On Day One
On Day One
na’
sGl
obalShar
pPowerPr
oject
Hoover Institution | Stanford University
On Day One
An Economic Contingency Plan for a
Taiwan Crisis
Executive Summary
Full economic decoupling from China is not possible or desirable today, but it may become
necessary in some break-glass scenarios. Washington needs a plan to decouple from the
People’s Republic of China (PRC) starting on Day One of a Taiwan crisis, both as a contingency
plan and as a part of integrated deterrence. However, trying to force a hard decoupling through
sanctions would not serve US interests, and the PRC would likely prove resilient. Instead,
Washington should publicly prepare a plan to trigger “avalanche decoupling” on Day One as
part of a wider program of economic recovery and leadership. Supply chains would stay as
open as possible in the short term, but unilateral US actions would create inexorable momen-
tum toward full decoupling over time. Avalanche decoupling would harness market forces and
incentivize third countries to cooperate, including by helping to secure US borders against
mislabeled PRC products.
1. Impose no restrictions on noncritical supply chains on Day One, and thereafter give
firms adequate time to reshore them.
2. Sustain dollar hegemony and prevent the rapid internationalization of the renminbi (RMB).
3. Refrain from asking other countries to decouple from the PRC; instead, build US
decoupling into a wider program of economic support in response to the Taiwan crisis.
4. Commit the United States to enforce its anti-PRC trade policy against third countries in a
rules-based manner, subject to appeal and external adjudication.
1. Unilateral discriminatory trade policy, likely ratcheting tariffs or quotas to take imports
from the PRC to zero over a period of years, citing the World Trade Organization (WTO)
national security exemption.
3. The establishment with Core allies of an Economic Security Cooperation Board (ESCB),
which would provide aid to third countries, collective insurance against PRC economic
coercion, and a rules-based system to support and adjudicate US and allied trade policy
against the PRC.
The plan would sustain support for a revitalized rules-based trading system across much of the
global economy, while the United States and its Core allies (e.g., Japan, the United Kingdom,
Canada, and Australia) decouple through national trade policy. Publicly developing the plan
in advance, alongside Core allies, would give the United States an additional option for Day
One. It would also show Xi Jinping that if he moved against Taiwan, most of the global econ-
omy would cooperate with Washington, leaving China impoverished and isolated, even if it tri-
umphed in a Taiwan war.
POLICY RECOMMENDATIONS
• Congress should systematically evaluate the Day One Plan and compare it to
alternatives.
• Congress should introduce legislation authorizing the plan and leave it on the shelf as
one of multiple options if the PRC moves against Taiwan.
• US and allied diplomats should explain the plan to nonaligned countries, and to Xi.
As US deterrence weakens, the risk of conflict in the Taiwan Strait is rising. The US “strategy
of denial” aims to deter aggression by showing that US forces could defeat a conventional
Chinese attack on Taiwan.1 The military buildup by the People’s Republic of China (PRC) is
undermining the strategy of denial and demonstrating the ability to blockade or quarantine
Taiwan. The US “strategy of punishment” aims to deter aggression by showing that Washington
could impose costs on the PRC if it disrupted regional peace and stability. However, the PRC is
stockpiling energy, food, and critical supplies, building financial safeguards, and indigenizing
critical supply chains—steps that make the PRC more resilient to short- and medium-term eco-
nomic punishment. As a result, it is not clear from open sources to what degree PRC leader Xi
Jinping remains deterred. CIA director William Burns has stated that Xi has asked the People’s
Liberation Army (PLA) for the capability to take Taiwan by 2027. In other words, if Burns is cor-
rect, Beijing seeks to render the strategy of denial moot by 2027.
If the PRC moves against Taiwan by force, the financial and economic effects will be imme-
diate and enormous, and the United States will have to quickly decide on an economic
response. The president will have substantial emergency authorities, but the true power will
reside in Congress, which controls the purse strings and can broaden or restrict the pres-
ident’s economic authority if it wishes to do so. In short, the people’s elected representa-
tives will inevitably have their say in accordance with the demands of the moment. This fact
makes it impossible to predict in advance precisely what America would do. However, in a
moment of crisis, there will not be enough time on “Day One” to develop new ideas from
scratch. Political leaders’ realistic choices will be limited to strategies that were developed
and vetted in advance. The task of economic contingency planning—and economic deter-
rence too, for that matter—is to develop coherent options, so that if Day One comes, the
people’s representatives have a meaningful choice.
Currently, US economic contingency planning for Day One is highly underdeveloped. As the
bipartisan House Select Committee on the Chinese Communist Party concluded bluntly in
December 2023, “The United States lacks a contingency plan for the economic and financial
impacts of conflict with the PRC.”2 Many observers outside the defense community assume
that a US–PRC war is inconceivable and that a major economic rupture would not be possi-
ble, even in crisis scenarios. Among those who believe that a rupture is conceivable, there
is disagreement about the most likely pathway to conflict. These analytical challenges com-
plicate contingency planning and make it hard to communicate in advance what the United
States would do. Nevertheless, it is essential to show Beijing that the United States has at
least one plan for Day One to advance its economic interests—and those of its allies and neu-
tral nations—while imposing heavy long-term costs on the PRC. No one can know how the
politics would change on Day One. However, if Washington has no visible plan that meets the
above criteria, Beijing may become more likely to attack. The lack of any economic plan for
a severe crisis also constrains the United States’ ability to respond dynamically and maintain
escalation dominance in the face of the PRC’s escalating gray-zone coercion against Taiwan.
In all plausible scenarios of Day One, Washington would probably tighten and expand export
controls on “critical” products and components, such as semiconductors. The harder ques-
tion is what to do about trade in “noncritical” products, from household cleaning supplies to
electronics. The PRC exported $3.38 trillion in goods in 2023, of which $427 billion went to the
United States. In the same year, the PRC imported $2.56 trillion of goods, of which $148 billion
came from the United States. If these supply chains were abruptly cut, the resulting shortages
and inflation would badly hurt consumers. However, the dependence of America and its allies
on “noncritical” trade with the PRC is a strategic vulnerability. In principle, reshoring noncrit-
ical supply chains could create manufacturing jobs in the United States and third countries at
the expense of the PRC. Around one hundred million PRC workers are directly employed in the
export manufacturing sector, representing almost one-fifth of the country’s GDP. The problem,
of course, is that reversing four decades of outsourcing to the PRC is an enormous task. The
faster firms have to reshore supply chains, the greater the economic disruption and political
complications.
On Day One, Washington currently understands that it has two economic options:
2. Hard decoupling: Impose immediate maximum pain on the PRC and try to disrupt the
PRC’s ability to trade with the world, mostly likely through the sweeping use of blocking
sanctions on PRC financial institutions.
This report rejects this binary choice and develops a third approach:
3. Avalanche decoupling: Keep noncritical supply chains open on Day One but lock in
a longer-term process to achieve a more orderly decoupling over time, building on
incentives and market forces.
Which of the above options is politically possible will depend on the politics of the moment. If
Taiwan submits to coercion without any shots fired or if the PRC engineers Day One so that its
ultimate victory seems certain, there might be no political consensus in Washington for dramatic
economic actions such as options two or three. By contrast, in other plausible scenarios—
especially but not exclusively those in which the PRC starts a conflict with a surprise first strike—
the political response in the United States and allied countries might be so strong that option
one is ruled out. This report calls this latter possibility the break-glass scenario. In it, the PRC
moves against Taiwan, and Washington concludes that it must decouple in some form.
We analyze option two and conclude that it is unviable. Any sanctions package seeking to
force a “hard decoupling” of the PRC from the world economy would exacerbate the financial
and economic crisis of Day One. It would devastate the US economy and the economies of its
Beijing is rapidly building resilience to option two, and open sources show that prominent PRC
officials think this strategy is making rapid progress. Due to capital controls and the state’s
enormous foreign exchange (FX) reserves, Beijing would be in a strong position to prevent a
banking system meltdown if sanctions were imposed. Beijing is also rapidly signing up banks
across the world to the Cross-Border Interbank Payment System (CIPS), which enables secure
cross-border payments. It is also using various levers to encourage use of the offshore version
of its currency (CNH) across the Global South.4 As this strategy advances, prominent PRC ana-
lysts are gaining confidence that dollar sanctions would not obstruct the PRC’s ability to trade
in a crisis. Instead, they predict that neutral countries and even many US allies and their firms
will shift their payment processes across to CNH or some basket of other related currencies.
The long-term risks for dollar dominance would be dire. Among other effects, US export con-
trols and existing sanctions on Russia, North Korea, and other rogue states would begin to lose
their effectiveness at the very moment when they are most needed.
In other words, option two would be so costly and so risky that it would not be a realistic
option, even in the most extreme Taiwan crisis scenarios. However, if option two is unrealistic,
and there is no other alternative to option one, then the PRC may be tempted to move against
Taiwan. It is therefore essential to develop a plan for option three to show that it is possible in
principle to achieve full decoupling over time.
This report therefore addresses the following question: Conditional on the PRC having moved
against Taiwan and the United States reaching a bipartisan consensus that decoupling is nec-
essary but hard decoupling is unacceptable, what principles and policies should guide the
US economic response? In other words, how could the United States achieve full decoupling
from the PRC in a way that maximally benefits itself and its allies and partners while impos-
ing maximum long-term pain on the PRC? Surprisingly, no existing literature has considered
this question. We find that executing gradual decoupling would involve both costs and risks
for the United States. It would require an enduring bipartisan consensus. Above all, it would
require the United States to take up the mantle of economic leadership and put time, effort,
and money into sustaining the rules-based economic system. Nevertheless, in principle, a
relatively orderly, market-driven, gradual decoupling is possible. If the United States takes the
right set of actions on and after Day One, it can unilaterally trigger an avalanche that consoli-
dates dollar hegemony, claws back high-end manufacturing jobs from the PRC on a timeline
of Washington’s choosing, and sustains the US-led rules-based trading system while destroy-
ing the PRC’s terms of trade over the longer term.
Since hard decoupling through sanctions is unviable, the only way to achieve trade decou-
pling is through national trade policy using tariffs or quotas to phase out bilateral trade over
time. The challenge of this approach is that Washington currently lacks the policy tools and
administrative ability to stop firms and third countries from transshipping PRC goods into the
US market while taking steps to obscure their origins. If Washington tried to reduce bilateral
trade with the PRC to zero without a plan for managing this problem, it would quickly find
itself in simultaneous trade disputes with nearly all of the global economy. Supply chain dis-
ruptions, shortages, and inflation would result, and the global trading system based on WTO
rules would quickly break down. If Washington persisted in its push for decoupling, it would
give the PRC an opportunity to co-opt the system and deepen its partnerships with US allies
and neutral states in the process. In short, unless the United States develops new unilateral
tools and multilateral coordination systems that other countries are incentivized to join, it
cannot decouple from the PRC without decoupling from much of the global economy.
At the same time, a violent PRC move against Taiwan would also represent a threat to the
rules-based trading system. While Taiwan is not a US treaty ally, it is among the world’s
most important high-tech trading economies. If Beijing seized Taiwan and used it as a geo-
graphic springboard to project naval power into the Western Pacific, other US treaty allies in
the region, including Japan, South Korea, and the Philippines, would become far harder for
Washington to defend. Beijing would gain a far freer hand to coerce its neighbors with eco-
nomic tools or use political coercion to impose its economic preferences, particularly now
that the United States would have conceded that it could not break its dependence on the
PRC. As Asia fell under the hegemonic control of the PRC, Beijing would be emboldened to
flaunt global trade rules and practice economic coercion against states in other regions, her-
alding a shift to a truly multipolar world. In the wake of a Taiwan crisis, there would also be a
risk that major economies, including the United States, would turn away from global trade,
resulting in a disastrous rerun of the 1930s that would leave the United States far weaker and
far less prosperous.
Since successful avalanche decoupling would require the cooperation of third countries and
private firms, the United States would have to commit to four principles that would guide its
conduct through the decoupling process:
1. Impose no restrictions on noncritical supply chains on Day One, and thereafter give
firms adequate time to reshore them.
2. Sustain dollar hegemony and prevent the rapid internationalization of the RMB.
3. Refrain from asking other countries to decouple from the PRC; instead, build US
decoupling into a wider program of economic support in response to the Taiwan crisis.
4. Commit the United States to enforce its anti-PRC trade policy against third countries in a
rules-based manner, subject to appeal and external adjudication.
Washington would have to respect all four principles, bringing them together in an affirmative
vision to sustain the rules-based trading system in the face of an unprecedented challenge
from a large rogue state. Only the United States and a small number of like-minded allies
would be likely to decouple fully from the PRC.
Building on these principles, the report discusses three policy pathways that, if implemented
together, could achieve avalanche decoupling on terms favorable to the United States, its
allies, and the wider rules-based trading system.
1. Unilateral trade policy: Ratcheting tariffs or quotas on imports from the PRC.
In that spirit, this report’s contribution is to begin the project of mapping out the contingent
decoupling plan in consultation with key stakeholders whose support would be essential.
This is not a traditional policy paper. We do not use quantitative forecasting; we discuss oper-
ational issues only at a high level, and we propose ideas that differ radically from the current
Washington policy conversation. Our analysis is based on Chinese-language sources and
economic and political reasoning, and it draws inspiration from historical study of the Anglo-
American reconstruction of Western Europe after 1945.7 Our goal is to snap readers out of
“business-as-usual” incrementalism, encourage them to reexamine deterrence with fresh
eyes, and propose a framework for further research and planning. Operationalizing the Day
One Plan would be a vast and ongoing effort requiring coordination between nearly every US
federal government agency, Congress, partner countries, academic and policy communities,
and industry. The report concludes with an outline of an agenda for how the United States
and allied governments can start the investigative and consultative phases of this project.
OUTLINE
Part 1 explores the economic challenges Washington would face on Day One of a break-glass
scenario. It discusses the key US national interests at stake and the risks that these interests
would face. It discusses the character of the potential financial market reaction in various
scenarios using the outbreak of World War I as a benchmark. It lists some economic actions
that the United States would probably take in all Taiwan contingencies, including breaking
its dependence on the PRC for critical products. Finally, it sketches the United States’ three
basic economic options and discusses the politics of the break-glass scenario.
Part 2 scrutinizes hard decoupling and finds that it is unviable. It begins by defining hard decou-
pling and noting its continued appeal as an idea. It then examines the economic price and
political risk associated with hard decoupling. The PRC’s financial system would likely prove
resilient if the United States imposed sweeping dollar sanctions. Russia’s stabilization of
its financial system and economy in March and April 2022 provides a template. Drawing on
Part 3, the heart of the report, presents the Day One Plan. First, it develops guiding principles.
Second, it explains how to operationalize them and discusses political, legal, economic, and
financial issues and second-order effects arising from implementation. Finally, it systemat-
ically reviews the PRC’s potential retaliatory options, explains how the Day One Plan would
deal with them, and evaluates implementation risks.
Part 4 explains why developing the Day One Plan publicly and in advance would contribute to
the Trump and Biden administrations’ policies of “integrated deterrence.”
The conclusion summarizes the key findings, considers how the Day One Plan should be
communicated to Beijing, and recommends a process for the US federal interagency and
allied governments to study, develop, and ultimately operationalize the Day One Plan.
CORE TAKEAWAYS
• Current thinking about economic deterrence emphasizes the threat of immediate and
overwhelming sanctions to break the PRC’s ability to trade with the world.
• The United States and its allies need a plan for the break-glass Day One contingency that
preserves their fundamental economic interests while punishing the PRC. The answer, in
principle, is avalanche decoupling.
• On Day One, the United States could—and likely would—take unilateral measures to cut
off trade with the PRC in critical products.
• This report is the first study of how avalanche decoupling can be achieved.
• Making avalanche decoupling work would require coalition building based on incentives
and credible reassurances, not threats and moral appeals.
• Avalanche decoupling of US–China trade would not require third countries to ever
decouple from the PRC.
• It would, however, require that third countries meet a minimum bar: accurate reporting of
what PRC products and parts they are re-exporting into the US market.
• Over time, market forces would create incentives for many of these countries to erect
trade barriers against PRC goods.
• Developing the Day One concept into an operational plan will be an ambitious effort,
requiring input from a range of stakeholders. The purpose of this report is to start that
conversation.
TERMS DEFINED
Capital Controls
A basket of policies that Beijing uses to regulate the flow of capital into and out of the country,
including restrictions on the conversion of the CNY into foreign currencies and vice versa. PRC
individuals and companies require regulatory approval to transfer money out of the country for
investments, acquisitions, remittances, and other purposes. Capital controls are implemented
in a dynamic fashion and can be tightened during periods of financial volatility to manage cap-
ital outflows. Capital controls are a key tool that Beijing uses to maintain financial stability and
manage the exchange rate.
