The growing threat of economic coercion

The use of economic coercion by major powers in pursuit of political objectives is generating new risks for Australian businesses, writes David Uren.

In an increasingly fractious global trading environment, the use of economic coercion by the major powers in pursuit of political objectives is generating new risks for business. Tension in the federal government’s relationship with China has led to a series of threats and actual curbs on Australia’s access to the Chinese market, while Chinese diplomats have made similar threats this year to the United Kingdom, Canada, Germany, the Czech Republic, the Netherlands and Sweden.

The United States, too, has been broadening its spread of economic sanctions targets beyond the usual pariah nations such as Venezuela and North Korea to include individuals and organisations in China and Hong Kong, businesses engaged in building a gas pipeline from Russia to Germany and even members of the International Criminal Court.

China and the US have radically different approaches to economic coercion. China deploys consumer boycotts and regulatory interventions, always denying there is any official orchestration or political intent. The informality of the Chinese system is calculated to evade accountability and leave its targets guessing, encouraging others to err on the side of caution.

By contrast, the US is highly formal, with legislated sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) and heavy penalties imposed for the least infractions. French bank BNP Paribas paid a huge US$9b fine for offering services to customers sanctioned by the US (but not by France) in 2014, while eight foreign businesses have incurred fines of more than US$500m each in the past five years.

Collateral damage

The use of economic sanctions accelerated greatly following Donald Trump’s 2017 inauguration, but had been on a rising trajectory before that. Trump argued that the US could achieve its foreign policy objectives using financial leverage and sanctions rather than shedding the blood of US soldiers in military interventions.

There is bipartisan support for the US sanctions machinery. There was unanimity in Congress this year for deploying sanctions against Chinese officials and organisations over Hong Kong’s national security law and the incarceration of Muslim minorities in Xinjiang, if not for Trump’s “maximum pressure” campaigns on Iran, Cuba and Venezuela.

A dramatic example of the reach of US sanctions was the impact, in 2017, on Rusal, the Russian company responsible for about six per cent of global aluminium supply. World aluminium prices surged 15 per cent after the company’s global customers were told they had 30 days to conclude all transactions or face exclusion from the US financial system. Rio Tinto’s large aluminium smelter in France suddenly found its supply of alumina from Rusal’s Irish refinery halted, as the Russian company feared US authorities would seize payments. The impasse was only overcome when Rusal’s billionaire founder, Oleg Deripaska, who was the real target of the US action, agreed to sell down his stake.

Australian industrial chemicals and fertiliser business Incitec Pivot has long maintained an explicit sanctions policy prohibiting the breach of any economic sanctions, whether imposed by the United Nations or any country with which it does business, and demanding “appropriate due diligence” on all counterparties and transactions.

It nevertheless discovered that a shipload of fertiliser that one of its vessels had picked up in the northern Chinese port of Lianyungang, destined for India, had in fact been sourced from Iran. With the US accounting for as much as a third of the company’s sales, it swiftly offloaded the cargo at the nearest Chinese port.

Financial institutions are particularly exposed, given the millions of transactions they conduct daily with counterparties around the world. At the heart of regulator AUSTRAC’s case against Westpac was the use of its payments infrastructure by correspondent banks that had dealings with sanctioned countries.

Australian regulation of sanctions is split between the Department of Foreign Affairs and Trade’s Australian Sanctions Office, which administers Australia’s program of economic sanctions, and AUSTRAC, which regulates compliance with the multilateral Financial Action Task Force guidelines combating money laundering and the financing of terrorism.

However, the regulator that matters for any Australian business with international exposure is America’s OFAC. For guidance on what it regards as a satisfactory compliance program, see bit.ly/3mu3TMq

Access denied

China’s share of Australia’s export revenue hit a record 46 per cent in May, with bilateral trade growth since the China-Australia Free Trade Agreement was signed in 2015 outstripping the growth in Australia’s trade with the rest of the world. Accompanying Australia’s gain is Chinese leverage —as Australian producers of barley, beef, wine, cotton and coal are discovering.

An analysis by the Australian Strategic Policy Institute counted 152 instances of Chinese economic coercion against 27 countries over the past decade. It included state-issued threats, pressure on specific companies, boycotts, tourism, trade and investment restrictions, curbs on official travel and arbitrary detention and execution.

China has a long history of using denial of access to its market as a political tool. A formal study of its practice was published in 1930 by American political scientist Dorothy J Orchard, starting with a well-coordinated ban on purchases of US goods in 1905 in protest against barriers to Chinese immigration, followed by boycotts of Japanese goods starting in 1908 and, later, boycotts against British goods.

