China’s Evolving Economic Arsenal: From Fragmented Retaliation to Structured Coercion

Agora Strategy Executive Briefing on Santions in China

Executive Summary

• China’s toolbox for economic coercion has become more sophisticated, targeted, and institutionalized. Regulatory investigations, export controls, trade restrictions and legal designations are part of a growing menu of tools replacing earlier unstructured instruments like consumer boycotts. China’s sanctions regime is increasingly formalized yet remains unpredictable in its concrete application.
  

• The U.S.-China trade war has served as a successful training ground for this expanded toolkit. Recent restrictions on rare earth elements and magnets have demonstrated Beijing’s ability to exert pressure through strategic dependencies. This appears to have made an impression on the Trump administration and potentially caused the compromise reached in Geneva in early May.
  

• European firms are indirect targets – and potential future focal points. Although China has so far exercised restraint and continued what some interpreted as a ‘charm offensive’, European companies in key sectors have already faced disruptions in raw material supply. In the future, China may feel emboldened to use its economic weaponry more actively for its own advantage.
  

Implications for International Business

• Reinforce supply chain resilience for critical inputs. For firms reliant on rare earths and other critical raw materials, China’s export control system is more than a bureaucratic hurdle. Given the risk of sudden supply disruptions triggered by geopolitical tensions or regulatory delays, they should invest in diversification and dual sourcing strategies to reduce the effect of potential shocks.
  

• Manage regulatory exposure and intellectual property risks. China’s export license procedures include demands for sensitive commercial information, such as operations, workforce, end-use applications, production details, and customer lists. While many businesses appear willing to comply, doing so entails longer-term risks of handing over strategic sensitive data.
  

• Integrate scenario planning into corporate planning cycles. Companies that proactively align international strategies with the evolving landscape of strategic competition – especially those with dual exposure to U.S. and Chinese policy risks – enhance their ability to anticipate and adapt to future disruptions.

China's sanctions weapons

China’s use of economic sanctions is evolving fast, and the implications for European governments and businesses are far-reaching. Until recently, a key concern for foreign firms operating in China was the risk of state-encouraged consumer boycotts. In 2019 and 2020, companies were repeatedly attacked for listing Taiwan or Hong Kong as separate countries on websites and merchandise, for raising concerns about forced labor in Xinjiang, or for ending sourcing from that region. These campaigns were openly encouraged by the Communist Youth League.

In recent years, however, such public consumer boycotts have become less common. This may reflect growing caution among firms about provoking Beijing, but it may also reflect the fact that Chinese authorities increasingly rely on new tools. Today, firms whose home governments cross political red lines are far more likely to be penalized through regulatory and legal measures that are part of a broader system developed after the first U.S.–China trade war in 2018. This system is still taking shape and offers little of the legal certainty that multinational firms might hope for.

Chinese authorities now select from a growing menu of legal and quasi-legal instruments. Long-favored methods involve import restrictions by delaying customs clearance or quietly instructing firms to stop sourcing from targeted countries. In 2020, after Australia called for an independent investigation into the origins of COVID-19, China curbed a broad range of Australian exports, including nearly all wine shipments. When Lithuania permitted the opening of a “Taiwanese Representative Office” in Vilnius in 2021, it was erased from China’s customs database, effectively making it impossible for Lithuanian goods to enter Chinese ports. Other restrictions have come under the guise of trade defense tools. In early 2024, after France had pushed for EU tariffs on Chinese electric vehicles, Beijing launched an anti-dumping investigation into imports of brandy from the EU — a predominantly French product.

Another favored tactic has been to directly target foreign firms operating in China. After South Korea agreed to deploy a U.S. missile defense system (THAAD) in 2016, Beijing forced dozens of Lotte stores — the South Korean retail giant — to shut down, citing fire safety and other regulatory violations. In recent years, such actions have increasingly been channeled through domestic instruments such as antitrust law. This approach, too, remains in use. U.S. firms like Google, DuPont, and Nvidia have all come under scrutiny in recent months as part of the rivalry with Washington. Even when probes do not result in formal penalties, the uncertainty it generates has real commercial consequences — by making business operations harder, depressing investor confidence, and exposing companies to reputational risks in China’s market.

