Small Waves Precede Tidal Waves: American Sanctions on Chinese Companies involved in South China Sea Island Building and their Larger Ramifications

The United States (US) Department of Commerce recently blacklisted two dozen Chinese firms which it said, “played a ‘role in helping the Chinese military construct and militarize the internationally condemned artificial islands in the South China Sea.’” Companies listed included Guangzhou Haige Communications Group, China Shipbuilding Group, and China Communications Construction Co. (CCCC). The US State Department later accused CCCC and its subsidiaries of “‘corruption, predatory financing, environmental destruction and other abuses.’”

The assault against CCCC stands out because it is a very prominent Chinese state-owned enterprise (SOE) and a contracting giant with widespread involvement in major infrastructure projects such as airports, bridges, railways, roads, and seaports around the world. The direct impact of being blacklisted is likely to be small since CCCC does not need supplies from the US. However, the adverse spillover effects could be quite consequential with CCCC client countries and international financial institutions likely feeling pressure to minimize future interactions with CCCC. Indeed, not long after the US action, the Philippines hinted it might terminate a major contract, ironically for a reclamation project, with a CCCC subsidiary! In the wake of the US’s recent actions, it also would be hard to imagine American companies as well as American allies and their firms maintaining normal business activities with CCCC and its subsidiaries given the risk of secondary sanctions from the US, much less potential reputational damage for collaborating with such a “horrible” firm. Given the history of US pressure against Huawei, it is entirely likely Washington will escalate pressure against CCCC, other blacklisted firms, and their subsidiaries, especially after it discovers its initial round of sanctions yielded little more than symbolism. All of this has potential ramifications for global contracting, China’s Belt and Road Initiative, and plummeting US-China relations. Small waves may well turn into tidal waves.