China has begun a “surgical” retaliation against foreign companies after the US-led tech blockade

China has begun targeting Western interests in the country after five years of escalating trade and technology restrictions led by the United States under Presidents Donald Trump and Joe Biden.

Over the past two months, Chinese officials have imposed new sanctions on US arms firms Lockheed Martin and Raytheon, opened an investigation into US chipmaker Micron, raided US due diligence firm Mintz, arrested local employees, and detained a top executive from Japan’s Astellas Pharma group. London-based Deloitte has been hit with a record fine. President Xi Jinping’s administration is now considering curbing Western access to materials and technologies essential to the global auto industry, according to a Commerce Department review.

The response to what Beijing calls a US-led “tech blockade” reveals Xi’s strategy of narrowly targeting industries and companies with little risk of harming China’s own interests.

Said Paul Heinel, former China advisor to US President George W. Bush and Barack Obama.

However, the decision to conduct raids and detain employees of foreign companies raised the specter of Beijing escalating hostage diplomacy if relations with the West deteriorated.

China recently launched an investigation into US chip maker Micron © GDA / AP

The Mintz and Astillas cases prompted an urgent review of staff safety and the immediate suspension of some travel plans to China, according to two people from foreign risk advisory groups.

“This has been a wake-up call for the industry,” said one person. “It’s difficult for due diligence players — levels of paranoia in China are very high — but it also affects ‘premium’ service firms and groups like Bain, McKinsey and Boston Consulting Group.”

Experts said Japan has been particularly vulnerable to Beijing’s hostage diplomacy because it lacks a sophisticated intelligence agency of its own and the tools to negotiate the return of its citizens.

Since China passed the anti-espionage law in 2014, 17 Japanese nationals have been arrested. Japan’s foreign ministry said five of them, including an Astelas employee, remain in detention.

In February, China imposed new sanctions on Lockheed and Raytheon, two of the largest US defense companies. The move reflected Chinese opposition to arms sales to Taiwan but had little commercial impact as the groups were not allowed to sell military equipment to China.

Beijing’s investigation into Micron, launched last month on national security grounds, is seen as the clearest sign of momentum for retaliation by Xi.

Dexter Roberts, a senior fellow at the Atlantic Council, a Washington think-tank, said he was surprised by Beijing’s restraint given that the US-led campaign to isolate China from core chipmaking technologies “hit right at the very heart of China’s global high-tech ambitions.”

Despite Beijing’s anger, Xi’s economic planners worry about undermining efforts to use foreign investors to help restart China’s economy after the pandemic. This means that Beijing is expected to refrain from acting against companies and industries that are seen as crucial to the economic recovery.

“It all comes down to the fact that China faces a lot of challenges this year, especially on the economic side,” Roberts said. “The last thing they should do is get distracted by a more adversarial relationship with the United States.”

In the wake of the Treasury Department’s record $31 million fine to Deloitte for audit deficiencies, experts said they expect increased pressure on the Big Four accounting firms.

Cheng Lin, professor of accounting at China European International Business School in Shanghai, said that while audit quality has long been an issue for foreign and domestic companies, the “primary drivers” were Beijing’s concerns about data and national security.

The auto industry is also preparing for the results of the Commerce Department’s 2022 review of technology export restrictions, including potential controls on certain rare earth materials and lidar technology used in mapping self-driving cars.

Any decision by China to “weaponize its dominance in mining and refining” for materials used to make electric cars will create “immediate anxiety for the United States, Europe, Japan and Korea,” said Tu Li, founder of Sino Auto Insights, a consulting firm in Beijing. governments”.

Arthur Cropper, head of research at Gavekal Dragonomics, a consultancy in Beijing, said the restrictions could also be used as bargaining leverage to loosen semiconductor controls.

Sue Kim, a former CIA analyst and expert on Asia, expects that Beijing’s retaliatory moves will expand because there seems to be no near-term solution to relations between the United States and China.

“With so many elements in the US-China competition, Beijing has many levers it can pull, including putting pressure on US allies and partners whose economies depend on trade with China,” she said.

Additional reporting by Primrose Riordan and Gloria Lee in Hong Kong

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