Financial sanctions may fail to deter China from invading Taiwan

a Several months Earlier, the U.S. House of Representatives Select Committee on China participated in a war game with tabletop maps and blue and red counters. It simulated a Chinese invasion of Taiwan and exposed familiar weaknesses in the US position: the need to strengthen its bases and the rapid depletion of precision weapons. But the match also highlighted the less obvious risk that America’s economic weapon has failed halfway through.

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In the simulation, the blue team (i.e. Americans) had to frame sanctions on a whim. They punished several Chinese state-owned banks and only put “moderate” pressure on their opponents. The conclusion was that the best time to plan sanctions is before they are needed.

Until recently, such stories might have seemed alarming. However, the Taiwan crisis is now fully conceivable. Over the past eight months, Charlie Best and Agatha Kratz of research firm Rhodium Group have met with officials, analysts and businessmen in Berlin, Brussels, London and Washington to discuss sanctions. They discovered that the subject was not just an American obsession.

But the sanctions negotiations may lack details. “There’s been a lot of discussion about this, but no clear perception of the scale of economic assets and economic flows that would be at risk,” Best said. In a new report from the Atlantic Council, a think tank, he and Ms Kratz try to remedy the problem. They are considering sanctions (such as an island blockade) that could be imposed during a non-war Taiwan crisis. They provide figures for several scenarios including sanctions against individuals, industries and financial institutions. The most drastic measures resemble the punishment imposed on Russia after its invasion of Ukraine.of gCoordinated action by the seven nations would block transactions between China’s central bank and the “big four” state-owned commercial banks.

These measures will freeze about 95% of China’s foreign exchange reserves (the rest is mostly gold). It would also cut off most of China’s banks’ foreign assets worth $586 billion.of gThe seven countries would have to confiscate modest reserves ($52 billion) held in renminbi.and gThe seven banks will have to waive claims, including loans, deposits and bonds to Chinese banks, amounting to less than $126 billion, or 1% of their total cross-border claims.

When a foreigner purchases goods, services or assets from a Chinese resident, payment will be made through a local bank. The same is true when transactions flow in the opposite direction. Best and Kratz estimate that the big four banks handle nearly 40% of this business, roughly matching the proportion of the Bank of China’s overseas assets. Sanctions on such institutions would amount to approximately $127 billion in annual foreign direct investment, an additional $108 billion in “portfolio investments” (purchases of stocks and bonds), and $148 billion in repatriated profits from investments in China. may endanger. Minimizing these costs would hurt trade in goods and services. The report estimates that the big four banks make payments worth about $2.6 trillion annually.

But sanctions won’t have an “immediately devastating effect,” warned Best. China will impose tight controls on capital outflows and allow the yuan to depreciate. This report assumes the following: g7 will allow other banks to fill the holes left by the big four. If exports are resumed, dollars will flow in and the Chinese economy will stabilize.

Rather than impeding trade indirectly through financial sanctions, g7 could be directly restricted by banning imports and exports. The report considers not only sanctions against single industries such as aerospace, but also broader sanctions covering chemicals, metals, electronics, aviation and transportation equipment. The authors estimate that such measures could put 13 million Chinese jobs at risk across the industry. It could also put 1.3 million jobs in the country at risk. gThere are 7 suppliers.

Overall, broad financial sanctions are so devastating that it is difficult to imagine their use in scenarios other than war. But if war does break out, even harsh sanctions may have little effect. Ultimately, an armed conflict would block critical shipping lanes, disrupt Taiwan-controlled high-end chip supply chains, and spread panic. “In effect, the military conflict itself will act as a sanction,” argue Gérard DiPippo and Jude Blanchett of the Institute for Strategic and International Studies, another think tank.economic weapon discovered by gSeven after Russia’s invasion of Ukraine is not only a double-edged sword. It can also be redundant in the only viable scenario.

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