On May 23, 2022, President Joe Biden, when asked whether the United States would get involved militarily if China invaded Taiwan, answered firmly, “Yes. That’s the commitment we made.”¹ As the world watches the war in Ukraine, many wonder whether China will take similar actions with respect to Taiwan, and what the United States’ response would be, both military and otherwise. The United States has loosed a salvo of new sanctions and export controls in response to Russia’s February 24 invasion of Ukraine. This article, in turn, examines potential sanctions, export controls, and import restrictions the United States could place on Beijing in the event of an incursion against Taiwan.

Background

China is a rising global superpower and may have its eyes set on Taiwan, which it sees as a breakaway province. For years, the United States has been cautious in its approach to China and Taiwan, currently not recognizing the island as formally independent, but providing military backing and other shows of support as if it were. At the same time, China is a massive trading partner for the United States, far greater than Russia. To achieve U.S. economic, security, and policy aims at home and abroad with respect to China, Washington already utilizes a variety of sanctions and export controls. These same restrictions could be weaponized, in intensified forms, against China – in much the same way as against Russia in the Spring of 2022 – should the mainland seek to forcibly bring its island neighbor under its control.

Current Sanctions and Control Environment

Economic Sanctions

The Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) administers economic sanctions programs and maintains lists of sanctioned parties. The targeted sanctions lists and regimes specific to China include the Chinese Military-Industrial Companies sanctions program (“CMIC”)² and a Hong Kong-related Executive Order.³ OFAC also currently imposes sanctions on Chinese parties under a variety of other economic sanctions programs. OFAC has also listed numerous individuals, entities, and vessels as Specially Designated Nationals and Blocked Persons (“SDNs”) or imposed on them less severe economic sanctions, such as restrictions on the opening of correspondent or payable-through accounts,⁴ or preventing U.S. persons from trading in an entity’s securities.

Export Controls

The Department of Commerce’s Bureau of Industry and Security (“BIS”) administers the Export Administration Regulations (“EAR”), which control items “subject to the EAR,” which include items in the United States (irrespective of origin), U.S.-origin items wherever located, foreign-made commodities incorporating controlled U.S.-origin commodities in quantities exceeding de minimis levels, and certain foreign-produced direct products of specified U.S.-origin technology or software. Items subject to the EAR are classified based on an alphanumeric Export Control Classification Code (“ECCN”) found on the EAR’s Commerce Control List (“CCL”), where they are assigned a Category beginning with a digit 0 through 9. The EAR further has jurisdiction over items subject to the EAR not found on the CCL; such items are classified as “EAR99.”

These export controls are separate from, but often overlap or complement, OFAC’s economic sanctions. China is already a sensitive jurisdiction for U.S. exports. BIS currently controls products to China for a variety of reasons, including National Security, Missile Technology, Regional Stability, and Crime Control. China finds itself among other Military End-User-controlled countries such as Belarus, Burma, Cambodia, Russia, and Venezuela. After anti-democratic crackdowns in Hong Kong, the United States began treating Hong Kong as part of the mainland for export control purposes, eliminating previously available license exceptions.⁵

BIS has listed a significant number of Chinese individuals and entities, many state-owned or -controlled, on the Entity List, imposing strict licensing requirements for transactions involving such listed parties. Additionally, the Entity List Foreign Direct Product (“FDP”) Rule targets certain “footnote 1”-designated non-U.S. Huawei affiliates on the Entity List, limiting the foreign-produced electronics and computing equipment they can receive.

Import Regulations

As part of its international trade policy, but also to promote human rights ends, the United States currently imposes certain import restrictions on goods coming from China. After the U.S. Trade Representative initiated a Section 301 investigation on unfair trade practices by China, the United States imposes average tariffs of 19.3% on goods coming from China, compared with average tariffs of 3.0% for the rest of the world.⁶ Tariffs increase the price of imports so that consumers will either purchase them domestically or from a third country not targeted by the tariffs.

Beyond tariffs, the United States has begun to crack down on human rights abuses in China through the Tariff Act of 1930, Section 307, which prohibits generally the entry into the United States of goods produced with forced labor, and the Uyghur Forced Labor Prevention Act (“UFLPA”), which creates a rebuttable presumption – effective June 21, 2022 – that any goods coming to the United States from the Xinjiang Uyghur Autonomous Region (“XUAR”) of China were produced with forced labor, and thus are prohibited from entry into the United States. U.S. Customs and Border Protection (“CBP”) enforces the UFLPA by detaining goods imported from XUAR at the port of entry, requiring the importer to prove by clear and convincing evidence that the merchandise was not produced by forced labor. (See our recent discussion of UFLPA here).

Potential Sanctions and Controls

There is no one-size-fits-all-sanctions program. China and Russia are not the same, and any regulatory response to Chinese aggression will have to be tailored to address China’s status as a global power.