What marks a clear shift is China’s construction of a legal sanctions framework that allows it to target foreign firms and individuals with greater coherence and precision. Three instruments stand out: First, the Unreliable Entity List, launched in September 2020. It allows Chinese authorities to impose punitive measures on foreign entities deemed to harm China’s national sovereignty, security, or development interests. In practice, it has been used mainly against U.S. defense contractors involved in military cooperation with Taiwan. In 2025, however, it was also applied to clothing group PVH and biotech firm Illumina in retaliation for U.S. tariffs.

While officially accused of violating market principles, Illumina is widely believed to have been targeted for lobbying in support of the Biosecure Act — a proposed U.S. law aimed at restricting Chinese access to American genetic data and biotech infrastructure. This law signals a shift toward techno-nationalism, potentially accelerating the decoupling of Western and Chinese biotech supply chains and prompting allies to adopt similar screening mechanisms. This would have severe implications for the global pharma industry as it restricts access to Chinese-made biotech components, compels firms to reassess vendor relationships, and increases compliance costs.

Second, the Anti-Foreign Sanctions Law, adopted in June 2021 and updated in 2024 has also primarily been used to limit the activities of U.S. defense firms. In addition, it has been invoked to sanction researchers and officials accused of interfering in China’s internal affairs. Third, the Export Control Law, in force since December 2020 provides the legal basis for restricting exports of dual-use, military, and other sensitive goods. It authorizes reciprocal measures against countries imposing export controls on China and enables targeted restrictions through an export control list. So far, this list has similarly been used against US defense companies in particular.

While China has shown a growing willingness to impose costs on foreign firms, much of this remains largely symbolic. Many of the targeted U.S. defense companies have limited or no commercial presence in China, while most sanctioned individuals have no business there. Even so, the system is expanding, and authorities have wide discretion in how they apply the available tools. For companies at risk, the landscape remains unpredictable. A spike in geopolitical tensions can trigger any combination of trade restrictions, regulatory probes, or legal designations.

Key Issues

A fragile truce in the U.S.-China trade war

The second U.S.–China trade war, which began escalating on 2 February 2025 as President Donald Trump imposed a ten percent tariff hike on Chinese goods, served as the first major test of China’s expanded economic coercion toolkit. Over the following months, Washington rolled out further measures, including a sweeping “Liberation Day” tariff package. Following several rounds of retaliation from Beijing, U.S. tariffs on Chinese goods had climbed to at least 145 percent.

Unlike during Trump’s first term, China entered this trade war well prepared. It responded not only with its own tariff increases – raising duties on U.S. goods to 125 percent – but also with a wide array of non-tariff measures. These included import suspensions on selected U.S. products such as logs, poultry, soybeans, and Boeing jets, and a reduction in imports of American films. Authorities also issued a travel warning, launched anti-monopoly investigations into Google and DuPont, anti-dumping probes into U.S.-made optical fibers, and placed several U.S. defense firms as well as Illumina and PVH Group on its Unreliable Entity List.

Among the many actions taken, China’s export controls on critical raw materials appears to have made the strongest impression on the Trump administration. These were deployed in two salvos. On 4 February, Beijing announced new licensing requirements for five key minerals: tungsten, tellurium, bismuth, molybdenum, and indium. A second round followed on 14 March, targeting seven rare earth elements. China’s dominance over the global value chain for these inputs – crucial to defense, high-tech, and clean energy – appears to have spooked not only markets but also the White House.

The U.S. and China eventually came to the negotiating table in Geneva in early May. Prior to the talks, President Trump – after markets reacted severely to his global tariffs – had indicated a willingness to lower tariffs on China. When lead negotiators later reached a 90-day truce, many observers interpreted it as Trump’s failure to uphold the tariff pressure he had so aggressively threatened. The US lowered its tariffs from 145 to 30 percent, while China reduced its own from 125 to 10 percent and pledged to withdraw all non-tariff measures imposed since 2 April. By calling Washington’s bluff, China may have come away with a stronger hand in future talks.

The peace, however, remains fragile. Both sides have accused each other of violating the terms of what was in itself a vaguely worded agreement. While tensions have eased for now, the core issues – chief among them the unresolved trade imbalance – remain unresolved. A renewed confrontation could easily erupt if Trump suddenly deemed the deal insufficient. With only five months into his second administration, uncertainty remains high. For many firms that depend on predictability, Beijing is currently seen as easier to read than Washington.

A major sticking point in the relationship are China’s stiffening export controls on critical raw materials. These began to bite in response to U.S. technology measures under the Biden administration and escalated sharply during the current trade war. The new framework imposed by Beijing requires export licenses for sensitive items, often involving extensive paperwork for companies. Despite China’s recent pledge to withdraw non-tariff measures, the two sides have disagreed over what that would mean in practice. The U.S. has pushed for a full resumption of trade flows, while China has insisted on retaining the right to impose controls in cases where exports might contribute to military equipment or be deemed dual-use.

