2 September 2022

For Putin and Russia, the Wagner Group Could Be a Recipe for Disaster

Alexander Clarkson

In the Bavarian town of Rain am Lech, a statue in the market square serves as a reminder of more tumultuous times. It depicts Johann Tserclaes, the count of Tilly, who helped lead the armies of the German Emperor Ferdinand II against Protestant challengers during the first decade of the Thirty Years’ War. Tilly was considered a hero by imperial loyalists, despised by adversaries for the horrific war crimes his mercenary troops inflicted during the Sack of Magdeburg in 1631. Avoiding these inconvenient details, the monument in Rain commemorates his nearby death in battle in 1632, after defeat at the hands of Swedish Protestants.

The armies that Tilly helped lead were largely made up of mercenary troops called the Landsknechts or condottieri. Their pivotal role in imperial armies struggling to survive finds echoes today in private military contractors such as Russia’s Wagner Group, in that their fates are intertwined with those of the regimes they serve, but whose established command hierarchies they also disrupt.

No doubt, historical comparisons with contemporary events are a risky business. Each conflict has its own unique social context that cannot be easily transferred to dynamics shaping wars in other eras. Awareness of the specificities of each battlespace is crucial to ensuring that attempts to examine shared patterns do not lead to absurd analogies that ignore the vast differences between, for example, the pike and shot warfare of the 17th century and the drone-guided artillery battles taking place in Ukraine today. Yet with all these caveats in mind, there are two historical patterns that can provide insights into how the role that private military contractors, or PMCs, play within the Russian political system might evolve over time.

Pelosi’s Visit to Taiwan: Provoking the First AI War in History?

Cheng Li

For the past few years, prominent diplomats and scholars of U.S.-China relations have worried that the nearly half-century-long absence of major war in East Asia might end due to the drastic deterioration of the bilateral relationship. These worries have reached an unprecedentedly elevated level following the visit of U.S. Speaker of the House Nancy Pelosi to Taipei this August.

Beijing’s exceptionally strong reaction, which has included dispatching missiles, warships, and warplanes into the air and seas around Taiwan, has sent the unambiguous message that the Chinese leadership is prepared to use force. From the perspective of this rising authoritarian global power, Washington’s de facto support of Taiwan independence (of what the Chinese perceive to be a “runaway province”) challenges China’s “vital core interest.” The aggressive military drills by the People’s Liberation Army (PLA) have notably crossed the so-called “median line” in the Taiwan Strait. In addition, the PLA has fired missiles targeting seven sea areas surrounding the island of Taiwan, including the far side of the island facing the Pacific, the region frequently navigated by U.S. naval vessels. This development was seen by some experts as a move akin to rehearsing a blockade.

Russia Voices Aim to Increase Combat Readiness at Bases in Central Asia

Catherine Putz

At a meeting of Shanghai Cooperation Organization (SCO) military heads on August 24 in Tashkent, Russian Defense Minister Sergei Shoigu said that Russia would be increasing the readiness of Russian forces in Central Asia in the context of continued instability in Afghanistan.

According to TASS, Shoigu said, “For our part, we are increasing the combat readiness of Russian military bases in Kyrgyzstan and Tajikistan, as well as other response forces for possible crisis situations.”

He said Afghanistan “remains a serious security challenge in Central Asia.”

“In the country, against the backdrop of the ongoing armed confrontation, the socio-economic situation is deteriorating, the ideology of religious radicalism is being implanted, drug trafficking and cross-border crime are flourishing.”

None of the issues cited by Shoigu are particularly novel; they have featured in Russian and Central Asian statements about Afghanistan for the last two decades. Concerns about religious radicalization and drug trafficking, especially, have fed wide-ranging investments into Central Asian border services and motivated tight control of religious and political expression in Central Asia. That said, with the U.S.-led withdrawal of American and NATO forces in August 2021 and the return of the Taliban to power, concerns have grown that Afghanistan could once again become a safe harbor for terrorists.

The Islamic State’s regional branch, Islamic State Khorasan province (ISKP) has expanded its vision and operations across South and Central Asia. Its amplified narratives directed toward Central Asia — especially Tajikistan and Uzbekistan are of particular concern. Al-Qaida also remains a concern, with its presence and protection by at least some faction of the Taliban government made evident when its top leader, Ayman al-Zawahiri, was killed in Kabul by a U.S. drone strike on July 31.

Russia maintains military bases and other facilities in both Kyrgyzstan and Tajikistan.

In Kyrgyzstan, Russia’s presence is largely concentrated in the Kant Air Base outside Bishkek's capital. Russia’s current presence at the base dates to 2003, when Moscow and Bishkek agreed to lease the former Soviet base to Russia. In 2012, the two sides settled a new agreement extending the lease 15 years (with an option to automatically extend for five more years); Moscow agreed to write off $500 million in Kyrgyz debt. The base is presently referred to as the 999th aviation base under the Russian 4th Air and Air Defense Forces Army and is believed to host various air frames, including Su-25 and Su-27 jets and Mi-8T helicopters.

In February 2020, Kyrgyz authorities announced that Russia was aiming to install new air- and missile-defense equipment and drones at the base. It’s unclear if those improvements were made or if the pandemic derailed the modernization efforts. Russia also reportedly maintains a naval testing station at Issyk Kul.

Tajikistan hosts Russia’s largest military presence abroad (with the exception of Ukraine, involuntarily). Collectively referred to as the 201st Russian military base or the 201st Motor Rifle Division, its history in Tajikistan stretches back to 1945. Given the breakout of civil war in newly independent Tajikistan in 1992, Russian forces never fully left the base (as they had in Kyrgyzstan). The base’s constituent parts include facilities and troops near Dushanbe, Kulyab, and Qurghonteppa (also called Bokhtar) and the force is estimated at around 7,000 troops.

In January 2021, Russian Ambassador to Tajikistan Igor Lyakin-Frolov told TASS that the “combat readiness of the Russian base, which can give a worthy response to threats and challenges emanating from Afghanistan, has increased.” Later in 2021, Russia dispatched 30 new tanks to the 201st.

