The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with 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” (Columbia University Press, 2022) – is the 442nd in “The Trans-Pacific View Insight Series.”
Identify EU economic statecraft options against China in a Chinese maritime blockade or kinetic military conflict with Taiwan.
Market access is Europe’s best leverage vis-à-vis China. Despite Beijing’s efforts to deepen trade ties to emerging economies, the EU accounts for China’s largest trade surpluses, for a total of $219 billion in 2023 (compared to a $281 billion surplus with all developing economies combined). EU trade leverage over China is also unlikely to wane in coming years; since 2019 the bloc’s imports from China have grown by a whopping 42 percent, highlighting how European firms are struggling to reduce economic reliance on China.
Blanket bans on Chinese imports would be hugely painful for EU economies. Instead, EU policymakers could adopt – in collaboration with G-7 partners – measures targeting imports of non-critical, finished consumer goods, which account for around 30 percent of EU imports from China. Such sanctions could take the form of import bans or high tariffs. Two sectors – electronic/electrical gadgets and low-end goods – could form priority areas for such measures.
Electronic and electrical gadgets include a variety of products like smartphones, kettles, consoles, ovens, fridges, and other devices. Seen from China, joint G-7/EU measures curbing shipments of such goods to developed economies would be painful: shipments of electronic and electrical goods to G-7-EU countries account for 13 percent of Chinese exports. Nearly half of these purchases came from the EU, making shipments to the bloc critical for Chinese firms operating in these sectors.
Low-end goods represent another sector for potential G-7/EU trade measures. G-7/EU economies absorb three-quarters of China’s exports of clothes, toys, and footwear (or about 7 percent of China’s exports). The EU’s buy-in for such measures would be critical: nearly 40 percent of Chinese shipments of low-end goods to G-7/EU economies make their way to the bloc.
Can EU-G-7 sanction threats serve as effective deterrence against Chinese incursions in Taiwan?
Getting deterrence right is difficult and it is hard to know precisely whether sanctions threats have worked or not. This is because we do not have access to counterfactuals – that is to say knowledge of what would have happened if G-7 allies had not sent sanctions threats. It is easy to say, for instance, that sanctions threats did not work in 2014 when Russia annexed Crimea and started to back separatist rebels in Ukraine’s eastern region of Donbas. Yet it is impossible to know what Russian President Vladimir Putin would have done, back then, if Europe and America had not threatened to impose tough sanctions on Russia. Perhaps he would have launched a full-blown invasion of the territory or annexed more of Ukraine’s land.
Eight years later, it is clear that G-7 sanctions threats did not deter Russia from invading Ukraine in early 2022. This highlights how Europe’s adversaries typically do not expect that the EU will get its sanctions act together, let alone go for powerful measures. China is probably no exception to this rule. Ahead of an invasion of Taiwan, Beijing would fully price in the costs associated to retaliatory sanctions from the U.S., Canada, the U.K., and probably Japan. However, Chinese leaders would probably assume that they could manage to deter the EU from going down the sanctions road. This means that EU sanctions deterrence could be game-changing in the run-up to a conflict around the island: clear threats from the bloc would signal to Beijing that the costs associated to an invasion of Taiwan are even higher than those that the Chinese leadership already expects.
Of course, this theory assumes that Beijing believes Europe’s threats are credible. Russia’s experience in this regard may well prompt Chinese leaders to think twice before ignoring Europe’s warnings. In addition, this analysis assumes that Europeans would manage to unite politically on sanctions. This would be difficult, but U.S. pressure to do so would probably help them in this regard.
Examine the implications of EU de-risking plans on European leverage on China.
The success of G-7/EU trade measures on China would hinge on the robustness of trade relations between both sides. This means that current EU plans for de-risking, that is to say reducing ties with Chinese firms, could reduce the effectiveness of trade-related measures. Sanctions leverage is greatest between partners: the larger the economic ties, the more painful sanctions are. In turn, the bloc may want to be careful what it wishes for with de-risking. To avoid reducing trade leverage vis à vis Beijing, the EU may be better off focusing de-risking efforts only on sectors that are genuinely critical.
