The reality is that China’s decision-making process makes it practically impossible for him to be deterred militarily. Having replaced collective leadership by strongman rule, Xi has removed any scope for the military top brass to defer to American deterrence as none can appear weak without being punished. The prospect of enormous casualties and long-term Taiwanese resistance cannot deter Xi either, as they would not threaten his hold on power.
The only effective deterrence is an economic one, one that will completely devastate China’s economy and thus put his hold on power at risk.
Economic deterrence can work as China’s economy relies on the West for critical technologies and products for its manufacturing industries, for economic services to facilitate investments and trade, and for markets to sustain growth.
If the West should fail to sustain sanctions on Russia over the invasion of Ukraine, China cannot be deterred.
This has continued even though Xi started to selectively decouple China from the West in 2013. His first move was to ban Western concepts, from constitutionalism and universal values to neoliberalism. He then released the Made in China 2025 strategy to reduce China’s economic dependence on the West.
But Xi has not planned for full economic decoupling. Indeed, despite his efforts and Donald Trump’s trade war, the sheer scale of economic interdependence means decoupling has not gone far.
For the US and its allies to deter China from attacking Taiwan, they will have to convince Xi that they will act collectively and pay a substantial price by imposing sanctions so severe that they will devastate China’s economy. This can only work if economic interdependence remains.
China’s economy is 19 per cent dependent on exports, compared to 10 per cent for the US, making China more vulnerable. China is also heavily dependent on the US for financial services and high-tech components. The effects of export restrictions on ZTE and Huawei show the vulnerability of Chinese industrial champions.
The scale tips further if the US can get the EU, Japan, the UK, South Korea, Australia and Canada on side. US led sanctions can devastate the Chinese economy, though it will be very painful for the others too.
If the West will collectively impose and sustain comprehensive sanctions, the most dynamic part of China’s economy, the private sector, will be crippled and will need to lay off workers in enormous numbers, with dire consequences for the real estate and financial sectors. They will put the Chinese economy in a tailspin, and unleash forces that can threaten social stability and the political order.
If Xi sees that an attack on Taiwan will lead to sanctions that will destroy China’s economy and thus threaten his hold on power, he is likely to play safe. After all, he is not in a desperate hurry. Not taking Taiwan will be hugely disappointing for Xi but preferable to losing power.
For economic deterrence to work, three conditions must be met:
First, the US and the democratic West (including Japan and South Korea) must not fully decouple with China. Economic deterrence requires the side to be deterred to feel that its losses will be intolerably devastating.
The key is to make economic interdependence lop-sided and to one’s advantage. It means selective and strategic, but not full, decoupling. It requires the West to stop exporting technologies that enhance China’s military power and remove dependence on China for electronic and other components essential for their economy to hum along. It also needs to sustain China’s reliance on the West for financial services and markets.
Too painful to bear
It means trade with China should be reduced to a level that its severe curtailment can be tolerated while the loss of financial services and the West as a market are too painful for China to bear.
Xi knows this well and can thus be deterred as he is attempting the reverse, reduce China’s reliance on the West while deepening the latter’s economic dependence on China. Indeed, if the US and its allies are not prepared, Xi will threaten them with economic destruction to deter them from supporting Taiwan when he invades Taiwan.
Deterrence relies on credibility. If the West should fail to sustain sanctions on Russia over the invasion of Ukraine, China cannot be deterred.
For the US to rally support, it must persuade fellow democracies that threatening sanctions that will shrink their economies by a few percentage points is a worthwhile cause. It must show why upholding Taiwan’s democracy is critical to the world. It cannot succeed if the US is led by a president who puts America first rather than the interest of the global community side by side with US interest.
The US must show Xi taking over Taiwan is a critical step for China to establish hegemony and reshape the world order after its authoritarian image. A Xi victory will make the world less safe for countries unwilling to dance to his tune.
The prospect of the US confronting China militarily will rupture the globalised economy, an eventuality that will be substantially worse than accepting a relatively smaller and shorter-term economic shrinkage that sanctions will bring, if they should materialise.
Professor Steve Tsang is director at the SOAS China Institute of the University of London