There are few prospects more terrifying than China invading Taiwan. What would America do? What would Europe do? And what would China and its allies do in response to the western response?
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There are lots of questions. Many are looking at how western countries responded to Russia's invasion of Ukraine for guidance.
Could a similar model of coordinated economic sanctions be used against China if it invaded Taiwan? If it's an alternative to military conflict between nuclear powers, it's certainly an idea worth exploring.
The problem is that the West's sanctions against Russia haven't been as effective as many hoped. Sure, they are causing severe economic pain for Russia. But it's been more of a slow bleed rather than a quick death. Those expecting a Russian financial crisis have been disappointed.
The original plan made sense. Russia needs foreign currencies to stop financial crises. If investors start pulling their money out of Russia, the currency drops in value which makes investors panic even more. To stop this spiralling into a crisis, Russia uses foreign currencies to buy back its own currency to keep its value from plummeting.
The plan from Western countries was to block Russia's access to these foreign currencies so that, when investors started pulling their money out, the Russian financial system would go into freefall - making it hard for Putin to pay for his war while hurting him politically.
The West attacked Russia's access to foreign currencies from all sides. They used trade sanctions to stop them getting foreign currencies by selling their exports. They froze Russia's assets so they couldn't sell them for cash. They froze Russia's foreign exchange reserves through the international banking system. They excluded Russian firms and individuals from using the SWIFT international payments system.
The plan worked well initially. The Russian currency fell by a whopping 46 per cent against the US dollar in March this year. But it quickly recovered, and the financial system stabilised.
What went wrong?
First, most of the world didn't enforce the trade sanctions. More than 100 countries representing 40 per cent of the world's GDP kept trading with Russia either in whole or in part.
Second, sanctions have a time lag. Even in the world of "just in time" supply chains, economies still have buffers and can marshal resources from elsewhere, at least for a little while.
Third, the sanctions on SWIFT and Russia's foreign exchange reserves have more holes than Swiss cheese. Only half of Russia's foreign exchange reserves could be frozen. The rest were out of reach. Many banks can still use SWIFT - including the banks processing European purchases of Russian gas and many smaller banks.
What does this mean for China if it was to invade Taiwan?
First, you can forget the idea that Western countries could engineer a financial crisis in China, even if you wanted to. If you couldn't do it in Russia, it'd be even harder in China.
China's access to foreign currencies is huge. It has more than US$3 trillion of foreign exchange reserves. It has bilateral currency swap lines with more than 30 countries. It brings in trillions of dollars of foreign currencies each year thanks to its massive integration in global supply chains.
Western countries might be able to block some of this by freezing assets, cancelling bilateral currency swap lines and enforcing trade embargoes. But these efforts would be a drop in the ocean. China is simply too big, too interconnected with the global economy and has too many international partners who won't follow US orders.
This raises another very big problem. The sheer size of the Chinese economy and its integration with the rest of world means that any economic attack on China would have very uncertain repercussions. Unintended consequences would be big and numerous.
MORE ADAM TRIGGS:
For all its big talk, Russia is not an economic superpower. Other than its energy exports, its integration with the global economy and global supply chains is minimal. It has few financial links with the rest of the world and was, frankly, a relatively low-cost target for coordinated economic sanctions.
None of this is true of China. China is the world's second largest economy and is heavily integrated in supply chains, from electrical equipment and textiles to chemicals and minerals and basic metals. It owns almost $1 trillion of US government debt and is integral to global bond and equity markets.
Does this mean China can do what it wants? Hardly. Economic integration cuts both ways.
China's integration in the global economy and the global financial system means that any reckless actions on China's part would be met with big economic consequences regardless of what Western countries do in response. And although Western countries might not be able to trigger a financial crisis in China, they could certainly inflict serious economic pain - pain which would reverberate back onto them, too.
What we are seeing here is the benefit of economic integration: it makes military conflict very costly and very uncertain in its consequences.
Let's hope it's enough to keep countries in check and stops them from doing the unthinkable.
- Adam Triggs is senior research manager at the e61 Institute, a non-resident fellow at the Brookings Institution and a visiting fellow at the Crawford School at the Australian National University.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
