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Economic Fallout of a Taiwan Crisis: An In-Depth Look at Sanctions and Global Implications
By Charlie Vest and Agatha Kratz, Rhodium Group
June 21, 2023
As tensions in the Taiwan Strait continue to escalate, the potential for economic countermeasures against China is gaining growing attention from policymakers worldwide. With increasing concerns over China’s military pressure on Taiwan, as well as its handling of Hong Kong and evolving relations with the US, understanding the economic impacts of such measures is crucial.
Table of Contents
- Introduction
- Economic Countermeasures in a Taiwan Crisis: Goals and Considerations
- The Role of Economic Countermeasures: Deterrence and Denial
- G7 Coordination in a Taiwan Crisis: Challenges and Complexities
- Conclusion
Executive Summary
In a potential military crisis surrounding Taiwan, economic countermeasures – including sanctions, export controls, and restrictions on economic activity – are among the tools being discussed by policymakers in the US, Europe, and China. Despite concerns, G7 coordination in such situations presents unique challenges due to the size and interconnectedness of China’s economy.
Our research uses in-depth analysis, interviews, and expert opinions to explore the goals, limitations, and consequences of economic countermeasures targeting China in a Taiwan crisis.
Introduction
Deepening economic ties between China and Taiwan, as well as the rest of the world, have played a significant role in maintaining peace and stability in the Taiwan Strait for decades. However, heightened tensions, geopolitical tensions between the US and China, and Beijing’s increasingly assertive actions towards Taiwan have raised questions about the potential implications of economic countermeasures.
Economic Countermeasures in a Taiwan Crisis: Goals and Considerations
Economic countermeasures can achieve various objectives, including deterrence (punishing transgressions or denying future resources/technology), as well as degrading an adversary’s ability or willingness to continue aggression. The US and its allies have used economic statecraft to limit the flow of military and dual-use technology to China as a long-term strategy to hinder potential aggression against Taiwan.
The Role of Economic Countermeasures: Deterrence and Denial
In the context of a Taiwan crisis, economic countermeasures might be implemented as a deterrent before or after military action takes place. Russia’s invasion of Ukraine offers some insight into the potential impacts and limitations of economic measures. Immediately prior to the invasion, Western countries threatened sanctions as a deterrent, while the US and its allies imposed sanctions afterward to degrade Russia’s war-making capabilities.
These sanctions, which had a signaling effect as well, took time to have noticeable impacts.
G7 Coordination in a Taiwan Crisis: Challenges and Complexities
Given the size and interconnectedness of China’s economy, coordination among G7 nations (Canada, France, Germany, Italy, Japan, the UK, and the US) in implementing economic countermeasures in a Taiwan crisis presents unique challenges. Although China has considered the potential for Western sanctions, reaching consensus within the G7 regarding their use may prove challenging due to high costs, political hurdles, and differences in stakeholder interests and Taiwan’s legal status.
Conclusion
While the prospect of economic countermeasures against China in a Taiwan crisis is of great concern, it is essential to be aware of the goals, potential impacts, and challenges associated with their implementation. The recent experiences with Russian sanctions offer valuable insights into both the potential effects and limitations of economic statecraft in a crisis.
Future research should further explore alternative tools and strategies to address these challenges, as well as the long-term implications of economic countermeasures on China’s economy and relations with the international community.