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Research: The sanctions race between China and the G7 will hit the global economy hard

Research: The sanctions race between China and the G7 will hit the global economy hard

that it American think tank Atlantic Council Which on Monday presented its assessments of a hypothetical situation in which the conflict over Taiwan escalates into sanctions between China and G7 countries, in the same way the G7 imposed on Russia after an all-out invasion of Ukraine in 2022.

  • China and Taiwan have been separated since 1949 when the Communists won the Chinese Civil War and seized power on the mainland. The defeated Nationalists took refuge on the island of Taiwan.
  • In practice, Taiwan enjoys full self-rule. But China still insists on Taiwan's submission to Beijing and has threatened to invade the island if Taiwan officially declares its independence.
  • The tense relationship between China and Taiwan improved in the 2000s. Taiwan has huge investments in China, and China is Taiwan's largest trading partner. In 2015, the presidents of the two countries met for the first time since 1949.
  • When Taiwan's new president, Tsai Ing-wen, in 2016 refused to accept China's principle that Taiwan is part of “one China,” Beijing cut off all official contacts.
  • The United States is an unofficial ally of Taiwan, which has introduced a democratic form of government with elections and a multi-party system.
  • In 1979, the United States recognized that Taiwan was part of “one China” and that the government in Beijing represented all of China. Norway and the vast majority of countries in the world do the same.
  • President Joe Biden reiterated this spring that the United States would defend Taiwan militarily if the island was invaded.
  • Taiwan's population is about 23.5 million people, while China's population is about 1.4 billion people.

The researchers looked at two hypothetical scenarios: A moderate escalation of the conflict over Taiwan, limited to an economic conflict between China and the United States, where there is still no question of a military conflict. The second option is a much more dangerous scenario, as the entire G7 imposes major economic sanctions on China, Chinese companies and institutions. For both scenarios, they looked at what kind of response Beijing would be able to come up with targeting the West and the extent to which it would be able to cope with and avoid restrictions imposed by all G7 countries.

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The G7 consists of many of the world's most important economies: the United States, the United Kingdom, France, Germany, Italy, Canada, and Japan.

Huge losses for both sides

The researchers estimate that in a scenario of economic sanctions alone between the United States and China, US exports worth about US$79 billion would be at risk of being affected. This equates to approximately NOK 860 billion. If the entire G7 imposed the same restrictions, exports worth about $358 billion would be at risk. This equates to about NOK 3.9 trillion (3,900 billion). In comparison it is Norwegian Oil Fund Just over NOK 17,000 billion.

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Otherwise, the G7 would risk losing Chinese goods and exports worth more than $477 billion, equivalent to about 5.2 trillion (5,200 billion) Norwegian kroner. In addition, investments made by G7 countries in China amounting to about $460 billion are also vulnerable.

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In comparison, China has limited financial tools available to directly influence the G7 economies. The restrictions China will impose on capital outflows are likely to be driven largely by its own concerns about economic stability rather than an attempt at coercion, the researchers wrote in the report.

If the conflict in Taiwan ends in a sanctions race between China and the G7 countries, global trade will be severely affected. Trade between China and the United States in particular could be hit hard. Er is a container ship docked in the Port of Long Beach, California, with the USS Iowa in the foreground. Photograph: Mark Ralston/AFP

China has learned from Russia

They also point out that China in recent years has expanded its state toolkit to punish companies that actively contradict its positions on Taiwan. They can do this by using tariffs, import bans, boycotts, or inspections. China is also preparing new draft laws to counter any sanctions it may impose on Russia.

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Researchers believe that this largely separates China from Russia, and thus it will be difficult for Western economies to hit China with the same force.

However, export restrictions will hit China hard as well. Researchers estimate that about 100 million Chinese jobs depend on foreign demand, of which about 45 million jobs depend on demand from G7 countries. The researchers estimate that many of these workplaces, especially in the short term, will be at risk of collapse.

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“Even under the moderate scenario, China as an investment target would decline significantly and impact the Chinese exchange rate and domestic financial stability,” the researchers wrote.

You will avoid an eye for an eye

They therefore believe that China, for strategic reasons, will want to avoid responding to restrictions on the basis of an eye for an eye. They believe Beijing will increasingly target sectors where it can inflict asymmetric losses, especially with export controls and trade restrictions on critical commodities such as rare earths, pharmaceutical ingredients and renewable energy raw materials.

Chinese President Xi Jinping probably won't impose tactics

Chinese President Xi Jinping probably won't force his “teeth to teeth” tactics on the West if the country is hit with sanctions if the conflict in Taiwan worsens. Photo: NTP/AP

“Even if they are very costly in financial terms, they are tools that would still be taken into account in crises, because the cost of war would be much higher,” they write in the report.

They compare the assessment of economic retaliation as a deterrent to sanctions in the same way that obtaining nuclear weapons is a military deterrent.

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Comprehensive sanctions will have significant ripple effects on the Chinese economy. Zhao Xin, a professor of social studies at the Chinese Cultural University in Taipei, says the country needs a market in the West. He believes China would face major problems at home from such sanctions, making it have problems coming up with a countermeasure.

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There are already many internal challenges that Beijing must overcome, such as the real estate crisis, youth unemployment, and declining consumption.

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We will try to divide the Group of Seven

Researchers believe that in such a scenario, Beijing would try to create division in the G7 countries and thus influence the sanctions. In a scenario where the country only faces sanctions from the United States, China will be able to circumvent the sanctions to a much greater extent than if all G7 countries stood together against it. Not all G7 countries have taken an equally clear position on the Taiwan issue, and many companies, especially in Europe, see China as an important export destination.

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Beijing is also expected to try to influence the G20 to remain neutral. Many G20 countries also rely on bilateral loans and investments from China.

The researchers state that such a situation would in any case be a lose-lose situation for all parties and that both the G7 countries and China are painfully aware of the economic dependence on each other and are working intensively to reduce this dependence.

I believe that trade trumps war

Therefore, they also believe that the more time passes before sanctions are imposed, the better the G7 and China will be able to deal with them.

– If you look at the end result of the supply chain from Taiwan, you will see that there will be no war between these two sides. “It's too important to be suppressed by the military,” says Frank Huang. South China Morning Newspaper. He heads a large Taiwanese company that produces advanced semiconductors for computer chips.

– We have to live together, he continues.

Taiwan controls 90 percent of the global market for advanced computer chips and 65 percent of the semiconductor market. Therefore, the island has great strategic importance for the global production of advanced technology.