What Would Happen if America Applied the Same Sanctions to China As to Russia?

It probably wouldn't be as dramatic as imagined, but better not to check.

Every day, the global economic fallout from America's and the European Union's sanctions against Russia is becoming a little more concrete. We can thus begin to get a glimpse of what a trade and financial break with China might look like.

The first point to observe is the current debate in Europe around a ban or restrictions on Russian gas imports. The main reason why all European political leaders are so reluctant to cut off energy supplies from Russia, which provides almost 40% of Europe's natural gas, is that it would mean a major recession.

However, several studies have already estimated that the negative effect of such a decision by the European Union would not be as great as feared. For the German economy, it would mean a drop in GDP of no more than 1 to 2%.

In reality, the consequences of such a decision will depend on the assumptions initially made about the flexibility of an economy, its alternative sources of supply, and the rigidity of its preferences. Although using a very different methodology, the European Central Bank arrives at almost the same conclusion.

These different studies also acknowledge the high uncertainty of the current context. To go further, a strong political will is needed through a large gas resource-sharing mechanism on a European scale. This would allow the burden to be shared.

If most studies estimate that the real economic impact of ending energy imports from Russia would be modest, it becomes difficult to understand why Europe is so reluctant to make such a decision.

The question of the impact of sanctions identical to those of Russia on China returns to the forefront

As with the effects of globalization, the effects of de-globalization tend to be unevenly distributed. Europe's caution may be explained by pressure from lobbies representing the sectors that would suffer most from an embargo on Russian energy.

China is not Russia. Its economy is ten times larger. As a key supplier of intermediate manufacturing inputs, and the last link in the Asian supply chain, China has become the world's factory. As an importer, it now exceeds the United States itself in sectors ranging from commodities to European luxury goods.

While Russia had just over $600 billion in foreign exchange reserves, China has over $3 trillion. It stands out as a major holder of U.S. government debt. Its savings and portfolio preferences have long contributed significantly to the current low-interest-rate environment. So wouldn't global production collapse if geopolitical tensions suddenly led to China's economic isolation, potentially alongside other autocracies such as Russia and Iran?

This is a question that no one can answer definitively, but it can be argued that conventional business and financial models do not predict such a catastrophe, at least in the medium to long term. A recent study has shown, for example, that the disassociation of global value chains (which would be significantly impacted by a reduction in trade with China) would cost the US only 2% of its GDP.

For China, the cost would probably be higher, but it would remain at a few percentage points of GDP.

If we consider that de-globalization is likely to lead to a significant reduction in the diversity of products available to consumers, higher margins for local monopoly suppliers, and a lower level of “creative destruction” in the economy, we might conclude that the impact of US-China economic unbundling is greater. Here again, however, it is difficult to demonstrate that the effects of trade sanctions would be as devastating for the United States or China as they are for a smaller and less diversified Russian economy.

Even autocrats and dictators have to give in to financial pressures at some point

It is also amusing to see that even the most determined autocrats like Vladimir Putin can finally give in to global financial pressures. For example, in 2014, after Russia's illegal annexation of Crimea, fear of a global bond market reaction to annexation sanctions deterred President Vladimir Putin from firing the president of the Russian Central Bank, Elvira Nabiullina, when it raised interest rates to painful levels to fight inflation.

Elvira Nabioullina had been widely applauded for having prevented financial crisis and insolvency.

The status of the Russian Central Bank today is such that Putin is rumored to have refused Nabiullina's resignation the day after the invasion of Ukraine. Proof that these global financial pressures force the establishment of better policies and institutions, with central bank independence as a major example.

Final Thoughts

If it is difficult to conclude in advance the consequences of major sanctions taken by the West against China, one can imagine that pushing de-globalization too far would quickly lead to disaster. Innovation and dynamism would be the first victims but in probably bearable proportions.

No need to panic too much, because such an economic decoupling between the United States and China would have less impact than imagined. Despite everything, we would all prefer that this theory was never put to the test and that we did not have to verify it in the facts.

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