There is less clarity on the Russian Air Force’s presence in Tajikistan. In 2017, Russia was apparently seeking to move more solidly into the Ayni Air Base outside Dushanbe, which it had used on an ad hoc basis over the years. The base had been renovated by India, which had hopes of moving in, but it’s unclear what kind of presence or control either have at the base at present. (The same goes for Farkhor Air Base, which is discussed in Indian media as the country’s first foreign base but about which little concrete is known.)

Back to Shoigu’s recent statements, it’s unclear precisely what he means by increasing “combat readiness” of Moscow’s forces in Central Asia, and how that relates to or differs from Lyakin-Frolov’s 2021 comments to the same effect. It may mean increased alert with regard to Afghanistan or increased activities; but it may also be just signaling on the part of Russia.

At present, the Russian military is bogged down in Ukraine, fighting six months into a war Moscow likely believed would be much shorter. In announcing the upcoming Vostok 2022 war games — which will involve military forces and observers from Algeria, Armenia, Azerbaijan, Belarus, China, India, Kazakhstan, Kyrgyzstan, Laos, Mongolia, Nicaragua, Syria, and Tajikistan — Russia said it was sending 50,000 troops to participate. Reuters noted that the 50,000 Russians are far below the reported 300,000 that participated in the exercise in 2018 (which may have been an exaggeration). The 50,000 number may also be an inflated figure. One Polish analyst, Konrad Muzyka, told Reuters: “It’s just Russia pretending everything is fine and they still have the capability to launch a large-scale military exercise with China. But in reality I think the scope of this exercise, especially from a ground force perspective, is going to be very, very limited.”

The joint communique that was issued after the recent SCO defense ministers meeting hones in on Afghanistan: “The defense ministers believe that settling the situation in Afghanistan without delay is one of the key factors in preserving and strengthening security and stability within the SCO space.”

But while the statement does not mention “Ukraine” directly, it does lay out a distinctly Russian talking point about Ukraine: “The ministers firmly condemned attempts to revise the causes and outcomes of World War II, and to rehabilitate Nazi criminals and their accomplices, as well as promote neo-Nazi ideas.”

The SCO includes as full members China, India, Kazakhstan, Kyrgyzstan, Russia, Pakistan, Tajikistan, and Uzbekistan.

Sri Lanka’s President Says IMF Talks Nearing Successful End

Krishan Francis and Bharatha Mallawarachi

Sri Lanka’s president said Tuesday that his bankrupt country’s talks with the International Monetary Fund for a rescue package have successfully reached final stages as he presented an amended budget that seeks to tame inflation and hike taxes.

President Ranil Wickremesinghe, who is also the finance minister, said in a speech in Parliament that his government will soon start negotiating debt restructuring with countries that provide loans to Sri Lanka.

Declaring that Sri Lanka is on the “correct course in the short term for recovery,” Wickremesinghe warned the country must prepare for at least 25 years of a national economic policy, staring with the 2023 budget.

An IMF team is visiting Sri Lanka and is expected to end Wednesday's current round of talks.

There Is No ‘New Normal’ in the Taiwan Strait – Yet

Gerrit van der Wees

The passage of two U.S. guided-missile cruisers, Antietam (CG-54) and Chancellorsville (CG-62), through the Taiwan Strait on August 28 shows that there is anything but a “new normal” in the situation across the Taiwan Strait yet.

After the large-scale exercises by China’s People’s Liberation Army (PLA), which followed U.S. House Speaker Nancy Pelosi’s early August visit to Taiwan, a number of commentators had come to the misguided conclusion that with those exercises, Beijing had created a “new normal” under which it could cross the Taiwan Strait centerline and conduct military operations closer to Taiwan at will.

While Beijing is trying hard to push in the direction of such a “new normal,” it is far too early to tell, as Taiwan and the United States are pushing back against that notion. Both are working hard to prevent China from slicing another slice of the salami by pushing in the opposite direction, as expertly described by Bonnie Lin of the Center for Strategic and International Studies and Joel Wuthnow of the National Defense University.

China’s Exercises Had Their Limits

The “new normal” conclusion primarily arose from the mistaken perception that the exercises China conducted from August 4 through August 10 – right after the Pelosi visit – gave the PLA pretty much free rein on where and when to conduct military operations. That was simply not the case. At all points and at all times, Taiwan and U.S. military forces were close by to ensure that the Chinese did not cross any red lines.

Yes, the PLA reportedly fired a total of 11 short-range ballistic DF-15 missiles into pre-determined areas in the seas around Taiwan, thus “bracketing” the island and implying that at a future occasion China could hit land targets. However, in practice the main “result” of this exercise was that it clearly painted China as an aggressive, belligerent force, as was clearly reflected in the G-7 response, issued on August 4. That five of the missiles landed in Japan’s Exclusive Economic Zone (EEZ) certainly did not enhance Beijing’s standing in Tokyo either; the Japanese government strongly protested.

The exercises also involved large number of fighter aircraft, primarily of the Russian made Su-30 type, as well as the Chinese-made J-10, J-11, and J-16. No bombers were involved, except on August 7, when three H-6 bombers briefly flew across the median line of the Taiwan Strait, and then turned back when confronted by Taiwanese fighter aircraft. And this became the pattern: PLA aircraft crossed the line, were met by Taiwanese fighter aircraft, and then turned back.

The same happened with naval incursions by PLA Navy ships: They got closer to Taiwan’s coast than before, but they did not enter Taiwan’s territorial waters. The PLA fully realized that such a move would have resulted in a confrontation with unforeseen consequences. It certainly helped Taiwan that a number of U.S. ships were lingering in the background, including the nuclear-powered aircraft carrier USS Ronald Reagan (CVN-76), and the USS Tripoli (LHA-7), an amphibious assault ship on its maiden voyage with some 20 F-35B aircraft on board. All of this ensured that the PLA did not have a free rein on their operations.

Thus, did Beijing “gain ground” with these exercises? It may have been an opportunity to test their new integrated command structure, and they may have simulated some initial steps in a possible blockade or invasion, but internationally it had a very adverse effect. Particularly in the United States, Europe, and among like-minded countries in the region such as Japan and Australia, it called attention to the long-term threat posed by Beijing to the stability in the region.