Hard Decoupling
A scenario in which the US attempts to rapidly force its trade and financial relationship with
the PRC to near zero.
De-risking
Presented as an alternative to decoupling in peacetime, an effort by one country or a group
of countries to break dependencies in critical goods and technologies by building stockpiles,
regulating the transfer of sensitive technologies, and reshoring critical supply chains to friendly
countries. The term gained favor from the European Commission and was embraced by the
Biden administration and the G7 in 2023. De-risking generally implies that supply chains for
noncritical goods do not need to be reshored.
Gradual Decoupling
A scenario in which US or global trade and financial relations with the PRC decline gradually
but steadily toward zero.
Break-Glass Scenario
A catch-all term for the universe of scenarios in which PRC actions on Day One persuade
the White House and a bipartisan majority in Congress that the United States must end its
economic relationship with the PRC. This is a political scenario, not a military one. It is agnos-
tic as to how Beijing might choose to move against Taiwan, focusing instead on the United
States’ reaction.
Dollar Sanctions
An umbrella term for sanctions imposed by the US Treasury Department’s Office of Foreign
Assets Control (OFAC) that restrict transactions denominated in US dollars or involving the
US financial system. Types of dollar sanctions include blocking sanctions, which freeze
assets owned or controlled by designated individuals, entities, or governments that are sub-
ject to US jurisdiction; inclusion on the Specially Designated Nationals list, which triggers
various restrictions and prohibitions on access to the US financial system and transactions
denominated in US dollars; and other tools of a similar nature. In general, US persons and
entities may not engage in any transactions with individuals or entities subject to dollar sanc-
tions. The Treasury can also impose secondary sanctions under which non-US persons and
In this report, “dollar sanctions on the PRC” refers to an attempt to use dollar sanctions
broadly enough to disrupt the PRC’s ability to conduct international trade.
Quarantine Scenario
This scenario features a declaration by Beijing that ships and aircraft transiting in or out of
Taiwan be routed via a mainland port to clear customs. Beijing could, in principle, impose
a quarantine at any moment, justifying it on the basis of existing claims. Unlike in a block-
ade, Beijing might refrain from using indiscriminate force against foreign vessels resupplying
Taiwan. Instead, it would use a combination of legal, financial, political, and military tools to
force private firms and other countries to comply. In principle, flows of goods and people in
and out of Taiwan would not be disrupted, as long as airlines and private shippers met Beijing’s
customs and visa requirements. The quarantine scenario is potentially attractive for Beijing
because it would not sound like an act of war and would push the burden of escalation onto
the United States.
Blockade Scenario
In a blockade scenario, the PRC would forcibly obstruct ships and planes from resupplying
Taiwan in an attempt to coerce the authorities in Taipei to accept unification on Beijing’s
terms. People’s Liberation Army training manuals for officers specify procedures for “joint
blockade and joint support operations,” and PLA forces have exercised this scenario, most
recently in August 2022. A blockade would be different from a quarantine in that it would
seek to interdict all trade in and out of Taiwan, including food and fuel. Notably, the Taiwan
Relations Act (TRA) of 1979 explicitly claims that the United States would regard a blockade
of Taiwan as a threat to regional peace and stability and a matter of “grave concern,” raising
the possibility that US forces might become directly involved in breaking the blockade.
Before analyzing the United States’ economic options for Day One, it is first necessary to
imagine what a Day One crisis would be like. Five key US economic interests are worth high-
lighting: (1) maintaining financial and macroeconomic stability, (2) breaking US and allied
dependence on Chinese production, (3) preserving the rules-based trading system, (4) pre-
serving dollar hegemony, and (5) punishing the PRC economically. Many countries would
share—or at least understand—the first four interests. However, very few countries would
share the fifth.
In the context of Day One, financial market responses would affect these interests in import-
ant ways. In the most plausible Taiwan crisis scenarios, the dollar would appreciate markedly,
while the CNY would depreciate. As long as this trend lasted, it would have significant macro-
economic and strategic effects that Washington would have to deal with and could potentially
harness. The US government would probably also take certain economic actions in all Taiwan
crisis scenarios. For example, export controls would probably be expanded, and the Federal
Reserve would probably try to stabilize the financial system. Any viable economic contin-
gency plan must take all these considerations into account.
There are, of course, many plausible Taiwan crisis scenarios, each with important differ-
ences. The PRC could launch an amphibious invasion, blockade all traffic in and out of
Taiwan, or attempt a quarantine to screen Taiwan’s trade without shutting it down altogether.
Beijing might also try to decapitate Taiwan’s elected government through a coup or other
means. Beijing is already ramping up “gray zone” pressure against Taiwan short of kinetic
means, hoping to coerce Taiwan into bloodless capitulation. These options can be com-
bined. In each scenario, the United States would have military, political, and economic
options to react. While Taiwan is a close US partner, and Washington has unique strategic
interests in maintaining peace and stability in the Taiwan Strait, Washington and Taipei cur-
rently have no formal political or military state-to-state relationship. Financial markets and
supply chains would react differently in each case and respond dynamically to US and PRC
policy shifts. The scenarios defy systematic modeling. This fact presents a fundamental
challenge for economic contingency planning.
Nevertheless, a common set of US economic interests would apply in all contingencies, and
the characteristics of the financial and supply chain reactions also have common features.
This report does not take a position on how the PRC is most likely to move against Taiwan or
how the United States would or should respond militarily. Rather, its goal is to provide a cred-
ible economic contingency plan for a break-glass political scenario. The guiding question of
Part 1 sets the stage for this discussion. Assuming Washington decides that it has to decouple
from the PRC, what interests would it have to attend to in the process, and what related eco-
nomic challenges would it face?
The United States and its allies and partners would have a common interest in limiting the
economic damage on Day One. Regardless of how the PRC moved and whether or how the
US government wanted to intervene militarily, the president and Congress would face consid-
erable pressure to maintain domestic financial stability and prevent an economic depression
and a rise in the unemployment rate. Maintaining financial and macroeconomic stability would
be a strategic concern, not just a political one. A global economic crisis would make it harder
to maintain allied unity during a prolonged conflict with the PRC. It could also undermine
other key US interests.
Regardless of the outcome of any Taiwan crisis, even if the outcome was decided quickly,
there would be no going back to the status quo ex ante. Beijing, by resorting to force, would
have demonstrated a willingness to completely disregard the Three Communiqués, the
foundational agreements of the US–PRC diplomatic relationship. On Day One, breaking US
and allied dependence on the PRC would, therefore, become an enduring new interest. The
Chinese Communist Party (CCP) regime could no longer be trusted to abide by similar agree-
ments in the future or to respect any particular international law.
RULES-BASED SYSTEM
On Day One, the United States would have a vital interest in preserving the global economic
and trading system. By this, we do not mean the abstract concept of the “liberal international
order.”8 We mean the legal and political structures that underpin the free flow of international
trade, prevent US adversaries from engaging in egregious economic coercion, and manage
For all its flaws, the existing system provides enormous strategic benefits to the United States.
These include:
• Structural guarantees that global trading rules cannot be rewritten in ways that
disadvantage the United States and its allies.
• A mechanism for aligning interests between the United States and its allies and partners,
signaling that it is safer to align with the United States than with US adversaries.
• A legal framework for imposing costs on US adversaries when they violate the system’s
rules and norms and for controlling the export of sensitive technologies through long-
arm jurisdiction sustained by the position of the dollar.
These strategic and material benefits underpin US economic prosperity at home and facilitate
US actions to protect its security interests around the world. They are longer-term structural
interests that should be protected, if possible.
After the collapse of the Soviet Union in 1991, the United States pursued a vision of globaliza-
tion that involved integrating former adversaries into the existing rules-based trading system.
Russia and then the PRC were invited to accede to the WTO, on the assumption that history
had repudiated the Communist model and that integration into the global system would facil-
itate economic and ultimately political liberalization.10 In the process, the United States and
its allies and partners became economically dependent on Russia and even more so on the
PRC. This assumption has proven false with regard to Russia. A PRC attempt to seize Taiwan
by force would prove that the assumption was entirely incorrect.
Following a Taiwan crisis, the system would face a high risk of collapse. The United States
would be inclined to erect barriers to international trade, as would many other countries.
Day One would be a moment without precedent since the signing of the General Agreement
on Tariffs and Trade (GATT) in 1947, the foundational document of the WTO. A Taiwan crisis
would provide an open-ended excuse for states to cite the national security exemption in
Article XXI of the GATT Charter to justify any trade policy they liked. Either the United States
or the PRC could potentially weaponize procedural rules that would render the WTO and IMF
Many argue that a PRC blockade or quarantine of Taiwan would threaten the viability of the
rules-based trading system nearly as much as invasion. A physical close blockade of Taiwan
has been a concern since the early 2000s, although it would be challenging to execute.11
Robert Blackwill and Philip Zelikow have recently highlighted the quarantine scenario, in
which the PRC Coast Guard would run “a clearance operation offshore or in the air to screen
incoming ships and aircraft.” As Blackwill and Zelikow point out, a targeted quarantine—
for instance, one directed specifically at US arms supplies—would put Washington in an
extremely difficult position.
Blockades and quarantines are less bloody than invasions, but they are no less violent.12 As
Thomas Schelling observed in Arms and Influence, his famous book on nuclear coercion, “the
power to hurt is bargaining power,” and “latent violence” when used as geopolitical blackmail
can be an even more effective tool of domination than physical violence.13 A blockade or quar-
antine of Taiwan would have the character of an ultimatum: submit totally to Beijing’s authority
or starve. If Taiwan crumbled under blockade or quarantine, US treaty allies, including South
Korea, Japan, and the Philippines, would become vulnerable to similar tactics in the future.
The rules-based economic system could not survive in its current form if the main regional
power in the world’s most important trading region were allowed to use this violent tactic
indiscriminately against its neighbors.
In short, the rules-based trading system would face risks and challenges on and after Day
One, regardless of what the United States and its Core allies decided to do:
• If they left the system essentially unchanged, they would allow themselves to remain
vulnerable to economic coercion by a rogue authoritarian state that pursues territorial
expansion through force. If the PRC succeeded in absorbing Taiwan and establishing
regional hegemony in Asia, a future China-led coalition might, in time, co-opt the system
or break it and build a new one that served the PRC’s interests first.
• If they exited the system and retreated into economic autarky and strategic isolationism,
they would gravely damage long-term US economic interests abroad, as well as
potentially allow the PRC to co-opt or replace the system.
• If they sought to revitalize the system for a post–Day One era while unraveling their
economic dependencies on the PRC, they would need a concept for preventing the
system’s collapse.
The US interest in preserving the rules-based trading system would be widely shared with
allies, partners, and neutral states alike. If Day One were followed by a rapid collapse in global
trade, it could take decades to restore the integrated global economy that had existed prior
to Day One. For trade-dependent industrialized economies, such as the European Union (EU)
DOLLAR HEGEMONY
The United States has an extremely important national interest in preserving dollar hegemony.
Among other economic benefits, dollar hegemony gives the US government the unique abil-
ity to enforce sanctions and export controls extraterritorially. Existing US sanctions play an
essential role in preventing Russia, Iran, and North Korea from developing economically in
ways that threaten the United States and its allies. The United States and allied countries also
enforce export controls such as the Foreign Direct Product Rule through threats of civil and
criminal penalties, denial of export licenses, administrative sanctions, and in severe cases
dollar sanctions from the Treasury Department against offending firms.14 These tools prevent
dual-use US technologies from falling into the hands of rival militaries and being used against
US and allied forces. Dollar hegemony also affords the US government unique enforcement
capabilities. Most international trade is invoiced in dollars, and transactions are settled on
the messaging platform SWIFT and the settlement platform CHIPS. The US government has a
broad ability to monitor transactions on both systems.
Although the dollar faces little risk of being dethroned by a single rival currency, particularly
the RMB, its power is gradually being eroded.15 The RMB’s lack of convertibility and shallow
capital market make it unsuitable to replace the dollar as a reserve currency.16 However, it is
notable that the “BRICS” countries—originally Brazil, Russia, India, China, and South Africa,
and now including Iran, Egypt, Ethiopia, and the United Arab Emirates—have signed agree-
ments in principle to support de-dollarization.17 US sanctions on Russia have accelerated the
global process of de-dollarization. China now settles nearly half of its international trade in
CNY, although much of this trade still involves an intermediate exchange of dollars. As rogue
states, such as Russia and Iran, migrate their trade away from the dollar and onto China-
controlled payment systems, it is becoming increasingly challenging for the US Commerce
Department to enforce export controls. If this process of gradual de-dollarization in trade
continues, the threat of dollar sanctions against noncompliant actors will weaken further. In
the event of a Taiwan crisis, the PRC would accelerate its efforts to erode the position of the
dollar. For the reasons discussed below, a Taiwan crisis by itself would likely strengthen dollar
hegemony. However, if Washington imposed or threatened to impose dollar sanctions on the
PRC after Day One, it might accelerate the shift toward a multi-currency system by incentiv-
izing third countries to ramp up their de-dollarization efforts. Part 2 will discuss this issue in
more detail.
The United States therefore has an interest in ensuring that whatever economic action it
takes following Day One sustains dollar hegemony rather than undermining it. Notably, US
allies and partners do not necessarily share the US interest in preserving dollar hegemony.
Many, especially in Europe, would prefer a multi-currency system in principle.18 However, in a
world thrown into turmoil following Day One, many countries may prefer dollar hegemony to
a world in which existing US sanctions against Russia, Iran, and North Korea stopped working
effectively.
In certain circumstances, the US may have an interest in imposing intense economic pain on
the PRC for an indefinite period of time. However, as long as the PRC is integrated into the
world economy, few other countries are likely to share this interest. US policymakers need to
bear this fact constantly in mind.
The financial market reaction to Day One would likely be immediate and severe—and might well
mark the high point of US financial power. As during other periods of heightened risk, including
COVID-19, global investors would likely flee to safety in US Treasury securities and US bank
deposits, as well as Swiss francs and gold. Financial markets may price in some risk as tensions
mount in the weeks and days leading up to the first shots being fired. If this line were crossed,
panic could ensue. There could be bank runs and liquidity crises across the world. PRC mon-
etary authorities would likely tighten capital controls to prevent a systemic crisis.19 The chain
reaction of impacts would be both relatively advantageous to the United States and disadvanta-
geous to the PRC in the immediate aftermath—but not necessarily in the long term.
1. Markets would start to price in whatever threats of economic action Washington had
made in advance of Day One, discounted according to the credibility of the threats.
2. Markets would react negatively to the probability of crisis escalation. In the dynamic
context of Day One, the risk of escalation to a world war could be substantial and hard
to quantify. The result would likely be a flight to safety, with a spike in volatility across all
global financial markets and fire sales of risky assets in emerging and frontier markets
and trade-dependent economies.
US advance statements about the character of the economic response would play the most
important role in shaping the market reaction. If the United States shrugged off the PRC’s move
Markets would also price in PRC escalation risks. If Japan signaled that it would join a deci-
sive response, for example, the PRC could target civilian infrastructure on the Japanese main-
land. 22 Markets would also assume a significant probability that even without a kinetic war,
Taiwan’s role in the global economy would be significantly curtailed and that the US–China
conflict might escalate over time into the economic or financial domain, depending on what
Washington said it would or would not do on Day One. Beijing might seek to expropriate
Taiwan’s semiconductor manufacturing base and cut off the supply of finished products to the
rest of the world. Alternatively, the crisis might result in the destruction of Taiwan’s semicon-
ductor manufacturing base and ongoing disruptions to regional supply chains. Markets would
respond dynamically as new information emerged.
Markets would be particularly concerned about the risk of escalation to kinetic war and its
medium- and long-term effects on international trade. A kinetic war could badly disrupt com-
mercial shipping in maritime East Asia (see fig. 1) and, in some scenarios, shut it down alto-
gether for many months. Fully 48% of the world’s 5,400 operational container ships passed
through the Taiwan Strait in the first seven months of 2022, including 88% of the largest 10%
of container ships. 23 Merchant ships sailing through an active war zone would cost a fortune
to insure, if they were insurable at all. Littoral Asian states such as Japan and South Korea
would try to redirect ships out of range of the conflict, but this might not be possible, since in
a naval war over Taiwan, much of the fighting would take place in the waters of the Philippine
Sea, on the eastern side of the First Island Chain. 24 With supply routes disrupted, prices for
goods dependent on PRC components would spike. At least $3 trillion in annualized trade and
financial flows, not including foreign reserve assets, might be disrupted. 25 There would also be
the lingering question of how fast, if at all, these supply chains could heal after a war.
