As summit looms, a question of sanctions against China | McClatchy Washington Bureau

As it prepares for a visit Friday by Chinese leader Xi Jinping, the Obama administration is weighing how to punish China for cyberattacks against U.S. government and private-sector computers and networks while not provoking retaliation that could harm U.S. companies.

President Barack Obama is signaling that sanctions are one option. “We are preparing a number of measures that will indicate to the Chinese that this is not just a matter of us being mildly upset,” he said earlier this month.

But imposing sanctions on the world’s second largest economy is neither easy nor without risk. And the consideration of sanctions has taken a different course than actions against another big power, Russia, which saw protracted consultation with U.S. industry.

Broad action against the Chinese government risks sparking retaliation, with economic effects that could spill over into global trade and perhaps be felt in trade-driven Pacific Coast states such as California and Washington.

White House officials confirmed Tuesday evening that there will be no sanctions before the Friday meetings, but they left the door open for action after Xi’s trip if there is no progress made.

“Candidly, cyber (theft) is an issue where we have not made the progress we have wanted to make,” said Deputy National Security Adviser Ben Rhodes.

In Seattle on Tuesday, Xi denied that China promotes the theft of proprietary information from U.S. companies.

But he supported the idea of a “high-level dialogue mechanism” of the kind the Obama administration seeks.

Trade associations that work closely with the administration on sanctions issues said they hadn’t been asked for their views.

“They have not asked, which makes me think that this is more in the ‘shot across the bow’ camp that it is in the ‘let’s hit them three different ways tomorrow’ camp,” said William Reinsch, president of the National Foreign Trade Council, a lobby for multinational companies.

That alone suggests the threat of sanctions against China, with whom the United States is a major partner in both trade and investment, is unfolding differently than the targeted sanctions last year against Russia for its intervention in Crimea and Ukraine. Russia has the world’s 15th biggest economy, smaller than Spain’s.

“There are a lot more commercial challenges with China than there were with Russia, they really need to be tuned into possible consequences,” said Reinsch, whose group generally opposes trade sanctions as ineffective. “Know what’s going to happen whatever you do, and be prepared for the consequences.”

In the case of Russia, there was broad consultation with U.S. industry ahead of the expected retaliation that came against U.S. exports of poultry and other farm products.

“On Russia, they did an exceptionally good job consulting with the private sector beforehand to really get a grip on what the impact would be on various things they could do – they were basically very concerned about collateral damage,” he said.

Former Treasury Secretary Henry Paulson, himself a China expert, helped bring the two countries closer in the final years of the Bush administration. Speaking Tuesday on CNBC, he acknowledged that the cyberthreat issue is “the biggest risk when we look at U.S.-China relations.”

There are numerous limitations to targeting citizens and companies in China.

Financial sanctions are most effective when large global banks shun the targets, making them pariahs. But it’s not clear the Chinese firms or actors alleged to have carried out the hacking actually travel widely outside their country. That means locking them out of global finance might have little effect, especially if they are funded by the deep-pocketed Chinese government.

“We need to impose a cost on the Chinese entities that are doing this,” said Michael Singh, a former top adviser on the National Security Council, from 2005 to 2008. “Ultimately what you want to do is prevent it, not just respond to it.”

That’s where sanctions get tricky. The source of the computer hacking isn’t necessarily the beneficiary of the stolen information.

“The other downside, not all these companies have a profit motive,” said Singh, now the managing director of the Washington Institute for Near East Policy, a think tank. “We’re not dealing with a capitalist economy here, at least not a strictly capitalist one.”

The threat of sanctions also comes when China’s unexpectedly sharp economic slowdown is roiling Wall Street and global financial markets. The turmoil began with the surprise devaluation of China’s currency, sparking fears of global currency battles. Sanctions could prompt fears of a trade war.

If China were to react to sanctions by imposing barriers on U.S. products, it’d be bad news for California, which accounted for almost 11 percent of U.S. global exports last year. California exported more than $16 billion to mainland China last year.

China is a top trading partner for the state of Washington, which exports the highest value of goods to China among U.S. states. Two-way trade exceeded $29 billion in 2014, and exports to China from Washington neared $21 billion.

CORRECTION: An earlier version of the story gave the wrong name for the Washington Institute for Near East Policy.