Was Pelosi’s Visit “Provocative”?

With all of this in mind, can the visit by Pelosi be labeled “provocative” or “unwise,” as described in a number of U.S. publications? The answer is negative. For sure, the move led to an increase in tensions because of China’s military exercises. But as U.S. Secretary of State Anthony Blinken argued in his August 5 statement from Phnom Penh, “China has chosen to overreact and use Speaker Pelosi’s visit as a pretext to increase provocative military activity.”

The PLA exercises laid bare China’s aggressive intentions, and are thus an important motivation for Taiwan, the United States, and like-minded allies to strengthen their efforts to deter any similar moves in the future. This collective deterrence will be a main factor to maintaining peace and stability in the Taiwan Strait. The value of Pelosi’s trip is that it has brought this into sharp focus.

Pelosi’s trip also highlighted that Taiwan is a vibrant democracy under threat. In an op-ed in the Washington Post about her visit, Pelosi wrote: “…[D]isturbingly, this vibrant, robust democracy – named one of the freest in the world by Freedom House and proudly led by a woman, President Tsai Ing-wen – is under threat. ….. We cannot stand by as the CCP proceeds to threaten Taiwan – and democracy itself.”

How Far Will the U.S. Go to Help Taiwan?

One final question is, how far the United States will go to help Taiwan militarily? Newswires often recite a statement, "The United States has no formal diplomatic relations with Taiwan but is bound by law to provide the island with the means to defend itself.” That second part of the sentence, however, is only half the story.

Indeed, the Taiwan Relations Act, which indeed commits the U.S. to provide “arms of a defensive character” to Taiwan, also states that the U.S. “shall maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.”

This much more powerful language has been emphasized by U.S. Secretary of Defense Lloyd Austin at the June 2022 Shangri-La meeting in Singapore, and by Blinken in his recent speeches and statements.

We need to wait until the full effect of this (re)discovery of U.S. commitments under the Taiwan Relations Act plays out against the background of China’s heightened aggressiveness before deciding whether there is a “new normal” in the Taiwan Strait or not. The United States, together with Taiwan and other like-minded allies in the region, now has a much stronger focus on how to deter China from further adventurism.

And, as Pelosi emphasized in her Washington Post op-ed, the fight to preserve Taiwan’s democracy, and ensure that its 23 million people can freely decide their own future, is closely linked to Ukraine’s fight for its survival as a democratic nation. It is part of the worldwide struggle between democracy and autocracy. That is the real “new normal.”

The Evolving Role of Greenhouse Gas Emission Offsets in Combating Climate Change

Joseph E. Aldy


As governments, firms, and universities advance ambitious greenhouse gas emission goals, the demand for emission offsets — projects that reduce or remove emissions relative to a counterfactual scenario — will increase. Reservations about an offset’s additionality, permanence, double-counting, and leakage pose environmental, economic, and political challenges. We review the role of offsets in regulatory compliance, as an incentive for early action, and in implementing voluntary emission goals. The rules and institutions governing offsets drive large variations in prices and in the types of projects deployed to reduce or remove emissions across offset programs. A lack of carbon price convergence and potential information asymmetries may contribute to limited price discovery and market segmentation. Considering offsets' financial properties, an array of financial and technological innovations could enhance offsets’ environmental integrity and promote liquid offset markets. Unresolved questions about policy's future will influence voluntary offsets markets' evolution.

The View from Olympus: The Marine Corps Gazette Gets the Evolution of Maneuver Warfare Right.

William S. Lind

The September issue of the Marine Corps Gazette includes an article for which there has been a long-standing need, namely an accurate recounting of the history of maneuver warfare’s evolution into official Marine Corps doctrine. Written under the pen name Marinus as part of an ongoing series, the Maneuverist Papers, it does what none of the books on the subject have managed, namely provide a non-partisan account that identifies all the streams that fed into the maneuver warfare river.

Of these streams, which the article calls threads, there were five: intense dissatisfaction among Marine Corps officers over our performance in Vietnam and our final loss of that war (something that seems to have vanished with more recent defeats); interest in mechanized operations because that is what a conflict in Europe with the Soviet Union seemed to require; the model offered by the Prussian/German Army, for which I was the main spokesman; renewed interest in classical military literature, especially Clausewitz and Sun Tzu; and the theoretical work of Col. John Boyd, USAF. My only quibble with the account is its failure to mention that I began the maneuver warfare debate with a critique of forthcoming Army doctrine that I wrote in 1976 and was published in Military Review in 1977. Like it or not, I was first.

US-Russian Contention in Cyberspace

Lauren Zabierek, Christie Lawrence, Miles Neumann

In recent years, as news of U.S.-Russian tensions in the cyber domain has dominated headlines, some strategic thinkers have pointed to the need for a bilateral cyber “rules of the road” agreement. American political scientist Joseph Nye, a former head of the U.S. National Intelligence Council, wrote in 2019 that, even “if traditional arms-control treaties are unworkable” in cyberspace, “it may still be possible to set limits on certain types of civilian targets, and to negotiate rough rules of the road that minimize conflict.” Robert G. Papp, a former director of the CIA’s Center for Cyber Intelligence, has likewise argued that “even a cyber treaty of limited duration with Russia would be a significant step forward.” On the Russian side, President Vladimir Putin himself has called for “a bilateral intergovernmental agreement on preventing incidents in the information space,” comparing it to the Soviet-American Agreement on the Prevention of Incidents on and Over the High Seas. Amid joint Russian-U.S. efforts, the Working Group on the Future of U.S.-Russia Relations recommended several elements of an agreement in 2016, among them that Russia and the U.S. agree “on the types of information that are to be shared in the event of a cyberattack” (akin to responses to a bio-weapons attack) and prohibit both “automatic retaliation in cases of cyberattacks” and “attacks on elements of another nation’s core internet infrastructure.” Most recently, in June 2021, a group of U.S., Russian and European foreign-policy officials and experts called for “cyber nuclear ‘rules of the road.’”

