Sanctions against China in case of a Taiwan war could exact a US$3 trillion toll on global economy, report predicts

Research drawing on lessons from Russia’s invasion of Ukraine and its aftermath finds Western countries struggling to coordinate response
Major industries G7 could target for sanctions include China’s chemical, metals, electronics, shipbuilding and aviation sectors

US-China relations

Mark Magnierin New York

Published: 12:03pm, 22 Jun 2023

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Full-blown economic sanctions levelled against Beijing by Group of 7 countries in the case of a war over Taiwan would exact a colossal US$3 trillion toll on the global economy – nearly equal to Britain’s annual output – even as it left Western countries struggling to craft a coordinated response, according to a report released on Thursday.

The research by the Atlantic Council and Rhodium Group represents an effort to tease out potential tools, costs and options following any attempt to take Taiwan by force, drawing on lessons from the 2022 attack on Ukraine by Russia, whose economy is one-tenth the size of China’s and far less globally integrated.

“Costs from escalation in the Taiwan Strait are so costly to everyone,” said Charlie Vest, Rhodium’s associate director and a co-author of the report titled “Sanctioning China in a Taiwan Crisis: Scenarios and Risks”.

“But escalation does happen. And we’ve seen that in very clear terms in Ukraine. So it’s just important that people think about and understand the implications.”

The 35-page report outlines three broad targets of G7 sanctions following an attempt to take Taiwan by force: China’s financial sector; industries with ties to the Chinese military; and individuals or companies associated with Beijing’s military and political leadership.

The G7 would likely choose financial sanctions, export controls and other sanctions that would hurt China more than the West, even as China sought to protect against its vulnerabilities, according to the report.

“There’s a lot of game theory needed,” said Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, which has estimated that economic sanctions are only successful about one-third of the time, significantly less so when involving major powers. “It’s kind of like mutually assured destruction.”

In addition, sanctions take time to bite, potentially longer than a successful invasion would, at which point the focus would become punitive. And the longer they are in place, the easier it becomes for target companies and countries to adapt, divert trade and find workarounds, as seen with Russia.

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Economic sanctions alone are insufficient to avert a conflict, and need to work in tandem with military and diplomatic efforts, the report added.

“We should not index too heavily on the power of economic countermeasures to deter a crisis,” said Vest. “We really do need to look for traditional forms of relationship management deterrence to keep the ship afloat.”

A potential Taiwan crisis and likely response are receiving far greater scrutiny in Washington, other G7 capitals and Beijing in the wake of the Ukraine invasion, the report said.

Various factors raise the risk of an escalation, including the weakened China-Taiwan status quo, mounting Sino-American geopolitical tension, China’s growing military muscle, more hardline US policies towards Beijing and Taiwan’s coming presidential elections, it added.

Students salute Taiwanese President Tsai Ing-wen during a graduation ceremony at the National Defence University in Taipei on Wednesday. Taiwan holds its next presidential election in January 2024. Photo: Reuters

Major industries the G7 could target for sanctions include China’s chemical, metals, electronics, shipbuilding and aviation sectors – which employ 45 million workers and produce over US$6.7 trillion in annual revenue. Some of these sectors are already subject to sanctions.

Cutting off key aviation components and technologies would deal a huge blow to Beijing’s travel and commercial airline manufacturing industries, the report continued. But it would also directly affect at least US$2.2 billion in G7 exports, a figure that could rise to US$33 billion if China were to impose retaliatory measures, it said.

G7 nations would also face difficulty crafting a coordinated response, given disparate national interests, varied willingness to suffer economic pain and the unique facets of their relationships with Washington.

While many observers were surprised by the G7’s rapid coalescence on sanctions against Russia over Ukraine, Taiwan is further removed for European members, and China’s economy far more integrally linked with the rest of the world.

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“Their security was directly at risk,” said Chorzempa. “It would be orders of magnitude more difficult to achieve consensus on China-related sanctions than it was in a Russia scenario.”

The estimated net worth of China’s 200 most wealthy people is about US$1.8 trillion, the report said, of whom 29 are members of the National People’s Congress or Chinese People’s Political Consultative Conference.

Drawing up sanctions against elite Chinese to sway political decision-making – as the G7 has done against Russian officials, oligarchs and family members and as the US has done against officials in the People’s Liberation Army, Hong Kong and Xinjiang – presents challenges.

As the Panama Papers showed, there are ample ways to hide money through shell companies and other tactics, the report noted, and many officials who would be targeted are firmly committed to China’s Taiwan policy and unlikely to be swayed easily by financial sanctions against their personal assets.

The G7’s most effective sanctioning power remains Washington’s grip on the global financial system, through the US dollar and networks like the Swift system used by banks to exchange money globally, according to the report.

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For years, China and Russia have bridled at the extreme leverage this gives the US. China has built its own version of Swift, called the Cross-Border Interbank Payment System, to handle renminbi transactions, promote a digital currency and enable renminbi payment with Moscow and other allies.

The problem for China, however, is that the global financial system trusts the dollar, US rule of law and its relatively open system, experts said.

This is less the case with China’s currency, given capital controls and Beijing’s ability to change rules arbitrarily and muscle banks and companies to act in its political interest.

“There really isn’t a good option for China in the near term, because of the ubiquity of the US dollar, the importance of the US economy and financial system,” said Chorzempa.

“There’s clearly recognition in China that sanctions, if imposed, would be massively costly to China. But if they are deciding to make this move anyway, then you might be far beyond the economic cost-benefit calculation.”