China’s own interests may limit leeway for sanctions against US firms over Taiwan arm sales

By Elaine Kurtenbach, AP
Monday, February 1, 2010

China’s interests may limit sanctions on US firms

SHANGHAI — China’s threats to punish U.S. companies involved in a major arms sale to Taiwan are raising questions over whether Beijing could pull it off without undermining its own aviation industries.

China has not said what sanctions it might impose to penalize the companies involved in building the arms for democratic-ruled Taiwan. But the roster of potential targets is an A-list of U.S. defense contractors, including Boeing Co., Lockheed Martin Corp. and Raytheon Co.

The plan to sell $6.4 billion of arms to the island, which China claims as its own territory, has drawn a barrage of criticism since it was announced Friday. Beijing quickly suspended military exchanges with Washington and announced the unprecedented threat of sanctions.

“This is the first time the government has issued such an announcement, and I think they are very serious,” said Wu Xinbo, a professor at the Center for American Studies at Shanghai’s Fudan University.

The companies involved in the arms deal include Boeing Co., which makes the Harpoon Block II missiles included in the sale to Taiwan, but which also has massive sales to China’s commercial airlines.

Sikorsky Aircraft Corp., a unit of United Technologies Corp., is to supply 60 Black Hawk helicopters. Lockheed Martin Corp. has the contract to provide 263 PAC-3 air defense missiles, and Raytheon Co. will supply a Patriot Air and Missile Defense System to the island.

All could face a backlash over the Taiwan arms sale, which are handled through the Foreign Military Sales section of the U.S. Department of Defense. But some of the companies have relatively little China business, while others — Boeing in particular — have important market positions that analysts say China would be loathe to upset with sweeping sanctions or boycotts.

“For important joint ventures where China has a stake or products crucial for China’s market, the impact may be limited,” said Wu, of Fudan University.

Still struggling to make up for jobs lost during the global financial crisis, Beijing also would be loathe to put out of work the tens of thousands of people working at Boeing and United Technologies Corp.-related factories, which apart from aircraft make a wide range of products including elevators and air conditioners.

The two other key suppliers for the Taiwan arms package, Raytheon and Lockheed Martin, which have less business in China.

“Most of the largest U.S. defense companies, except perhaps Boeing, have little business in China. Beijing has long discriminated against major U.S. companies who have supported high profile U.S. Foreign Military Sales programs for Taiwan,” said Mark Stokes, a former defense attache in Beijing who is executive director of Project 2049, a private think-tank based in Arlington, Virginia.

Boeing is perhaps the thorniest issue for potential Chinese retaliation. The company said Monday that it had not received any notice of sanctions. “This is a government-to- government issue. We are not in the position to comment or speculate on this matter,” the Chicago-based company said in a statement.

The aircraft maker is deeply entwined with China’s commercial aviation industry. It has contracted hundreds of millions of dollars worth of parts for its 787 Dreamliner to Chinese suppliers, and more than a third of its aircraft have major parts made or assembled in China. More than half of the aircraft flown by China’s airlines are Boeing or McDonnell-Douglas jets, and just keeping them supplied with parts is a big part of its global business.

In October, Boeing signed an agreement with the government-affiliated Chinese Academy of Sciences — the Chinese side was represented by Jiang Mianheng, son of former leader Jiang Zemin — to collaborate on research on energy, materials and wireless technology.

Such projects garner good will. They also reflect Boeing’s commitment to the “most important jetliner market in the world,” says aerospace analyst Richard Aboulafia of the Washington-based Teal Group.

But while China is crucial for Boeing, China’s airlines and its own programs aimed at building a mid-sized regional jet, the ARJ21, and a larger wide-body jet dubbed the C919 and not due to begin operating for several more years, likewise depend on foreign-developed technology.

“Yes, they could completely paralyze jetliner growth in this business, but I can’t imagine it would hurt Western companies any more than it would hurt Chinese transportation systems,” Aboulafia said.

Looking ahead, China’s anger over the arms sale could sway it toward favoring European aviation giant Airbus for aircraft contracts, or stalling or canceling some planned purchases of Boeing jets. In the past, Beijing has often used such tactics to try to shape trading partners’ Taiwan policies.

But overall, Beijing will have to weigh its options carefully: As a member of the World Trade Organization it would likely face challenges for sanctions not justified under WTO rules.

Such considerations might help protect United Technologies Corp., which like Boeing has wide civilian commercial interests in China. Apart from Sikorsky Aircraft, UTC companies include jet engine manufacturer Pratt & Whitney, Otis elevators, UTC Fire and Security, and air conditioner maker Carrier.

Associated Press researcher Ji Chen contributed to this report.

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