Hearing some of these calls, we at Russia Matters and the U.S.-Russia Initiative to Prevent Nuclear Terrorism were moved to probe them further: Is a cyber rules-of-the-road agreement feasible? If so, what form could it take? If not, what are some next-best alternatives? We proceeded to formulate research questions (see Appendix 2) and seek out authors who could separately explore the American and the Russian perspectives on the cyber-treaty idea. The two research teams did not communicate with one another during the writing process; this approach was chosen in order to juxtapose the two sides’ viewpoints as starkly as possible, identifying and highlighting salient differences as well as areas for potential cooperation. While the authors are all affiliated with different institutions, they have written this paper in their personal capacity, representing the views of neither their organizations nor their governments.

JOURNAL ARTICLE - Journal of International Relations and Sustainable Development

Lauren Zabierek

The United States nor its allies alone cannot counter adversarial and criminal cyber activity in the digital domain-–the reach, scale, stealth, and danger are simply too great for any one country to bear. As such, calls for international operational collaboration in cybersecurity and emerging technologies are increasing. Former U.S. State Department Cyber Diplomat Chris Painter noted in a December 2020 Foreign Policy article that there must be more leadership and partnership on global cyber cooperation. What follows represents a thinking-through of what this ought to entail.

Operational Collaboration

First, it’s important to understand what operational collaboration means. At its core, this means conducting activities together (jointly, multilaterally, etc.) to achieve an outcome—in the context of cybersecurity, it may be defensive or offensive activities in an effort toward enhanced security and resilience. In a 2018 report entitled An Operational Collaboration Framework for Cybersecurity, the Aspen Institute defined this concept as the public and private sectors “working together to protect, mitigate, prevent (during steady state), and respond and recover (during an incident) with several cross-cutting enablers.” As there are efforts to create opportunities for operational collaboration at a domestic level, there should be a similar focus on the international level.

Do Armed Drones Reduce Terrorism? Here's the Data.

Joshua A. Schwartz, Matthew Fuhrmann

At 6:18 a.m. on July 31, a CIA drone fired the two Hellfire missiles that killed al-Qaeda leader Ayman al-Zawahiri, a former deputy to Osama bin Laden. Since 9/11, the United States has conducted over 14,000 drone strikes like this against suspected terrorist targets. Countries such as Iran, Turkey, Nigeria and Egypt­ have also acquired armed drones and conduct their own strikes.

But do armed drone operations reduce terrorism, or do they actually make countries more vulnerable to it?

To find out, we analyzed patterns of terrorism in 18 countries — every country that has fielded armed drones to date. The evidence reveals that obtaining armed drones reduces the amount of terrorism a country experiences. Armed drones may raise ethical concerns but appear to be an effective counterterrorism tool.

What drone pessimists believe

Some analysts argue that drones increase terrorism for two main reasons.

The risks to Ukraine’s Zaporizhzhia power plant, explained

Ellen Ioanes

Russian and Ukrainian forces are locked in a standoff at the Zaporizhzhia nuclear power plant, raising fears across Europe and the specter of Chernobyl. Shelling near the strategically located plant — which both sides have blamed on the other — has increased the risk of a serious accident, and families are fleeing the area in the face of a possible nuclear catastrophe.

Zaporizhzhia is Europe’s largest nuclear power plant, providing electricity to Ukraine and several European countries. Its location on the Dnipro River makes it a critical target for Russian forces, which have controlled the plant since March. Despite Russian forces allegedly turning the plant into a military installation, Ukrainian operators still manage the safety and daily operations of the plant, under significant duress.

Multiple parties, including UN Secretary General Antonio Guterres, have called for the immediate demilitarization of the plant, citing the potential for a serious and widespread nuclear disaster. However, Ivan Nechayev, deputy director of the Russian foreign ministry’s information and press department, claimed that such a deescalation “will make the plant even more vulnerable.”

How Malaysia’s Judiciary Fought Back and Convicted a Former PM

James Chai

On the morning of his final court appearance, Malaysia’s former prime minister, Najib Razak, left his glitzy Pavilion residence in Kuala Lumpur surrounded by bodyguards and outriders. This was the same place where in 2018 the police seized assets worth RM114 million ($25.5 million), including 72 bags of cash and jewelry, boxes of designer handbags (mainly Hermès), watches, and a few tiaras, as part of the investigation into the massive corruption scandal involving the state investment fund 1Malaysia Development Berhad (1MDB).

Much has changed since May 2018, when Najib became the first sitting prime minister to suffer an election defeat in the country’s 60-year history. The night of the historic defeat filled Najib with “agonizing frustration.”

“It was the kind of defeat I had never before felt in my life… I was going down in history as the first Malaysian leader to leave with a change of government,” he told The Malay Mail.

Averting Debt Disaster in the Developing World


BEIJING – Many developing countries are teetering on the edge of a debt crisis, with the COVID-19 pandemic, soaring food and energy costs, and the monetary tightening of major economies all threatening to push them over. But the international community has yet to do what is necessary to pull at-risk countries back from the brink.

For some economies, such as Lebanon and Sri Lanka, the crisis has already arrived. They could soon be joined by many more. As of the end of March, 38 of 69 low-income countries were either already in or at high risk of debt distress. Middle-income developing countries’ debt-service burden is at its highest level in 30 years.

The international community has taken some action in response to the problem. Soon after the pandemic began, the G20 introduced the Debt Service Suspension Initiative (DSSI), under which $12.9 billion in payments owed by 73 low-income countries was suspended between May 2020 and December 2021. Moreover, in November 2020, the G20, together with the Paris Club of sovereign creditors, created the Common Framework for Debt Treatments Beyond the DSSI to help DSSI countries restructure their debt and manage insolvency and protracted liquidity problems.

Fasten your seatbelts: How to manage China’s economic coercion

Aya Adachi, Alexander Brown, Max J. Zenglein

Key findings

Over the past years, political relations between the EU and China have deteriorated. This has increased the risks associated with economic pressure. A sober assessment of companies’ vulnerabilities is necessary to adjust to this new reality.