A blockade or quarantine of Taiwan would have less predictable effects on supply chains, but
the financial reaction might also be extreme. In these scenarios, the economic effects would
depend largely on the nature of Beijing’s actions and Washington and Taipei’s responses.
The PRC Coast Guard might harass and forcibly board or redirect all noncompliant vessels
and aircraft. Private carriers would be inclined to comply with Beijing’s dictates; however,
the authorities in Taipei might try to stop them, lest all the island’s essential trade fall under
Beijing’s control. Washington might respond with a massive show of military force and a
resupply effort, alongside other measures. Washington might also respond with political sig-
nals of commitment to Taiwan, which could involve a major revision or even abandonment of
the One China Policy. 26 It is unclear under exactly what circumstances Taiwan’s semiconduc-
tor facilities would shut down, but this would probably happen very soon after a blockade or
quarantine were imposed. 27
To understand the potential ramifications for the global reserve currency, it is worth consider-
ing the case of Britain, which in 1914 was the financial center of the pre-war economy—and,
as the United States would be in a Taiwan crisis, a participant with a homeland geographically
removed from the conflict. Franz Ferdinand’s assassination sparked fears of war and a mass
panic on stock exchanges across the globe. Europe had not seen a great power war in nearly
five decades, a fact that heightened both the uncertainty and the resulting market response.
(continued)
The absence of any experience of the effect of war between the leading commercial
nations since the establishment of the machinery of modern commerce would in any
case have made the situation created by the outbreak of a general European war a seri-
ous one for the City, and the rapidity with which the crisis developed during the last few
days of July produced for the moment a condition of the nature of paralysis. 30
The cause of this paralysis was a mass flight out of securities, bills of exchange (then the main
currency trading instrument), and long-term debt and into gold and above all sterling. 31 Across
Vienna, Berlin, Paris, London, and even New York, depositors rushed to withdraw funds from
banks, which in turn began to call in loans and dump securities. Trading houses involved with
trade with Germany and its allies were worst exposed, but so many banks faced cash with-
drawals that the Bank of England asked Bradbury to suspend gold convertibility. 32 Instead, the
Treasury decided to close most exchanges—in order, as Bradbury put it, “to enable people to
get their bearings.”33 All this took place days before all the belligerents had officially declared
war. The London Stock Exchange did not reopen until the following January, and even then
with stringent restrictions on “speculative trading.”34
Importantly, the rush into sterling came at the expense of the dollar, even though the United
States was neutral. The fact that Britain was itself a belligerent mattered less than the fact that
London was the global financial and trading center. The outbreak of a US–China war could trigger
an even more intense scramble for safe assets. In 1914, public debt represented 23% of global
GDP, and only industrialized countries had large quantities of debt. As of 2022, the equivalent
figure was 92% of global GDP. No equivalent data series exist for global private debt in the early
twentieth century, but according to the IMF, global private debt has more than doubled since
1950, rising from 105% to 242% of GDP.35 Today, the specter of a possible imminent US–China
war would force all investors to scramble to move their capital into the safest assets available.
Only a few capital markets are deep enough to absorb trillions of dollars of inflows quickly.
One key difference between 1914 and today is that in a world of fiat money, central banks
could and almost certainly would intervene decisively. If successful, these steps could man-
age the risk of global financial contagion and depression. However, they would be unlikely
entirely to reverse the sharp movement in currency markets that would probably occur soon
after Day One.
CURRENCY MARKETS
On Day One, the dollar would likely surge in value. Only a small number of assets consistently
appreciate in moments of geopolitical crisis and “risk-off” sentiment. The dollar is one of
them, as are gold and a handful of other “safe haven currencies.”36 In a Taiwan crisis, alter-
native assets, such as cryptocurrencies, may absorb some of the risk-off flows. However,
there are several reasons to believe that the dollar would rally, at least at first. In geopolitical
crises, investors tend to demand assets that are both safe and liquid. The US dollar is by far
In 1914, the gold standard checked the extent to which sterling could appreciate—a limiting
factor that would not apply to the dollar if a Taiwan crisis broke out today. In a world where
currencies trade freely and, in practice, the Federal Reserve underpins the global financial
system, there is no single institutional check on the extent to which the reserve currency can
appreciate. Most global trade today—including half of the PRC’s overseas trade—is settled
in dollars. Global central banks currently hold 58.41% of their FX reserves in dollars, as of
Q42023, followed by euros (19.98%), yen (5.70%), and sterling (4.84%). Total reserves held
in CNH amounted to 2.29%—less than the Canadian dollar. 37 During times of crisis, there is
often increased demand for dollars to facilitate international transactions and meet financial
obligations, which can drive up its value. Central banks of countries experiencing currency
depreciation may increase their holdings of US dollars as a precautionary measure to ensure
that their countries will be able to meet their import needs. (Central banks might behave dif-
ferently if dollar sanctions on the PRC were on the table. In that scenario, the central banks
would need to hedge in case their political leaders chose to continue to trade with the PRC in
other currencies. A clear commitment not to impose dollar sanctions is therefore an essential
prerequisite to ensuring that the dollar would appreciate on Day One.)
While the dollar strengthened, capital would likely try to flow out of the PRC, putting more
pressure on PRC capital controls. As a result, there would also be downward pressure on
both the onshore CNY and offshore CNH. PRC monetary authorities actively manage both
currency markets using a variety of public and hidden tools. 38 In 2017, the People’s Bank of
China (PBoC) adopted a “countercyclical adjustment factor,” committing in essence to inter-
vene to stabilize the currency in moments of “irrational” or “procyclical” market action. 39
The PBoC has also intervened in offshore markets before, selling dollars to push up the CNH
exchange rate.
In short, Day One would probably see substantial dollar strengthening and substantial weak-
ening in the CNY and CNH. Beijing, as the instigator of the crisis, would presumably have
prepared in advance to prevent uncontrolled capital outflows and bank runs, so the PRC’s
financial system would probably not collapse of its own accord. Third countries that depend
on the PRC market for imports and exports, run current account deficits, and pay for their
imports in dollars would probably bear the greatest pain. This category of states, which
includes much of the developing world, would also be exposed to capital flight, and would
likely require emergency dollar liquidity from the Federal Reserve to prevent outright financial
crisis. Thus, even if the United States were engaged in a kinetic war with the PRC, the market’s
flight to safety on Day One would probably mark the high watermark of US financial power.
Thanks to its position as the global reserve currency, the dollar would likely strengthen—as
long as the United States had signaled in advance that it would not impose dollar sanctions
SECOND-ORDER EFFECTS
Assuming the dollar strengthened and the CNY weakened at the start of a crisis, a variety of
significant second-order effects would result. Rapid dollar strengthening would compound
the global economic crisis. A strong dollar is good for the US consumer, who buys goods
denominated in other currencies, but bad for consumers in other countries, who use their
own currencies to buy commodities and other goods denominated in dollars. This currency
effect would compound price increases resulting from supply chain disruptions and short-
ages. The economic pain would be felt most acutely in the developing world. Poorer countries
would therefore face strong political pressure to seek ongoing external support, including
emergency financing from the United States, the PRC, or both countries.
Massive dollar strengthening would cause political complications within the United States.
Dollar strength reduces the competitiveness of US exports and historically has been asso-
ciated with domestic political pressure for protectionism, devaluation, or both. During the
recession of the 1890s, for example, the United States responded to the effects of an overly
strong dollar by increasing tariffs rather than breaking from the gold standard. 40 Similarly,
between 1981 and 1982, when Fed Chairman Paul Volcker’s interest rate hikes caused the
dollar to strengthen and three million manufacturing jobs were lost, the Reagan administra-
tion and Congress responded with tariffs. 41 The share of US imports subject to trade restric-
tions rapidly rose from 12% to 21%. 42 After the 1984 election, the Reagan administration
then used the Plaza Accord to weaken the dollar against the yen and leading European cur-
rencies, using the threat of additional tariffs as a negotiating tool. 43 Reagan later imposed
100% tariffs on Japanese electronics and 200% tariffs on key exports from the European
Economic Community. Both tariffs provoked swift changes in policy, particularly in Japan.
If the dollar strengthened sharply following a Taiwan crisis, there could be domestic polit-
ical pressure in the United States calling for either a weaker dollar, or trade barriers to
protect US industry. 44 The United States would need to be able to overcome its protection-
ist instincts.
Meanwhile, a weakening CNY would provide a massive competitive advantage for the PRC’s
export sector. The PRC’s newfound export advantage might not be immediately obvious,
especially if physical conflict in the Taiwan Strait made it hard for cargo vessels to acquire
insurance to operate within the First Island Chain. In the longer run, however, if the PRC’s cur-
rency remained very weak, the global economy would be flooded with cheap PRC products.
In the late 2000s and early 2010s, when the PRC kept the CNY up to 30% cheaper than its fair
market value, its manufacturing sector grew at double-digit compound rates, rapidly gaining
global market share.45 The PRC has since risen up the value chain, so a sharp weakening in
the CNY exchange rate in the near future could have an even bigger effect. This would also
have global political implications. Industrialized and industrializing countries in Europe, Asia,
Latin America, and elsewhere might consider erecting trade barriers to protect their domestic
producers from being ravaged by PRC competition. The United States would have to manage
To summarize, the precise scope, duration, and character of the Day One economic crisis
would depend on circumstances and is impossible to pinpoint in advance. What is clear is
that on Day One, developed and developing economies would face a moment of extreme
peril and uncertainty. The potential combination of a much stronger dollar and a much weaker
CNY would threaten to upend the global economy, exacerbate the financial crisis, and stress
the rules-based trading system. In that context, the world would look to the United States not
to deepen the crisis but to provide economic leadership.
One of the first steps the Fed would likely take would be to extend dollar swap lines to key
foreign central banks.47 The Fed last did this at the beginning of the first COVID-19 wave, citing
the need “to maintain the flow of credit to US households and firms, reduce dislocations to
US financial markets emanating from financial turbulence abroad, and, by supporting foreign
growth, maintain export markets for US producers.”48 In some Taiwan crisis scenarios, the Fed
might need to go further, providing dollar liquidity in larger quantities and to a broader set of
central banks. The Fed might also slash interest rates and activate emergency lending facilities
as it did during the pandemic, pursuant to its emergency authority under Section 13(3) of the
Federal Reserve Act.49
Access to dollar liquidity would enable foreign central banks selected by the Fed to extend
zero-interest loans and other support to their own systemically important firms. 50 Offering the
swap lines would serve US national interests because the US economy would suffer if major
banks and industrial firms in allied countries collapsed. More broadly, it would serve US inter-
ests to stabilize the macroeconomic shock in strategic partner countries, cultivate diplomatic
goodwill, and demonstrate a commitment to supporting the global economy through the crisis
and into the postwar period to come.
If supply chain disruptions produced large-scale shortages, inflation would result, and the
Federal Reserve would find itself in a challenging position. Managing inflation would eventu-
ally require raising interest rates, which would further strengthen the dollar. However, raising
It is impossible to plan a specific course of Fed action on Day One. The president and
Congress could not legally force the Fed to take specific actions in a crisis. However, in
recent years, the Fed has acted pragmatically to help mitigate major crises. Whatever eco-
nomic course of action US political leaders chose to adopt on Day One, it is reasonable to
assume that the Fed would try to support it rather than undermine it.
EXPORT CONTROLS
In any Taiwan crisis scenario, the Commerce Department would likely seek to extend and
broaden export controls on critical technology to the PRC. Some critical supply chains would
likely be broken as a result, and reshoring them as fast as possible would be a national secu-
rity imperative. Close cooperation between the US government, allied governments, and the
private sector would be essential. In the strategic context of Day One, export controls would
be a policy of self-defense to ensure that US technology is not used to harm US troops or the
citizens of US allies. Export controls would not, in and of themselves, constitute a major pun-
ishment against the PRC.
On Day One, as US lawmakers were deciding on the nature of the US economic response,
they would have to take all these factors into consideration. Given the dynamic nature of the
crisis, lawmakers would have neither the time nor the institutional bandwidth to design an
entirely original policy response from scratch. The initial choice would be simple: hit the PRC
with symbolic retaliation and focus on domestic economic support and recovery; or adopt a
more assertive policy that would meaningfully transform the US–China economic relationship.
Lawmakers would undoubtedly face considerable pressure from a wide range of constituen-
cies to let the PRC off with an economic slap on the wrist. Wall Street and Main Street would
likely be united on this point. Big and small businesses would partner with labor unions to
lobby Congress and the White House not to take actions that would exacerbate the eco-
nomic crisis for the United States. These groups would have a legitimate reason to fear that
Despite the temptation to give the PRC a pass economically on Day One, there are many sce-
narios in which inaction is not a serious option, either politically or strategically. As will be
discussed in Part 2, multiple US senators, congressmen, and former officials already believe
that it would be necessary to break the bilateral economic relationship immediately after
Day One. 52 The rest of this report focuses on this universe of scenarios, which we call by the
umbrella term “break-glass” political scenario. In this event, the context of the PRC’s actions
on Day One persuades the White House and a bipartisan majority in Congress that the United
States has no choice but to end its economic relationship with the PRC. We do not take a
position on what exactly the PRC might have done to trigger such a bipartisan consensus.
Our claim is simply that there are clearly multiple plausible pathways that could produce the
break-glass political scenario in the near future and that the United States government there-
fore needs a plan for them.
The question, then, is the following: Conditional on the PRC having moved against Taiwan
and US lawmakers deciding that full decoupling is necessary, what is the best way to achieve
decoupling? Put another way: How could the United States achieve this goal in a manner that
supports its key economic interests rather than undermining them—at the lowest possible
cost to the taxpayer and consumer and the greatest possible cost to the PRC? How could
the United States harness the financial reaction to Day One and leverage its unique finan-
cial incumbent advantages to sustain the rules-based trading system and dollar hegemony
through this process of decoupling while maintaining its leadership and effective cooperation
with a wide range of allied and neutral countries?
• On Day One, the United States would have several important economic and strategic
interests other than punishing China. Policy would have to reflect a balance between
these interests.
• In the context of Day One, a wide range of allied and neutral countries would share at
least some of these interests with the United States.
• Markets would react dynamically, taking cues from US statements and actions, as well as
perceived escalation risks.
• In all scenarios, the dollar would likely strengthen, and the CNY and CNH would likely
weaken. However, the magnitude of this effect is unknowable, and the trend could
reverse over time, depending on US economic action and the outcome of the conflict.
According to current thinking, Washington’s economic option for break-glass Taiwan scenar-
ios is to use the dollar weapon, and perhaps physical blockades as well, to trigger a financial
crisis in the PRC and force a hard decoupling. 53 This section unpacks some of the flaws in
that analysis. As we saw in the previous section, the United States would have important eco-
nomic interests at stake on Day One that have nothing to do with punishing the PRC. Even
if a hard decoupling could be achieved, it would advance one US economic interest at the
expense of all the others.
The first argument against hard decoupling is impossible to ascertain in advance but would be
decisive if true: that the PRC might prove resilient to the shock. The initial market reaction to a
Taiwan crisis would present an unprecedented test for the PRC’s financial sector. Washington
could compound that blow if it imposed sweeping blocking sanctions on PRC financial institu-
tions. Nevertheless, Russia’s experience in 2022 provides a playbook for how PRC authorities
could stabilize their own financial system in the medium term. If the PRC’s financial system
proved resilient to this initial shock, Washington would be left out of proverbial ammunition.
Meanwhile, the disruption to global supply chains would devastate the economies of US
allies and partners, undercutting allied unity. In the worst-case scenario, a botched attempt to
enforce dollar sanctions could break the rules-based trading system itself, push much of the
world into a PRC-led trading bloc, and permanently undermine dollar hegemony. It is doubtful
whether Washington could force the European Union to go along unwillingly with a hard decou-
pling, let alone developing economies that have not joined sanctions against Russia.54
In a crisis, most of the world would want to continue to trade with the PRC, whatever Washington
did. If the United States tried to interfere, the PRC would be willing to pay a premium over the
Worse, threats to use dollar sanctions to force broad trade decoupling undermine US
efforts to maintain technological dominance through the “small yard, high fence” strategy. 55
Fundamentally, US export controls are enforced through the threat of dollar sanctions. There
is no other realistic pathway for the US government to exercise long-arm jurisdiction over
products that are only partially composed of US components and that circulate freely around
the world, beyond the reach of US customs authorities. If Washington’s first reaction to a
Taiwan crisis were to impose secondary sanctions, it would also be weakening its ability to
enforce export controls, which could put American lives at risk in a kinetic conflict.
