Sanctioning China in a Taiwan crisis could put $3 trillion of global trade at risk

• A new report from the Atlantic Council found that sanctions on China in a Taiwan crisis could risk as much as $3 trillion in global trade and flows.
• China's economy is 10 times the size of Russia's and it's the world's largest trader.

In the event of an escalation from Beijing in the Taiwan Strait, a coordinated, G7-led effort to sanction China could put $3 trillion of global trade and flows at risk, according to researchers at the Atlantic Council.

The use of sanctions against Russia over the last year have raised the idea for similar action against China, but given the scale of China's financial influence, it would mean steeper repercussions for all parties involved, the authors said.

The scenario warrants attention, the think tank maintained, as the status quo in the region has deteriorated substantially amid US-China tensions, China's increased use of military and economic tools to pressure Taiwan, and Beijing's recent handling of Hong Kong.

Given that China is the world's largest trader, and that its economy is 10 times that of Russia's — which has been effectively barred from the global financial system and trade via Western sanctions — the fallout would have "substantial impacts" on countries and markets all over the world.

"In a maximalist scenario involving sanctions on the largest institutions in China's banking system, we estimate that at least $3 trillion in trade and financial flows, not including foreign reserve assets, would be put at immediate risk of disruption," the authors wrote.

Further consequences could include "widespread goods shortages, mass unemployment, and a possible financial crisis," they added.

A G7-led response, the authors said, would likely seek to target specific Chinese industries that rely on Western markets or technologies. But any measures would also hurt the sanctioning countries.

For example, sanctions aimed at China's aerospace industry could directly impact about $2.2 billion in G7 exports to China, and disrupt the supply within G7 nations' own aerospace sectors, and put another $33 billion in G7 exports at risk in the event of retaliatory measures.

To be sure, any economic intervention would have to be a complementary move to military and diplomatic action. Relying too much on financial maneuvering could lead to policy missteps, in the Atlantic Council's view, and it could open the door to China to scale up alternative currency and transaction systems.

"Coordination is key to successful sanctions programs, but high costs and uncertainty about Beijing's ultimate intentions will make stakeholder alignment a challenge," researchers said. "Finding alignment with Taiwan in particular on the use of economic countermeasures will be central to any successful effort."