Marco Garzia | 27 February 2024

Summary

• Economic sanctions are still a viable tool to assure international compliance with the “Rules-based International Order” (RBIO), thanks mostly to Western economic dominance. 

• Challenges to the RBIO have emerged and keep emerging. However, a noteworthy yet shrinking gap between Western capabilities and the rest of the World is still present. 

• China has emerged as the largest threat to the effectiveness of Western economic sanctions, thus creating difficult-to-foresee scenarios amidst increasing economic decoupling.  

What is the “easier” way to relatively painless compliance to a “Rules-Based International Order” (RBIO)? Most Western countries find it to be economic sanctions. Currently, multiple defiant countries face a combination of financial, trade, sectoral or individual sanctions imposed by international organisations and individual Western states acting in coordination. After all, the G7 countries alone account for a staggering GDP of USD 46.3 trillion (Q4 2023), an impressive figure that does not consider the additional countries commonly associated with the bloc. This implies that the “West” still possesses clear economic dominance. However, their share of global GDP (43% in Q4 2023) could progressively diminish with the rise of competing economic powerhouses that have consistently shown faster annual percentage GDP growth.  

Nonetheless, there are shrinking advantages the West has that can help steer a country back to compliance. Firstly, the combination of the US Dollar (USD), the Euro (EUR), the British Pound (GBP) and the Japanese Yen (JPY) still account for an overwhelming 89.2% of all foreign exchange reserves in Q3 2023, with the closest non-Western competitor being the Chinese Renminbi (RMB) at 2.6%. This is compounded by the clear dominance of USD-denominated transactions that, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), still accounted for 41.7% of global payments (Q1 2023). Secondly, Western countries still have the upper edge regarding technological knowledge in various strategic sectors (military technologies, AI, consumer electronics, etc.). However, it must be noted that the gap is progressively closing, thanks to Chinese and Russian efforts. Lastly, Western countries, especially the US, present the most developed and largest capital markets worldwide, with five out of the ten largest stock exchanges by market capitalisation residing there and accounting for a combined capitalisation of USD 63.2 trillion (Q4 2023). The closest competitor, the Shanghai Stock Exchange, sits at a market capitalisation of USD 6.7 trillion (Q4 2023). 

This implies that even when collaborating, potential rivals still have a long way to go to catch up to the Western bloc. However, it cannot be denied that there are emerging challenges to the RBIO from countries actively pushing for multipolarity to cut out their sphere of influence. Indeed, China and Russia, in particular, have been vocal about the new international order they envision. An international order that must first undermine the initial “self-defence” mechanism that Western countries could employ, namely economic sanctions.  

Attempts in this direction have come in many forms. Prime examples are the explicit calls to establish a BRICS currency, although the necessary cohesiveness of the bloc is doubtful as they do appear to have different and, at times, conflicting geopolitical objectives. Moreover, increasing numbers of bilateral trade agreements promoting alternative currencies, first and foremost the Chinese RMB, have been struck in the past few years. This phenomenon is complemented by further diversification of reserve assets on behalf of international actors, such as Russia, in order to better withstand economic sanctions.  

With limited success, China and Russia have been promoting alternatives to the SWIFT payment system in the form of, the Cross-Border Interbank Payment System (CIPS) and the System for Transfer of Financial Messages (SPFS). Simultaneously, sanctioned actors have increasingly started looking towards China as an alternative source of financing and trade, thanks to the latter’s position as an attractive country for Foreign Direct Investment (FDI) and an outward investor itself.  

However, there seems to be a common thread connecting, and grating feasibility to, these undermining attempts. China. The country has been vocal about its discontent with the current international order multiple times and, now at least, is the sole global power capable of supporting sanctioned countries. Certainly, Iran or Russia are large hydrocarbon producers whose military capabilities, both in terms of military technology and productive capacity, cannot be ignored. However, their respective economies heavily depend on exporting such commodities and lack the necessary diversification and internal consumption to stand independently. On the other hand, China possesses a much larger and more dynamic economy that is eager for the resources sanctions have diverted, although it cannot yet absorb the totality of their hydrocarbon production.  

Therefore, China is the country on which the largest defiant actors depend. This is something Beijing itself is aware of. Yet, their lackluster internal consumption, paired with the continued demand for Western products, does not allow the country to take a fully adversarial stance towards the RBIO. Hence, especially in the face of harsh economic sanctions an invasion of Taiwan would unleash, there have been pushes to stimulate internal consumption to curb its reliance on exports as a percentage of GDP. This is amongst the reasons why China still maintains an ambiguous stance towards the West and why Western efforts for decoupling could end up being a double-edged sword. In fact, on the one hand decoupling would allow for limited damage to Western economies. However, it would also allow China more space to leverage widespread grievances towards what is perceived as a Western-led order, thus limiting the overall effectiveness that global alignment on economic sanctions would have. 

Forecast

• Short-term: Amidst global economic struggles, China is unlikely to turn openly hostile towards the RBIO. Russia is likely to continue withstanding economic sanctions. 

• Medium-term: As economically larger countries continue to strengthen their ties to China, or get outright sanctioned, the effectiveness of economic sanctions is likely to decrease. At the same time, defiant countries will likely try to undermine Western economic dominance.

• Long-term: Increased economic decoupling from China will progressively reduce the threat posed by the potential imposition of economic sanctions, with unforeseen effects on a possible invasion of Taiwan.