THE THREAT
Economic decoupling was an explicit threat under the Trump administration, and it remains
an implicit threat under Biden. “So when you mention the word decouple, it’s an interest-
ing word,” President Donald Trump said in September 2020. “We will make America into the
manufacturing superpower of the world and will end our reliance on China once and for all.
Whether it’s decoupling, or putting in massive tariffs like I’ve been doing already, we will end
our reliance on China, because we can’t rely on China.”56 When Biden took office in 2021, his
team distanced itself from the word “decoupling,” which antagonized US allies. 57 As National
Security Advisor Jake Sullivan put it in April 2023, “We are for de-risking and diversifying, not
decoupling.”58 However, the Biden administration’s claim that it would not decouple from the
PRC in peacetime arguably strengthened the implicit deterrent threat that decoupling is con-
tingent on the PRC’s behavior.
In principle, the PRC is extremely vulnerable to economic decoupling. Its model of political
economy remains heavily dependent on global trade. It now represents nearly one-third of
global manufacturing value added (see figs. 2 and 3). Over two hundred million PRC citizens—
nearly one-third of the workforce—are employed in manufacturing. The domestic market is far
too small to absorb this vast output, so about half of the PRC’s manufactures are exported. 59
The PRC derives a greater share of its GDP from manufacturing than any other country except
Ireland (see fig. 4). As Matthew C. Klein and Michael Pettis have noted, the PRC has built its
manufacturing juggernaut through policies of financial repression that hold back domestic
consumption.60 Given that the PRC consumes much less than it produces, the rest of the
world must consume more than it produces. In theory, then, the United States could punish
the PRC by forcibly clawing back manufacturing jobs.
4.5
3.5
2.5
1.5
0.5
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Data from World Bank, “Manufacturing, Value Added (Constant 2015 US$),” https://data.worldbank.org
/indicator/NV.IND.MANF.KD.
35%
30%
25%
20%
15%
10%
5%
0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Re-created from Andrew Batson, “Breaking Down China’s Manufacturing,” The Tangled Woof (blog),
June 13, 2023, https://andrewbatson.com/2023/06/13/breaking-down-chinas-manufacturing; data from OECD,
Trade in Value Added, TiVA database, accessed May 23, 2024, https://www.oecd.org/sti/ind/measuring-trade-in
-value-added.htm#access.
Source: “Share of Manufacturing in Gross Domestic Product (GDP), 2021,” Our World in Data, data as of
May 29, 2023, https://ourworldindata.org/grapher/manufacturing-value-added-to-gdp?time=2021.
Prominent US experts have recommended threatening the PRC with rapid decoupling through
trade sanctions to deter aggression against Taiwan. In 2023, the Independent Task Force of
the Council on Foreign Relations (CFR) discussed this issue in a major report, “US-Taiwan
Relations in a New Era,” endorsed in whole or part by seventeen luminaries, including Michael
G. Mullen, former chairman of the Joint Chiefs of Staff, and Michèle A. Flournoy, former under
secretary of defense for policy. The report argues that the economic damage of a PRC attack
on Taiwan would be such that if sufficiently understood, the US public and allied nations
would be prepared to commit to deterrence through economic sanctions, using anti-Russian
sanctions over Ukraine as a baseline.61 As a result, it recommends that the United States should
immediately begin “intense consultations” with allies and partners “on the scope of a sanc-
tions package that would be introduced immediately after a Chinese blockade or attack, while
urgently working to lessen economic dependence on China.”62 Others argue that while eco-
nomic sanctions are not a credible deterrent, a hard decoupling would be likely in any conflict
scenario. In their recent report for CFR, Robert Blackwill and Philip Zelikow suggest that “the
United States would cut off, and strictly control, any business transactions or dollar transac-
tions with China. No trading with the enemy would be conducted” and US entities, including the
Treasury, would stop paying interest on bonds held by PRC entities.63 Many scholars and practi-
tioners also assume that the United States could intensify the pressure with a counter-blockade
of Chinese trade at the Straits of Malacca.64
ECONOMIC IMPLICATIONS
Before brandishing threats of decoupling, however, the US government must confront the real-
ity of what a rapid decoupling from the PRC would cost. No victorious great power has ever
attempted to sanction half of global demand for key commodities and more than half of global
supply of numerous essential goods. On the eve of the 2022 Ukraine invasion, Russia repre-
sented 13% of global oil production and 1.3% of total global imports. The PRC accounts for
55% of global copper demand and 79% of the world’s lithium-ion battery production, to take
just two examples.68 Its manufacturing base is sophisticated and staggeringly diverse. It took
decades and trillions of dollars of public and private investment to build. Decoupling too quickly
would disrupt supply chains that depend on the PRC, imposing economic pain on the rest of
the world, including the United States (see figs. 5 and 6). Further, the PRC is a much larger and
more sophisticated economic adversary than Russia and would have more tools to fight back.
Most Americans are aware that the US economy is uncomfortably dependent on the PRC—
but the dependence goes deeper than most people realize. Most people know that 95% of
iPhones, iPads, Macs, and AirPods made worldwide are assembled in the PRC.69 Most also
know that the PRC dominates the value chains for critical minerals, representing roughly
60% of global production and 85% of processing capacity.70 It is less widely known that a
hard economic decoupling from the PRC could kill American civilians by disrupting supply
chains for lifesaving drugs. Three of the four factories in the world that produce the active
pharmaceutical ingredient for benzathine penicillin G are in the PRC. Global value chains for
pharmaceuticals—especially generic drugs—and medical goods and devices are also highly
dependent on PRC chemicals, materials, and electronic components.71
American small businesses would bear the brunt of a hard decoupling. Small and medium-
sized enterprises account for 41.2% of US imports from the PRC but only 23.6% of imports
from Mexico and 29.8% of imports from Canada.72 More broadly, US small businesses
have thinner margins and smaller capital buffers to survive economic shocks. Large cor
porations enjoy diversified access to multiple markets and consultants who can help them
fine-tune their supply chain processes at a global level. However, most small businesses
rely on a small number of existing relationships with suppliers, many of whom source their
goods from the PRC. Many small businesses are also unaware of the extent of their depen-
dence on the PRC, since they source their imports through middlemen or buy goods that
are assembled elsewhere in Asia using PRC components that can’t easily be replaced.
Media coverage of supply risks tends to focus on “critical” products, but shortages of more
chemicals
articles steel
mineral oils slag 2.4% 1% 0.68%
Perfumery &
2.69% 1.92%
and products
cosmetics
and
Pharmaceutical
products 0.65%
Nickel Aluminum articles Cermet...
ash
Fertilizers 0.6% Iron or steel...
0.4%
Electrical
0.86%
Machinery,
mechanical
Edible fruits, nuts & fruit peels
0.75%
Rubber & articles thereof
0.8%
4.07%
machinery and appliances, Cars, tractors, Meat & Cotton
Fish... Food...
edible 0.38%
trucks & parts
& parts thereof.
o al Non-...
electronics
0.2%
3.34% 1.39%
0.25%
0.82%
0.84%
Glass...
0.21%
Arabia
Korea Taipei
States 1.18%
6.94% Mexico
1.41%
Chile
Peru
Thailand Burma
5.69%
0.45%
Kuwait
1.64% 1.13%
Turkmenistan
5.71%
0.41%
1.79%
Germany Russia
Switzerland France Spain
Netherlands
0.81%
Italy 0.28%
South Africa Democratic
Republic of
the Congo
United Kingdom 0.81% 1.09%
0.72%
5.05% 4.67% 1.64%
Ireland
0.78%
Angola
1.01%
Source: “OEC Profiles: China,” Observatory of Economic Complexity, accessed May 30, 2024, https://oec
.world/profile/country/chn#yearly-trade.
2.78%
Copper...
filaments Miscellaneous metal...
0.31%
0.7%
Coated...
0.25% 0.81%
Organic Chemical
products n.e.s.
Inorganic
chemicals
Optical, photo, & film
equipment; medical Footwear
instruments
chemicals
1.13% 0.9%
2.21% 1.7%
29.5%
Pharmaceutical... Paints... Soap...
2.96%
0.41% 0.19%
0.31%
Fertilizers
0.34% Mineral fuels, Glass &... Paper
Machinery,
mineral oils and articles
products of their
Cars, tractors, trucks &
Ships,
boats, & distillation
floating...
parts thereof.
1.69%
mechanical
0.7%
4.09%
0.69% 0.68% 0.89%
Railway... Stone, plaster...
0.26%
0.97%
thereof
articles
thereof 0.83%
Kong States
3.68% 3.29% 2.94% 2.2%
7.39% Chinese Taipei Indonesia Turkey Saudi
Arabia
Thailand 14.8%
4.76%
Pakistan Israel Iraq
United Arab
Emirates
0.56%
2.04% Mexico Canada
0.43% 0.38% 0.37%
1.55%
South Korea
Cambodia Iran
0.3%
0.37%
Singapore
2.44% 1.66%
0.27%
Philippines Kyrgyzstan
Qatar
4.03%
0.36%
1.5%
0.57%
1.18%
Kenya
0.82% 0.8% Egypt
1.33% 0.48%
0.29%
0.2% 0.2%
Brazil Chile Peru
Russia
Hungary
Austria
0.67% 0.41%
Netherlands Sweden
0.28% 0.19%
Colombia 2.18%
Spain 0.36% Norway
0.49%
2.53% 2.02%
0.27%
1.72%
New...
1.26% Greece
0.29%
Argentina
0.44% 0.3%
Source: “OEC Profiles: China,” Observatory of Economic Complexity, accessed May 30, 2024, https://oec
.world/profile/country/chn#yearly-trade.
If the US agricultural industry lost the PRC market, it would face a similar existential crisis.
The PRC imported $35.5 billion of US agricultural products in 2022, constituting 18.4% of
America’s total agricultural exports. However, the more important value of Chinese demand
is that it holds up prices for these products. The PRC imports 60% of the world’s soybeans,
for example. Soybean prices rise and fall on the back of PRC demand. If the PRC were sud-
denly cut off and unable to import soybeans, the three hundred thousand American farms
that grow soybeans would face a devastating financial blow. More than eighty-nine million
acres of farmland in the United States—an area the size of Montana—are currently dedicated
to growing soybeans. If these acres were used for other crops instead, prices of those crops
would fall as well.73 Unlike the Trump administration’s tariffs, which generated revenue to com-
pensate soybean farmers for their lost sales, a hard decoupling from the PRC would be a pure
deadweight loss and would give farmers no time to adapt. Other US export industries, such as
aerospace and electronics, would face a similar fate.
Rapid decoupling from the PRC would, therefore, cause the prices of some products to col-
lapse, but in general, it would trigger shortages and inflation globally. Recent experience of
the impact of the COVID-19 pandemic provides a point of reference. At the peak of the supply
chain crisis in October 2021, the average time for PRC goods to travel from factory to ware-
house rose from the pre-COVID average of 40–50 days to 76 days.74 That month, US inflation
jumped to 6.2%. These supply chains ultimately healed because factories in the PRC rapidly
returned to production. A hard decoupling would have a much greater effect on prices and
would impact a much broader array of goods.
While America would suffer badly under rapid decoupling, its closest allies are significantly
more vulnerable. According to modeling by Inoue Hiroyasu of the University of Hyogo and
Todo Yasuyuki of Waseda University, if Japan’s imports from the PRC were disrupted by
80% for two months, Japan’s total production would decline by 15%, for a total annualized
loss of 53 trillion yen ($360 billion)—nearly 10% of its GDP.75 Roughly a quarter of Japanese
imports of intermediate products come from the PRC.76 According to a paper that calculated
these estimates using a more elaborate methodology, a hard decoupling from the PRC could
reduce Japan’s total value added manufacturing output by up to 39.5%.77
All European countries would be badly affected, but Germany, which counts the PRC as
its largest trading partner, would be among the hardest hit. A team led by David Baqaee
at the Kiel Institute for the World Economy has calculated that a hard decoupling from the
PRC would cause a 5% contraction in German GDP in the first year, roughly the same as in
2020, the first year of the COVID-19 crisis (5.3%). The “permanent loss of prosperity” would
be around 1.5% annually after five years.78 No good modeling studies exist on the potential
effects of a hard decoupling on German employment, but they might be dramatic. Volkswagen
sells 40% of its cars in the PRC, and the PRC accounts for 13% of Siemens’ global revenue
and 15% of BASF’s. The PRC was also Germany’s largest trading partner in 2021.79 As German
Australia is similarly dependent on the PRC, which buys nearly one-third of its exports. Trade is
directly responsible for one in five Australian jobs.81 Moreover, Australia’s export sector is geo-
graphically concentrated. In Western Australia, exports comprise 56% of GDP, and the largest
export segment is iron ore destined for the PRC. Permanent loss of the PRC market would dev-
astate the state’s economy and likely cause large-scale internal migration. In October 2023, the
South China Morning Post reported that Australia’s Department of Foreign Affairs and Trade
and its Treasury Department had conducted three classified studies to explore the potential
for complete economic decoupling from the PRC. All three found that it would be “impossi-
ble,” according to two sources with knowledge of the matter. “No other markets could replace
China as a market for Australian commodity exports,” one of the sources said.82 The Treasury
secretary at the time ordered that the reports not be released to the public.
Saudi Arabia and other major oil exporters are similarly vulnerable. The PRC bought 27% of
Saudi crude oil exports in 2021, or 1.75 million barrels per day. 83 However, oil is fungible, and
the more significant impact of a hard decoupling from the PRC would be a collapse in the oil
price. As of October 2023, Saudi Arabia requires a Brent price above $86 to balance its bud-
get. 84 A hard decoupling that blocked the PRC’s oil imports for an extended period could have
a much greater impact on prices than the COVID shock in 2020. 85 The PRC currently imports
11.28 million barrels per day, and other major oil consumers would see demand decline steeply
if trade with the PRC were permanently curtailed. 86 Saudi Arabia is also exposed, like all other
countries, to a disruption in imports from the PRC. Saudi consumers are accustomed to a high
standard of living and rely on cheap Chinese products in their daily lives. They would surely
not appreciate shortages and rationing—and the country’s leadership would strongly prefer to
avoid a discontented population.
If decoupling were combined with a kinetic war with the PRC—or a counter-blockade at the
Straits of Malacca, as many commentators have suggested—the economic loss could be
greater still. 87 One RAND analysis found that it could reduce US GDP by 10% in the first year. 88
Physical disruption of trade flows out of Taiwan alone could cause over $2.5 trillion in eco-
nomic losses. 89 War or even blockade-style operations short of war could also disrupt supply
chains by making it expensive or impossible for shippers to insure their cargoes. A model
produced by a team of Bloomberg economists predicted that US GDP would decline 6.7%
in the first year of a Taiwan war, but that nearly every US ally would suffer a greater shock:
Canada (6.9%), Australia (7.4%), India (8%), the EU (9.6%), Japan (13.5%), the PRC (16.7%),
Southeast Asia (20.1%), and South Korea (23.3%).90
To summarize, while it is advantageous for the United States to have a plan for broad-based
decoupling, instantaneous and permanent decoupling is not realistic. In every major war in US
history, Washington has either banned or strictly controlled “trading with the enemy.”91 However,
given how far globalization has come, threats to take actions that would devastate the US econ-
omy and the economies of US allies are not politically credible.92 Beijing is aware of this. When
the House China Select Committee war-gamed a Taiwan invasion scenario in April 2023, the
PRC RESILIENCE
After more than a decade of assiduous efforts to prepare for the hard decoupling scenario,
the PRC has become far more resilient than many US analysts recognize. In this section,
we explain why financial sanctions or physical blockades, such as an operation to screen
the PRC’s oil imports as they passed through the Straits of Malacca, would not meaningfully
impair the PLA’s warfighting capacity, even if successful. They might also trigger organized
resistance from neutrals. Moreover, according to untranslated PRC sources, Beijing likely
believes that it would be resilient even if Washington acted on these threats, so the threats
themselves do little to deter aggression.94
PRC scholars appear to have thought more carefully about these matters than their American
counterparts.95 The Chinese literature on financial warfare exhaustively references American
authors and officials, including some of the same sources cited in this report. In addition to
understanding the legal and political basis of the US financial warfare toolkit, PRC scholars
take a keen interest in financial history, mining the historical record for clues about likely US
actions and potentially useful counterreactions, going back to the privateer Francis Drake
in the sixteenth century.96 This coherent body of thought about economic warfare with the
United States shines light on the PRC’s strategy for dealing with the worst-case scenario.
