China’s economic statecraft has been shaped not just by its recent surge in wealth. Beijing has watched for decades how Washington wields sanctions against other countries to attempt to bring them to heel. The Chinese remember well how the United States imposed an oil embargo on Imperial Japan in 1941 in response to its occupation of China and Southeast Asia. The attack on Pearl Harbour followed soon after. More recently, Washington has routinely used sanctions against other countries and areas, with the current list extending from Russia to the Balkans, Iran , North Korea , Lebanon, Syria and the Democratic Republic of Congo, to name just a few. As a fledgling superpower, Beijing clearly feels it can try the same tactics. More to the point, Beijing’s psyche on this issue was moulded in the decades following the Korean war , when China was subject to a US embargo itself and forced to rely on trade and technology from the Soviet Union. From the time the Communist Party of China took office, its leaders learned the hard way about how trade could be used as a diplomatic weapon. Amy King, senior lecturer in strategic and defence studies at Australian National University, says of that period that Communist Party leaders “had not anticipated the US-led embargo, and, when it came, were surprised how quickly it disrupted the Chinese economy”. In the 1950s, Dr King says, Beijing deployed trade as an inducement to drive a wedge between the US and its allies, such as Japan and Britain, by offering to open its market to imports. Beijing’s attempt to break the US embargo was also the start of a tradition that has survived into the next century, of an effort to build ties with Asia and Africa and dilute relations with “imperialist” America. The world looks very different for China today, following its development into an economic behemoth. As a permanent member of the United Nations Security Council, China has joined multilateral sanctions efforts against North Korea and Iran, in both cases primarily under pressure from the US. Beijing has quietly applied its own sanctions on Pyongyang, both to bring it to the negotiating table and to ensure that its leaders take China’s interests into account when they do sit down for talks. The use of sanctions is now firmly embedded in mainstream Chinese diplomacy. In the past, Beijing has both backed and vetoed sanctions against Myanmar at the UN. In tandem with Russia, Beijing has in recent years also blocked UN sanctions against Syria. How, why and when to use sanctions, and on occasion veto them, has been a topic for open debate in Chinese foreign policy circles for more than a decade, and the government has not stepped in to shut it down. In the words of Tsinghua University’s Yan Xuetong, known for his hawkish views, Chinese diplomacy under President Xi Jinping is likely to divide the world increasingly along the lines of “friends and enemies”. Writing in the early years of the Xi administration, Yan said those countries that play a “constructive” role will get “practical benefits” from China’s development. Conversely, antagonistic countries “will face more sanctions and isolation”. Beijing has stuck to the mindset that it pioneered in the early years of the People’s Republic, using access to its large market as an inducement to get its way and closing off economic opportunities to countries or companies that do not toe the line. The difference now is that China wields real economic clout as the world’s largest trading power . Other countries did not fear Chinese sanctions in the 1950s. They do now. Europe – especially Germany and France – Canada and the US are all struggling with their relationship to China. They are watching how Beijing responds to countries such as Australia , which are pushing back. Smart Australian policy would encourage partnerships that constrain Beijing’s ability to punish one democracy without provoking a reaction in another. In a limited sense, this is already in train. The US, Japan and Australia have long coordinated statements on the South China Sea. The same phenomenon, of democracies speaking with one voice, is spreading to other issues, such as the Uygurs and Hong Kong . The biggest constraint on China is the way it is locked into global trade and supply chains. China’s globalised economy ensured that Beijing ring-fenced its sanctions in the crisis with South Korea. Can China take advantage of rift between South Korea and Japan? For every country hurt by Chinese import restrictions, there is a party inside China that also suffers economic pain. So far, this equation has helped to stay Beijing’s hand in dealing with Australia. There is little doubt that China has its red lines, which, if crossed, would trigger sanctions. Think Taiwan , or taking sides in a military clash in the South China Sea . Perhaps Beijing is just biding its time with Canberra, but so far Australia does not seem to have breached the sanctions threshold. Still, it would be foolhardy to think that China will not try to extract an economic price at some stage. Beijing is continuing to court Latin American countries, such as Brazil and Argentina , as well as carrying out its Belt and Road Initiative in Eurasia . Both regions are rich in resources and fertile farmlands, qualities that are already proving useful for China as it looks to find new suppliers for products that it now sources from the US, such as soybeans . China is also building up its own universities to make foreign institutions less attractive. Beijing might not be able to tip Canberra into economic depression, but there is little doubt that it has the tools to punish Australia in ways that would hurt employment in the education and tourism sectors, and hit the federal budget through reducing mineral purchases . Beijing could cause momentary political panic simply by targeting areas of rapidly growing trade, such as meat, wine and vitamins, all industries with the power to lobby Canberra to change policy on China. Australian PM backs revived Quad grouping to counter China’s might Australia may yet pull off the balance of pushing back against China, through greater military spending and anti-foreign interference measures , while increasing bilateral trade. But sooner or later, and well before such an equilibrium is reached, Australia will be tested. It will be at a time and in a sector of Beijing’s choosing. Only then will Australians see if talk about getting tough on China is bluster. How much economic pain can Australia and its politics absorb before we wilt? For all the daily noise about China in the media, that is a question this country has only barely started to confront. Richard McGregor is a senior fellow for East Asia at the Lowy Institute. This is an edited extract of his essay “Trade Deficits: How China could Punish Australia” in the latest issue of Australian Foreign Affairs – China Dependence