Beijing uses economic coercion for signaling and deterrence. By pressuring prominent companies or sectors, it tries to deter others from crossing certain lines. MERICS identified 123 such cases between February 2010 and March 2022. Fearful of becoming a target, companies might avoid making public statements on sensitive issues or deem it safer to align themselves with the positions and objectives of China’s government.

Since 2018, China has increased its use of economic coercion, and the triggers have become more diverse. China’s red lines have expanded beyond traditional issues of sovereignty and national security to include China’s international image and the treatment of Chinese firms abroad.

The forms of coercion employed by China include a range of measures. Beijing resorted to popular boycotts in 56 percent of cases when companies crossed a perceived red line. When responding to the actions of foreign governments, China adopted restrictions on trade and tourism in 41 percent and 20 percent of cases, respectively.

Empty threats are another common form of coercion, accounting for about a fifth of all cases (21 percent). Such bluffs can be effective, as selecting a prominent target may work to deter other governments and companies from unwanted actions.

When exerting economic pressure, Beijing makes sure to minimize adverse effects on its own economic development. Companies in the consumer and agricultural goods, commodities and services sector are the most frequent targets of retaliation, since in these areas alternative providers can usually be found. Almost half of recorded coercive measures were in the consumer goods sector.

The most vulnerable sectors and companies are those deemed to be of little value to the strategic goals of central and local governments in China, such as economic and technological development. Where the interests of Chinese competitors clash with foreign firms, then there is additional risk.

Foreign companies of high strategic relevance, such as high-tech firms with a large investment presence in China, are likely to be more secure. Those companies can be outspoken on issues which do not align with the position of China’s government and are unlikely to face severe repercussions.

The examples of companies from Japan, South Korea and Taiwan show how firms of different risk profiles are managing their exposure. Some high-risk companies revert to keeping a low-profile, but companies of all risk types are pursuing diversification and other measures to balance their economic ties with China.

1. Europe is increasingly in China’s crosshairs as the relationship is reset

European business interests in China are becoming more exposed to different forms of Chinese economic retaliation, which follows sometimes their own actions but increasingly also measures taken by the EU or its member states. Quickly escalating disputes with China’s government mean that the risk exposure of European companies to economic coercion is often out of their control. China’s souring relations with Lithuania over the renaming of the Taiwan representative office has been a case in point, with companies operating in Lithuania caught in Beijing’s crosshairs. It has become clear that companies can now have their operations affected by retaliation following the actions of any EU government.

The deepening of economic relations with China is now increasingly seen in the context of growing systemic rivalry – if not conflict. Bridging differences is becoming ever more difficult as the systemic divide is widening. Political risks are on the rise, exposing vulnerabilities in companies’ China business. They will have to adapt to new dimensions of risk.

The EU and its member states have taken more robust stances towards China in recent years, including introducing policies risking confrontation with Beijing over its key interests. This covers political confrontations over human rights or Taiwan as well as economic conflict over issues ranging from subsidies to market access.

China’s leadership nonetheless has a strong incentive to continue prioritizing economic interests and thus accept political differences. However, it might at the same time calculate that its best option is to leverage existing and prospective economic ties to further these interests. Thus, the threat of economic retaliation is a new reality in Europe’s relationship with China. Navigating it will require European companies to properly assess their risk exposure and to prepare steps to mitigate the impact.

Leveraging the fear of economic loss has become a powerful tool for China’s government when dealing with Europe’s recent policy shift. Beijing hopes to influence policy decisions and to shape “correct” views on the relationship by threatening or imposing economic costs. This strategy is already defining the relationship as recent examples of Chinese measures targeting Lithuania over Taiwan or fear of Chinese reactions to banning Huawei as a 5G provider illustrate. While the list of prominent cases of Chinese economic coercion is growing, they are only the tip of the iceberg as many remain unreported.

Exhibit 1

To gain a clearer picture of the nature of China’s increasing use of economic coercion, MERICS has compiled the specifics of publicly known cases from all over the world to deduce patterns in Beijing’s behavior.1 We identified 123 cases between February 2010 and March 2022, with their frequency increasing since 2018 (see Exhibit 1). However, the number of instances when an action was taken by a European actor because it anticipated a measure by China without this actually existing is not captured in the reviewed cases. As such, the effectiveness of China’s use of economic coercion could be significantly higher.

The combination of the informal nature of many Chinese measures and companies’ fear of being affected means that the majority of cases remains invisible. Mindful of their China exposure, companies might not be willing to speak out about economic coercion—including over market access or technology transfer, and even more so political issues—to avoid retaliation. China’s government has tremendous power over how a foreign company can operate in the country. Officials can effectively turn the taps of revenue from the Chinese market on or off at will. As a result, European companies might work hard to water down the positions of governments or business associations towards China, de facto lobbying for China’s interests. China’s most effective form of economic coercion might therefore be covert pressure on companies.

As Europe and China recalibrate their relationship, the potential for economic conflict is likely to increase. European companies will be fearful of being caught in the middle. In a highly dynamic business environment, many risks associated with China might be predictable, but many are not. Either way, economic coercion is now part of the new dynamic risk exposure in economic ties with China. This makes it ever more important for European companies and governments to have a clear picture of the actual economic vulnerabilities. In developing one, the experience of East Asian countries is a rich source of case studies to show which industries and business sectors have been typically targeted and what effective measures were taken to minimize risks while preserving economic interests in China.

Exhibit 2

2. Navigating the triggers of China’s economic coercion and its policy toolbox

Perceived interference in the country’s internal affairs has long defined the “red lines” of China’s government over the past decades. Criticizing China’s human rights situation or undermining the positions of the Chinese Communist Party (CCP) on Taiwan or Tibet have long been triggers for conflict. The list of red lines has gotten somewhat longer but it still mostly involves sovereignty, security and territorial claims (see Exhibit 2). The cases of economic coercion identified indicate that traditional red lines remain the dominant triggers, accounting for 75 percent of them.

The scope of triggers for economic coercion has become more diverse as China’s economic strength has grown. Since 2018, Beijing has more frequently resorted to using its economic leverage to threaten punishment for perceived attacks on its wider interests, including overseas. The greater politicization of economic ties will likely lead to additional new red lines, making it more difficult to anticipate triggers of coercion. In theory, taking any position that is not aligned with that of the CCP is likely to lead to a response. However, whether and how China’s government responds, is harder to predict.