Even extreme measures to shut down the PRC’s essential imports would be unlikely to col-
lapse the PRC’s financial system quickly and would probably not work fast enough to change
the military outcome of a war. Unlike Russia, the PRC has an almost entirely indigenous
defense industrial supply chain.97 It produces 4.1 million barrels of oil per day domestically,
roughly a quarter of its total consumption. Its strategic petroleum reserve (SPR) has doubled
in the last five years to approximately 950 million barrels, or three months of current imports.98
The PRC may add several hundred million more barrels of capacity in the next few years. The
PRC also has stockpiles for other strategic commodities. According to US Department of
Agriculture estimates, it had 69% of global maize reserves, 60% of global rice reserves, and
51% of global wheat reserves in 2022.99 A blockade would alarm markets, but Beijing could
respond by halting trading in domestic financial markets and restricting withdrawals from
banks. Meanwhile, if the PRC were unable to import essential goods but continued to export
over its land borders, its current account surplus might sharply increase. This would support
the CNY and reduce the pressure for capital outflows.
If the United States tried to shut down the PRC’s international trade, these stockpiles would
buy time for Beijing to set up alternative smuggling routes. The PRC has land borders with
fourteen countries, several of which would happily re-export grain and oil at marked-up prices,
If the PRC still could not find sufficient resource supply to meet its needs, its domestic econ-
omy would adapt to shortages, as great powers have always done in wartime. Today, the PRC
derives most of its protein from soybeans and meat (produced with soybean-based feed)
imported from the United States and Brazil. However, this is only an illusory dependence. The
PRC was almost entirely self-sufficient in protein until the early 2000s, when it began to import
more because the population had grown rich enough to afford it.101 Beijing has also signaled
that it is preparing to respond decisively if protein supplies are cut off. In a 2021 speech, Xi
called the PRC’s food security a top-priority national security issue and called for research into
“alternative proteins” from “plants, animals, and microorganisms.”102 Zhao Hongtu of the China
Institutes of Contemporary International Relations put it this way in an important 2007 article:
“The energy needs of a country in wartime are very different from those in peacetime. As a
major energy and oil producer, China has sufficient domestic energy supplies to meet its war-
time energy needs, especially its military needs.”103
Markets reacted violently (see fig. 7).105 The ruble fell from 84 to the dollar on February 24 to
139 to the dollar on March 12. Russian inflation jumped to over 2% per week. Russian house-
holds withdrew $9.8 billion worth of FX from accounts in March alone.106 The sanctioning
countries did not want to shut Russian oil and gas out of the global market altogether, fearing
a sharp rise in prices. Therefore, they did not impose sweeping dollar sanctions on Russia’s
entire financial system, allowing the country to continue to settle its energy trade in dollars
and euros. Nevertheless, Russian authorities tried to shift trade into other currencies. Before
the war, 86% of Russia’s foreign transactions by value were settled in dollars or euros. Nine
months later, that figure had fallen to 54%.107 Russia began to settle trade in CNH, Indian
rupees (INR), and Emirati dirhams (AED) instead.
25% 160
140
20%
120
80
10%
60
40
5%
20
0% 0
Jan-2021
Feb-2021
Mar-2021
Apr-2021
May-2021
Jun-2021
Jul-2021
Aug-2021
Sep-2021
Oct-2021
Nov-2021
Dec-2021
Jan-2022
Feb-2022
Mar-2022
Apr-2022
May-2022
Jun-2022
Jul-2022
Aug-2022
Sep-2022
Oct-2022
Nov-2022
Dec-2022
Jan-2023
Feb-2023
Mar-2023
Apr-2023
May-2023
Jun-2023
Jul-2023
Aug-2023
Sep-2023
Oct-2023
Nov-2023
Dec-2023
Jan-2024
Feb-2024
Russia consumer price inflation (year-on-year) (Ihs) Russia benchmark interest rate (Ihs)
USD/RUB exchange rate (rhs)
Source: Data from Bloomberg L.P. (2024). Retrieved from Bloomberg database.
Russian financial authorities steadied the economy by acting decisively to stabilize the exchange
rate, which reduced the pressure on the banks and contained inflation. On February 28, the
day the sanctions were imposed, CBR Governor Elvira Nabiullina raised interest rates from
9.5% to 20%. This move dramatically increased the incentive for households and firms to keep
their rubles deposited in Russian banks rather than withdrawing them and exchanging them for
FX. In the following days and weeks, Moscow took several additional steps to increase global
demand for the ruble and reduce Russian demand for the US dollar.108 These included the
following:
• Banning Russian financial institutions from helping foreigners sell Russian assets
Together, these measures successfully stabilized the ruble exchange rate by creating incen-
tives for market participants to buy and hold rubles rather than sell them. The United States
and other sanctioning powers did not respond with additional policies to keep the ruble
weak, so the exchange rate snapped back closer to its fundamental value. In April 2022, the
ruble was the world’s best-performing currency. By June, due to rising oil prices and reduced
imports, the ruble had stabilized between 50 and 60 to the dollar—stronger than its pre-war
average. Inflation remained substantially higher than the pre-war average because of difficul-
ties acquiring essential imports, but high interest rates kept it under control. Over time, supply
chains rerouted through Central Asia, the Caucasus, and the Middle East, allowing Russia to
keep buying essential goods from the sanctioning countries, albeit at marked-up prices.109
As long as Russia is willing to pay higher prices, these countries will keep their incentives to
transship Western goods, despite the sanctions.
The PRC has much larger FX reserves than Russia and is therefore potentially much more
resilient to the sudden imposition of financial sanctions. At the outset of the crisis, Russia’s
government controlled $630 billion in FX and gold reserves. Just over half were frozen by
March 1, 2022.110 By contrast, as of April 2023, the PRC’s State Administration of Foreign
Exchange (SAFE) held $3.2 trillion in FX reserves. According to Brad Setser’s calcula-
tions, the PRC likely has up to $3 trillion of additional undeclared dollar assets, although
it is not clear how liquid these holdings are.111 According to the Bureau of International
Settlements, PRC banks had only $1.56 trillion in cross-border liabilities ($471 billion net
of cross-border assets, mainly from Belt and Road debtor countries), as of Q3 2021.112 In
short, Beijing has ample FX reserves to prevent a default on external debt. On Day One
of a Taiwan crisis, it could copy Russia’s playbook and, if necessary, sell its FX to support
its exchange rate. With sufficiently tight capital controls, Beijing could inject an unlimited
amount of domestic currency liquidity into the banking system, reassuring depositors that
they had nothing to fear.
This discussion highlights three lessons about the PRC’s short-term resilience to economic
punishment. First, the PRC’s financial system may well be resilient to Russia-style financial
sanctions, due to the large FX reserves that Beijing could use to stabilize its exchange rate.
Second, a Malacca blockade or a similar operation to shut off the PRC’s imports would be
unwise. In wartime or under blockade or quarantine, Taiwan could almost certainly not hold
out long enough for economic attrition to persuade Beijing to change its policy.113 Third,
market participants and third countries would react opportunistically and dynamically to
US economic punishment and the PRC’s reactions, in ways that would probably support the
PRC’s short-term economic and financial resilience. Trade decoupling would therefore be
a long-term process—with all that implies for the economies of the United States, its allies,
and other nations.
Starting in 2018, the Trump administration’s trade war convinced many PRC observers that a
“financial war” (金融战争) could break out at any time and that the nation needed to prepare.
PRC economists have long doubted that the United States could achieve full trade “decou-
pling” (脱钩).117 They are more concerned about the US program of selective and gradual
decoupling—the “small yard, high fence” policy—which they see as more credible and polit-
ically sustainable. Most of all, they fear that the United States could use dollar sanctions or
other financial weapons to destroy the PRC’s economy and financial system without trade
decoupling, for example by challenging the Hong Kong dollar (HKD) peg.118 There are fears
that if the United States imposed dollar sanctions on the PRC before it had broken its depen-
dence on the dollar system, the PRC’s economy would be badly hit, although not necessarily
as badly as Iran’s or Russia’s. PRC analysts also express concern that the United States might
wage a financial war against the PRC in peacetime, replicating the financial war it supposedly
waged against Japan in the 1980s and 1990s to derail Japan’s “economic miracle.”119
Beijing’s quandary is that it cannot relax its capital controls—least of all in the midst of a
crisis. Through years of intervention to support the value of the currency during a period of
slowing growth, rising debt, and falling interest rates, PRC monetary authorities have bottled
up trillions of dollars in potential outflows. In a war scenario, outflow pressure would increase
further. In this context, loosening capital controls in a crisis would risk an uncontrolled col-
lapse of the currency, followed by a systemic banking crisis—too great a risk to social stability
for the CCP to bear. The greater the outflow pressure, the more untenable the possibility of
easing capital controls becomes.
The uniquely effective capital control regime provides at least some defense against cur-
rency “sniping.” Under regulations first established during the 2015 stock market crash, PRC
individuals can currently take only $50,000 out of the PRC per year and are technically not
allowed to invest in foreign securities or property. Bank card withdrawals from PRC bank
accounts in foreign currencies are capped at CNY100,000 per year. All FX transactions must
During a Taiwan crisis, the PRC would have to dial the capital controls up to the maximum.
PRC government ministries would also likely ration imports of goods deemed inessential to
the war effort and limit foreign travel, which historically has been an outlet for unrecorded
flows.121 Even still, small cracks in the so-called capital dam could cause the currency to
depreciate and place stress on the banking system.
The PRC’s strategy to build resilience to potential US sanctions therefore assumes that full
capital account liberalization is impossible under current conditions. However, even though
the CNY cannot become a truly international currency as long as it is not freely convertible,
the PRC can encourage other countries to hold CNH and use CNH payment systems to settle
bilateral trade with the PRC. It can also offer swap lines to allow friendly countries to access
CNY under controlled conditions. This tool enables the PRC to issue CNY-denominated loans
in the developing world and to invoice import purchases in CNY. Xi Jinping himself has made
it a personal priority to accelerate the expansion of swap lines, the development of the CNH
market, and the international adoption of CIPS.
CIPS is the linchpin of the PRC’s strategy to degrade US economic deterrence. Established in
2015, CIPS enables the PRC to settle trade in RMB without using the SWIFT messaging system
and CHIPS settlement systems, both of which the US government effectively controls. Evading
US sanctions is explicitly one of the goals of CIPS. In 2019, Gao Xingwei predicted that as the
CIPS platform matured, it would first be favored by Iran and other countries already under US
sanctions.122 Not having to rely entirely on SWIFT for messaging would “significantly improve
China’s financial security and autonomy,” he added.123 In plain language, CIPS can be under-
stood as an alternative plumbing system for global payments. In the event that Washington
turns off the pipes that allow the PRC to trade in dollars, the PRC and its trading partners can
switch their trade settlement to CIPS.
The PRC’s strategy of building out CIPS as a sanctions hedge is making rapid progress. As of
March 2022, it was used by around 1,300 financial firms worldwide, compared to 11,000 for
the American alternative, CHIPS. The total transaction value was much smaller: $45.6 billion
for CIPS compared to $1.8 trillion for CHIPS.124 However, these figures are not indicative of
how usage rates would change during conflict. Today, nearly all of the PRC’s partner countries
can settle payments in USD on established channels, so they have no particular reason to use
RMB channels unless they are evading sanctions or doing a political favor for the PRC. The
situation would be different if the alternatives were shut down and CIPS were the only way to
transact with the PRC. What matters is that the system has been proven to work.
With tight capital controls plus CIPS, PRC authorities would be in a very strong position to
weather the initial financial reaction to the outbreak of war, even if the US imposed dollar
sanctions. To be sure, PRC regulators and monetary authorities would likely have to inter-
vene decisively to stabilize the domestic financial system. However, the 2015 stock market
crash and the outbreak of COVID-19 in January 2020 proved that PRC regulators have a
viable playbook for managing sudden financial panic.128 The PBoC could offer enormous
liquidity facilities to banks and corporations, guarantee bank deposits and holdings in
wealth management products held by shadow banks, and slash interest rates. Securities
regulators could restrict the sale of real estate and more liquid financial assets. The
State Council could issue special bond quotas to local governments to manage an antic-
ipated fiscal crunch. Other economic planners could deal with the logistics of rationing
and industrial policy for the wartime economy, setting quotas on key goods and perhaps
imposing price controls. Monetary authorities could intervene in the CNH market, which
would weaken sharply as foreign investors dumped their holdings. If the PRC financial
system survived this initial shock, the US government would be essentially out of ammuni-
tion in the financial war.
After a break from the dollar system, the PRC has every reason to believe that its trading
partners would be happy to resume trade through payment channels that the US government
does not control. If needed, neutral countries could provide backdoors into the USD area.
As Zhou Hanmin of East China University of Political Science and Law puts it, the PRC could
“make use of international offshore financial centers to conduct offshore financial business,
and continue to clear in dollars by concealing our own information, as Iran has done.”129
Unlike Iran, the PRC has close relationships with Gulf nations that would be happy to play
this role. Other BRICS countries, notably India, have taken steps to promote their currencies
through international trade settlement, in coordination with the PRC.130 This is why, as Zhou
further notes, “US foreign financial sanctions are indeed very severe and complete, but they
are not invulnerable.”131
The PRC probably imagines that in a crisis, trade links to the developed world would be
strained, and developing countries would become even more important partners. Indeed,
the RMB internationalization strategy is making the most rapid advances in the developing
world. According to AidData estimates, the share of new PRC overseas lending commitments
denominated in dollars fell from 93% in 2013 to 44% in 2021. In the same period, the share
denominated in RMB soared from 6% to 50%. Most of these new RMB loans are emergency
POLITICAL IMPLICATIONS
Given this context, if the United States were to attempt dollar sanctions, would other countries
respond by moving their trade with the PRC across to CNH or other currencies? The conven-
tional wisdom is that they would not. As a major Council on Foreign Relations report puts it:
Simply put, no country would be excluded from the economic carnage of a conflict in
the Taiwan Strait, which would throw the world’s economy into a severe depression
by destroying supply chains, forcing production lines to grind to a halt, sending stock
markets plummeting, and threatening global shipping. Once countries are aware of the
consequences, and the fact that their economies would not be spared even if they choose
to remain neutral during a conflict, they could be more willing to contribute to deterring
China from using force.
To raise awareness of the global consequences of a war over Taiwan, the U.S. government
should conduct country-by-country analysis of the fallout of a major conflict, which
U.S. embassies should then share with host governments. The United States should
then work with its allies and partners to prepare a sanctions package that would go into
effect immediately following a Chinese blockade or invasion. Policymakers could use the
sanctions imposed against Russia following its invasion of Ukraine as a baseline, while
also considering more severe financial sanctions. The United States and its allies should
preview these sanctions to China, making clear the economic costs of an attack. Although
the prospect of sanctions will not be decisive and is likely already factored into Xi’s
calculus, this strategy would bolster deterrence by demonstrating that sanctions would be
deep, immediate, and imposed by many of the world’s major economies.133
The assumption is that in a crisis, US allies, such as the member states of the European Union,
would willingly go along with rapid decoupling, simply because the economic situation would
already be extremely bad.
This assumption makes no sense. Plunged into a global economic crisis, most countries
would try to preserve what they could, not aggravate the crisis. A general economic crisis
would provide both a reason and an excuse for countries to renege on past commitments.
Even if the United States had persuaded other countries to make the sanctions automatic, in
actual crises, states can find excuses to avoid entrapment by past commitments. This applies
to both US allies and the United States itself. While US allies have an interest in deterring
a Taiwan war, they do not have an interest in creating an automatic trigger for economic
Armageddon. While some countries might agree, in principle, to threats of punitive financial
sanctions if the PRC attacked Taiwan, they could demand conditionality that would under-
mine the credibility of the threat. Furthermore, as in the case of Russia’s invasion of Ukraine,
Some analysts have gone further, suggesting that the United States could use secondary
sanctions to coerce neutral states and close allies alike to go along. As Jude Blanchette
and Gerard DiPippo argue, “if US forces were engaged” in a war over Taiwan, “the sanctions
[on the PRC] would be severe, and Washington would probably coordinate with—or even
compel—major allies to join such sanctions.”135 They contend that major European allies
would likely “support Washington’s efforts to punish China economically” because European
countries’ “economic and financial ties to the United States are far deeper than those with
China.” They also note that if allies resist, Washington might “present European leaders with a
binary choice they might otherwise hope to avoid.” Presumably, this would mean threatening
to weaken NATO commitments or threatening secondary sanctions against European compa-
nies and banks that facilitate trade with the PRC.
