CHINA WATCHEconomic Deterrence in a China Contingency

Deterring China from launching an attack on Taiwan is a central focus of U.S. and allied security planning. This planning encompasses creation and revision of military strategies, the establishment of partnerships with like-minded nations, and the gaming and simulation of conflict scenarios. Restrictive economic measures, such as sanctions, are also part of the deterrence toolkit. However, the timing, effectiveness, and desirability of these measures remain uncertain.

In a new report from RAND, the authors — Howard J. Shatz, Marco Hafner, Naoko Aoki, Peter Dortmans, Timothy R. Heath, and Fiona Quimbre — explore a scenario involving a strong perceived likelihood that China would blockade or invade Taiwan within an ensuing three to six months. The authors discuss what economic measures the United States, Australia, Japan, and the United Kingdom (UK) might employ to deter such aggression, how such measures might influence China’s actions, and how such measures might affect the global economic system. The report concludes with policy implications for U.S. and allied policymakers as they navigate an increasingly complex relationship with China. While U.S. policymakers may well institute such preemptive economic measures, the chances of success will depend heavily on the specific scenario under which the measures are instituted, and allies are highly unlikely to join in such preemptive economic measures absent strong U.S. pressure and leadership.

Key Findings

·  The United States can institute a variety of measures. If it were well-supported that China were to invade Taiwan in an ensuing three to six months, it is possible, but uncertain, that the United States would institute preemptive sanctions.

·  Australia would seek to use other levels of national power before sanctions. Australia would embrace economic deterrence tools only if it believed the threat from China was existential or if it significantly and irreversibly threatened Australia’s immediate security interests. The United States would need to exert significant pressure on Australia to have it join meaningful, preemptive actions.

·  Japan has the technical ability to impose sanctions relatively quickly, but the political decision would be difficult. Japan would consider the effectiveness of sanctions, Chinese retaliation, and the safety of Japanese nationals and assets in China and would need international pressure, particularly from the United States.

·  The UK’s position on a Chinese invasion of Taiwan has remained unclear. The possible costs to the UK economy of Chinese retaliation are high. However, in the case of Chinese aggression against Taiwan, no option would be off the table, and the UK could impose severe penalties if there were a strong consensus and pressure from UK allies, particularly the United States.

·  Perhaps the biggest unknown in gauging the effectiveness of preemptive sanctions is the extent to which China is prepared. China has been building an economy less susceptible to outside pressures. However, China’s economy and employment remain highly dependent on exports.

Recommendations

·  To correctly gauge the likely consequences of restrictive economic measures and, therefore, to select those likely to be most effective at delivering strategic effects while minimizing costs, the United States needs to expand its expertise in economic analysis to develop and implement more-sophisticated modeling and simulation of consequences and better learn from the experience of trade policy measures, sanctions, and export controls instituted since 2017.

·  Contingency plans should be developed in advance to enhance the U.S. ability to take effective and timely action. Noting the existence of such plans publicly can also signal to China that there would be consequences were China to proceed against Taiwan.

·  Coordination and planning need to involve the private sector because businesses do not always act as governments would want, and markets adjust to keep goods and services flowing.

·  For maximum effectiveness, allies and partners will need to be on board. Any contingency plan should also have positive and negative inducements that the United States can use.

·  Sanctions alone are unlikely to deter. However, they can serve as an important element in a combination of tools, including assembling a diplomatic coalition, bringing the issue to international forums, and posturing armed forces for a convincing military response. The use of economic tools should be part of broader contingency planning.