Giving the impression of being thin-skinned about its red lines is part of Beijing’s strategy. It forces foreign firms to tiptoe around sensitive issues by fueling the perception that their business interests are contingent on “correct” behavior. Matters are further complicated by China’s government primarily employing opaque and informal forms of coercion, allowing it to deny that it is resorting to economic pressure, and to deploy and retract measures at will.

The identified cases of economic coercion show that China has six types of measures in its toolbox.Popular boycotts: Foreign consumer goods can become subject to a popular boycott and face a drop in reputation and sales in China. Although such boycotts may appear to be organic expressions of consumer sentiment, they spread over social media platforms that are carefully monitored by government officials and are in some cases spurred on by state media outlets. Thus, any successful popular boycott can be seen as indirectly orchestrated by the government.

Administrative discrimination: Administrative procedures and regulatory checks are often used arbitrarily to coerce a target. In many cases, it is impossible for targeted companies to provide evidence of discriminatory behavior and litigate the case. The deployed measures are highly diverse, including complications with customs processing, exclusion from procurement, one-off fines for “violations,” and labor or safety regulations that can lead to the forced closure of business operations or costs associated with adjustments to meet new requirements.

Empty threats: Threats without any real action can sometimes prompt foreign governments and companies to comply with Beijing’s objectives. China has issued vague warnings of unspecified “consequences” without any follow-up measures on several occasions. Prominent examples include attempts to safeguard Huawei's access to 5G network markets in France, Germany, the United Kingdom, and the United States. In this way, China leverages the fear and uncertainty of foreign actors to apply pressure.

Legal defensive trade measures: In recent years, Beijing has developed several defensive trade policy instruments, including the unreliable entity list, the anti-foreign sanction law, and the export control law. It has also strategically used anti-dumping measures to retaliate against countries like Australia.2 China may adopt more formal methods in the future to limit market access, raise tariffs, or impose other costs.

Trade restrictions: Beijing frequently restricts trade by targeting imports of agricultural goods or commodities. Only on rare occasions has it employed or threatened to employ export restrictions, as was the case with rare earths to Japan in 2010.

Tourism restrictions: In pre-pandemic times China stood out as the country with the largest international tourism expenditure. In 2019, Chinese tourists spent USD 254.6 billion, making up 17 percent of the world total.3 By issuing an official travel warning, reducing visa services, or canceling tour operations, the government can drastically limit the number of Chinese travelers and thus impact the tourism, retail and hospitality industries in a targeted country.

3. Patterns of economic coercion: China seeks to minimize costs to itself through pragmatic target selection

China’s choice of coercive measure differs depending on whether it responds to actions taken by a foreign government or company. Popular boycotts are the tool of choice when targeting companies, accounting for over 50 percent of identified cases, followed by administrative discrimination, which accounts for 20 percent (see Exhibit 3). To target a government, China usually restricts the flow of goods and people to exert broader economic pressure. These two measures account for 61 percent of cases of coercion against foreign governments.4 Empty threats are also frequently employed against both governments and companies and were used in a fifth of all cases.

Exhibit 3

Exhibit 4

Consumer brands and services, including in entertainment and hospitality, are the economic sectors most prone to being targeted (see Exhibit 4). Consumer goods are more susceptible to popular boycotts and import bans. The same applies to imported commodities (including energy and raw materials) and agricultural goods (including food and beverages) that are associated with a particular country rather than a company (for example, wine or coal from Australia). Commodities and agricultural goods account for 18 percent of all cases. Producers of industrial or manufactured goods ranging from vehicles to machinery and electrical components are less likely to be targeted and make up 10 percent of cases.

The architects of China’s economic coercion are pragmatic when selecting targets. Beijing’s application of economic pressure to date reveals the following four patterns.Strategically relevant companies are not targeted. China employs economic coercion to promote its national interests. It is willing to bear the cost of economic inefficiencies or trade diversion as part of this process but it will not undermine its core goals for economic development and industrial upgrading. As a result, it rarely targets foreign companies in strategic industries that bring key technologies, intermediary products, or significant investment into the country.

Sectors with abundant substitutes are vulnerable. To minimize the impact of economic coercion on local business and consumers, China’s government tends to restrict market access for products and services for which there are abundant substitutes at home or abroad. The typical target sectors of agriculture, consumer goods, and tourism fit this approach very well. By the same token, the government avoids going after products where dependencies exist.

China uses economic restrictions to support local firms. Where possible, China will hit two birds with one stone by inflicting pain on a target company or sector while in the process furthering its own strategic goals or satisfying domestic interests. Nationalist boycotts are an effective way to stimulate the consumption of local brands and boost domestic industry. Lobbying by domestic corporate interest groups can also influence the selection of targets.

China uses empty threats to influence behavior without incurring costs. At times China will bluff when a red line is crossed but the matter does not warrant action that could further damage bilateral relations or disrupt business activities. As long as a few precedents of action exist, such threats can be effective, and selecting a prominent target can send a strong signal to apply pressure on governments and companies alike. Instances where China issued a warning but did not clearly implement a follow-up measure account for 21 percent of cases.

4. East Asian companies respond to perceived risks from China

China’s neighbors in Asia are the countries most affected by the opportunities and challenges of its economic and political rise. Japan, South Korea, and Taiwan are particularly exposed to a rapidly changing China due to their geographic proximity, economic interdependence, and growing political and security tensions with the country.

Over the past two decades, economic ties have deepened while at the same time these countries have been targeted by economic coercion. As China grew economically stronger and politically more assertive, tensions rose frequently during the 2000s, and Beijing has repeatedly applied economic coercion to deal with political disagreements. Japan, South Korea, and Taiwan (JKT) make up about 25 percent of the identified cases. For these neighbors, tensions are a fundamental part of their relationship with China despite their deep economic integration. Looking at their experience offers valuable lessons for dealing with the threat of China’s economic coercion.

