Why China is sanctioning Lockheed Martin

July 14, 2020, 10:30 AM UTC

China’s foreign ministry on Tuesday said it would place sanctions on U.S. defense contractor Lockheed Martin Corp for the company’s involvement in a U.S. government deal to supply arms to Taiwan, a self-governing island that the government in Beijing considers a province of China.

The U.S. approved a potential $620 million upgrade package for surface-to-air missiles for Taiwan last week. Lockheed Martin is the main contractor for those missiles.

The U.S. does not have official diplomatic ties with Taiwan, but it’s obliged to provide the island with military support under the 1979 Taiwan Relations Act and has done so for decades. Beijing sees such arms transactions as a violation of Chinese sovereignty and condemns them as foreign interference. Washington has declined Taiwan’s arms requests in the past so as not to anger Beijing.

Chinese foreign ministry spokesperson Zhao Lijian, who announced the Lockheed Martin sanctions, said the U.S. should suspend its military support of Taiwan “so that it doesn’t do further harm to bilateral relations and damage peace and stability in the Taiwan Strait.”

“China firmly opposes U.S. arms sales to Taiwan…We will impose sanctions on the main contractor of this arms sale Lockheed Martin,” Zhao said on Tuesday.

Zhao did not specify what the sanctions would entail. The U.S. has an arms embargo on China that prevents U.S. companies from selling military equipment to China; the embargo doesn’t apply to Taiwan.

“Foreign Military Sales are government-to-government transactions and we work closely with the U.S. government on any military sales to international customers. Discussions about sales to foreign governments are best addressed by the U.S. government[,]” Lockheed Martin said in an emailed statement to Fortune.

Taiwan’s defense ministry said the surface-to-air missile upgrade will be the Trump administration’s seventh arms sale to Taiwan. It expects the transaction to take effect in the next month.

Beijing has vowed to sanction U.S. weapons makers in the past over in Taiwan arms sales, but stopped short of making good on the threats.

In August 2019, when the Trump administration was preparing an $8 billion deal to sell Lockheed Martin-made F-16V fighter jets to Taiwan, China’s foreign ministry said China would place sanctions on “the American companies that participate in this arms sale to Taiwan.” Beijing issued a similar threat in July 2019 regarding a $2.2 billion sale of tanks and missiles from the U.S. to Taiwan.

In both cases, the threatened sanctions did not occur. If they had, they were not expected to have a significant effect on Lockheed Martin and other companies involved in the deals since the U.S.’s China arms embargo already limits the kind of sales U.S. defense contractors can conduct in China.

Almost three-quarters of Lockheed Martin sales occur in the U.S., and the U.S. government is its biggest customer, accounting for 71% of the firm’s net sales in 2019. Sales to Asia Pacific countries make up 10% of Lockheed Martin’s business.

The new sanctions are the latest blow to U.S.-China relations this week.

On Monday, China’s foreign ministry said it was placing sanctions on four U.S. officials in response to U.S. sanctions on four Chinese officials for their role in alleged human rights abuses in the Xinjiang region of western China. And Secretary of State Mike Pompeo said on Monday that Beijing’s claims to disputed areas of the South China Sea were illegal, a marked shift from the U.S.’s previous stance of having no position on contesting claims in the area.