Avoiding Entanglement: G20 Responses in a Taiwan Crisis

This report is a joint project of Rhodium Group and the Atlantic Council’s GeoEconomics Center.

This report examines three case countries from the Group of Twenty (G20)—Brazil, South Korea, and Indonesia—and their likely responses to both US and Chinese economic statecraft in several hypothetical scenarios related to the escalation of tensions and risks of conflict over Taiwan. This study is designed to assess the policy trade-offs that countries outside of the G7 and US alliance networks may face. The report assesses Brazil, South Korea, and Indonesia’s economic and financial linkages with China, alongside a review of historical sanctions policies, and insights from selected interviews with key stakeholders. The report then identifies China’s likely goals for interactions with G20 nations under a Taiwan contingency, as well as each case country’s respective economic and policy reactions.

US and G7 foreign policy goals and requests for these countries would likely be limited to the enforcement of economic and financial sanctions. They will likely include consensus building among G20 members to express political support for China to de-escalate. Beijing would have its own set of economic statecraft tools that could potentially be deployed, which are discussed in our previous report, Retaliation and Resilience: China’s Economic Statecraft in a Taiwan Crisis.

China is unlikely to deploy punitive or “negative” economic statecraft tools such as sanctions or export restrictions against non-G7 countries in a Taiwan crisis scenario. China’s past statecraft practice, its diplomatic strategy toward developing economies, and its existing economic influence over much of the G20 reduce the need for such punitive measures, as Beijing would have interests in portraying its economy as open for business as usual, even as political tensions increase. Obviously, these calculations may change for Beijing depending upon US or G7 outreach to any country with which Beijing had an extensive economic relationship, where China may see threats as a more useful tool.

For the purposes of this study, we used the same definitions of “moderate” and “high” escalation as defined in our previous report:

• In a “moderate” escalation scenario in which limited US or G7 economic sanctions are applied, China will primarily seek to preserve business as usual with G20 countries and focus on obtaining diplomatic support, or at the very least neutrality, from countries like Brazil. Compliance with China’s legal assertions of sovereignty over Taiwan—via possible customs requirements or navigation restrictions—could also prove important. China has little need to augment its existing economic influence over the countries in this study with punitive statecraft such as threatened sanctions or export controls.
• In a “high” escalation scenario of more widespread financial sanctions on China’s banks and the central bank, coercive economic statecraft against the three case countries is marginally more likely, but still a low probability. As G7 pressure on the rest of the G20 to enforce secondary sanctions increases, China may be willing to use more direct measures to forestall a wider, comprehensive response to changing conditions in Taiwan. Of the case countries, South Korea is most likely to be affected by any negative statecraft.

It is difficult to predict with certainty how G20 nations are likely to respond overall to both US and Chinese diplomacy during these scenarios, and this is true for Brazil, South Korea, and Indonesia specifically. As Taiwan is not a central diplomatic or political issue for any of the case countries, responses will likely be dictated by each nation’s own existing policies and declared self-interest, as well as their perceptions of the importance of preserving relations with either China or the United States.

G20 responses to Chinese and G7 economic statecraft

All G20 members—including the three case countries—will be affected by a Taiwan crisis by tighter global trade and financing conditions regardless of their foreign policy decisions. A Taiwan crisis will affect multiple variables in the global economy from freight and shipping costs to commodity prices. In terms of trade linkages, G20 economies are generally more exposed to China’s economic statecraft tools than the G7, with 13 percent of exports or $541 billion in annual trade volumes potentially subject to disruption. However, G20 economies are less exposed to China’s punitive statecraft in terms of financial linkages, given lower volumes of foreign direct investment in China (around $149 billion in outward direct investment stock from G20 economies excluding the G7 in 2022) or cross-border portfolio flows, along with China’s incentives to extend options for financing and trade facilitation outside of potential US and G7 sanctions.

• Brazil is most likely to face little risk of punitive economic statecraft from China, given its economic ties to China and shared membership in the BRICS grouping of economies along with Russia, India, South Africa, and others. Past cases suggest Brazil’s financial sector will seek to comply with any sanctions on Chinese entities or secondary sanctions, but with little fanfare. Compliance will be implemented as necessary to avoid any legal entanglement with the United States. However, Brazil’s policy response will likely be influenced by the nature and extent of the international response to escalation in Taiwan.
• South Korea represents the most complex case in this report. Korean decision-making in a Taiwan crisis is most likely to align more closely with the G7 (compared to the rest of the G20, especially under the Yoon administration). It is, therefore, more likely to elicit a coercive economic statecraft response from China. At the same time, South Korea’s economic linkages to China are extensive, and supply chains in automobiles and semiconductors are still tightly bound to Chinese entities, despite recent efforts to diversify. Memories of previous negative statecraft by China—such as Beijing’s limits on tourism flows and other economic interactions when South Korea deployed a US missile defense shield in 2017—may also produce a more muted response.
• Indonesia is not likely to face a significant punitive economic statecraft response from China in a potential Taiwan crisis. Though Indonesia is indirectly linked to Taiwan via overlapping territorial claims in the South China Sea, China’s trade and investment weight provide strong incentives for Indonesia to maintain its foreign policy stance of nonalignment in a Taiwan scenario.

Where new economic statecraft (by China or the G7) might affect outcomes, it is likely to be via positive economic inducements such as investments or favorable trade arrangements well before any Taiwan scenario comes into play. Once a crisis is underway, even substantial promises of future economic benefit are unlikely to override established policies and perceptions of economic self-interest within G20 governments.

Against this backdrop, G7 asks of the rest of the G20 members are similarly likely to be modest. With the G7 likely fractured on questions about sanctions enforcement, the most likely requests will be to support G7 sanctions to the maximum acceptable extent and to avoid exports or transshipment (or even merely increased exports) of dual-use goods or critical technologies. Notably:

• The G7 approach to G20 members that are US military treaty allies (e.g., South Korea, Australia) is more complicated, and the United States and G7 could ask for more substantive cooperation in these cases.
• Requests for supportive statements calling upon China to de-escalate or reduce tensions would likely accompany any G7 request for sanctions compliance.
• Coercive statecraft from the G7 related to sanctions compliance is unlikely, except as necessary to stop flows of critical goods, weapons, or technology to China in the event of escalation.

In a moderate escalation of tensions over Taiwan, maintaining economic ties with Beijing will be a lower-cost option for G20 economies, as China will have incentives to maintain the perception of business as usual and refrain from punitive statecraft tools. In a more extreme scenario, complying with US or G7 sanctions will likely be the lower-cost option for G20 economies given the more significant consequences to global trade and economic conditions that would unfold.