Exhibit 5

Exhibit 6

Having a large reliance on China does not automatically translate into vulnerability to economic pressure for a company. The JKT countries’ experience of Chinese economic coercion is in line with the broader triggers and patterns discussed in the previous section. For them, China’s actions were always triggered over its traditional red lines. This is in contrast to cases in the EU and the United Kingdom where economic interests were threatened for excluding Huawei from 5G networks. This was not the case in JKT countries despite their governments having done the same. Human rights issues are far less prominent if not absent in JKT countries’ business relations with China. The most common sectors in these countries targeted by economic coercion were agriculture, consumer products, entertainment, and tourism. High-tech sectors with a heavy investment footprint in China including those providing imported intermediate inputs needed for final production in the country were off-limits, given the potential negative consequences for the development of the Chinese economy.

Based on these patterns, the primary factors that determine a company’s risk profile when it comes to economic coercion is the mix of its technological sophistication and investment footprint in China (see Exhibit 6). Below are examples of JKT companies from each risk profile, including ones that have experienced economic coercion and ones that have successfully managed to avoid being targeted despite having large business interests in China. These examples show how companies responded to coercion or the perceived risk of it.

Samsung (South Korea – Semiconductors, industrial and consumer electronics)

What happened: After Samsung listed China, Taiwan and Hong Kong as separate countries and regions, Chinese K-pop star Lay Zhang canceled his brand ambassadorship with the company in 2019.5 But, in contrast to other companies that were fined or boycotted for similar reasons, Samsung was able to avoid further consequences.

Pattern: The Samsung case shows how Beijing is less willing to exert strong pressure against a company that provides critical technology.

Response: DiversificationSamsung has taken precautionary measures by reducing its production exposure to China. Reports show that Samsung halted production in the country of smartphones in 2019 and of computers in 2020, with only two semiconductor manufacturing sites left in Suzhou and Xi’an.6

These decisions to shift production are broadly considered to have been driven by rising labor costs, increasing trade tensions between the United States and China, and the rising risk perception surrounding Chinese supply chains.7

Toyota (Japan – Automotive)

What happened: In 2012, Japan’s government nationalized the Senkaku/Diaoyu islands that previously had been privately owned. The measure resulted in nationwide anti-Japanese protests in China as well as strikes and temporary production halts at Toyota manufacturing plants and a drop in car sales.

Pattern: Despite being among the top foreign investors in China, Toyota is not entirely safe from being targeted as it is one among many car manufacturers in the country and alternative products are available.

Response: Safeguarding China business and diversificationBetween 2013 and 2021, the China share of Toyota sales and production rose from 10.4 to 20.2 percent and from 9.7 to 19.2 percent respectively.8 China was Toyota’s second-largest market and second-largest production base.

There is little evidence of a shift in Toyota’s production strategy after the 2012 anti-Japanese protests, as its China share of total production in Asia increased from 12.4 percent in 2012 to 29.6 percent in 2021.

Toyota is exploring ways to reduce its dependence on materials controlled by China. In 2018, the company unveiled a new kind of magnet that cuts its use of rare-earth elements by about half.9

LG Energy Solution (South Korea – Batteries)

What happened: LG Energy Solution has been among the targets of coercion triggered by the security altercation between China and South Korea over the latter’s deployment of a US Terminal High Altitude Area Defense (THAAD) system in 2017.10 Beijing responded by excluding Chinese electric vehicle (EV) makers using battery packs supplied by South Korean makers from subsidies schemes. Consequently, Chinese battery manufacturers CATL and BYD made strong gains in market share at the expense of their South Korean competitors.

Pattern: The case of LG Energy Solution represents an example of China hitting two birds with one stone, by using coercion to support domestic firms.

Response: DiversificationDespite no longer being able to compete in the Chinese market, LG Energy Solution still holds a significant global market share in EV batteries at 21.5 percent.11 In 2021, the company reported an increase of 42 percent in revenue from 2020 and a 4.3 percent increase in operating profits from the previous year.12 However, China’s CATL has taken the lead with a global market share of 32.5 percent.

LG Energy Solution has set up 50:50 joint ventures with General Motors and Geely, and it has recently announced that it plans to invest around USD 5.5 billion in 2022 to construct and expand its battery production plants in China and the United States.13

Far Eastern Group (Taiwan – Conglomerate)

What happened: During the 2020 elections, Far Eastern Group (FEG), one of Taiwan’s biggest conglomerates, donated NTD 58 million to the Democratic Progressive Party, which interprets the status quo over Taiwan as de facto independence. Beijing responded by fining FEG CNY 36.5 million (USD 5.72 million) on various grounds, from tax to fire safety.14

Pattern: The case of FEG is an example of a company with a high-risk profile as its products (including building materials and synthetic fibers) are easily replaceable for the Chinese economy.

Response: Safeguarding China business and diversificationAfter the fines were issued, FEG’s chairman, Douglas Hsu, responded by apologizing and saying that he “opposes Taiwanese independence” and “like most Taiwanese, I hope cross-strait relations maintain the status quo.”15

FEG has taken some steps to limit its high exposure to the Chinese market by expanding its reach into Southeast Asia and North America.16

Yifang Fruit Tea (Taiwan – Food and beverage services)

What happened: After the Taiwanese beverage maker Yifang Fruit Tea closed down one of its branches in Hong Kong for a day in solidarity with protestors in August 2019, calls for a popular boycott of the company quickly emerged in China and also spread to other bubble tea brands.17

Pattern: As a visible, low-end consumer brand highly exposed to the Chinese market with plenty of competitors, Yifang exemplifies a company at risk of suffering from a popular boycott.

