Jul 12, 2019 | 21:40 GMT

4 mins read

China, U.S.: Beijing Takes Aim at U.S. Defense Firms Over Taiwan

The Big Picture

Negotiators from China and the United States are still working on breaking the gridlock in their recently resumed trade talks. Their wider strategic competition, however, threatens to complicate their negotiations as Beijing is hardening its stance on Washington's support for Taiwan — even though the United States has shown some restraint from seriously challenging China on its periphery.

What Happened

Once again, Taiwan is poised to throw a wrench into U.S.-Chinese ties. On July 12, Chinese Foreign Ministry spokesperson Geng Shuang said China would sanction any U.S. firms that sell arms to the self-governing island, just days after the White House approved the sale of $2.2 billion in tanks, missiles and related military equipment. The arms sales include 108 General Dynamics Corp. M1A2T Abrams tanks, which are produced and serviced at the Joint Systems Manufacturing Center in Ohio, as well as surface-to-air Stinger missiles that Raytheon Co. primarily manufactures in Tucson, Arizona.

Why It Matters 

The prospective sanctions could target a number of private companies that have contracts to serve the U.S. defense sector. No U.S. defense companies have a physical presence in China, which is restricted from purchasing U.S. weapons. But the sanctions could target firms through the country's "national technological security management list" — the Chinese version of an export control list that Beijing established on June 8 during the height of the countries' trade standoff. Essentially, the list allows China to restrict the export of key components and technologies — potentially rare earths, nuclear technology, 5G-enabled drones and the aerospace industry as a whole — on "national security" grounds. And with pending and potential future arms sales to Taiwan, including a contentious F-16V deal, the potential sanctions could be a Chinese effort to deter future arms sales to Taiwan. In addition, China's vague invocation of national security raises the prospect that Beijing could cast a wider net to target U.S. entities that it perceives to be assisting U.S. operations in the South China Sea amid the countries' strategic competition.

Even if Beijing tries to limit its measures to a few firms, interlinkages in the defense industry mean the sanctions could effectively ban rare earth transfers to the U.S. defense sector as a whole.

Geng's announcement raises the real prospect that China could use sanctions to restrict the access of some U.S. defense firms to rare earth elements, which are vital to the politically important defense and military sector. However, even if Beijing tries to limit its measures to a few firms, interlinkages in the defense industry mean the sanctions could effectively ban rare earth transfers to the U.S. defense sector as a whole. Moreover, many U.S. defense companies, especially major firms like Raytheon, have strong links with the wider international defense sector, meaning the sanctions could also ensnare defense firms from other countries. The main gun on the Abrams tank, for instance, is of German origin.

The prospect of sanctions could certainly complicate the current trade talks between China and the United States. Despite a push from some quarters in the United States to censure Beijing over its policies on places like Taiwan, the White House has remained relatively restrained. It has avoided openly criticizing Beijing over Hong Kong's protests or following through on sanctions motions against Chinese entities and individuals over human rights violations in Xinjiang, for example, to keep trade talks on track. The United States also delayed the sale of F-16s to Taiwan, reportedly due to White House fears of provoking Beijing. But as China has hardened its position, the new sanctions could drive the White House to double down against Beijing — as well as accelerate the U.S. push to manufacture key components containing rare earth elements at home or in friendlier nations. 

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