In collaboration with Rhodium Group, the Atlantic Council's GeoEconomics Center released a significant new research report June 22 that explores the potential economic impacts of sanctioning China during a Taiwan crisis.
The findings reportedly shed light on the actions G7 countries would likely take and the challenges they would face, according to the report.
“In the wake of the coordinated G7 response to Russia’s invasion of Ukraine and rising tensions in the Taiwan Strait, policymakers are asking questions about whether similar actions would be plausible or effective against China in a potential Taiwan crisis,” Josh Lipsky, senior director of the GeoEconomics Center, said in a June 22 news release. “This report is one of the first serious efforts to try to answer that question and better understand the risks involved.”
The report emphasizes that successful sanctions programs rely on stakeholder alignment, but the high costs involved and uncertainty surrounding China's intentions make coordination a difficult task. In particular, aligning with Taiwan on the use of economic countermeasures will be crucial. Additionally, differences within the G7 regarding Taiwan's legal status may hinder swift alignment on sanctions.
In the event of a significant crisis, the G7 countries would likely implement sanctions and economic countermeasures expressly targeting China, with a particular focus on its financial sector, individuals and entities associated with its political and military leadership, as well as industrial sectors linked to the military, the report said.
The response from the G7 countries in a crisis scenario would likely involve targeted sanctions on Chinese industries and entities that heavily rely on G7 inputs, markets or technologies, according to the report. These targeted sanctions, while impactful, would also have significant consequences for China, the sanctioning countries, their partners and global financial markets.
For example, the report highlights that sanctions on China's aerospace industry could directly affect at least $2.2 billion worth of G7 exports to China and disrupt the supply of inputs to the G7's own aerospace industries. Furthermore, in the event of Chinese retaliatory measures, approximately $33 billion in G7 exports of aircrafts and parts could be impacted.
One of the key challenges identified in the report is achieving coordination among the G7 countries when implementing sanctions during a Taiwan crisis. While discussions about potential economic countermeasures have begun, consultations are still in the early stages.
The report concludes by cautioning that economic statecraft, including economic countermeasures, cannot solely ensure deterrence or maintain peace and stability in the Taiwan Strait. While economic measures complement military and diplomatic tools, an overreliance on them or overestimating their short-term impact could lead to policy missteps. Moreover, there is a risk these tools become gradually less effective over time as China develops alternative currency and financial settlement systems.