Response: Safeguarding China business and diversificationYifang publicly supported Beijing’s “one country, two systems” stance and denounced labor strikes in Hong Kong (which resulted in a counter backlash and boycotts and the closure of more than 30 Yifang shops in Taiwan).18 Bubble tea brands HeyTea and Gong Cha also affirmed their support for Beijing in the hope of distancing themselves from the backlash in China.19

Since the incident in 2019, Yifang has expanded to Cambodia, Canada, Dubai, France, the Philippines, Sweden, Thailand, and the United States. Other Taiwanese bubble tea brands also expanded outside China.20

Companies that avoided being targeted:

TSMC (Taiwan – Semiconductors)

No known measures or threats have been levied against TSMC due to its crucial position in the global value chain for semiconductors. Given its role in turning Chinese chip designs into finished products and that it has two production facilities in Nanjing and Shanghai, acting against it could severely hurt China’s ambitions to enhance the competitiveness of its chip industry.21

Response: DiversificationTSMC’s recent announcement that it will invest substantially in manufacturing factories in Japan and the United States has been widely interpreted as a shift away from China, justified mainly by recent political tensions and the higher perceived risk of an armed invasion of Taiwan.22 The China share of the company’s revenues has declined sharply; having hovered above 17 percent between 2018 and 2020, it fell to 10 percent in 2021.

TSMC’s measures are far from a full decoupling of activities on the mainland and linkages still run deep. There are also reports of a USD 2.8 billion investment by TSMC in its manufacturing plants in Nanjing.23

Uniqlo (Japan – Fashion retail)

Uniqlo walks a tightrope to avoid choosing between China and the United States. It joined the Better Cotton Initiative in 2018 but has refrained from taking a position regarding human rights violations in Xinjiang, in contrast to other international apparel manufacturers which came under heavy scrutiny in 2021.24

Response: Doubling down on China Even after the United States barred Xinjiang cotton products, including Uniqlo imports in January 2021 due to allegations the company had sourced cotton from there, Fast Retailing (Uniqlo’s parent company) maintained its position with a carefully crafted statement.25 26 While competitors faced losses in China revenue ranging from 20 to 38 percent in November 2021, for speaking out against the human rights situation in Xinjiang, Uniqlo avoided boycotts and only experienced a drop of 0.9 percent in the same month.27

Rather than limiting its exposure to the Chinese market, Uniqlo aims to double down on its benefits, leveraging its unique selling point of offering functional apparel using so-called high-tech fabrics that thus far have proved difficult to copy for Chinese competitors.

5. A matter of strategic relevance: European companies need to reassess their risk exposure to economic coercion

As more political clashes can be expected between Europe and China, it will be critical for European companies to assess the likelihood of their business in the country being targeted by economic coercion. They are increasingly pulled between the expectations of the government of their home country and of China. While not seeking to antagonize either, there is room for companies to take principled positions and resist pressure from China. In the changing geopolitical context, companies need to reassess their risk profile in order to evaluate the credibility of potential threats and to navigate business opportunities and political risk.

Some European companies will inevitably be hit by Chinese economic coercion regardless of their best efforts to avoid it. JKT companies provide valuable lessons on how to mitigate the risk and continue to engage in the Chinese market. Regardless of their risk exposure, they have employed diversification strategies to various degrees, either as a precaution or as a reaction to economic coercion. The JKT examples also provide evidence that high market exposure in the form of revenue share and investment footprint in China does not automatically translate to high-risk exposure.

The actual risk exposure is more complex, and each company faces a different level of vulnerability. Taiwanese companies, in particular, are a case in point. Despite being caught up in the political tensions over Taiwan’s sovereignty, their massive business interests in China have rarely been the target of economic coercion. However, increasing political risk is also leading them to diversify more without abandoning the Chinese market.

The patterns of China’s past behavior show that numerous factors increase or decrease the likelihood and severity of a company being hit by economic coercion. Primary factors include a company’s level of technology and investment footprint. Foreign firms that produce high-tech or hard-to-replace products are unlikely to be targeted. Those with significant investments in China and that contribute to local employment and taxes are also likely to be in a more secure position.

On the other hand, companies in the commodities, agricultural, consumer goods and services sectors are vulnerable. The extent of their vulnerability is mainly determined by their usefulness for China. For example, Beijing would gladly see the sales of a foreign fashion brand decrease, but it is unlikely to come down hard on a manufacturer of cutting-edge robots or aircraft components. Secondary factors include bilateral government relations and brand visibility.

Exhibit 7

Measuring risk exposure to economic coercion strongly depends on a company’s profile (see Exhibit 7). European companies need to understand their respective role in China’s economy and strategic plans. A realistic assessment of how valuable the company is for the objectives of the local or central government in the country is key.

However, a company’s risk exposure changes over time given the dynamic situation. For example, China is working hard through its industrial policy on closing technological gaps with other countries, which can eventually render European companies irrelevant as technology providers. These companies thus require another safeguard, such as relevance as employers or taxpayers at the local level, or else their vulnerability will increase – especially if they have a high China revenue share.

Highly vulnerable companies will need to be more careful about pursuing market opportunities in China. Their investments could quickly lose value if their business becomes a target of coercion, due to an action of their own or that of others. However, companies that are less vulnerable today must continually reassess their strategic relevance.

China’s responses to infringements on its interests may come across as excessive shows of force, yet in many cases its measures may incur only limited economic costs on their targets. Often it uses economic coercion for signaling and deterrence, going after prominent companies or sectors to deter other companies or governments from crossing certain lines. The obvious choice is to target strategically irrelevant companies (high risk profile). Consumer brands, for example, will be pressured to align themselves prominently with government-approved positions. If they do not, officials may undermine their business operations in China.

Companies with a lower risk profile are far less vulnerable. Even those which derive a large share of their revenue from China can be in a secure position. Were China’s government to target such a company, it would not only put inbound investment and technology at risk, but also potentially lose the benefits of large foreign businesses lobbying their home governments in favor of Chinese interests. Such companies should thus not overestimate their vulnerability – they have far less to fear in speaking out, especially on issues relating to the business environment in China.

As long as European companies and governments are fearful of the potential impact of China’s economic coercion on their operations due to their high market exposure in the country, covert or open threats will be sufficient to water down or even prevent actions that Beijing deems undesirable.

China’s most effective forms of economic coercion are implied pressure and informal measures to disrupt foreign businesses in the country. Fearful of becoming a target, companies might avoid speaking out about the unfair treatment of foreign firms in China or deem it safest to align themselves with the positions and objectives of China’s government. This would be problematic from the perspective of European governments. Having a clearer picture of actual economic vulnerabilities will be a crucial step forward as Europe’s relationship with China becomes more complex.