The Weaknesses of Selective Sanctions: Evidence from U.S. Sanctions on China

• In Event: Emerging Scholars in Political Economy

Abstract

Sanctions are economic restrictions imposed on a state by another state or an international organization that aims at changing its political behavior. Existing literature on sanctions generally concludes that while traditional comprehensive sanctions usually fail to achieve their intended goals, selective sanctions can be more effective in alleviating the sanctioned state’s detrimental behavior through disincentivizing the relevant actors while minimizing the unintended negative impacts. This paper proposes a new theory that examines the weaknesses of selective sanctions in authoritarian contexts: First, these sanctions may incentivize the targeted entities to further consolidate ties with their own government as they increase the costs of seeking alternative developments overseas. Second, these sanctions may signal the importance of the targeted entities to the state (especially the local governments and the rank-and-file bureaucrats) and thus prompt more co-optation by the regime.

To examine our theory empirically, we analyze the impacts of the United States government’s restrictions on China’s surveillance technology companies, a prominent case of selective sanctions. In August and October 2019, the U.S. government sanctioned nine Chinese companies that manufacture surveillance equipment on grounds of security and human rights violations. From the Chinese Ministry of Finance data on government procurement, we collect over 1,800 prefecture- and municipal-level contracts involving eight of the nine sanctioned firms, as well as nearly 1,000 other surveillance technology providers that were not sanctioned by the U.S. government by July 2020. We then show through difference-in-differences (DID) and generalized synthetic control models that the sanctions have caused the targeted firms to receive substantial additional government contracts worth more than 40 million CNY (or 6.5 million USD) six months since their impositions, representing an over 100% increase over the predicted counterfactuals. Moreover, we show through a triple differences analysis that the growth is almost exclusively driven by contracts with the police departments and other administrative agencies rather than contracts on public utilities (schools, hospitals, etc.). Finally, based on stock price data from all publicly listed firms in China in the sectors of information technology and communication equipment, we show that the sanctioned companies’ stock prices have seen no reduction, indicating that the market harbors no negative view of the companies’ long-term value. Together, our results suggest that the merit of selective sanctions may have been overstated and their weaknesses overlooked in certain circumstances, especially those to which our theory is readily applicable.

Given the existing literature’s account that surveillance contracts expand the Chinese government’s capabilities to suppress protesters while benefiting the companies by providing more training data for their algorithms, the U.S. sanctions may have backfired and exacerbated the motivating human rights, security, and competitiveness concerns. Our results thus directly contribute to several areas in comparative politics, including the research on authoritarian resilience (Nathan 2003, Heydemann and Leenders 2011), state-business relations (Downs and Meidan 2011, Breslin 2012), and response to foreign sanctions or other pressure (Escribà-Folch 2012, Peksen 2019) for China and other authoritarian regimes. More generally, our results also provide a new perspective on the theory of sanctions in the context of political economy and international relations.

Author

• Qitong Cao, Stanford Graduate School of Business