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Financial Sanctions Enforcement in China: A Complex Web of Economic Interests

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In recent years, the United States and its allies have increasingly turned to financial sanctions as a means of exerting pressure on Beijing over its economic and trade practices. But do these measures work? And what are the implications for global supply chains and markets?

Effective Sanctions?

According to Agathe Demarais, senior policy fellow for geoeconomics at the European Council on Foreign Relations and author of “Backfire: How Sanctions Reshape the World Against U.S. Interests,” sanctions can be effective in certain cases, but their impact varies widely depending on a range of factors.

• Individual measures targeting specific entities or individuals may have limited effectiveness.
• Broader sectoral sanctions aimed at entire industries can have a more significant impact.
• The target country’s size and economic resources also play a crucial role, with larger economies like Russia typically having more financial clout to counterbalance the effects of sanctions.

Global Supply Chain Dynamics

The ever-changing nature of global supply chains means that it may be difficult to predict the exact impact of sanctions on China. Western economies are increasingly looking to attract semiconductor firms to their soil, offering subsidies and other incentives to encourage them to build production facilities outside of Taiwan or South Korea.

• Chinese firms are responding by doubling down on their tech self-sufficiency strategy, investing heavily in advanced technologies like semiconductors, AI, and quantum computing.
• This could ultimately erode the U.S.’s technological edge over China, rendering its sanctions strategy ineffective.

U.S. Policy Toward China

The Trump and Biden administrations have both imposed a range of measures on China, including financial sanctions, export controls, and tariffs. While the substantive policies differ little between the two, there are notable differences in terms of collaboration with allies and intellectual framework.

• The Biden administration has prioritized collaboration with allies, establishing forums like the U.S.-EU Trade and Technology Council to coordinate efforts.
• Trump focused primarily on reducing the U.S.’s trade deficit with China.

De-Risking Strategies

A full decoupling from China is unlikely, as it would be difficult to achieve and could lead to inflation and shortages in the U.S. Instead, de-risking strategies aim to reduce economic reliance on China for critical goods and avoid fueling the advances of the Chinese military.

EU’s Challenges

China itself has long sought self-sufficiency and has made significant progress in reducing its dependence on Western countries. It has re-oriented trade towards emerging economies, built sanctions-proof financial channels, and invested heavily in tech self-sufficiency plans.

• The European Union is in a more challenging position to de-risk from China due to its high reliance on Chinese goods, particularly for the bloc’s energy transition efforts.
• There is also no consensus among EU countries about how to tackle China’s aggressive behavior, making it difficult to implement effective de-risking measures.

Conclusion

Financial sanctions enforcement in China is a complex and multifaceted issue, with varying degrees of effectiveness depending on factors like sectoral targeting, country size, and global supply chain dynamics. As the U.S., EU, and other Western economies continue to navigate this issue, it is essential to consider the broader economic implications and potential consequences for global trade and markets.