SANCTIONING CHINA WILL WORK NO BETTER THAN SANCTIONING RUSSIA / PROJECT SYNDICATE

Sanctioning China Will Work No Better than Sanctioning Russia

The United States and Europe are currently erecting trade barriers to mitigate the perceived threat of Chinese economic coercion. But the underwhelming impact of the unprecedented sanctions imposed on Russia suggests that adopting a similar approach toward China will not yield better results.

Daniel Gros

MILAN – As the war between Israel and Hamas intensifies, global attention has largely shifted from Ukraine to Gaza. 

But while this is understandable, it would be a mistake to overlook the situation in Ukraine. 

With Vladimir Putin’s war of aggression approaching its second anniversary, it is crucial to understand why the unprecedented Western sanctions imposed on Russia have had such a limited effect.

Contrary to analysts’ expectations, the Russian economy has not collapsed as a result of Western sanctions. 

Instead, it continues to grow, albeit at a slower pace. 

One obvious reason for this is that demand for Russian exports – particularly oil and gas – remains strong, and these products are fungible. 

If Europe cuts back on purchasing Russian oil and gas, Russia can find other willing buyers, such as India and China. 

The largest cost for Russia implied by this shift in trading partners is transport, though the increase amounts to just a few percentage points for oil and other commodities, like coal, gold, copper, and various raw materials.

The notable exception is natural gas, which is more difficult to transport. 

Before its invasion of Ukraine, Russia was Europe’s biggest energy supplier, providing more than 40% of the European Union’s natural gas. 

In the summer of 2022, Russia attempted to “sanction” Europe by scaling back and eventually halting its gas deliveries. 

This resulted in a short-lived spike in global gas prices, compelling European buyers to order much more liquified natural gas from other suppliers and stoking fears that energy shortages would choke off economic growth, particularly in Germany.

But the impact on European economies, especially Germany’s, was less severe than anticipated. 

Contrary to some predictions, there was no recession. 

While German companies managed to cut their gas consumption by 20%, industrial output did not decrease; declines in energy-intensive industries were offset by growth in other sectors.

This resilience can be partly attributed to a combination of increased energy efficiency and the substitution of natural gas for alternative fuels. 

Moreover, natural-gas prices have reverted to their pre-war levels. 

Consequently, Russia’s attempt to use its gas exports as a weapon against Europe resulted in lost revenues, as the gas it used to deliver to Europe could not be easily sold elsewhere. 

The much-vaunted alternative pipeline to China is still in the planning stages, with China repeatedly postponing its final approval.

The limited success of Western sanctions on Russia, as well as that of Russian countermeasures, should not have come as a surprise. 

Numerous countries have previously tried to weaponize trade, with mixed results. 

For example, China’s attempts at “economic coercion” (the term Western countries use to describe sanctions imposed by others) against the much smaller Australia have repeatedly failed.

The argument that Europe should forsake its supposedly “naive” commitment to free trade because other countries use trade as a weapon is thus less compelling than it initially seems. 

By establishing a strategic reserve, European countries could mitigate China’s much-feared control of critical raw materials at a relatively low cost.

Moreover, global markets can provide alternatives for most Chinese-made industrial products. 

It is important to remember that major industrial producers are unlikely to back China should it choose to sanction the EU or the West as a whole. 

This is especially true for semiconductors, for which Europe primarily relies on non-Chinese sources. 

Given this, the European Commission’s strategy of limiting Chinese imports through various measures, including anti-subsidy investigations, makes little sense, particularly when it comes to products that are essential to the green transition, such as solar panels and wind turbines.

Similarly, engaging in a rational debate about trade relations with China in the United States has become all but impossible. 

Officially, President Joe Biden’s administration aims to maintain most trade links while imposing strict regulations on a few sectors, a strategy that National Security Adviser Jake Sullivan likened to “a small yard and a high fence.” 

In reality, however, the general hostility toward Chinese-made products has caused the “small yard” to expand. 

Initially, the US policy primarily targeted advanced semiconductors and chip-making equipment, which is often produced in Europe. 

But now, the areas behind high fences include batteries and the entire electric-vehicle supply chain.

Although China’s threats of economic coercion tend to be exaggerated and are usually manageable, Europe, the US, and other Western countries are still erecting costly trade barriers in an effort to mitigate these perceived risks. 

Even those who acknowledge the limited effectiveness of Chinese economic coercion often argue that Europe should limit trade with China in preparation for the sweeping sanctions that would be imposed on it if it invades Taiwan.

But Western countries risk incurring the costs of a scenario that is unlikely to materialize. 

Policymakers should base their decisions on experience and sound economic reasoning rather than rely on speculation. 

The benefits of maintaining trade relations with China far outweigh the theoretical advantages of increased geostrategic flexibility.

Daniel Gros is Director of the Institute for European Policy-Making at Bocconi University.