Colombo Port City and the big picture of US sanctions on Chinese firms

1 September 2020 

The United States last week announced sanctions on 24 Chinese State-Owned-Enterprises, including five subsidiaries of China’s construction giant, China Communication Construction Company (CCCC), the main contractor of the Colombo Port City, effectively upping the ante of an increasingly open trade war between US and China.  

The Chinese companies were added to ‘the Entity list’ of the US Department of Commerce ostensibly for their role in the construction of artificial islands in the South China Sea, where China has made expansive maritime claims to a sea area expanding up to the nine-dash line. The United States and nearly a dozen of rival claimant countries have rejected that as unlawful- and a Hague-based permanent court of arbitration in 2016 ruled China’s claims to historic rights there as having no validity under international law.   

The Entity List is a tool utilised by US to “restrict the export, re-export, and transfer of items subject to the Export Administration Regulations (EAR) to persons and organisations reasonably believed to be involved, or to pose a significant risk of becoming involved, in activities contrary to the national security or foreign policy interests of the United States.”  

The US companies would need to obtain a waiver to conduct business with the sanctioned Chinese entities.  
China Communications Construction Company has expanded economic interests in Sri Lanka. Its subsidiary, China Harbour Engineering Company is the parent company of the Colombo Port City, a multi-billion dollar project to build a new financial centre. China Harbours and CCCC has a history in Sri Lanka dating back to 1998 and were the contractor of Hambantota Port, Mattala International Airport, sections of the Southern Express Way, the Outer Circular Expressway etc.  

Five subsidiaries of the CCCC included in the US entity list - China Communications Construction Company Dredging Group Co. Ltd, China Communications Construction Company Tianjin Waterway Bureau, China Communications Construction Company Shanghai Waterway Bureau, China Communications Construction Company Guangzhou Waterway Bureau and China Communications Construction Company Second Navigation Engineering Bureau - are accused of engaging in dredging activities in the South China Sea. They were, however, domestic subsidiaries of CCCC sprung up to undertake development activities at the provincial level. Given domestic orientation, the actual commercial impact of sanctions would be marginal. The Washington Post reported the total US exports to the 24 companies amounted to US$5 million over the past five years. 

Since sanctions are imposed on selected CCCC subsidiaries, and not the CCCC as a whole, it is unlikely that the Colombo Port City and its Chinese builder would be affected. CCCC in its own right is a global construction giant, listed in Hong Kong and Shanghai and ranked among top 100 global firms, termed as Huwai Construction, though the comparison may no longer be desired.   

 However, as much as a wobbly nexus of subsidiaries had helped the Chinese SOEs, their inter-dependency might now be closely watched and would trigger a further response.   

The Colombo Port City has been lobbying for investment from high profile investors and countries. What impact the CCCC’s association with the US sanctions would have on the investor sentiments is not immediately clear, though the investors would naturally prefer to keep away from troubles, especially involving the United States.  
As it appears the overall objective of sanctions is global. As Washington Post quoted US trade officials as saying “they hoped the sanctions would have a wider impact by discouraging other countries from engaging with the companies through China’s Belt and Road Initiative, which builds infrastructure in developing nations.”  
How that is accomplished is not spelt out, but the United States being the pre-eminent power in the global economic system, also wields enormous, and often arbitrary power in policing it. An earlier blacklisting of Huwai, the leader of 5G telecommunication hardware, effectively pushed it out of the US chipmakers. Though the telecommunication giant remains profitable, the US sanctions are already biting into its prospects, unless China builds its own supply chains of high-end technology and not to mention, manages to reason out to wary European countries to use its 5G equipment against American objections.   

In South Asia, the rising tension in the Sino-India border and the heightened Indian security concerns after the deadly face-off in Ladakh are complicating China’s economic expansion.  

Sri Lanka is confronted with the hard reality of geopolitics. China’s rise during the first decade of this century, and even during the first half of the second decade was largely uncontested or responded with largely symbolic measures by the liberal institutionalists who ran the foreign policy in Washington, who continued to believe against the empirical evidence that China’s integration with the global market and its rising riches would effect changes in China’s internal system and moderate its foreign policy behaviour. 

 
Instead, China became increasingly assertive in its maritime claims and democratic space at home shrank. It also benefited from the absence of a cohesive balancing strategy by its would-be rivals.   

However, though delayed, the historical inevitability in international politics is now gradually unfolding: When a rising power challenges the status quo, reigning power and its status quo minded allies would gang up and push back. In a world dominated by economic inter-dependency, the systemic response was delayed, but a series of domestic policy calculations, China’s own miscalculations and a deadly accident have made it happen. Donald Trump understands that a strong anti-China posture helps him politically. China’s expansive maritime claims have tested the nerve of many of its neighbours who were until now willing to ride China’s economic gravy-train. A high altitude border clash has finally rested the ‘Chindia’ for good.   

Sri Lanka’s external environment has drastically changed over a matter of years. It does not have the freedom of action it had before. It can test the waters but should be mindful of unintended consequences. 

 
The government has recently given an enlarged sense of importance to its relations with New Delhi. The appointment of Milinda Moragoda as the High Commissioner there with a Cabinet rank underscores that sense of awakening. India’s security concerns over China in South Asia is acute and would need consistent communication between the two capitals. Moragoda as a Cabinet ranked diplomat would be able to bypass much of administrative drudgery as he reaches out to New Delhi. Personal relations would also help. (Though it would be naïve to expect personal niceties would help getting the Indian approval to shed the 13th amendment if it is the reason. India is too big and its politics are disparate and chaotic to be surmised in a personal touch).  

 India has its own limitations though. The most generalizable measure in international politics, realists argue, is the relative national power of the countries. China’s economy is five times of India’s in nominal value and two and half in purchasing power parity. China’s outward foreign direct investments are the worlds second-largest, second only to America.   

Though Sri Lanka’s external environment changed, our domestic needs for large scale investments for infrastructure development have not. China remains the place to go. And it is the only country that has both economic muscles and political will to bankroll large scale infrastructure development. That is notwithstanding that Chinese economic assistance is actually mercantilist. In contrast, especially Japan, and India to some extent have provided extremely generous development financing. But they are few and far between and are not large enough to satiate Sri Lanka’s need.  

Also, China would be the only large economy to record positive economic growth this year. According to some estimates, India’s first quarter of growth (April-July) - that was scheduled to be announced yesterday- has recorded negative growth of 16%. Domestic worries would leave little appetite for an expansive economic engagement abroad.   

As much as Chinese financing has helped address infrastructure backlog, ( though some of the constructions were wasteful vestige projects, which is nonetheless a product of domestic policy-making) there is a hole in overall economic engagement with China. Its contribution to human capital development is marginal, exports have hardly moved, the technology transfer is nonexistent. This is the problem with Sri Lanka’s economic engagement with all the countries, but given US$12 billion worth projects undertaken by China so far, this vacuum is extra special. Probably that is due to Sri Lanka’s own making. In that context, the revival of discussions on the Economic and Technology Cooperation Agreement (ETCA) with India by the new government, is a welcome step.  

Follow @RangaJayasuriya on Twitter