Foreign companies working in China understand there are some red-line issues. The Marriott hotel group had its Chinese website taken down after a customer survey inadvertently included Taiwan, Hong Kong and Macau in a list of nations. In 2018, 44 international airlines, including Qantas, acceded to a Chinese request that their destination maps refer only to Taipei, not Taiwan.

Australian relations with China have been deteriorating since the release of foreign interference legislation aimed at China in 2017, followed by the banning of Huawei from participation in Australia’s 5G communications network in 2018. The commercial fallout intensified this year after the Australian government’s call for an inquiry into the coronavirus pandemic independent of the World Health Organization.

American farmers affected by retaliatory tariffs in the China-US trade war have received government assistance. However, Australian Trade Minister Simon Birmingham has cautioned that any government compensation for affected farm sectors could aggravate matters, providing fuel for anti-subsidy action before the World Trade Organization (WTO). Birmingham has threatened to appeal to the WTO over China’s tariffs on Australian barley, but that would take years, while China has legitimate WTO grievances against Australian dumping duties.

The WTO is not where the bilateral tension will be resolved. There is perhaps some scope for stabilising relations through other multilateral forums, such as the Regional Comprehensive Economic Partnership trade agreement, which includes China, Japan, the Republic of Korea and the ASEAN nations and is in the final throes of negotiation. APEC, the G20 and the East Asia Summit should also provide opportunities for dialogue. In the meantime, businesses engaged in the Chinese market need to redouble their focus on sovereign risk management.

Compliance and political risk

Amcor chair Graeme Liebelt FAICD makes a plea for strengthening the international trading arrangements that brought such benefits over the past decades, but which are being eroded as nations seek to use trading rights as a political tool.

The proliferation of economic sanctions, boycotts and other forms of economic coercion are adding complexity to the management of international companies, he says. “It is not just the specific sanctions against nations, but sanctions against companies and sanctions against individuals, all of which have to be negotiated. And then there are the restrictions on trade we’re seeing China apply in Australia — not on Amcor, but on other companies.”

Liebelt says there is little that business can do if the Chinese government decides to block access to its market. “If you’re a barley or wine supplier — there are various categories of product that have been subject to some sort of restriction — it can get beyond your control,” he says. “If the Chinese government decides to do that, there’s not a lot you can do in the short term. In the medium term, you can diversify that risk. COVID-19 has forced us all to think about international supply chains. Are we too reliant on a single source of supply or a fragile transport system? A lot of companies are rethinking the risks of the supply chain, holding more stocks, finding more diverse sources of supply, and thinking about transport systems and responses to interruptions.”

Liebelt says business should not avoid dealing with China. “China is a rising commercial power and a rising political power, too. We need to find ways of renegotiating arrangements that acknowledge China’s legitimate claim to being a world power. We shouldn’t be stepping away from that challenge.”

However, he is concerned about the growing friction in the relationship between Australia and China. “Tensions have been allowed to rise so significantly over the past 12 to 24 months,” he says. “I don’t know what’s going on behind the scenes, but I’m hopeful that tension can be resolved. I would say that governments need to think about the broad picture. They need to look after the national interest — each government will be doing that — but within that framework, they should be negotiating in a way that acknowledges the rise of another superpower.”

Liebelt says the focus should be on strengthening the rules-based international trading arrangements that have enabled business to realise the benefits of trade. Business has to remain keenly focused on the compliance demands of international operation, he adds, whether that’s the US Foreign Corrupt Practices Act, trade sanctions or, in the case of financial institutions, the anti-money laundering and terrorist financing guidelines.

He says that while sanctions traditionally targeted “rogue” nations such as Iran or Cuba, they increasingly apply to specific companies and individuals. Liebelt, who is also on the board of ANZ, says there has to be thorough customer due diligence to ensure “politically exposed persons” are identified. “You have to set down the policy as to how you’d deal with it. There are companies around that are prepared to walk the line, but that’s not Amcor’s style. We set a policy to make every effort to comply with sanctions,” he says.

“Any management system involves a planning phase, an implementation phase, a measurement system and then, in most cases, improvement.

In the planning phase, you have to make sure you are aware of what is required, give people the training they need, ensure they have the resources to meet the requirement and then you need to be able to measure whether you are indeed complying. Then there is an improvement loop.”

David Uren is a non-resident fellow at the US Studies Centre at the University of Sydney and author of the recent Australian Strategic Policy Institute monograph Economic coercion: Boycotts and sanctions — preferred weapons of war.