Picture this scenario. It’s 2028, and U.S. intelligence services have assessed that the Chinese military is preparing a full-scale invasion of Taiwan to make good on Chinese President Xi Jinping’s pledge to “reunify” the island with the mainland. In a desperate attempt to deter the attack, Washington leads G-7 efforts to threaten Beijing with massive economic sanctions. The stakes are high, but there is a catch: China has likely priced in the costs of U.S. sanctions in its invasion calculations. And if the current trajectory of U.S.-Chinese economic and financial disengagement is any indication, U.S. leverage over Beijing will have substantially waned by 2028.
Picture this scenario. It’s 2028, and U.S. intelligence services have assessed that the Chinese military is preparing a full-scale invasion of Taiwan to make good on Chinese President Xi Jinping’s pledge to “reunify” the island with the mainland. In a desperate attempt to deter the attack, Washington leads G-7 efforts to threaten Beijing with massive economic sanctions. The stakes are high, but there is a catch: China has likely priced in the costs of U.S. sanctions in its invasion calculations. And if the current trajectory of U.S.-Chinese economic and financial disengagement is any indication, U.S. leverage over Beijing will have substantially waned by 2028.
Any signal of an impending Chinese invasion of Taiwan would send G-7 policymakers into overdrive. Alongside a possible military response, G-7 allies would likely threaten sanctions as part of a deterrence package. On sanctions, the worry for Beijing could be the extent to which other major economies will join Washington’s efforts. Among U.S. allies and partners, the stance of the European Union would probably be the one that matters most to Beijing. Trade with the EU accounts for China’s largest trade surplus—more than the surplus with the United States and roughly equal to China’s surplus with all developing economies put together.
Sanctions deterrence is hard to get right. For it to succeed, Chinese leaders would have to be convinced that the costs associated with an invasion would be painfully higher than what they have already factored in. This would not be easy, as Chinese policymakers know that an aggression against Taiwan would come at a very high price; economists reckon that a conflict over the island could shave up to 10 percent off global GDP growth, a hit nearly twice as high as that caused by the COVID-19 pandemic.
This is precisely why EU sanctions threats could be critical in the run-up to a Taiwan conflict. Ahead of an invasion of Taiwan, Beijing would fully price in the costs associated with retaliatory sanctions from the United States and several key U.S. partners, including Britain, Canada, and Japan. However, Chinese leaders would likely assume that they could prevent the EU from joining in. They may believe in their continued ability to exploit divisions among EU member states, for instance by getting support from Beijing’s European partners. Hungary, which received nearly half of all Chinese foreign direct investment in Europe last year, would be a main suspect. Precisely because Beijing believes it can avoid a major economic and financial rupture with Europe, EU sanctions threats could thus prove game-changing, as they would do exactly what sanctions deterrence is supposed to achieve: substantially change Beijing’s cost-benefit calculation for an invasion.
History shows that European policymakers have a tendency to hope for the best, rather than prepare for the worst. That makes serious EU planning for a Taiwan contingency unlikely in the coming years. Were an invasion scenario to materialize, European policymakers would need to quickly decide whether to go down the sanctions road and assess which economic statecraft measures are the likeliest to sway Beijing’s thinking. The Western sanctions toolkit relies on three tools: financial sanctions that leverage the preeminence of G-7 currencies in global trade, export controls that deprive adversaries of access to top-notch technology in a bid to degrade their military capabilities, and trade measures that curb the export revenues of foes through tariffs or import bans. However, recent developments suggest that by 2028 the traditional Western sanctions toolkit may have become mostly ineffective against Beijing.
Start with financial sanctions. In recent months, Chinese firms have crossed a symbolic threshold: They now invoice the majority of their cross-border trade in renminbi, up from 0 percent in 2010—a prerequisite if China is to eventually avoid Western-controlled financial channels. By 2028, Chinese firms will likely use the renminbi even more than they already do, partly shielding their transactions from Western financial sanctions. What’s more, the inconvenient truth for EU policymakers is that China cares more about its access to the U.S. dollar than to the euro, in which less than 3 percent of China’s global payments are denominated. Finally, China is doubling down on efforts to develop CIPS, its homegrown alternative to SWIFT, the global payments system based in Belgium that connects all of the world’s banks. If China’s transactions are denominated in renminbi and do not go through SWIFT, they become mostly immune to Western financial sanctions. The upshot? Threats of cutting Chinese access to SWIFT or the euro are unlikely to change China’s calculus.