Economic Sanctions

The most severe – but perhaps impractical and unlikely – action OFAC could take would be to impose comprehensive sanctions on China: an embargo, like those used against Cuba or Iran, prohibiting the importation of Chinese goods to the United States; the exportation of U.S. goods to China; and any financial transactions between the two countries. This would have extreme consequences in the United States and across the globe, given China’s web of economic ties all over the world.

Realistically, OFAC could designate key Chinese individuals and entities as SDNs, as it has done with Russian President Vladimir Putin, the oligarchs surrounding him, and their enterprises. This mechanism can pressure the elites and their businesses, state-owned entities, banks, or other key organizations or individuals, by blocking their U.S.-based assets and cutting them off from the U.S financial system. OFAC could expand existing non-SDN programs, by naming more entities to the CMIC List or adding additional Chinese banks to the CAPTA List. Further, OFAC could implement Sectoral Sanctions that restrict certain investment activities and prohibit business in key areas of China’s economy, such as energy, mining, or other key sectors, as it has done with Russia. Lastly, the United States and its allies could exclude Chinese banks from SWIFT, preventing them from accessing the global bank messaging system, hampering their ability to transact with banks outside of China, and ultimately destabilizing the economy.⁷ Although China has a similar system in its Cross-Border Interbank Payment System (“CIPS”), it does not currently stand as a close competitor to SWIFT or Western clearinghouses – SWIFT has almost ten times as many participating institutions⁸ – and in fact CIPS relies on SWIFT for much of its cross-border financial messaging.⁹ Unless CIPS is greatly expanded, it will not adequately cushion the blow from a SWIFT disconnection, leaving many Chinese financial institutions with no ability to transact abroad.

Export Controls

BIS has multiple export control tools it could use in response to a Chinese invasion of Taiwan. Most severe would be to issue Denial Orders for key entities, prohibiting them from U.S. export transactions. This has been done before for certain Chinese entities, including telecommunications giant ZTE for violation of its criminal settlement with the U.S. Government (see our discussion of that case here). Less restrictive, but still prohibitive, would be the designation of key Chinese parties on the Entity List, which would impose a strict license requirement on any named entities. Numerous Chinese parties already occupy the Entity List, so it is not a stretch to imagine that BIS would add more. Beyond designated parties, BIS could impose strict licensing requirements, under a policy of denial, on any or all items destined to China, as it has done with all non-EAR99 (meaning included in Categories 0 through 9 of the CCL) items destined for Russia. Further, BIS could expand the Entity List FDP Rule, or create an entirely new one that is broader in two respects: first, encompassing foreign-made items that are products of more than just software and technology in Categories 3 through 5 of the CCL; or, second, applying it to more than just Huawei affiliates, such as any critical manufacturing companies, or by tailoring it to China as a whole, as is the case with the Russia/Belarus FDP Rules (discussed in more depth here). Expanded FDP rules could strike China in critical areas by cutting off their supply of foreign-made semiconductors. China, like Russia, does not yet possess domestic, cutting-edge chipmaking fabs, making it vulnerable to sanctions, as evidenced by Chinese chipmaker SMIC shutting down a planned factory after a revoked export license stopped cooperation with a Dutch company, ASML Holding NV.¹⁰

Import Restrictions

Outside the unlikely event of a comprehensive embargo, it is probable that, on top of sanctions and export controls, the United States would impose additional import restrictions. How far any tariff increases would go is a difficult question to answer. However, any contemplated tariff action would have to be carefully implemented, as any tariffs imposed would affect not just businesses and consumers in China but also those in the United States. Plus, after the Section 301 tariff hikes enacted by the Trump administration (which remain largely unabated during Biden’s term), and current inflation, U.S. businesses and consumers are particularly sensitive to price increases on imports. The primary sector of imports where tariffs could impact Chinese markets include electrical and electronic equipment and machinery, which accounted for more than $250 billion worth of imports in 2021.¹¹

Additionally, the mechanism of CBP detention under UFLPA could be expanded to cover other regions of China, such as Hong Kong, which serves as a major port for the mainland, or the high-tech hub of Guangdong province. However, detaining massive volumes of goods presumed to come from major regions of China would be incredibly difficult for CBP and would make it exceedingly burdensome, or likely impossible, for parties engaged in the China-to-U.S. trade in goods to continue to do business.

Conclusion

Sanctions and export controls can be a powerful tool to change a party’s behavior but, like any tool, must be used appropriately. Drawing lessons from what has (or has not) worked in placing restrictions on Russia, Washington would likely craft a targeted sanctions, export controls, and import restrictions program that hopefully would deter any future military action but, in any case, would hit China in the areas where it is most vulnerable.