This analysis not only ignores the quarantine scenario but also ignores a lesson of history:
when great powers wage economic war, third-party states have agency and do not face
binary choices.136 The very concept of neutrality as it exists in modern international relations
was developed to facilitate trade between neutrals and multiple belligerent powers.137 Even
short of flat-out refusal, neutrals can use tortuous negotiation, foot-dragging, and ineffective
enforcement to facilitate trade with all relevant belligerent powers. Retaliating against non-
compliant neutrals is self-defeating, since it also involves losing access to their markets. In a
war with the PRC, if the EU failed to enforce US sanctions within its own market, Washington
could not impose secondary sanctions without deepening the economic crisis in the United
States and putting dollar hegemony at risk by driving a critical mass of firms to transact in
RMB. The EU and the PRC combined are close to 40% of global GDP. If they were sufficiently
motivated to shift their trade into EUR or RMB settlement networks beyond Washington’s
control, they could do so quickly. In the event of a kinetic conflict, Europe would face a major
economic crisis that might push it toward the United States. In a quarantine scenario, how-
ever, there might be no physical or legal barriers to sustained PRC–Europe trade.
If European cooperation is uncertain, support from non-Western countries, many of which have
refused to support sanctions on Russia, would be even less likely. India, Brazil, the Gulf States,
and most ASEAN economies would be strongly incentivized to create or join a loose non-
aligned bloc. Their reasons would be practical, not ideological. These countries would prefer to
live in a diverse global economy that offered them strategic agency rather than a permanently
bifurcated one that denied them access to the PRC market. These countries could also antici-
pate that Washington could not sever its largest trading relationships all at once and, therefore,
would eventually acquiesce to a situation in which trade with the PRC resumed. The countries
most likely to resist US efforts to force hard decoupling are commodity producers and coun-
tries that have already largely abandoned Western platforms for PRC alternatives in high-tech
Countries that wanted to avoid economic decoupling would have political excuses to break
from the US coalition. A total of 181 countries recognize Beijing as the sole legal government
of China, and fifty-one of them accept Beijing’s formulation of the “One China Principle”; the
rest of them, including the United States, take ambiguous positions on Taiwan’s status.138
Only twelve countries recognize Taiwan as a sovereign state, and Taiwan is not a member of
the UN. When Russia invaded Ukraine, it was indisputably an act of aggression by one sov-
ereign member of the UN against another. If the PRC invaded Taiwan, Beijing would argue
that the crisis was purely an internal matter, and other states could accept this argument
without necessarily setting a bad precedent for international law. Whether or not countries
actually believed this, the threat of devastating US-led economic warfare would provide an
incentive to reason toward Beijing’s position. It is therefore unclear whether a majority in the
UN General Assembly would disagree or even condemn an invasion of Taiwan, let alone a
quarantine.139 Countries that wanted to escape prior punishment threats could use a UN res-
olution taking the PRC’s side as a convenient excuse. Alternatively, they might blame Taipei
(or Washington) for provoking the crisis and call on Taiwan to accept a coerced settlement.
With each country that backed the PRC’s position or joined the neutral bloc, the less costly it
would become for the marginal country to abandon the US coalition, if it wished to do so.
In other words, if the United States went into a Taiwan crisis threatening secondary sanc-
tions, it would start with a divided coalition that would almost certainly fracture further over
time, breaking down the rules-based economic system in the process, and threatening an
extremely important US interest. A maximalist sanctions policy would risk leaving the PRC
with a bigger sphere of influence in global affairs than it enjoys today. US actions to save the
rules-based system in response to a Taiwan crisis would have left it fundamentally broken.
The PRC’s strategy has an inherent deficiency: the impossibility of relaxing capital controls,
especially in a crisis. What PRC commentators only hint at in their open-source analysis is
that a massive US-led currency intervention against the CNH would derail this strategy. To
STRATEGIC IMPLICATIONS
Washington must go back to the drawing board and devise a Day One Plan that works through
incentives rather than threats. It must consider the PRC’s assessments, capabilities, plans,
and potential retaliatory tactics. It must minimize the chance of trapping the United States in a
protracted, devastating, and unwinnable economic conflict. It must combine actions that the
president could and likely would take unilaterally on Day One with a convincing framework
for why most countries would want to accept US economic leadership on Day Ten, Day One
Hundred, and Day One Thousand.
Fortunately, most countries would prefer to prevent the collapse of the rules-based global
trading system and have little interest in seeing the PRC wrest control of it. A successful sei-
zure of Taiwan by force would not only undermine rules and norms that maintain peace in the
Indo-Pacific region but would also concentrate power in the hands of an authoritarian regime
that rejects the rule of law and insists on CCP control over people and economic assets. In
the long run, this outcome would be catastrophic for free markets and the interests of all free
countries, as well as small countries that would be powerless to resist Beijing’s dictates.
Although the US government cannot hold together an allied coalition through bullying and
threats, it can articulate a positive vision of how it would preserve the global economy and
align coalition interests at the PRC’s expense. The critical number is $3.38 trillion—the value
of goods that the PRC exported in 2023. America’s message to the world will be simple: “If the
worst happens, we are going to protect the rules-based system and minimize the economic
disruption, but we intend to take the manufacturing jobs back. Would you like some?”
• A Day One economic strategy based on a hard decoupling would subordinate every
other US economic interest to the goal of punishing the PRC.
• Even still, it would be likely to fail or even backfire in its political goals. It would be
unlikely to break the PRC’s war machine, force the PRC to abandon its designs on
Taiwan, or destroy the PRC’s financial system or economic model. Insofar as it would
impose pain on the PRC, it is likely that Beijing could bear the pain longer than the
United States and its allies could sustain it.
• An attempt to force a hard decoupling would also undermine other relevant US economic
interests, including the preservation of the domestic economy, the preservation of dollar
hegemony, and the rules-based trading system.
• The PRC’s fallback plan, if it loses the ability to transact in dollars, is to transact in CNH
through the CIPS payment system. Third countries are rapidly signing up for CIPS.
• In general, when great powers wage economic war, neutral states do not face binary
choices—in fact, they face strong economic incentives to violate blockades and
sanctions for profit.
On August 4, 1941, Winston Churchill and the chiefs of staff embarked on a risky trans
atlantic voyage on the battleship HMS Prince of Wales. Between August 9 and 12, off the
coast of Newfoundland, Churchill held meetings with US president Franklin D. Roosevelt
about the structure of the world system they hoped to create should the Allies triumph
in the war. The result was the Atlantic Charter: eight succinct “common principles” that
described their “hopes for a better future for the world.” Among them were commitments to
self-determination for all nations, the renunciation of territorial expansion, economic coop-
eration, and disarmament. Another was a commitment to free trade. Both sides committed
to “endeavor, with due respect for their existing obligations, to further the enjoyment by all
States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the
raw materials of the world which are needed for their economic prosperity.”140 The principles
of the Atlantic Charter ultimately guided the creation of the Bretton Woods agreement, the
United Nations, the Marshall Plan, and the GATT, the predecessor to the WTO. Notably, Allied
and neutral countries alike enjoyed the benefits of these institutions, although the Soviet
Union and its Communist allies were eventually excluded.
In the same spirit, as tensions rise in the Taiwan Strait, the United States and its allies should
start consulting on the principles that should guide their economic response if the PRC goes
rogue. These principles must be farsighted, applying not only to the immediate demands of the
break-glass political scenario but also to the long-term future that would follow any US–PRC con-
flict. Washington should embrace these principles publicly, in advance, and in coordination with
its allies and partners. Committing to these principles will increase confidence that the United
States would act wisely and effectively if it chose to trigger avalanche decoupling on Day One.
The watchword of the Day One Plan is US economic leadership. To achieve avalanche decou-
pling while maintaining US economic leadership, Washington should establish four funda-
mental principles:
1. Refrain from breaking noncritical supply chains on Day One and thereafter give firms
adequate time to reshore them.
3. Refrain from asking other countries to decouple from the PRC, and build US decoupling
into a wider program of economic support in response to a Taiwan crisis.
The details of the policies are negotiable, but all four principles would be essential to
instilling confidence in the chaotic context of Day One. Economic leadership would require
showing the world that the United States sought to minimize the initial economic and finan-
cial shock of a Taiwan crisis, not to exacerbate it. Economic leadership must be grounded
in a commitment to protecting the unique role of the dollar, which supports key US strategic
interests, such as export controls and existing sanctions on rogue states. Amidst the uncer-
tainty of a Day One crisis, economic leadership would require the United States to com-
municate a vision for preserving an integrated and inclusive global trading system based
on common rules, even as major economies decoupled bilaterally from the PRC. Finally,
economic leadership would require supporting third countries through the decoupling of
the United States and its Core allies (hereafter called the Core) from the PRC, allowing them
to draw shared economic benefits at the PRC’s expense, and incentivizing them to help
enforce the Core’s trade policies against the PRC.
If Washington could stay true to these four principles, it could force avalanche decoupling
unilaterally, on the timeline of its choosing, and in a form that sustains US economic lead-
ership in an inclusive, rules-based trading system. There would be no wishful thinking that
other countries would cut their economic ties with the PRC for high-minded moral reasons.
All negative actions against the PRC could be taken by the United States and a small number
of the Core. All coalition building would be built on incentives and rules-based multilateral
mechanisms. By aligning US strategic interests with the economic interests of third countries,
the Day One Plan would make decoupling much harder for the PRC to disrupt—and enable it
to gain momentum over time as it harnessed market forces.
Guided by these principles, this report outlines three policy pillars to execute avalanche
decoupling:
1. The Core would use ratcheting tariffs or quotas to decouple bilaterally from the PRC,
as justified by the national security exemption in WTO rules.
2. The United States would intervene unilaterally in global currency markets to “go short”
the PRC’s currencies, dealing a short-term blow to its financial stability and committing
the United States to destroying its terms of trade over the long term.
3. The Core allies would establish an Economic Security Cooperation Board (ESCB),
a new institution with a mandate to deliver bilateral aid to member states, including
as compensation for retaliatory PRC economic warfare, and facilitate the accurate
reporting of trade with countries that members deem systemic national security threats.
Notably, unilateral action alone would not shape the avalanche in the longer term in a way that
would advance US interests. While it would not be necessary for third countries to decouple
from the PRC themselves—or even to accept the US position on the Taiwan crisis—all coun-
tries continuing to trade with the United States would need to report accurate data on PRC
goods being transshipped through their markets, including components and intermediate
products. They would also need to be encouraged to remain committed to the rules-based
trading system. As trade barriers on PRC goods rose higher, private firms would have increased
incentives to mislabel and traffic PRC products into the US market, as they are already doing
in response to the Trump and Biden administrations’ tariffs. Governments in third countries
might have neither the ability nor the will to stop them. Without a plan to prevent mass leakage,
the United States would achieve “decoupling” in name only. US consumers would pay higher
costs, but they would remain nearly as dependent on PRC products as before. The United
States would find itself bogged down in trade disputes with its major trading partners—and
the PRC would suffer minimal punishment.
Once the tariffs and quotas of the Core began to kick in, the challenge would be to incentiv-
ize the governments of third countries to conduct audits, enforce penalties that incentivized
domestic firms to follow the law, and provide detailed and accurate data on the imports and
exports of PRC goods and intermediate components. The ESCB would build essential trade
supervision responsibility into a broader program of global economic recovery, led by the
United States but administered through an independent agency. Its customs enforcement
operations could be developed institutionally over time because the Core would impose
no restrictions on noncritical PRC goods on Day One. How fast the system would need to
be established would depend on how quickly the Core wanted the avalanche to proceed.
Crucially, the Core would have to refrain from treating the ESCB as an instrument for forcing
its geopolitical agenda on the rest of the world.
The history of US economic leadership during and after World War II should be an inspiration
for policymakers today if events force the creation of the ESCB. In the early 1940s, US and
British leaders decided that the postwar economic order would be based on compromise,
incentives, and rules-based institutions. The postwar international economic order had a geo-
political rationale—to ward off the threat of communist expansion—but this logic was always
The next three sections outline the policy areas and discuss potential PRC countermeasures
and US and allied responses. We then briefly consider the PRC’s other options for waging
economic warfare against the United States during a Taiwan crisis and discuss their implica-
tions for the Day One Plan. Finally, we discuss the severability of the three policy pillars.
The first pillar of the Day One Plan involves the use of discriminatory trade policy—tariffs
or quotas—to phase out trade with the PRC over a politically negotiated period of years.
Washington would cite the national security exemption in Article XXI of the GATT Charter to
justify these policies under WTO rules. During this process, some industrial policy may be
necessary, particularly for critical products, as a safeguard against potential PRC export con-
trols. Core allies would presumably follow suit.
It is impossible to establish in advance which states would comprise the Core. The most likely
case is that it would include the non-EU G7—the United States, the UK, Japan, and Canada—
as well as South Korea, Australia, New Zealand, and Taiwan. Support from EU member states,
above all the remaining members of the G7, would be highly desirable. However, EU participa-
tion would be challenging and is not essential to decoupling. At minimum, a Core composed
of the United States, Japan, the UK, Australia, and Canada would be sufficient. These nations
represent 36% of global GDP. Which countries would be included and how ratcheting tariffs
or quotas would be designed and sequenced are political questions that would be discovered
only through negotiation.
It would not be advantageous to make membership status in the Core fixed and permanent,
as not all members would support every policy. Some might want to participate in a joint
industrial policy for critical products. Others may be capable of pursuing only their own.
Some might impose tariffs on the PRC to ratchet at different rates, although they would have
to align policies to prevent opportunities for arbitrage. In time, the Core may become a set
of overlapping coalitions-of-the-willing. What would unite the Core would be a commitment
to decoupling from the PRC in a gradual and market-driven manner that sustains the rules-
based trading system.
As discussed in the first part of this essay, members of the Core may also broaden export
controls on dual-use technologies to the PRC. These would be policies not of decoupling but
of technological dominance. Therefore, the enforcement of export controls would be up to
individual member states, not the ESCB. This report does not discuss export controls further.
The rest of this section discusses how the Core could legally and operationally decouple from
the PRC in noncritical goods.
In the United States, decoupling would be authorized legally through Section 232 of the Trade
Expansion Act of 1962.143 Under current law, the president has broad discretionary power to
impose import restrictions if a Commerce Department investigation finds that certain imports
threaten to impair US national security. Any department, agency head, or “interested party”
can ask the Commerce Department to initiate an investigation, which can take up to 270 days.
If the Commerce Department makes an affirmative finding, the president has an additional 90
days to impose whatever remedy s/he thinks is most appropriate. Before the Trump admin-
istration, Section 232 power was used sparingly.144 Many US allies find it deeply concerning,
since the Trump administration breached long-standing norms when it imposed Section 232
tariffs on steel imports from countries such as Canada, South Korea, and Japan in 2018.
Still, the Trump administration proved its point: current US law recognizes a vaguely defined
exception that allows the president to restrict trade on national security grounds.
In the Day One contingency, Congress would presumably want to amend Section 232 to take
control of the avalanche decoupling process. The decision to trigger avalanche decoupling is
too significant to give to a single person, unless Congress authorizes that person to decide.
The current procedure is far too slow to be appropriate in a fast-moving Day One contin-
gency. The Commerce Department lacks the legitimacy to make the determination that all
trade with the PRC constitutes a national security threat, and pursuing full decoupling under
Section 232 might face legal challenges. Furthermore, in the Day One context, Section 232, as
currently written, would give the president too many powers and the wrong incentives to use
them effectively. On the one hand, the crisis context would allow the president to justify shat-
tering historic norms surrounding Section 232 and to use the power indiscriminately against
US allies and trading partners, violating the spirit of trade agreements that Congress has
ratified. On the other hand, the current language of Section 232 would give the president the
power to modify, pause, or even reverse decoupling with the PRC if it ever became personally
politically advantageous to do so. Since the United States holds presidential elections every
four years, the US government could not commit credibly to ratcheting toward full decoupling
under these conditions. If Washington could not make a credible commitment to see the ava-
lanche decoupling through, the Core would be unlikely to follow.