China’s new export control system also appears to haven initially been overwhelmed, with thousands of applications flooding the small office responsible for approvals and causing significant delays. It is impossible to say whether these were a mere coincidence or a calculated strategy. Following bilateral talks in London on 9–10 June, however, Beijing reportedly agreed to allow most critical raw materials to flow again to the United States, though it placed a six-month cap on export licenses. Overall, China’s seemingly successful use of these measures against the U.S. may reinforce its confidence in them – potentially emboldening the country to rely on export controls more frequently in future disputes.

For businesses reliant on rare earth supply chains, China’s export control system is more than just a bureaucratic hurdle. Not only will supply disruptions driven by geopolitical tensions likely increase in the future, but the licensing procedures themselves include demands for sensitive commercial data. According to multiple company reports, the Ministry of Commerce requires information about operations, workforce, end-use applications, production information, and even confidential lists of customers. For now, many businesses appear willing to comply to secure access to the critical materials they depend on. However, this poses severe longer-term risks of handing over strategic information to a government which has long faced criticism for weak intellectual property protections. Some experts have noted that these licensing practices could also improve China’s capacity to exercise economic coercion by allowing it to identify and target chokepoints with greater precision.

Washington’s trade war, Brussels’ problem

Europe finds itself caught in the crossfire of the U.S.-China trade war. As global deliveries of rare earths and magnets became entangled in Chinese licensing procedures, also some European carmakers and medical equipment producers were reportedly forced to halt production. For unsettled officials in Brussels, this has served as a sharp reminder of how Beijing may respond if the EU aligns more closely with Washington on economic security or imposes further restrictions on Chinese firms. In recent weeks, the EU has moved to bar Chinese medical equipment manufacturers from public procurement tenders and also pursues investigations into Chinese electric vehicle subsidies and other trade practices it considers distortive.

China’s rare earths restrictions have already triggered a counterreaction. At the G7 Summit in Canada in mid-June, European Commission President Ursula von der Leyen gave a remarkably direct speech, bringing a rare earth magnet with her as a symbol. The magnet had been produced in Estonia by a Canadian firm using Australian raw materials, underscoring the kind of supply chain the EU hopes to build to break China’s near monopoly. In her speech, von der Leyen warned that China was “not only using this quasi-monopoly as a bargaining chip, but weaponizing it” to undermine competitors. She recalled how China had previously flooded the market to wipe out rival firms, calling this a pattern of “dominance, dependency, and blackmail”.

At the meeting, the G7 also launched a Critical Minerals Action Plan to diversify production and supply of critical minerals, encouraging investments, and promoting innovation. Still, the world remains a long way from meaningfully reducing its reliance on Chinese rare earths and will have to live with that dependence in the near to mid-term. Dozens of new mines are needed globally to reduce dependency from China. The current average time of 15 years between exploration and the start of commercial mining for raw materials alone shows that Chinese dominance will extend far into the future.

Meanwhile, China continues its outreach to Europe. It appears to have exercised restraint in response to the EU’s own recent economic restrictions, likely hoping that escalating U.S. tariffs on the EU will push Brussels closer to Beijing. In a symbolic gesture, China recently lifted sanctions on several members of the European Parliament. But as economists have pointed out, China cannot replace the role of the U.S. economy for Europe. Furthermore, Europe has its own growing list of grievances with Beijing, independent of Washington’s agenda. These include China’s close alignment with Russia and its support of war efforts against Ukraine, as well as a surge in Chinese exports that many deem as flooding the EU market.

For now, China appears to have used export controls primarily for political reasons – as a successful tool to pressure the U.S. into easing its stance on Beijing. While these measures have not yet been actively directed at the EU, Brussels is wise to prepare for the possibility that China could apply similar tactics against European countries or firms. Having discovered a new and effective form of economic leverage, Beijing may not hesitate to deploy it for commercial advantage as well.

In a long history of unequal market conditions, these tools are a new chapter in the massive promotion of Chinese industrial champions against European competitors. The EU, which over the past years has assembled its own toolbox of trade defense instruments, will likely soon be tested – not only symbolically, meaning whether Brussels dares deploy its sharper instruments, but also substantially, i.e. whether the latter actually work against China’s tools.