China Invasion of Taiwan Could Lead to Sanctions 'Armageddon,' Lawyer Says

A potential Chinese military invasion of Taiwan could lead to an unprecedented level of new sanctions and export controls against Beijing, including U.S. financial sanctions against major Chinese companies and export prohibitions on anything related to the country’s military, trade lawyer David Wolber said. Banks in particular are concerned about the possibility of sweeping financial restrictions, Chloe Cina of Deutsche Bank said, adding that some are beginning to prepare for a worst-case sanctions scenario.

Wolber, speaking during a webinar this week hosted by the EU Sanctions Blog, said he thinks it’s “unlikely” China invades Taiwan in the coming years. “But if they do,” he said, “I think we're largely approaching a sort of Armageddon situation from a sanctions perspective.”

Wolber said that could include a “ratcheting up of export controls” on any shipments that have touchpoints to China’s military and the addition of a new set of Chinese companies to the Treasury Department’s Specially Designated Nationals List, which would cut them off from the U.S. financial system. “You could finally see some measure of targeting of the financial and economic sectors with more traditional sanctions actions,” he said.

The Biden administration hasn’t specified what measures it would impose if China were to invade Taiwan, but experts have said Western sanctions against Russia for its invasion of Ukraine could serve as a blueprint. Lawmakers in March introduced a bipartisan bill that would require the administration to form an “effective sanctions strategy” that would be triggered if China invades Taiwan (see 2303300024), and at least one lawmaker said the restrictions should “go far beyond” what has been imposed on Russia (see 2212090028).

Cina, head of Global sanctions advisory at Deutsche Bank, said new capital market restrictions could be on the “agenda, as are list-based sanctions.” Although it's unclear if the U.S. will ever have to impose broad sanctions against China, she said banks are preparing by “upskilling and resourcing to a degree that perhaps they had not previously thought would ever be imaginable.”

“I think banks are nervous,” she said. “They've seen that in a crisis like Russia, you really need to have boots on the ground and the right people that are in a position to be able to advise.”

Although companies should be preparing for the measures, Wolber said U.S. policymakers and regulators will likely be hesitant to impose sweeping new restrictions against China. He pointed to Treasury Secretary Janet Yellen’s comments last month in which she stressed the U.S. doesn’t want to decouple from Beijing (see 2304200058). “I think barring the pull of an actual military invasion that brings the U.S. into armed conflict with China,” Wolber said, “I think U.S. regulators are going to be nervous to really put in place anything that looks like Russia at this point.”

Although Cina said she’s unsure what type of event would trigger new U.S. sanctions, she said the scale of the event would likely dictate the severity of the measures. “Is it going to be triggered by an invasion, a quarantine, a blockade? Or, indeed, would it be the provision of lethal weapons by China to Russia?” she said. “There are a number of different things going on at the moment geopolitically. And depending on what that trigger is will impact the sort of sanctions they’re likely to be.”

Cina said banks shouldn’t wait any longer to prepare for the potential sanctions, even if they may be years away. “I think we all have to be very thoughtful in our thinking going forward with China, because the likelihood of it happening, whether it's high or low, could cause quite far-reaching economic pain on both sides.”

Uncertainty also surrounds China’s use of its own sanctions measures, such as its so-called Unrelibale Entity List and its Anti-Foreign Sanctions Law, Wolber said (see 2304280004 and 2304210008). He said both have been used “very sparingly so far” and have targeted U.S. politicians, think tank leaders -- and, in once case, two American defense firms (see 2304180029) -- but hasn’t forced multinational companies to decide between operating in China or the U.S. “No one really quite knows yet how far Beijing is going to push some of these tools,” Wolber said.

But the regulations have raised reputational risks for companies, he said. “Companies are being very careful now about language that they're using when they're complying or following their global policies or things like that in China,” he said, adding that it’s changed the “tenor” of certain contracts, representations, warranties and compliance procedures.

“I think it's fair to say that you would be remiss to not consider the AFSL and other Chinese tools if you're operating in the region,” Wolber said, “and at least pay heed to the fact that they're there and that you need to be cognizant of it.”