Fortunately, once Congress revoked PNTR with the PRC, a few small amendments to
Section 232 would suffice to trigger the avalanche while sustaining checks and balances
between the legislative and executive branches’ powers on trade policy. The amended
(a) to require any contracting party to furnish any information the disclosure of which it
considers contrary to its essential security interests; or
(b) to prevent any contracting party from taking any action which it considers necessary
for the protection of its essential security interests
(i) relating to fissionable materials or the materials from which they are derived;
(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic
in other goods and materials as is carried on directly or indirectly for the purpose of
supplying a military establishment;
(c) to prevent any contracting party from taking any action in pursuance of its obligations
under the United Nations Charter for the maintenance of international peace and security
On Day One, the Core would therefore declare that the PRC’s decision to begin a Taiwan
crisis represented a “systemic national security threat” as an attack on the entire rules-based
system. This claim would justify any and all discriminatory policies that the United States
might then impose on the PRC and other countries currently under international sanctions,
including potentially Russia and Iran. Self-evidently, a PRC invasion of Taiwan would consti-
tute a time of war under section (b)(i). Any attempt to blockade or quarantine Taiwan would
To strengthen the political legitimacy of the Core’s legal claim, Taiwan, a WTO member in
its own right, could also bring suits against the PRC. Members of the WTO do not have to
be states, only “governments acting on behalf of a separate customs territory.”149 Taiwan
acceded to the WTO in 2002, a month after the PRC, under the name “the Separate Customs
Territory of Taiwan, Penghu, Kinmen and Matsu.” Taiwan could challenge PRC aggression in
the WTO in the event of a quarantine or blockade, even if there were no kinetic invasion.
Beijing would probably challenge the United States’ broad interpretation of the national secu-
rity exemption and seek WTO arbitration.150 However, even setting aside the strong US legal
case and the current logjam in the WTO’s dispute settlement process, resolving this legal
battle would take years, and neither side could be forced to abide by the ruling. Nor would the
WTO have any authority to prevent the United States from intervening in currency markets,
despite the enormous impact this might have on international trade.151 Beijing’s complaints
would therefore be mainly political theater, an attempt to persuade the Global South that
Washington was to blame for undermining the global trading system.
Crucially, Washington would frame its invocation of the national security exemption as a
defensive reaction to the PRC’s aggression, not as a pretext for undermining the WTO. The
current US position is that national security interests are self-justifying—that is, they are what
a state says they are, and they cannot be assessed by WTO jurists.152 There is an argument
for this position in principle. However, in the unique crisis context of Day One, it might be
a mistake to continue to emphasize it. If other countries concluded that the United States
was abandoning WTO principles altogether, they might cite the national security exemption
to retaliate against the United States, and global trade could collapse as the world’s major
economies spiraled into a multi-front trade war. The United States should therefore empha-
size its commitment to WTO principles by continuing to abide by WTO rules and norms in its
relations with nonrogue states as much as possible. This means that it would need to exer-
cise restraint in using the national security exemption to justify trade action against other
countries.
The United States would also need to make clear that while it considered the PRC to be a
systemic threat to the rules-based economic system, it would not demand that other coun-
tries accept this designation or even condemn the PRC’s violent moves against Taiwan. Third
countries would merely have to accept that the Core states were acting lawfully in imposing
discriminatory trade policies against the PRC. The incentives for countries to take this posi-
tion would be structured through the ESCB, as discussed below.
There are several potential advantages to a ratcheting regime. Raising tariff levels gradually in
exchange rate–adjusted terms would smooth out the disruption to global supply chains over
time and minimize sticker shock for consumers. There would be no initial baseline. In other
words, if a tariff were the chosen approach, it would begin at 0.0%. A ratcheting regime would
also provide more clarity for financial markets and clearer signaling for industry than an ad
hoc system in which political leaders had to keep agreeing on the optimal rate.
It is less important that the tariff or quota ratchet quickly than that it be difficult for politicians
to interfere with the ratchet in the future. The goal of the ratcheting policy is to leverage pri-
vate investment by persuading firms that full decoupling from the PRC is inevitable. If this
inevitability can be established, capital markets will reward firms that act decisively to reshore
their supply chains into safe countries while punishing those that do not.
ENFORCEMENT
As the Core countries ratcheted up trade barriers against PRC products, the incentives would
grow for firms to re-export PRC products into the Core via third countries. This “leakage”
problem is a perennial challenge for all tariff regimes. Since the Trump administration imposed
tariffs on the PRC in 2018, there have been many well-documented examples of elaborate
fraud networks for laundering PRC goods.153 According to a study by The Economist, the
value of made-in-PRC goods entering America via third countries to evade tariffs may have
exceeded $100 billion in 2021 alone—more than total US imports from Japan or Germany
in the same year.154 Firms in Southeast Asia regularly repackage and re-export PRC inter-
mediate goods without appropriately indicating their origins.155 More recently, Central Asian
countries with long land borders with Russia, such as Kyrgyzstan, have seen “imports” of
manufactured goods soar several thousand percent as countries seek to evade sanctions
on Russia.156
Executing avalanche decoupling will require a new approach to customs enforcement and
border security. Since the negotiations for the 1993 Uruguay Round, the global trend in
It would also be important to manage the flow of small parcels from the PRC into the Core.
Under the de minimis rule, US Customs and Border Protection currently exempts import
packages below $800 in value from typical customs inspections. The rise of e-commerce has
made it easier to send parcels between customs regimes without proper inspections, and tar-
iffs create incentives for buyers and sellers to use this approach. After the Trump tariffs were
imposed, the number of packages entering the United States tariff free under the de minimis
rule rose from 150 million in the 2016 fiscal year to over 1 billion in 2023.160 Any process of
trade decoupling would require reform to de minimis rules to close this loophole. There is
already bipartisan support in Congress for de minimis reform.161 Other Core countries would
need to tighten their own de minimis rules.
Ultimately, minimizing transshipment would be the most challenging aspect of any decoupling
strategy. No approach will be perfect, and there will be significant leakage, even in the best-
case scenario. While perfection is not necessary to achieve broad decoupling over time, a
generally effective customs regime is a precondition for avalanche decoupling. Further invest-
ment in US Customs and Border Protection and similar institutions in other Core countries
would be a sensible preparatory step before any Day One crisis but would not be sufficient.
To achieve avalanche decoupling, the Core would need to incentivize third countries to hon-
estly report when PRC products are transshipped through their domestic markets. This is
where the ESCB comes in, as discussed below.
INDUSTRIAL POLICY
As discussed in the first part of this report, the Core allies would likely try to break their crit-
ical dependencies on the PRC in any Day One crisis, even outside break-glass scenarios.
Actual or threatened PRC export controls would make it essential to develop alternative sup-
plies for active pharmaceutical ingredients, for example. In the break-glass scenario, a larger
basket of products would likely fall in this category. Industrial policy would not be appropri-
ate for all goods, but it may be appropriate to invoke the Defense Production Act to ramp up
In the break-glass scenario, the Core would have a common interest in using coordinated
industrial policy to quickly reshore the most sensitive supply chains. These measures might
be coordinated internationally by the US Departments of Treasury and Commerce and their
allied equivalents, implemented according to domestic law, and made subject to regular
review and renegotiation. To hedge against the risk of PRC trade retaliation, the group might
also coordinate and finance the creation and maintenance of joint stockpiles. For critical
products, Core countries would strive to build sufficient production capacity to fully substitute
reliance on the PRC.
Under the Day One Plan, the United States would conceive of the Core, rather than the United
States itself, as the home market. This would be important for reasons of both efficiency and
political pragmatism, given the risks that some Core states might seek to use the process of
decoupling to gain unfair competitive advantages over one another. Given the Core’s fluid
composition, formal dispute resolution mechanisms would not be possible. It is therefore
essential that the bloc operate as much as possible through norms underpinned by US eco-
nomic leadership, as well as economic expertise and empirical data. Inspired by the history
of the GATT and Marshall Plan, Washington would therefore have to be prepared to stand
back and allow other members of the Core to play leading roles in this process, both sym-
bolically and substantively. Decisive US unilateral action would have triggered the process of
avalanche decoupling. Once this process began, however, US restraint would be essential to
bind the Core alliance together. The Core, after all, would advance US interests by implement-
ing discriminatory policies against the PRC and sharing the fiscal burden of decoupling.
PRC COUNTERMEASURES
The most immediate PRC political response to these measures would be political and legal.
Acting unilaterally or in a relatively small countercoalition, the PRC could block the IMF, World
Bank, and WTO from achieving essential functions in line with US interests and then blame the
United States for the resulting institutional dysfunction. Beijing could also organize a political
campaign to rally third countries, private firms, and other actors against avalanche decoupling.
This political grandstanding would have no immediate effect on the Core’s ability to impose
bilateral trade restrictions on PRC products, but it would create a political risk that major coun-
tries in the Global South might fall in line with this propaganda, blaming the West for the eco-
nomic disruption of the Day One crisis and ultimately collaborating with the PRC to undermine
the avalanche decoupling program. Managing perceptions in the developing world would be
strategically critical to the long-term success of the Day One Plan and is one reason why the
ESCB would play an essential role.
The PRC could also retaliate economically by dumping cheap products on global markets.
As discussed in Part 2, the CNY would probably weaken after Day One, due to market forces.
The US unilateral currency intervention described below would confirm and intensify this
trend. The PRC could also increase subsidies to its manufacturing sector to give its exports
• On Day One, the United States and a small group of US allies (“the Core”) would
implement discriminatory bilateral trade policies against all goods coming from the
PRC and other states labeled “systemic security threats.”
• These tariffs or quotas would start at extremely low levels, leaving noncritical supply
chains with the PRC largely open, but would ratchet over time, bringing total bilateral
trade to zero over a politically negotiated period of years.
• Only the Core would decouple from the PRC. Third countries would be under no legal
obligation or political pressure to change their trading relationships with the PRC in
any way.
• The Core countries would present their actions as legal under WTO rules. They would
argue that PRC actions had rendered further economic dependence on the PRC a
national security threat to themselves while emphasizing they would exercise restraint
in using the national security exemption in other contexts.
• The Core countries individually and collectively would need to develop a coordinated
industrial policy for critical products, especially electronic components with dual-use
functions that the PRC might cease to export in a crisis.
• The Core countries would need to develop joint stockpiles of key products for
which they depend on the PRC, such as critical minerals and active pharmaceutical
ingredients.
• The PRC’s political protestations could do little directly to stop this decoupling process.
• Over the longer term, the greatest challenge would be how to prevent the systematic
transshipment of (possibly mislabeled) PRC goods into the Core bloc via third countries.
Leakage would increase as the RMB was increasingly devalued.
• Solving the leakage problem would require incentivizing third countries to build and use
the customs administration capacity that they lack today. This is why the ESCB would be
necessary for avalanche decoupling to succeed.
Day One would be a pivotal moment for dollar hegemony. As established above, the imme-
diate outbreak of a Taiwan crisis would likely see a flight to safety in dollar assets. However,
the dollar’s favorable position could crumble quickly if the United States abused sanctions
and/or lost its political or military showdown with the PRC. The PRC is preparing to rapidly
internationalize its currency in a crisis. Maintaining dollar hegemony regardless of the political
outcome of a Taiwan crisis would be a critical goal. Since expelling the PRC from the dollar
system would not be realistic or prudent, US policy should seek to lock the PRC inside the
dollar system while the avalanche decoupling proceeds. This approach would minimize rogue
states’ ability to violate existing sanctions and export controls while degrading the PRC’s
terms of trade to erode its long-run competitiveness.
This section explains how the Treasury, with authorization from Congress, could accomplish
these goals by executing a large-scale short trade against the CNY and HKD. If successful, the
proposed operation might cause the rapid implosion of the PRC banking system on Day One.
It would also very likely force Beijing to expend a large amount of its FX reserves to stave off a
crisis while making a profit for the US taxpayer. However, US financial operations alone would
have little long-term impact on the PRC economy. Even if the CNH lost much of its value, it
would retain a fundamental value if it could be exchanged for PRC products. To prevent CNH
and HKD exchange rates from rebounding later, the Treasury would need to continue cur-
rency market operations indefinitely, which could become expensive. To defray these costs
and the risks of losing money on the trade, Washington would need a credible plan to achieve
broad economic decoupling over time, eroding the fundamental value of the CNY by taking
away the PRC’s major export markets. If Washington succeeded in this long-term plan, the US
taxpayer would eventually realize a large profit. If Washington failed to follow through on ava-
lanche decoupling, the currency intervention could end up becoming an enormous liability
for the US taxpayer. Currency intervention, therefore, would not be a standalone option for
meaningful long-term economic punishment. It would be a down payment—a commitment to
do “whatever it takes”—on a subsequent effort to see decoupling through.
TREASURY ACTION
In the context of large-scale Fed swap lines to provide bilateral dollar liquidity to third coun-
tries, the Treasury would intervene in currency markets on Day One against the CNH and
HKD. The operation’s proximate goals would be as follows:
• Break the pegs between the CNY and CNH, and between the HKD and USD.
• Drive down the HKD and CNH exchange rates as far as possible.
• Keep HKD and CNH weak and volatile for an indefinite period, raising transaction costs
and exchange rate risk to disincentivize third parties from holding them.
• Force the PRC to spend its liquid FX reserves defending the exchange rate.
The most likely scenario is that Beijing would abandon the CNH—and potentially the HKD peg
as well—and return to its pre-2015 model of a single currency (CNY) behind capital controls. In
this scenario, the PRC economy would continue normally, and Beijing would conserve its FX
reserves for a rainy day. However, Beijing’s trading partners would no longer be interested in
taking payment in CNH. Beijing would have to be careful about offering swap lines of CNY to
foreign partners, since the Treasury could potentially borrow CNY from them and sell it, driv-
ing down the onshore exchange rate. PRC firms would therefore have to conduct international
trade in dollars or other FX using payment and clearing systems that they did not control.
The CNH market is also joined at the hip with the Hong Kong financial system, which presents
an additional PRC vulnerability that Washington could exploit. Hong Kong has always been the
main settlement hub for offshore transactions, with its banks handling 75% of CNH clearing.
London comes in a distant second.163 The Hong Kong Monetary Authority (HKMA) also serves
as a vital provider of CNH liquidity. The HKD is pegged to the USD, and the HKMA intervenes
in FX markets to keep the HKD in a band between 7.75 and 7.85.164 The peg undergirds Hong
Kong’s financial system. If the peg collapsed, and Hong Kong’s financial institutions became
insolvent, the PRC would lose its most important clearing center for RMB transactions. A col-
lapse of the Hong Kong banking system could also ripple through mainland capital markets,
especially if margin calls forced Hong Kong banks to dump assets on the mainland. This pres-
ents a major vulnerability to exploitation. Beijing would probably intervene to preserve finan-
cial stability in Hong Kong.
If the US Treasury attacked the HKD, backstopping the HKD’s peg to the US dollar could
become another drain on Beijing’s reserves. The HKMA holds FX reserves several times
the size of the Hong Kong monetary base, which has enabled it to maintain the peg even
in moments of great strain, such as the 2019 protests and 1997 Asian Financial Crisis.165
However, in a Taiwan crisis, Hong Kong would face a grim combination of forces: existential
risk to short- and long-term viability of its financial sector, forced selling of real estate, an
exodus of foreign residents, and a collapse in its export facilitation sector. Foreign hedge
funds have already eyed the peg for decades as a potential target for a speculative attack.166
Given that the HKD is the world’s ninth-most traded currency, the HKMA’s reserves are small
relative to the potential firepower that global capital markets could put behind a short trade. The
PBoC and HKMA already have swap lines established, and these could be expanded in a cri-
sis.167 Nevertheless, depending on the extent of selling pressure, a simultaneous speculative
attack on the HKD and CNH could force the PRC to bleed enormous quantities of reserves. If
the HKD peg broke, capital would flood out of Hong Kong, the HKD would depreciate sharply,
and international investors would be even less inclined to hold or take payment in CNH.168
It is also possible to execute a short trade without physically exchanging currency. This can be
done using a nondeliverable forward (NDF), an agreement between two parties to buy or sell
an asset at a specific price on a future date. At the time of settlement, the parties determine the
difference between the agreed-upon exchange rate (the contract rate) and the prevailing market
exchange rate on the settlement date. When that date arrives, one party pays the other party the
cash amount equivalent to this difference. If the price of the asset declines between when the
NDF is opened and when it is settled, the short seller makes money. NDFs would be the simplest
tools for the Treasury to short the CNH because they would not require the Treasury to take own-
ership of CNH or pay interest. However, it is not clear how many counterparties would be willing
to offer NDFs to the Treasury, as opposed to lending their CNH for a profitable interest rate.
The Treasury’s primary objective in a currency intervention would be to destroy the value of the
CNH, not necessarily to make a profit. As a result, the operation would work slightly differently
from a conventional short trade:
1. Congress would authorize the Treasury Department to use the Exchange Stabilization
Fund (ESF)—its emergency reserve for FX intervention—to borrow and transact in CNH.170
Congress has modified this authority before, most recently during the pandemic.
2. The Treasury would offer to borrow an infinite quantity of CNH from foreign central banks
and institutional investors at the prevailing interest rate, plus a small premium to incen-
tivize the transaction.171 If desired, the Treasury could negotiate to make its interest pay-
ments in dollars.
3. The Treasury would also offer to take out as many NDFs as possible, betting that the value
of the CNH would decline in the coming days, months, and years.