European export controls are similarly unlikely to make much of an impression on China. Over the past several years, Washington has relied on such measures to prevent Chinese firms from closing the technology gap with their U.S. counterparts. So far, the results have been mixed. Despite stringent export controls on semiconductors, for instance, China still manages to make headway in the field. Just last year, Chinese firms manufactured a top-notch 7-nanometer chip. They also appear to be on track to produce 5-nanometer chips this year, suggesting that U.S. export controls are slowing—but not halting—Chinese progress. What’s more, EU policymakers would probably struggle to identify even one sector where European firms hold a substantial technological advantage. In the global tech race, the two leading actors are the United States and China, not Europe. Finally, export controls are unlikely to meaningfully degrade China’s ability to wage war, not least because Chinese leaders will probably want to make sure they have closed the tech gap before invading Taiwan, the world leading manufacturer of microchips.
For Western policymakers, another intriguing trade measure would entail restricting Beijing’s access to critical imports. Leaving food and feedstocks aside, energy could be a priority sector for such measures. Beijing imports 70 percent of its oil consumption, for example. Chinese leaders would likely build large commodity stockpiles before initiating a military conflict, but these would not last forever. The G-7 has a couple of aces up its sleeve to curb China’s oil supplies. First, two G-7 members—the United States and Canada—jointly produce nearly 30 percent of the world’s oil. Second, China’s largest current oil supplier, Russia, would probably struggle to come to Beijing’s rescue, since Russian oil production is likely to drop in the coming years as Western sanctions curb Moscow’s ability to develop new fields. Iran, another member of China’s coalition, would be of little help to Beijing as well. Tehran’s crude production is only 4 percent of global output.
With financial sanctions and export controls out of the equation for the EU, the bloc’s policymakers would still have one option to try to alter China’s calculus around Taiwan: trade measures. EU tariffs or import bans would leverage a fundamental flaw in China’s economic model. Each year, Chinese firms churn out as much in manufactured goods as their counterparts in the United States and the EU combined. Yet the country’s reliance on exports as a driver of growth is also its Achilles’ heel. Exports account for nearly 20 percent of China’s GDP, supporting the livelihoods of at least 100 million Chinese citizens. Despite Beijing’s efforts to deepen trade ties to emerging economies, the EU remains the primary destination for Chinese exports. This gives EU policymakers a valuable card to play: leveraging access to the EU market.
Blanket bans on all Chinese imports would be hugely painful for Europe, since many industrial firms rely on Chinese intermediary inputs and machinery to operate. Instead, the EU could target imports of non-critical consumer goods. EU import bans targeting Chinese goods in just two sectors—electronic and electrical gear, such as kettles, phones, and fridges; and low-end goods, such as clothes, footwear, and toys—could deal a blow to the Chinese economy. If all G-7 economies are in, such import bans could slash China’s exports by a massive 20 percent.
Three data points suggest that the bloc will retain substantial leverage over Beijing by 2028. First, EU imports from China grew by a whopping 41.9 percent between 2019 and 2023, highlighting how Chinese exporters are not keen to cut ties to the EU. Second, the bloc remains a huge customer for Chinese tech firms; the EU’s reliance on Chinese-made technology-intensive goods is rising steadily. Third, at $8.1 billion, German foreign direct investment in China was higher during only the first six months of 2024 than in all of 2023. This all stands in stark contrast with the United States, which is doubling down on efforts to cut economic ties to China. Since 2019, U.S. imports from China have dropped by nearly 5 percent, even as overall U.S. imports were up by nearly 24 percent.
In the run-up to a Chinese aggression against Taiwan, Europe’s stance could well matter more than both China and the EU currently assume. But making use of this leverage would be no easy feat for the bloc, considering that member states have widely diverging stances over their economic relationships with China. One need only look at current intra-EU fights over electric vehicle tariffs to guess that EU member states have widely diverging views regarding the threat that China poses—or does not pose—to Europe.
But at the same time, the EU’s handling of the European debt crisis, the COVID-19 pandemic, and Russia’s war in Ukraine have shown that the bloc is capable of getting its act together when faced with catastrophe. Given that Europe’s stance could matter far more than it thinks, now would be a good time for the EU and member governments to start planning their response to a Taiwan crisis.
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