Gesture Diplomacy

"When the U.S. Congress banned China from collaborating on the International Space Station, what happened? Within ten years, China had its own Space Station." 

In summer 1970, when the parents next door banned my brothers and me from playing British Bulldog in their garden because we were too rough, we took the game to the street. Soon more kids joined in; we had extra space, a fantastic time and went to bed exhausted. Sometimes, actions have unintended consequences. 

Thus as the U.S. announced another round of sanctions against officials here over the perceived erosion of freedoms, I'm wondering have they thought this through? This move comes one year after the implementation of the National Security Law. And while you can argue the merits of the NSL, what is certain is the law brought a quick end to the rioting.

And that is not to suggest that the NSL vanquished the extremists. On the contrary, some have transitioned to terrorist activity, with bomb plots and lone-wolf attacks on police. As a result, the police remain on alert with high levels of vigilance. 

Along with the sanctions came a warning about doing business in Hong Kong. That fell on stony ground given Hong Kong's stout economy that companies ignore at their peril.

But the question needs asking, do sanctions work or are these moves counterproductive? 

When China launched the NSL, the U.S. responded with immediate measures against Hong Kong officials and individual police officers. Yet, there is no evidence of any impact. Indeed, some people see sanctions as affirmation that the U.S. sought regime change here and felt vindicated to be named. 

Even policymakers view sanctions as blunt instruments, more manifestations of frustration than a serious attempt to resolve differences. Moreover, when dealing with a strong opponent like China, sanctions can give rise to the very thing you intended to avoid.

When the U.S. Congress banned China from collaborating on the International Space Station, what happened? Within ten years, China had its own Space Station. 

In responding to the perceived threat, the U.S. spurred the Chinese on, thereby bypassing the West in the process. The same is happening on a broad front; in computing, agriculture and infrastructure development. 

Former U.S. Consul General to Hong Kong, Kurt Tong, makes a case that sanctions and other economic prohibitions aren't working. Instead, capital flows into Hong Kong remain robust because the sheer size of the China market means banks and companies must engage. 

So while U.S. Neocons cling to sanctions, he concludes the U.S. and Western nations have few options to influence China because the success of Hong Kong remains essential for the global economy.

Oddly, having argued that sanctions don't work, he says that the U.S. should continue to apply them against individuals. He fears stopping sanctions will 'sends the wrong signal'. And with that, he sums up how naive, disjointed and ineffective is the U.S. approach. It's all about gestures because business trumps everything. And the Chinese, who are pragmatic above all else, know this.

Of course, you could argue that America's greatest asset for contesting China is its military. But I'd assert it's the U.S. dollar. Of all global trade transactions, some 41 per cent occurs in U.S. dollars. Whereas the RMB only makes up one per cent. This fact affords America leverage over the World's economy while protecting U.S. citizens by allowing them to access cheap goods. 

In reality, the American people are paying for Chinese goods with 'paper money' printed to keep the U.S. financial system afloat. Plus, with well over 90 per cent of global financial transactions in U.S. dollars, the Americans have an advantage. Hence the U.S. has a trade surplus in services and a deficit in goods with China.

Should the RMB ever gain traction in the World's financial system, the U.S. would be in serious trouble. While China is exploring options that rival the dominant US-dollar mechanism, including blockchain, these look some way off. But if the U.S. did opt to weaponise the dollar then China would likely respond with its own system.

These days China no longer shrugs off sanctions to do nothing. Instead, it is willing to hit back. Confident in the power offered by its vast market, it can deny access that hits hard. Ask the Australian wine industry, which suffered a 96% drop in exports to China, its best  costumer. Ask Nike how sales are going in China; down 59% after the company became embroiled in the cotton saga.

Yet, as the American Chamber of Commerce made clear, the appeal of Hong Kong remains undiminished. Excellent infrastructure, robust rule of law, safe streets and access to the Mainland all work in Hong Kong's favour. As proof, AmCham invested in a new site in Central to foster business. 

Equally, The Economist rated Hong Kong top of the league for 'normalcy' during Covid, while inward foreign investment is the world's third highest. At the same time, property prices continue to rise, as unemployment moves below five percent. 

Say no more.