should be expected; the AFSL is being used to impose sanctions on individuals and organizations and the UEL is being used to penalize companies engaging in defense trade with Taiwan and with almost no material impact on the targeted firms – symbolic actions to date.
   6. Beijing appears to be setting the precedent for extraterritorial application of its various sanctions, not only to match US efforts, but to advance China’s ability to gain greater global control over mineral supply chains. (pp. 116-118, Graph 1)

Implications of China’s economic diplomacy

1. A new era of Chinese economic statecraft is here; Beijing is more confident in using them to inflict both precise and broad-based pain with the result that US-China economic and technological competition is becoming more confrontational and costly. (pp. 118-119)
2. The evolving trajectory of China’s use of these new tools is of the most concern as recent behavior suggests growing comfort with using tools in new ways and applying them to a broader set of challenges; the recent and rapid evolution from using them as tools of retaliation to using them to develop greater control over global markets and supply chains is a worrisome possibility and perhaps eventuality; however, China is still using them in deliberate and discreet ways to limit escalation and collateral damage, taking into account China’s economic well-being. (p. 119)

Conclusion

This paper provides a highly relevant assessment of China’s development and use of new economic tools to respond to trade and technological competition, particularly with the United States.  It is a must read for anyone assessing current tensions between China and the US, the EU or other relevant powers, and interested in understanding how China is likely to conduct its economic statecraft in the near future.

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External Resources

• An Age of Sanctions – East Asia Quarterly
  This edition takes stock of the rising arc of economic statecraft: the repercussions of Russia’s war on Ukraine, trade weaponization, and governments’ growing use of coercion in service of foreign policy.
• The Paradox of Trump’s Economic Weapon – Foreign Affairs
  US economic coercion may have different effects than intended, pushing US trading partners deeper into China’s orbit and away from the US rather than convincing them to do Trump’s bidding.
• The Story of Sanctions – Center for Strategic and International Studies
  Sanctions are a key part of US economic statecraft, taking many forms and with mixed success, and can include embargoes, either general or specific, export controls, and investment controls.

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