State’s Undersecretary Fernandez talks about China’s “economic coercion”

Trade does indeed promote peace, as promulgated by many statesmen and thinkers, including former U.S. President Woodrow Wilson who in 1918 called for “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions” as part of his blueprint for world peace.

The axiom today seems to have gone off track with China which has amassed huge trade surpluses against some nations, besides resorting to economic coercion by using its infrastructure projects such as ports, railways, roads, etc., under its Belt-Road-Initiative, to impose its will on smaller dependent nations.

The U.S., recording a massive $ 279.4 billion trade deficit with China in 2023, according to U.S. Census, has noticed that many nations in the Indo-Pacific, have adopted what one Malaysian politician called the “middle path”, a position aimed at preventing an armed U.S.-China conflict in the region where the U.S. has maintained a traditional presence in Japan, South Korea, the Philippines, etc.

Jose Fernandez, the State Department's undersecretary for economic growth, energy and the environment, at a recent event at the Asia Society in New York said that China’s economic coercion was today felt by nations across the world as they became increasingly conscious of their one-sided dependency on trade and economic ties with China.

Washington’s Initiatives

Fernandez, in conversation with Wendy Cutler, herself a seasoned international negotiator formerly with the U.S. Trade Representative’s office and currently Vice President of the Asia Society Policy Institute, outlined Washington’s initiative to help countries facing Chinese pressure.

“The threat of coercion is often enough to stop countries from making sovereign decisions that may upset China … Beijing has overplayed its hand on economic coercion.” Fernandez explained that it was not the actual coercion itself, but the threat of coercion that worked for Beijing.

Fernandez, a former New York based corporate lawyer and a partner at Gibson Dunn & Crutcher LLP in New York, said that China uses economic influence as a primary weapon. “… there are no bright lines between economic security and national security. At times, they are interchangeable, but they are always, always intertwined. Beijing is a great practitioner of this economic coercion strategy.”

Fernandez recalled Chinese President Xi Jinping’s April 2020 remarks that if China dominated global supply chains it could force other nations to depend on it and then use that leverage to exert pressure over Beijing’s trading partners. “We have seen this over and over again, and they continue to do it.” Fernandez cited the 2010 Japan/China dispute over the Senkaku Island when Beijing used its leverage against Japan which needed rare earth minerals for its automobile industry at that time. Not having an alternative source of these minerals then, “Tokyo was exposed to Beijing’s demand.”

Citing multiple manifestation of China’s economic coercion, Fernandez referred to Lithuania’s case in 2021 when Washington intervened as Beijing attempted to penalize Lithuania for establishing a liaison office with Taiwan. Beijing cancelled a $300 million export credit facility to Lithuanian companies, but Washington persuaded the Exim Bank to extend a $600 million export credit facility for Lithuania. Washington also opened its market for Lithuanian eggs at a time when the U.S. faced egg shortage.

According to a State Department report, numerous countries in Asia, Africa, Latin America and Europe seek guidance on dealing with or mitigating China’s economic pressure. Philippines, for example, received State Department advice on exploring new export markets and supporting its agriculture sector in the event of a Beijing boycott.

Some trade-dependent countries are cautious about offending Beijing which, the Lithuania experience shows, blocks trade and supply chains, pressurizes multinationals and launches diplomatic maneuvers.

Diversifying the Supply Chain

According to Fernandez, these countries are diversifying their supply chains for minerals such as lithium, cobalt, nickel, manganese, graphite, rare earth elements and copper. “… many have taken action to reduce their exposure (to China) and build their (own) resilience.” he said, adding that “Beijing has overplayed this playbook”.

Meanwhile, except for the Philippines, the ASEAN (Association of Southeast Asian Nations) members are doing a tight rope balancing act between the U.S. and China with which they maintain strong economic ties. When asked to comment on how the U.S. viewed ASEAN ‘s balancing act, Fernandez told the American Journal of Transportation that the U.S. has “excellent commercial and political relations” with the ASEAN group. “But … we are not asking them to choose … in fact, I keep telling them that China is one of our top three markets, and we have substantial commercial relations with China. So, we are not asking them to choose. What we are asking is … a level-playing field in China, a respect for IPR, allowing our companies to compete in the Chinese market, and through them not to engage in subsidies with their companies … if we get a level-playing field, we’ll take our chances … I’ve seen over and over again that companies will win some, and lose some, but they’ll do ok, if they are allowed to compete fairly. And that’s what worries me in the ASEAN countries and elsewhere.”

At another press conference later at the New York Foreign Press Center on Sept. 25, Fernandez said: “We are promoting economic opportunity for companies overseas, creating jobs here at home, and also abroad …”

Coordinating with the Commerce Department, the State Department has supported over $160 billion worth of new deals for U.S. companies investing in countries around the globe. “We have strengthened supply chains, which has been a major priority of ours, to withstand future shocks like the COVID pandemic … we’ve learned our lesson during COVID” which made the U.S. aware of the urgency in diversifying our supply chains and making them more resilient …”