Encircling the Dragon: The Unintended Consequences of Blockading China

This morning I read an article in which the author, Sean Mirski, sketched out a scenario in which a naval blockade could be a decisive tool in a hypothetical future war with China. The general idea is that, with China relying so heavily on its exports, cutting off trade would cripple its economy and thus force it to ask for terms rather than continue the fight. Economic siege warfare.

I read on, all the while waiting for what seemed to me to be the inevitable counterpoint to this strategy, and yet it never appeared. I am speaking, of course, of the economic damage that those conducting and enforcing the blockade, and indeed the world at large, would also suffer from such an undertaking.

I lived for five years in Salem, Massachusetts. While most people associate this historic New England city with the infamous witch trials of 1692, it is far less commonly known that it was a world-class seaport and a major center for the China trade in the18th century. Salem is famous the world over for its Late Georgian and Federal-style architecture, mainly built by wealthy merchants and sea captains at height of Salem’s prosperity. Walking through the McIntire District or along the waterfront, you see just how much things were booming there.

Starting in 1807, however, a series of trade embargoes between Britain, France, and the United States, part of which would contribute to the grievances that kicked off the War of 1812, destroyed the trade-reliant economy of Salem. By the time the ports were re-opened to trading, Salem had been knocked off its pedestal by other ports such as New York. It never fully returned to its former glory.

Although I agree that a blockade of China’s trade routes would be an effective means of forcing a peace if a conflict erupted, we need to recognize why that is: that China is heavily reliant upon exporting their goods because so much of the world is heavily reliant upon importing their goods. This turns a blockade on China less into an economic siege and more into an economic game of bloody knuckles.

Who do you think could hold out longer? I’m honestly not sure. I am sure, however, that one cannot successfully mount a siege that does equal (or greater) damage to yourself as to your enemy.

 

 

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2 Responses to Encircling the Dragon: The Unintended Consequences of Blockading China

  1. Nathan Koren

    Having not read the parent article, this indeed strikes me as an asinine idea. Let’s take a quick look at what some of the costs would have been, had there been a blockade in 2012:

    * China exported $USD 2.1 trillion in 2012.[1] The US consumed 17.2% of this, or $USD 352 billion.[2] If this flow of goods had ceased, let’s say that replacement goods would be available (this is not necessarily a good assumption), but at an average 10% premium above the cost of the Chinese goods. In that case, the US would have to spend $352 * 10% / 2 = $USD 2.9 billion per month on replacement goods during a blockade; the cost to the rest of the world (mostly US allies) would be $USD 17.5 billion per month. Our allies might take this unkindly.

    * Furthermore, the US exports $USD 100B per year to China.[3] Let’s assume that it can find other markets for those exports (again, not necessarily a good assumption) but at a price 10% less than China would have paid. Thus the loss of US exports to china would cost $100B * 10% / 12 = $USD .8B per month. The cost to the rest of the world — again, mostly our allies — would be $USD 11.7B per month.

    * In recent years, China has bought approximately $USD 140 billion per year in US debt.[4] It is possible that the US could raise this from other sources, but at significantly higher interest rates which would create truly long-term economic damage. Or it could just bear the cost itself, printing money and creating even more inflationary pressure than the loss of cheap Chinese goods would create. This would cost the US approximately $140B / 12 = $USD 11.7B per month

    So a China blockade would have minimum economic costs to the US of about $USD 15.4B per month, and would damage the rest of the world to the tune of $USD $29.2B per month. This is in addition to whatever the costs of actually running the blockade are.

    Then there’s China’s nuclear option: re-sell their US debt holdings on the open market, undercutting the Fed’s offering and making it impossible for the US to raise additional debt. At current rates of deficit spending,[5] China could do about $USD 92B of economic damage per month to the US, and they hold enough US debt to keep this up for a year. At a time when the US is trying to marshall the resources to maintain a blockade, China could effectively cut off their money supply. The only alternative would be to eliminate all discretionary spending — including the spending necessary to maintain the blockade — or to begin offering much higher-yield debt — creating massive long-term economic damage to itself — or to begin printing money, triggering inflation on the order of 30%+ per year. That would be bad.

    So let’s just say that if the US attempted to blockade China, it would destroy a great empire.[6]

    1: http://www.worldstopexports.com/chinas-top-10-exports/1952
    2: http://www.worldstopexports.com/chinas-top-import-partners/723
    3: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
    4: http://en.wikipedia.org/wiki/National_debt_of_the_United_States
    5: http://www.cbo.gov/publication/43697
    6: http://en.wikipedia.org/wiki/List_of_oracular_statements_from_Delphi#560_BC

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