An eight-person State Department team known as “The Firm” aids countries when China cuts off trade.
When South Korea decided to host a US anti-ballistic missile system, the lucrative flow of tourists from neighboring China suddenly dried up. When Australia accused Beijing of meddling in its domestic politics and demanded answers over the origins of Covid-19, China stopped buying exports like coal, wine and beef.
It wasn’t until Beijing tried to punish Lithuania for opening a liaison office with Taiwan in 2021 that Washington intervened.
A key outcome from that episode was the creation of a team inside the US State Department to help when Beijing responds to political disputes with economic and trade weapons; what the US and its allies call economic coercion. Demand for that help has been strong, according to the US official in charge of the program.
“Countries are coming in, and many are coming in saying ‘We want the Lithuania treatment,’” Jose Fernandez, under secretary for economic growth and the environment, said in an interview, referring to a package of trade finance, procurement deals and market access Washington offered the Baltic nation.
Since then, about a dozen other nations in Asia, Africa, Latin America and Europe have sought guidance on how to prepare for or mitigate economic pressure from China, according to people familiar with the program, who asked not to be named discussing private information.
Beijing is “using their economic clout to entice or isolate countries,” said Jose Manuel Romualdez, the ambassador to the US from the Philippines, which is being advised by the State Department on potential new export markets and other support for its agriculture sector in the case of a Beijing boycott. Those measures could include the deployment of cold storage facilities to the Philippines for agricultural products that China might boycott.
The eight-person State Department group, known informally as “the firm” and led by Melanie Hart, the China policy coordinator in Fernandez’s office, operates like a consultancy. Among the first steps for its “clients” is an analysis of trade vulnerabilities to China by the department’s economists. It then looks for ways to help diversify export markets away from China and, if requested, offer a public show of support. The team has also conducted table-top exercises to game out different responses to Beijing, the people said.
One driver for this strategy is a recognition that the US didn’t sufficiently support South Korea or Australia when China tried to coerce them, according to the Asia Society’s Wendy Cutler, a former US trade negotiator, who co-wrote a recent report on Chinese actions against Lithuania.
“We decided that we had seen this movie before and that it was time to stop the tape,’ Fernandez said. Asked about the perception that the US hadn’t done enough in earlier cases, Fernandez said “I think that is a fair criticism.”
The US government also leverages its economic power in foreign affairs, with China lobbing the “economic coercion” accusation back at Washington. The US has increasingly sought to deploy economic and trade tools in its competition with China, including sanctions, tariffs and export controls, promoting “friend-shoring” to bolster supply chains and stepping up scrutiny of investments and data flows.
They also point out that internal political divisions also mean that the US mostly can’t craft new trade agreements, the prized deals that would open up domestic markets to friendly nations.
“It is a challenge for the United States because it does not have an offensive trade agenda,” said Deborah Elms, the founder of the Asian Trade Center in Singapore. “There just isn’t a whole lot that Washington is offering to current or potential partners on the economic side.”
Even if there were an active trade policy, it’s “become increasingly difficult for parties to believe that the United States would follow through and deliver,” she said, noting that Asian nations have watched the US under former President Donald Trump pull out of an Asia-Pacific trade deal and then watched the current administration fail to finalize the trade “pillar” of its own Indo-Pacific Economic Framework.
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China’s Ministry of Foreign Affairs rejected the accusation that it had tried to coerce Lithuania, stating that its actions were a “legitimate response” to safeguard its rights and interest. “The United States is the inventor and patent holder of ‘coercive diplomacy’ so it is extremely ironic that the United States wants to help other countries deal with so-called ‘economic coercion,’” according to a statement sent via WeChat from a ministry spokesperson.
In the case of Lithuania, China ramped up pressure on Vilnius after it allowed a new Taiwanese trade office in the country to use the word “Taiwan” in its name, rather than the Beijing-approved “Taipei.”
In a few months, Beijing blocked trade, including by deleting Lithuania from its customs system, pressured multinationals in the country to stop sourcing there, canceled trade credits and voided the official identity cards of Lithuanian diplomats in Beijing.
Fernandez secured a trade credit offer worth $600 million from the US Export-Import Bank, a reciprocal procurement deal with the Defense Department, and improved access to the US market for agricultural products like eggs.
There was also a series of diplomatic gestures, including high-level meetings and statements, and efforts to help Lithuanian firms sell more to US allies in Asia. The US also signed onto the European Union’s complaint at the World Trade Organization in January 2022.
“The reaction was very swift, really very swift,” Gabrielius Landsbergis, Lithuania’s foreign minister, said in an interview, praising the support from the US and other Group of Seven nations as sending a strong signal. “I would say that the biggest assistance was political, because in most of the cases it was a political issue.”
He also offered a warning to other nations.
“I am 100% sure that we are not the last case,” he said. “If you’re dependent, know that it can become a weapon and most likely it will be a weapon one day.”