The Group of Seven’s response to Russia’s full-scale invasion of Ukraine was a landmark moment, revealing the potential for countries to align around sanctions against a major economy in a moment of crisis. Amid heightened tensions in the Taiwan Strait, policymakers in G7 capitals and Beijing alike have begun asking whether such tools could be used against China, and what their potential impact could be.

In a new study in partnership with the Atlantic Council, we explored the potential for and impact of sanctions on China in a Taiwan crisis, drawing on interviews and roundtables with policymakers, practitioners, and business leaders. Our work shows that while G7 countries have begun proactively discussing sanctions options, there are many challenges to establishing deterrence through sanctions in the context of a Taiwan Strait crisis.

Discussions with experts and policymakers pointed to three types of economic countermeasures that G7 nations would likely consider: sanctions on China’s financial system, on government officials and elites, and on aspects of the country’s industrial system. Though not all are infeasible, each involves substantial costs and risks.

Regarding financial sector sanctions, G7 countries might start by considering sanctions on China’s smaller banks, such as the U.S. has previously imposed on the Bank of Kunlun and Bank of Dandong for dealing with sanctioned entities in Iran and North Korea. Yet, as in these cases, such actions would have a limited impact on China’s financial system given the myriad alternatives to dollar financing in China’s state-directed banking sector.

Policymakers could look to broader financial sector sanctions, but the global costs would ramp up quickly in ways that would make coordination difficult. By our estimate, sanctions on China’s largest financial institutions and its central bank would directly disrupt roughly $3 trillion in annualized trade and financial flows between China and the rest of the world — equivalent to the United Kingdom’s gross domestic product last year. China’s banks play a central role in trade, helping Chinese firms exchange dollars for renminbi and vice versa. While sanctions could disrupt a bank’s access to dollars and euros, they cannot change China’s central place in global value chains, which makes the expansive use of these tools a tough proposition.

Sanctions on individuals are likely to be considered, but their value for deterrence is probably limited. The overseas assets of government officials are notoriously hard to track. Even if these assets were ultimately found and frozen, it is unlikely that doing so would be sufficient to effectively deter escalation.

Given the limitations of sanctions in a Taiwan Strait context, attention should focus on the importance of traditional diplomatic and military tools to ensure continued peace and stability in the Taiwan Strait.

Finally, G7 countries are likely to consider sanctions and export controls targeting aspects of China’s industrial system, as they did with Russia. Once again, the scale of China’s global trade and its place in global value chains looms large: broad-based sanctions on strategically relevant sectors such as chemicals, metals, electronics, and transportation equipment would put hundreds of billions of dollars in traded goods and millions of jobs at risk, making blanket sectoral sanctions a costly and unlikely option. 

Instead, industrial sanctions would likely involve a more targeted approach aimed at industries where China is asymmetrically dependent on G7 goods and technologies. One such example is civil aerospace, where China depends heavily on components produced abroad, in particular jet engines. With China’s flagship C919 jet airliner only now coming into service, sanctions and export controls on high-end parts would be a major setback for China’s aerospace ambitions.

But these sanctions would by no means be costless either. China would likely retaliate with measures of its own against foreign aerospace companies that depend heavily on China’s market. G7 countries exported approximately $33 billion worth of finished aircraft and aircraft parts to China in 2018, all of which and more could be put at risk from retaliatory action. Disruptions to aerospace supply chains from China would compound the costs further.

There are other issues beyond cost that would complicate coordination. Effective deterrence requires some degree of agreement on red lines and how to respond to them. An outright invasion of Taiwan would be one such red line, but the global costs of the invasion itself would significantly outweigh any impact of sanctions. Our prior research shows that the direct impacts of a Chinese blockade of Taiwan would have major repercussions for China and the global economy. In effect, Chinese military action would function as a sanction upon itself.

Short of war, the red lines become fuzzier. Countries may disagree in their interpretations of how escalatory a Chinese action is, who is ultimately to blame, and how best to respond. Foremost in this equation would be the policy decisions of Taiwanese officials themselves, who might be reluctant to endorse sanctions given the substantial risks to Taiwan’s economy.

All these factors suggest that while certain economic countermeasures are possible, they are a long way from providing credible deterrence. Coordination among G7 partners is still in its early stages, not to mention coordination with other economies that would ultimately be necessary to craft a successful sanctions program. Given the limitations of sanctions in a Taiwan Strait context, attention should focus on the importance of traditional diplomatic and military tools to ensure continued peace and stability in the Taiwan Strait.

---