The U.S. Needs an Economic War Council for China

This week, Taiwanese President Tsai Ing-wen met with U.S. House Speaker Kevin McCarthy at the Ronald Reagan Presidential Library in Southern California. It’s the second time in less than a year that Taiwan’s leader has sat down with a speaker of the U.S. House of Representatives—and it’s the second time Beijing is saber-rattling and threatening significant retaliation.

Tensions in Asia are nearing a high point. Across Washington, there is a sense that, left unchecked, Beijing is likely to try to seize Taiwan by force. There’s much debate about Chinese President Xi Jinping’s precise timeline as well as what domestic and foreign factors might shorten or extend it. What is clear, however, is that we are now entering a critical phase in efforts to deter Chinese military aggression in the Indo-Pacific.

A Chinese decision to launch an invasion of Taiwan would disrupt global trade, wreak havoc on supply chains, imperil a vibrant Asian democracy, exert extreme pressure on America’s closest allies, and almost definitely bring the United States and China into direct confrontation.

The most important U.S. policy goal must be to deter Beijing from making such a costly choice.

Military planning together with Taiwan and other regional partners is necessary but not sufficient to give deterrence the best chance to succeed. Economic contingency planning is essential, too. Unfortunately, the U.S. government doesn’t do this as a matter of course. There are barely enough officials working on sanctions and economic statecraft at the State Department and Treasury to administer the more than 30 sanctions programs currently in place, much less plan for future contingencies.

This urgently needs to change. Using lessons from the template it developed in advance of Russia’s 2022 invasion of Ukraine, Washington should rapidly start preparing to use economic statecraft to defend its allies in the Indo-Pacific from Chinese aggression.

The Biden administration stitched together a coalition of major U.S. allies in Europe and Asia to impose rising costs on Russia’s economy, starting with a frontal assault on the country’s banking system and escalating to the more recent campaign to squeeze the Kremlin’s oil revenues—the lifeblood of Russia’s economy. The sanctions have gone much further and intensified much faster than anyone expected. This success was the product of almost a decade of collaboration between the United States and its allies on Russia sanctions. After Putin invaded Ukraine in 2014, Washington assembled a contact group of key allies in the G-7 and beyond to align policies on Russia sanctions. The group remained intact even during the Donald Trump years, though it was much less productive. As a result, when the United States first grew worried in late 2021 that Putin may have been planning another invasion, it had a ready-made group of allies to call on to coordinate fresh sanctions options.

Despite this impressive work, the initial goal of the sanctions—deterring Putin from invading Ukraine—failed. The fact that the strength of the sanctions was a surprise may help explain this failure. There is evidence that Putin did not believe the United States and its allies would go as far as they did on sanctions. For instance, when the United States and others imposed sanctions on Russia’s central bank less than a week after Putin ordered the invasion, the bank held well over half of its foreign exchange reserves in dollars, euros, pounds, and yen. Had Putin expected the United States and its allies to impose such sanctions, Russia’s central bank would have surely done more to diversify its holdings away from assets denominated in these currencies. Consequently, a huge chunk of Putin’s war chest was immobilized just days into the war.

This miscalculation carries a key lesson for U.S. policymakers seeking to deter a Chinese invasion of Taiwan. For sanctions to contribute to deterrence, the United States and its allies must be crystal clear about their red lines and the costs they stand ready to impose if Beijing crosses them. In observing the response to Putin’s invasion of Ukraine, Xi can hardly doubt that a Chinese invasion of Taiwan would lead to serious economic consequences for his country. But given that China has much greater economic clout than Russia, he may well doubt that the United States and its allies would slap penalties on Beijing as strong as those they have wielded against Moscow. Just as Putin calculated that the costs of sanctions would not outweigh the benefits of invading Ukraine, Xi could make a similar calculation about invading Taiwan. One of the highest priorities of U.S. policy toward China, therefore, should be to tip Xi’s calculus in the other direction.

After Biden’s threat of “swift and severe consequences” failed to deter Putin from invading Ukraine, the goal of the sanctions campaign shifted. As Russia’s tanks barreled toward Kyiv, Washington correctly calculated that sanctions could no longer be expected to change Putin’s calculus. There was no way that Putin was going to simply pull back from Ukraine in hopes of obtaining sanctions relief. The conflict would be decided on the battlefield. This explains why the leading edge of U.S. policy in the last year has been to provide military assistance to Ukraine.

The goal of sanctions became attrition—not to change Putin’s mind but to constrain his material resources and thus curtail his ability to inflict further harm in Ukraine and elsewhere. In just a year, the attritional effects of sanctions are already visible. Russia’s economy contracted by around 3 percent in 2022, and it has struggled to resupply its army with precision-guided munitions and equipment. Domestic auto production has collapsed, forcing the Kremlin to relax regulations and allow cars to be manufactured without air bags and anti-lock brakes. And in the starkest illustration of the attritional effect of sanctions, Putin has had to go hat-in-hand to Iran’s supreme leader to beg for drones and other military hardware.

