China has been developing a range of ways to respond to sanctions from Western countries, and its response to potential sanctions from Group of Seven, or G7, nations in the event of an escalation of tensions in the Taiwan Strait could put hundreds of billions of exports to its economy at risk, according to a new report.
But analysts also warned that Beijing would also pay a heavy price if it deployed its own "economic statecraft" to counter economic sanctions from the United States and its allies in the event of escalation actions against democratic Taiwan that stopped short of an actual invasion.
"We assess that in a moderate scenario where U.S. exports to China are curtailed, more than $79 billion worth of U.S. goods and services exports (such as automobiles and tourism) would be at risk," analysts at the Rhodium Group and the Atlantic Council’s GeoEconomics Center concluded in the report, titled "How China could respond to U.S. sanctions in a Taiwan crisis."
"In a higher-escalation scenario involving G7-wide sanctions against China, around $358 billion in G7 goods exports to China could be at risk from the combination of G7 sanctions and Chinese countermeasures," the authors warned, adding that the G7 depends on more than US$477 billion goods from China that could be affected by export restrictions.
Meanwhile, at least US$460 billion in G7 assets would be at immediate risk both from G7 economic sanctions and any retaliatory measures by Beijing.
China, however, would face "high economic and reputational costs" from such retaliation, the report said, adding that some 100 million Chinese jobs depend on foreign demand, with 45 million dependent on demand from G7 countries.
It said China will likely seek to divide the G7 nations in the event of "escalatory" action like a shipping blockade against Taiwan.
Tariffs to be key part
Charlie Vest, associate director of Rhodium Group's corporate advisory team, said tariffs would be a key part of any Chinese economic sanctions in the event of such a crisis.
"The most likely things that are going to get targeted are things where China has a strong presence in the manufacture of these goods to the global economy, [such as] vehicle batteries, neodymium magnets that go into wind turbines, these sorts of things," Vest told an online seminar discussing the contents of the report.
"When we think about this work, we are not imagining an all-out war with China over the Taiwan Strait: We're imagining something that's escalatory [rather than] any sort of serious wartime scenario," he said.
"We are thinking about economic statecraft that China has used against trading partners in the past."
Josh Lipsky, senior director of the GeoEconomics Center at the Atlantic Council, said China has already started building an international banking payments system that would enable it to skirt around financial sanctions imposed by the United States.
"The issue to think about is wholesale cross-border digital currency and that's the mBridge project ... between the UAE, Thailand, the People's Bank of China and Hong Kong Monetary Authority," Lipsky said.
These are "cross-border bank transactions that don't touch the dollar and settle near-instantly," he said. "If you think about it from ... a [U.S.] Treasury perspective ... suddenly I may lose purview on the way I enforce sanctions going forward."
China has much to lose
Zongyuan Zoe Liu, Maurice R. Greenberg fellow for China studies at the Council on Foreign Relations, said China has much to lose from an economic sanctions war over Taiwan.
"The Chinese economy is very much dependent on international trade and commerce," Liu told the seminar, citing China's trade surplus of more than US$800 billion.
"It is going to be extremely devastating for the Chinese economy," she said. "If we think … how much employment, how many jobs those numbers are supporting ... this is going to become a social social stability challenge."
Liu said Chinese-owned ports globally could get pulled into enforcing Chinese trade sanctions internationally.
"Perhaps in a low escalatory scenario the ports that are operated by China or majority owned by China could potentially become a point of denial [for] foreign trade," she said.
Liu said China has long seen financial security as part of its current focus on national security.
"People talk a lot about how important President Xi Jinping is in terms of emphasizing financial security as part of his whole comprehensive framework for national security, but actually he's not the first president or the first general secretary in China to emphasize national security," she said.
"A lot of this actually goes back all the way to the Asian financial crisis and [China's] weakening by the Asian financial crisis when president Jiang Zemin himself emphasized in 1997 that without financial stability China would not have [a] framework for development."
"Since then, Chinese scholars as well as policy makers started to emphasize the importance of national security as an indispensable part of national security."
Translated by Luisetta Mudie. Edited by Roseanne Gerin.