No Winners in This Game

The United States has a distinct advantage in sanctions intended to place pressure on China’s economy, based on China’s continued reliance on the U.S. dollar for its trade and financial operations internationally. However, it remains uncertain whether U.S. policymakers would impose the most severe form of macroeconomic pressure sanctions, such as sanctions on China’s central bank and major commercial banks. China’s banks are the largest in the world and play a key role in facilitating China’s international trade. The economic disruption and market instability that would result from heavy sanctions on these banks is unknown but likely enormous.

Chapter 3 describes insights derived from an economic domain strategy game that the CNAS Energy, Economics & Security team conducted to develop insights into how the United States, its partners, and the PRC may use sanctions during a potential conflict scenario. While the research included in chapter 2 focuses on a factual assessment of where economic leverage may exist, the game builds on this factual baseline to explore how that leverage may be most effectively used. A key insight from the games is that limited sanctions may be less likely to alter PRC policies, yet the United States and its partners may hesitate to impose more severe sanctions due to the risky and uncertain impacts of such sanctions on their own economies.

The games and research also highlighted important issues related to the timing and sequencing of sanctions. For sanctions to play a deterrent role, the United States and its partners would need to signal strong, united resolve to impose harsh sanctions well in advance of a conflict. Yet, political resolve to impose sanctions historically only emerges at the moment of crisis. The impact of sanctions is felt only months or years after their imposition, and the harshest measures—which would be akin to acts of economic warfare—would likely not be imposed until a conflict was already under way. These timing dynamics heighten the risk that the PRC will miscalculate the degree of U.S. and partner resolve in a pre-conflict period. The inability to build and message a clear consensus on sanctions in advance of a conflict can seriously undermine their deterrent effect.

In any sanctioning effort, coordination with foreign partners will be critical. The economic games reinforced the need for a broad coalition of sanctioning partners, centered on the G7 economies, to limit the PRC’s ability to evade or retaliate for U.S. sanctions. U.S. sanctions will be porous and ineffective if not reinforced by similar actions from other major economies. Countries in the Global South will be important actors as well, as they can provide alternative markets for China and help buffer the impact of U.S. and partner sanctions.

Chapter 4 outlines a set of institutional, international, and operational recommendations for what the United States and its partners should do now to prepare for a large-scale sanctions effort, should geopolitical conditions deteriorate to a point where such an effort is required. Sanctions, and the threat to impose them, are inherently a question of credibility. The central challenge for the United States and its partners will be to enhance the credibility of their sanctions threat, without inadvertently escalating tensions with the PRC. A theme across the recommendations is the need to deepen the strategic thinking and analytic processes for the development of sanctions options within government. This must be done in three spheres: within the economic agencies, to sharpen the vision for the use of sanctions in a range of potential crisis or conflict scenarios with the PRC; across the interagency, to incorporate economic domain options into an integrated deterrence strategy that truly integrates all instruments of national power, including economic measures; and with key international partners, to lay the groundwork for a coalition of sanctioning economies.

The challenge of sanctioning China at scale is enormously complicated. This report does not address every aspect of this challenge. It should be read as an initial baseline report, with a focus on identifying key points of U.S. economic leverage and providing initial insights into how the United States and its partners can best maximize the modest leverage that they have. The research focuses on the use of economic instruments in the abstract, rather than tying them to a specific crisis or conflict scenario, with the aim of developing insights that would be relevant across a wide range of possible scenarios.

The next phase of research from the Energy, Economics & Security team will apply the insights from this report to specific crisis or conflict scenarios, including considering sanctions packages that may be appropriate for a range of conflicts and the different phases of those conflicts.

Sanctions alone will not deter the PRC from war. However, that does not mean that sanctions have no role in managing tensions with the PRC. The question for policymakers is not whether sanctions will work to deter China, but instead how sanctions can be used to greatest effect as part of a broader strategy that integrates all instruments of national power.

Summary of Recommendations

The United States, working closely with its foreign government partners and the private sector, should take a range of institutional, international, and operational steps to build the credibility of the U.S. sanctions threat and responsibly prepare for potential conflict with China.

INSTITUTIONAL

The United States must strengthen its institutional capacity to engage in economic domain conflicts. Specifically, the U.S. government should:

• Develop integrated economic domain strategies to guide the application of economic force in the competition and potential future conflict with the PRC.
• Institutionalize economic domain strategic planning processes across the economic agencies, in the interagency, and with key foreign partners.
• Strengthen sanctions assessment and enforcement capabilities, including through an increase in resourcing for these functions.
• Build surge capacity to implement sanctions in the government, and encourage private sector entities to do the same.
• Maintain regular dialogue with the private sector on geopolitical risks and anticipated sanctions impacts.

INTERNATIONAL

The United States and its partners should:

• Engage in coordinated economic domain strategic planning to strengthen capacity in partner governments, build political consensus, and develop possible sanctions actions.
• Share intelligence with each other on Beijing’s intentions toward Taiwan or other potential drivers of conflict, with the aim of building consensus on coordinated sanctions efforts.
• Coordinate diplomatic outreach and messaging in crucial deterrence periods to demonstrate alignment and resolve.
• Engage proactively with the Global South on the need for sanctions and support from the United States and partners to mitigate impacts.

OPERATIONAL

The United States should undertake economic domain operations on a range of fronts, some that should be implemented now while others focus solely on preparation unless and until a conflict erupts. The United States should:

• Implement a long-term technology denial operation, carefully assessing the net strategic benefit of further restrictions that impact ordinary commercial activities.
• Prepare for commodity embargo operations, including through consideration of novel sanctions structures that account for the commoditized and globally available nature of key products, such as energy.
• Prepare for macroeconomic pressure operations by preserving the essential role of the U.S. dollar in the global financial architecture, exercising restraint on the premature use of financial sanctions, and building credibility of the financial sector sanctions threat.
• Strengthen economic domain defenses by enhancing supply chain resiliency, establishing emergency stimulus mechanisms, and pushing back on the PRC’s trade coercion practices.
• Develop sanctions options for gray-zone actions and scenarios short of conflict.