These sanctions are probably influencing Russia’s military performance in Ukraine, but the effect is far from decisive. The sad reality is that the sanctions came too late to make a big difference in the current war, though they will undoubtedly constrain Putin’s ability to fulfill his imperial dreams moving forward. Attritional sanctions would have been far more useful before Putin decided to invade Ukraine, throwing a wrench into Russia’s military modernization program years before Putin ordered the tanks to cross Ukraine’s border.

The lesson for China policy is that it will be too late to apply attritional sanctions after Xi has decided to invade Taiwan. The Biden administration seems to understand this, based on the sweeping export controls it imposed on China’s semiconductor industry last October. But despite their ambitions, these moves were limited to a single foundational technology. The hard reality is that if Washington is serious about degrading China’s military capacity, it will need to widen its aim beyond a handful of high-tech components—painful as that might be for U.S. investors and businesses that have grown accustomed to reliance on China.

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Yet there is a flip side to China’s central role in the global economy—it makes China deeply vulnerable to sanctions, especially in the financial and technology sectors. The challenge for Washington and its allies is to carefully design measures that will impose more costs on China than they do on themselves, to develop contingency plans to mitigate the potential economic aftershocks, and to align on these complicated steps before Beijing decides to attempt to retake Taiwan by force.

For all these reasons, it is imperative for the United States and its allies to prepare in advance. Within the U.S. government, policy officials at the State, Treasury, and Commerce departments and other key agencies must come together to develop a list of sanctions options that could be deployed in the event of a Chinese invasion of Taiwan. But a list is not enough. U.S. officials must rigorously analyze these options, model potential consequences, and sketch out policy responses to address ramifications that run contrary to U.S. interests.

Such detailed contingency planning is routine for the Defense Department. But the economic agencies of the U.S. government lack the resources or institutional processes to carry out similar exercises. This must change. If China were to begin an invasion of Taiwan tomorrow, economic warfare would inevitably be a key part of the U.S. response. Absent advanced planning, however, it is also inevitable that the United States and its allies would scramble to put together a response, resigning their sanctions campaign to incrementalism and possibly emboldening Xi to push forward.

To avoid this bad outcome, the United States should immediately establish an Economic Contingency Planning Committee (ECPC), which would be charged with planning for the economic battles of the future. Its first task should be to create and vet sanctions options that could be deployed in response to a Chinese invasion of Taiwan. The ECPC should possess a dedicated budget and staff, seconded from the State, Treasury, and Commerce departments as well as agencies such as the CIA. Ideally, Congress would create the ECPC via statute, ensuring that it is appropriately resourced and supported. This was one of the U.S.-China Economic and Security Review Commission’s top recommendations to Congress in 2022. Yet if Congress does not act quickly, the Biden administration can and should set up the ECPC via an executive order.

The ECPC’s remit should go beyond internal contingency planning to include collaboration with allies. When Putin began amassing troops close to Ukraine’s border, the Biden administration benefited from the preexisting Russia sanctions contact group. Washington should form a similar “coalition of the willing” focused on China and empower the ECPC to socialize its sanctions options and analysis with members of the coalition. Over time, the coalition could even issue joint declaratory policies. For instance, the members could lay out the economic consequences that they stand ready to impose if China invades Taiwan.

It would be a tragedy if Xi, like Putin, underestimates the United States and its allies’ readiness to impose economic costs on China if he moves to seize Taiwan. That’s why policymakers must urgently move to ensure that Xi fully appreciates the costs of such a reckless gamble. The greater the resolve to impose costs on China, and the more tightly coordinated the mechanisms are for doing so, the larger the chances that Beijing will determine such a move is not worth the costs it would incur. And it is critical that all of this is done as soon as possible, as time would be an even more important factor in a potential Chinese invasion of Taiwan than it has been in the Russian invasion of Ukraine. Taiwan is an island, so once an invasion begins, it will be very hard to arm and resupply. An iterative, learn-on-the-fly approach may well be impossible.

This is no easy task. China’s economy is much larger, much deeper, and considerably more diversified than Russia’s. China imports $3 trillion in goods and services each year and is the largest trading partner of some 120 countries, whereas Russia imports about $400 billion in goods and services each year and is the largest trading partner of only a handful of smaller economies, such as Belarus, Armenia, and Kazakhstan. But if China’s economic strength is much larger than Russia’s, it is hardly infinite. Taken together, the United States and its democratic allies in Asia and Europe account for well over half of global GDP. The collective weight of the world’s advanced economies working together is sufficiently large and strong to give Beijing pause.

That collective strength only matters, however, if those countries can act together. Converting raw economic muscle into collective deterrence will only occur if the correct internal bureaucratic and external coordination mechanisms are put in place now.

The time to deter Russia was before it invaded Ukraine. The time to punish it was after. For China, the time for action is now.