Medicines and critical raw materials are two such sectors. The EU’s reliance on China for pharmaceuticals is huge; Chinese firms supply more than half of the bloc’s active pharmaceutical ingredients and precursors. This is a vulnerability that Beijing could exploit, either through signals that it may weaponize access to such goods (likely in response to EU sanctions threats) or via export bans (for instance if the EU makes good on its sanctions threats). The picture is even more striking for critical raw materials: China controls 95 percent of the global refining capacity for rare earths, a set of minerals that have a wide range of civilian and defense applications.
Reducing the EU’s reliance on China for medicines and raw materials is a tall order, but the bloc has options. First, building coalitions for the production of key goods would reduce dependence on China while also signaling to Beijing that the bloc is seriously prepping for a conflict.
Second, EU policymakers also have the option to do nothing and trust that market adjustments would help to smoothen supply shocks. This may work especially well for critical raw materials: perhaps the main lesson from Russia’s decision to turn off the gas tap is that the lights did stay on in Europe throughout winter 2022-23, mainly thanks to a price-led reduction in demand.
How might Trump 2.0 trade policies toward China and the EU affect EU-G-7 concerns over Taiwan?
The Trump 2.0 presidency looks set to fuel transatlantic trade tensions, as Trump has pledged to impose tariffs of 10-20 percent on all U.S. imports. Such tensions would make it far more difficult for America and Europe to collaborate on sanctions in a Taiwan conflict scenario, weighing on the robustness of Western economic statecraft measures against Beijing.
Assess lessons learned from Ukraine-related sanctions that could be applied to a Taiwan conflict scenario.
Three lessons stand out from Ukraine-related sanctions. The first has to do with avoiding sanctions inoculation. Such a process happens when Western economies implant a harmless quantity of sanctions in a given country, helping their target to become immune to more powerful measures. The de-Swifting of Russian banks provides a good example of sanctions inoculation. Only seven Russian banks were disconnected from Swift, meaning that Russian firms could reroute affected transactions through one of the many financial institutions that remained connected to the network. In parallel, Moscow doubled down on efforts to connect to China’s CIPS [Cross-Border Interbank Payment System] mechanism, building long-term immunity against a full de-Swifting of all Russian banks.
The implication in a Taiwan scenario is that if deterrence fails and Western policymakers choose to impose sanctions on China, then they should go hard and fast as well as prioritize measures that Beijing would struggle to adapt to. Otherwise, China would likely incur only temporary economic damage, which it would be able to gradually brush away as it builds long-term immunity against tougher measures.
The second lesson deals with freezing central bank assets. Western measures to freeze a portion of Russia’s foreign exchange reserves have failed to engineer a balance-of-payments crisis, in part because economic theory suggests this is an almost impossible task in a country that runs a huge current account surplus. To make matters worse, more than two years later, like-minded allies still argue over what to do with Russia’s reserves. Meanwhile, policymakers from non-aligned economies are shaking their heads in disbelief while they follow the twists and turns of the Russian reserves saga. The lesson is that G-7 economies should resist the urge to seize China’s foreign-exchange assets, as such a measure is unlikely to provoke a balance-of-payments crisis in China and would fuel debates around the legality of such a move.
The final lesson has to do with garnering public support for sanctions and tackling disinformation. Against all evidence, Russia has made claiming that sanctions are ineffective a priority in a bid to divide Europeans and get the bloc to lift these measures. China would seek to apply the same strategy in a bid to foster tensions among both G-7 allies and Europeans. Tackling this issue would be no easy feat: Beijing is a skilled actor for disinformation and intimidation. Yet G-7 allies should consider measures to beef up their institutional frameworks in the field.