If China invades Taiwan, can it impose sanctions similar to those imposed on Russia? Power of Western sanctions; new economic weapons are a double-edged sword

If China invades Taiwan, can it impose sanctions similar to those imposed on Russia?

Power of Western sanctions; new economic weapons are a double-edged sword

April 25th 2022 by The Economist

About the Economist (Founded in 1845, it is a leading British business magazine and is regarded as one of the world’s most authoritative media, particularly on economics and international politics. Trusted by the intelligentsia, it is known for its sharp analysis and opinion pieces rich in historical perspective and insight. It has a worldwide circulation of approximately 1.42 million.)

Can the U.S. really go so far as to freeze or confiscate China’s reserve assets?”

 Wang Yongli, a former director of the Bank of China, asked this question in a piece published last month. Well, that is a good question with no easy answer.

 After Russia invaded Ukraine, the United States and its allies imposed heavy sanctions on Russia’s central bank, barring it from using about half of its foreign exchange reserves.

 They also cut off some of Russia’s largest banks from the Western financial system and banned the export of many high-tech products to Russia.

 So, if China were to take some geopolitically indiscreet action, such as invading Taiwan, would the Western camp be able to impose the same sanctions on China that it has imposed on Russia?

Western financial hegemony is still alive and well.

 The United States and its allies undoubtedly have the means to do so. The center of financial dominance is still firmly in the West,” says Eswar Prasad of Cornell University in the US.

 China probably holds about two-thirds of its $3.2 trillion in foreign reserves in Western government bonds and similar instruments.

 The amount is so large that there are few realistic alternatives to these means of wealth accumulation.

 Moreover, if Western countries instruct their own financial institutions to refrain from doing business with Chinese banks, Chinese banks will not be able to procure U.S. dollars, euros, or British pounds.

 But can the West really go that far?

 A “freeze” on China’s foreign exchange reserves may not be a major destabilizing factor. Even if China wanted to sell its holdings of government bonds and other securities to spite the West, it would not be able to do so if sanctions were imposed on it.

 China would also be unable to buy new securities. But the bond market would not mind China’s absence so much.

 China is no longer a major buyer these days.

 Besides, an invasion of Taiwan would cause panic in the market and trigger a flood of private investors’ money into highly rated bonds.

An Unexpected Backlash Against Western Financial Institutions

 China, however, may find other means to fight back. One in particular could be the seizure of large amounts of assets held in China by Western governments and corporations.

 According to Gerald DiPippo of the Center for Strategic and International Studies (CSIS), a Washington-based think tank, foreign direct investments (e.g., factories) totaled $3.6 trillion at the end of last year, while stocks, bonds, and other “portfolio” (indirect) investments totaled $2.2 trillion. In total, foreign holdings in Russia amounted to $3.6 trillion.

 In total, this is more than six times the assets held by foreigners in Russia.

 What would happen if the West imposed sanctions not only on China’s central bank but also on private financial institutions? First, Western institutions could be exposed to financial “blowback.

 According to the Financial Stability Board (FSB), a group of financial authorities from major countries, four Chinese banks are among the 30 “global systemically important banks (G-SIBs).

 If these four banks are crippled, Western financial institutions that lend funds to or open accounts with these banks could also be hurt.

 So, can the West be assured that its own financial stability will not be shaken by divesting itself of Chinese banks? The answer is no.

 Clay Laurie of the International Finance Association (IIF), a group of leading financial institutions, said, “I don’t have that confidence. I don’t have that confidence.

Financial Sanctions Spill Over to Trade

 These measures will wreak havoc on trade as well.

 Less than 20% of China’s trade transactions last year were settled in yuan. Most of the rest were denominated in US dollars.

 Martin Chorzempa of the Peterson Institute for International Economics in the U.S. notes, “If insurance and trade credit are no longer available, a significant amount of economic activity will disappear.

 Since China is the largest trading partner for more than 120 countries, trade disruptions could turn the rest of the world against the United States and its allies.

 Western countries could also be hurt, and their unity and resolve could be shaken.

 Imports from China account for about 18% of total imports in the United States and over 22% in the European Union (EU), including many components of goods produced in the country.

For this reason, any obstruction of trade with China would hurt its own production, including exports.

 According to simulations conducted by Gabriel Felbermeyer of the Vienna University of Economics and Business with collaborators, if imports from China were cut by more than 90%, U.S. and its allies’ exports would be reduced by almost 10%.

China’s huge market is a weapon.

 The greatest source of influence that China can exercise is its own huge market.

 For example, the U.S. might want to stop certain high-tech components, such as semiconductors, from being shipped to China.

 However, the Boston Consulting Group estimates that a complete ban on shipments would cause U.S. semiconductor companies to lose 37% of their sales and jeopardize over 120,000 jobs.

 On the one hand, China might move to curb exports of “rare earths,” which are used in many electronic products.

 If implemented, this could disrupt the supply chain for batteries for electric vehicles and other niche products.

 China could also shut its opponents out of markets they may be unwilling to relinquish.

 For example, European sanctions initially exempted the $2.4 billion Russian luxury goods market. This is the so-called “Gucci Exemption.”

 According to data collection firm Statista, China’s luxury goods market is worth more than $50 billion a year.

 Whenever Russia tries to fight back, the West can always unleash a more powerful economic punch.

 Not necessarily against China, according to Eddie Fishman of the Center for a New American Security (CNAS) think tank.

 If this is the case, it is more likely that China will actually fight back.

 The U.S. and its allies could suffer considerable pain if they impose the same sanctions on China that they imposed on Russia.

 Thus, the West would probably not go that far.

 But we must hope that China will not dare to find out.

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