Explainer- How could the U.S. sanction China to deter a Taiwan attack?

Draft U.S. congressional legislation has outlined a full range of punishing sanctions that could be imposed on China over Taiwan, including on President Xi Jinping and other leaders, action to exclude Chinese banks from global markets, bans on U.S. listings of Chinese firms, on imports of Chinese goods and curbs on Chinese energy projects.

However, the so-called "nuclear option" of banning all U.S. dollar business between U.S. and Chinese banks, which would effectively freeze the Chinese institutions out of the international financial system, is considered highly unlikely, certainly initially, given the harm it could do to the U.S. and global economies more broadly.

DEFENCE, TECH AND AEROSPACE

Instead, policymakers would likely opt initially for less dramatic measures, such as asset freezes targeted against Chinese officials, companies and institutions; more limited moves against some banks; and rules barring dealings benefiting China's military-industrial complex, including its semiconductor sector and aerospace.

Craig Singleton, a former U.S. government official and sanctions expert with the Foundation for Defence of Democracies, said there might be a willingness to look at steps against financial institutions affiliated with China's ruling Communist Party, including the People's Bank of China central bank and the various state-run banks that support trade and industry, "but the bar would be rather high."

"I suspect many U.S. policymakers will feel reluctant to take very severe measures, at least before an actual invasion," he said, explaining that such moves could "substantially harm America's economy."

ASIAN ALLIES LIKELY TO BE RELUCTANT

Support from Asia is crucial for effective sanctions, and it would be hard to persuade countries there given their massive economic ties to China.

Most Asian countries, Australia, Japan, Singapore and South Korea being exceptions, did not go beyond verbal condemnation of Russia over Ukraine, and "Russia is nowhere near as interconnected with the global economy as China is," one Asian diplomat said.

"I'm not sure how realistic this threat of Russia-type sanctions is going to be," he said.

"The most likely country that would support the U.S. position would be Japan. But Japanese companies, even as they've tried to diversify, have so much manufacturing in China, I don't know what they can give up quickly."

A total of 7,486 Japanese firms had local subsidiaries in China in the year that ended in March 2021, just under a third of all of Japanese firms' overseas subsidiaries, according to the latest survey from Japan's trade ministry.

"Many countries are not ready for sanctioning China," an official from a U.S. Asian ally said. "We're in the initial phase to develop solidarity between like-minded countries, which seems a little symbolic and superficial at this moment."

CHINESE COUNTERMEASURES

Beijing has taken a tough line with Asian countries following U.S. leads in the past, such as when South Korea faced Chinese economic retaliation after the stationing of a U.S. missile defence system on its territory.

China has also acted to lessen reliance on imported technology and is working to develop use of a digital currency that would allow it to circumvent banking sanctions.

"China has been aggressive in attempting to roll out its digital currency to as many ... partners as possible," said Nazak Nikakhtar, a former senior official at the U.S. Commerce Department.

"So there will be a good subset of the global trading community that will be able to work around any direct sanctions on China."

Chinese leaders had made clear they would learn from Russia's sanctions experience and also from then-President Donald Trump's campaign against telecoms giant Huawei, which took nearly two years of sanctions and chip export bans to do significant damage.

"Huawei stockpiled U.S. chips before the bans went into effect, with the goal of shielding the company from a crackdown," Singleton said. "China will almost certainly do the same vis-à-vis Taiwan, there are some indications China is doing as much already, to reduce its risk exposure as U.S.-China relations continue to deteriorate."

BIDEN'S CALL

Experts like Singleton consider "comprehensive sanctions" on China unlikely, especially given they have yet to be imposed on Russia.

A former senior U.S. official said it would ultimately come down to President Joe Biden, who on a visit to Japan this year said China was already "flirting with danger" with the military pressure it was putting in Taiwan.

"At the end of the day, let's be clear, this is a political decision by the president, and if he decides we need to signal deterrence like this, he can say 'go' and Treasury can get it done really fast," the person said.