(continued)
5. If Beijing wished to defend the CNH exchange rate, it would have to direct PRC banks to
halt the issuance of new CNH loans offshore. It would also need to buy up CNH from the
Treasury and other offshore investors using dollars or other FX from its reserves. Together,
these actions would reduce the amount of CNH in circulation. Beijing could not return this
CNH to circulation in the future without selling it, which would weaken the exchange rate
in the process.
6. In light of the Treasury’s actions, and Beijing’s potential responses, third parties holding
CNH would have to choose. If they expected the CNH to hold its value or appreciate—that
is, if they expected the Treasury’s short trade to fail—they should buy NDFs or lend their
CNH to the Treasury, the world’s safest borrower, for a “risk-free” profit. However, if they
expected the CNH to depreciate—that is, if they expected the short trade to succeed—
then the only rational decision would be to sell all their CNH before the price fell.
7. When the Treasury acquired the CNH, it would offer to sell it all on the open market at the
current market price, going “short.”
8. The Treasury would continue to borrow and sell CNH indefinitely until directed by Con-
gress to stop.
9. If the short trade worked, and the value of the CNH fell significantly, the Treasury could
negotiate with its creditors to repay its CNH loans in dollars instead, at a favorable
exchange rate.
10. Insofar as the Treasury still needed to repay loans in CNH, its operations would need to
become unpredictable. The Treasury could not buy back CNH to cover its short positions
without causing the CNH to strengthen. Private investors would anticipate that the CNH
would strengthen before the Treasury’s larger CNH loans came due, as major repurchases
would be necessary. Speculators might try to exploit this fact by attempting to hitch a ride
on the CNH during periods of strengthening. The Treasury would therefore have to keep its
schedule of CNH liabilities secret and buy and sell CNH in unpredictable quantities and at
irregular intervals, perhaps in coordination with major US and allied banks.
11. Whenever the supply of CNH for sale exceeded the demand to buy CNH, the exchange
rate would fall. If the exchange rate became highly volatile, the PRC’s trading partners
would be disincentivized to hold it, or even to accept payment in it, lest they find them-
selves unable to sell it to someone else later.
The CNH market is quite small, which makes it a relatively easy target for speculative attacks. As
of July 2021, just $200 billion worth of CNH was deposited offshore. The derivatives market is
even smaller and shallower, which would give speculators an additional tool to wreak havoc.172
Anticipating this vulnerability, the PRC is trying to expand the market. Unfortunately for the PRC,
allowing the CNH market to grow comes with a trade-off. The bigger and deeper the market
gets, the more FX the PRC might have to spend to keep the exchange rate stable in a crisis. The
smaller and shallower the CNH market, the less costly it would be to attack it.
The PRC has trillions of dollars of FX reserves that it could hypothetically use to support both
exchange rates. The PRC’s State Administration of Foreign Exchange (SAFE) held $3.2 trillion
in FX reserves at the end of April 2023. It may also be able to mobilize up to $3 trillion more
through the sovereign wealth fund and state banks, though it is not clear how much of these
“leveraged” FX holdings are liquid.173 The PBoC can also acquire dollars by selling CNH,
thereby weakening the exchange rate, as it has done in the past.174
Still, the PRC would have to ration its FX reserves carefully. If Beijing spent too much of its
reserves attempting to defend the currency but lost control of the exchange rate anyway, it
might face a balance of payments crisis in the future if avalanche decoupling took place and
its terms of trade became unfavorable. In any scenario, US pressure on CNH would force
the PRC to adopt policies that would make its currency undesirable for use by third par-
ties, including restricting convertibility and draining liquidity from the CNH capital market.
The capital market for CNH is already underdeveloped, so the currency today is useful for
buying the PRC’s exports but little else. Countries exporting to the PRC would demand pay-
ment in dollars or other more stable currencies. Finally, the more carefully Beijing rationed
its FX reserves, the less dollar aid it could provide to the rest of the world on Day One of a
Taiwan crisis.
The PRC could also adopt policies to increase external demand for CNH and shrink the CNH
money supply. Russia successfully deployed some of these policies when it rescued the ruble
in March 2022. Thus, the PRC could execute the following measures:
• Instruct PRC state-owned banks and sovereign funds to buy CNH on the open market
and hold it indefinitely.175
• Raise interest rates on CNH and CNY deposits to discourage bank withdrawals.
• Shut onshore exchanges and prohibit PRC financial institutions from helping foreigners
liquidate assets onshore.
Taken together, these measures would effectively reduce the money supply of CNH while
encouraging market participants to buy or hold CNH, thereby pressuring the exchange rate
The challenge for Beijing is that efforts to shrink the CNH money supply would contradict
efforts to expand trade in CNH. Once PRC banks and other entities had bought up CNH,
they could not return it to circulation without selling or lending it, which would weaken the
exchange rate. Moreover, if the PRC’s export partners stopped paying in FX but Beijing had
to continue paying for most of its imports in FX, the State Administration of Foreign Exchange
(SAFE) could potentially drain its FX reserves by over $2 trillion per year. The PRC’s imports in
2023 amounted to $2.56 trillion.
Another strategy would involve accepting a devaluation of the CNH and trying to stabilize the
CNH/CNY exchange rate at some weaker level. There is no reason, in principle, for the CNH
and CNY to be pegged 1:1. So long as they are freely convertible at some exchange rate—
such as 2:1, or even 10:1—the PRC could maintain the purchasing power of the CNY while
limiting the incentives for arbitrage. If the two exchange rates could be re-pegged at another
level, third parties would once again have incentives to hold it, as CNH would be useful for
buying the trillions of dollars of PRC exports that the world currently consumes every year.
However, having abandoned the initial peg, the burden of proof would be on the PRC to per-
suade markets of the reliability of the new peg.
If the CNY and CNH exchange rates to the dollar were moving independently, the PRC’s cap-
ital controls would come under extreme pressure. Today, PRC authorities currently allow
regulated financial institutions to make 1:1 conversions of CNH to CNY under controlled
conditions. This arrangement would become problematic if a peg could no longer be main-
tained because PRC entities could profit through arbitrage. Private PRC enterprises would
seek excuses to buy dollars with CNY, perhaps under the pretext of buying foreign compo-
nents; use those dollars to buy CNH; and then convert them into CNY for a profit.176 PRC firms
receiving payment from foreign customers might also have incentives to seek payment in
dollars, hide those earnings overseas from their own authorities, and convert them later after
the CNH had weakened further. These activities would be highly likely to cause the CNY to
weaken, exacerbating pressure on capital controls and causing domestic inflation. In the long
term, these potential risks would be highly problematic for the PRC. To prevent the PRC from
re-pegging the CNH to the CNY in the future, the Treasury would simply double down on its
short selling.
1. The PRC could ban conversion between CNH and dollars, requiring that all CNH trans
actions take place on CIPS. However, the Treasury could respond by selling CNH in
exchange for euros, yen, or any other currency for which CNH conversion was not banned.
If necessary, the Treasury could conduct its currency intervention through proxies.
2. The PRC could try to establish a cryptocurrency pegged to the dollar. However, the
Treasury could simply short the cryptocurrency, draining FX reserves in the process.
If the Treasury engaged in a large-scale short trade against the CNH and HKD, it would be
making a bet that the value of these currencies would fall rather than rise. If the currency
intervention turned out to be a self-fulfilling prophecy, the Treasury would make a profit that
could be disbursed to taxpayers or used for other purposes, such as paying down the national
debt. However, if the trade failed for any reason, and the CNH and HKD exchange rates to
the dollar rose above the level at which the Treasury had shorted them, then the US taxpayer
would face significant and theoretically unlimited fiscal liability. The Treasury would also lose
money if the exchange rate held constant, because it would have to pay interest (possibly
denominated in CNH) on the CNH that it borrowed. In a sense, the currency intervention
could therefore be understood as a nonrefundable down payment on future trade decoupling.
The United States would now have a powerful fiscal interest in eroding the long-term funda-
mental value of the PRC’s currencies by destroying its terms of trade.
The risks to the currency intervention would come from independent market participants,
not just PRC counter-intervention in the markets. The further the CNH exchange rate fell
below its fundamental value, the more attractive it would be to speculators. No matter what
the Treasury did, the value of the CNH would be unlikely to fall all the way to zero. Indeed, the
exchange rate would probably continue to fluctuate wildly for as long as the Treasury’s cur-
rency intervention lasted. CNH would have some value as long as PRC exporters were willing
to accept it as payment.177 CNH would also retain some value as a “war option.”178 Even if the
PRC ran out of FX, it would still be able to purchase essential imports by issuing IOUs denom-
inated in FX.179 The US government would therefore have to show credibly that it could sustain
the short trade for as long as necessary.
Importantly, the point of the currency intervention would not be to destroy the CNH alto-
gether, but to render it a poor store of value. At any given market price and set of exchange
rates, firms and countries prefer to be paid in a stable and secure currency rather than to
receive the same amount in a devalued, highly volatile, or nonconvertible currency. This
preference explains why all oil exporters today prefer to take payment in dollars rather than
Bitcoin. Venezuela and Iran accept cryptocurrency for oil only because they are subject to
dollar sanctions and are therefore forced to sell their oil at a discount.180 The goal of the cur-
rency intervention would not be to shut down trade with the PRC. Indeed, the US government
would encourage the PRC to continue to trade in dollars with the rest of the world by letting
the PRC keep using the existing dollar payment networks: SWIFT and CHIPS. Rather, the goal
In this context, currency intervention would be highly likely to succeed if—and only if—the
Treasury enjoyed an ironclad and open-ended mandate from Congress. Congress can, in
theory, authorize the Treasury to deploy an unlimited number of dollars for the purpose of
shorting the CNH. On the other side of the trade, Beijing has and can theoretically acquire
only a limited quantity of dollars to support the exchange rate by buying CNH and HKD. Thus,
the goal of the operation would be to persuade both Beijing and the market that the CNH and
HKD were indefensible.
The surest way for Congress to prove this commitment would be to give the Treasury unlim-
ited authorization to deploy dollars for the currency intervention. Quite similar to European
Central Bank president Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro,
such an action would send the message that the United States government was prepared to
stake the credibility of its own currency on its ability to destroy the CNH while daring doubtful
market participants to bet against it.
The effect of currency intervention on dollar price level is less clear, but it would not nec-
essarily be inflationary. The Treasury would be deploying trillions of dollars to execute a
financial operation, but it would not be spending them or injecting those dollars into the real
economy in the manner of a fiscal stimulus. Shorting the CNH by borrowing it and selling it
for dollars would reduce the dollar money supply. This, on its own, would cause the dollar to
strengthen. The aggregate effect of the currency intervention on the dollar price level would
depend largely on what happened to the value of the CNH and other peer currencies, which
in turn would depend on how Beijing and financial markets responded to the Treasury’s
actions. If the currency intervention succeeded quickly, and Beijing allowed the CNH to col-
lapse, the resulting impact on US prices would probably be mildly deflationary. If the currency
intervention took longer to work because Beijing spent trillions of dollars buying CNH, the
inflationary outlook would be uncertain for some time. It is possible that the dollar money
supply could increase, with mildly inflationary results.
It would be the Federal Reserve’s responsibility to manage the dollar money supply in
light of the Treasury’s currency intervention. The Fed maintains a balance sheet of roughly
$8 trillion. Through the pandemic, it has asserted sweeping authority to expand or contract
the balance sheet at will to maintain macroeconomic and financial stability. In any Taiwan
crisis—with or without a currency intervention—the Fed would play a key role, intervening
to maintain stable prices and support the banking system of the United States and friendly
countries. If the dollar money supply abruptly expanded or contracted during the currency
intervention, including through potential PRC fire sales of dollar assets, the Fed would have
to act accordingly.
The goal of currency intervention would be to force the PRC to settle most of its trade in FX
using SWIFT or similar cross-border payment platforms that it does not control. The PRC’s
own CNH cross-border payment system (CIPS) would become virtually useless if foreign
trading partners did not want to hold CNH or take payment in it, especially if Beijing could
no longer safely issue CNY swap lines. The PRC could not build an alternative RMB trad-
ing system in the future without bringing the CNY and CNH back into alignment. The United
States should not count on any particular outcome. However, all of the steps that Beijing
would have to take would undermine the functionality of the CNH capital market, making it
much more cumbersome for foreign entities to do business using CNH, and hamstringing
Beijing’s efforts to internationalize its currency quickly after Day One.
A weakening CNH by itself would not be all bad for Beijing. A weaker currency would not nec-
essarily make the PRC’s exports more competitive if these goods had to be shipped through
a war zone, but in a quarantine scenario without kinetic conflict, or after a hypothetical war, a
weak CNH would greatly boost the competitiveness of PRC exports. As discussed elsewhere
in this report, this would pose a challenge for the US and its partners but also an opportunity.
• The Treasury would intervene in currency markets on Day One against the CNH
and perhaps also the HKD, aiming to break the CNH/CNY peg and the HKD’s peg to
the dollar.
• The currency intervention would aim to keep CNH weak and volatile for an indefinite
period, raising transaction costs and currency risk to disincentivize third parties from
holding it.
• If this attempt failed, Beijing would have to either abandon the CNH entirely or abandon
the peg, putting further pressure on its capital controls.
On Day One, to persuade neutral countries to work with the United States rather than allow-
ing private firms to actively undermine the decoupling process, the plan would have to be
structured fundamentally and explicitly as a program of global economic recovery led by
rules-based institutions. Otherwise, the avalanche decoupling strategy would lack political
legitimacy and resilience.
Furthermore, to prevent a general turn to autarky, keep prices relatively stable, and provide
countries with a clear incentive to enforce discriminatory policies enacted against the PRC
and other rogue states, the United States would need to actively support global economic
recovery through aid and investment. It would also need to limit the extent to which its own
use of the national security exemption would give countries the green light to abandon the
principles of the WTO altogether. As discussed in Part 1, the context of a strengthening dollar
would make this particularly challenging. However, the United States would have a clear
national interest in making such a commitment.
To achieve these goals and anchor the project of inclusive global economic recovery, the United
States and its Core allies could establish an ESCB. They would vest the board with its own sec-
retariat and a significant budget and incentivize as many countries as possible to join on Day
One. The ESCB would not require potential members to decouple from the PRC or to oppose its
actions against Taiwan. For non-Core members of the ESCB, membership would carry few politi-
cal, legal, or financial obligations. Inspired by the Economic Cooperation Administration created
as part of the Marshall Plan, the ESCB would have two primary mandates:
1. Provide dollar aid to member state governments and intervene as necessary to stabilize
prices and support member states through the process of decoupling.
2. Support member states in accurately reporting when products or their component parts
have been imported from states that one or more ESCB members deem a systemic
national security threat and hold members accountable for acting as transshipment
points for their products.
The Core would use the ESCB to provide financial support to countries that might play
important roles in global supply chains during and after avalanche decoupling. Many of these
countries would also face a severe economic shock resulting from the Day One crisis. Each
country would face a unique set of challenges. Some countries would struggle to attract pri-
vate investment during the crisis for geopolitical reasons that were out of their control. The
ESCB would support US interests by enabling these states to remain relatively stable through
avalanche decoupling.
Relatedly, by creating the ESCB, the United States would be sending a clear signal to global
markets that its decoupling strategy would be targeted narrowly against the PRC and other
rogue states and would not serve as a cover for a wider turn toward systemic protectionism. The
ESCB would support the enforcement of discriminatory trade policies against nonmembers. If
one member violated another member’s discriminatory policies against a nonmember by failing
to make basic efforts to prevent illegal transshipment, the ESCB would have the administrative
power to determine that the transshipping state could be subject to discriminatory trade pol-
icies. In theory, two states within the ESCB could still use the national security exemption to
implement discriminatory trade against each other. However, the ESCB would not be in the busi-
ness of enforcing these policies. In practice, the ESCB would be intended to include as much of
the global economy as possible. Its enforcement function would therefore be to support policies
against rogue states, such as the PRC, Russia, Iran, and North Korea.
The ESCB would also support US interests by providing a framework for collective resilience
against economic coercion by the PRC. In any Taiwan crisis scenario in which the US decides
to decouple, Beijing may put considerable pressure on third states with export and import
controls, offers of preferential loans or debt restructuring, and other economic instruments.
The ESCB would give states the confidence and capacity to resist such efforts, although its
power to do so would depend on how generously the Core was willing to fund it.
In short, the ESCB would not simply hand out aid but would play a vital role in shaping ava-
lanche decoupling. It would establish and enforce the principle that states could protect
Recipient countries received Marshall aid on a roughly per capita basis. The major industrial
countries received the largest shares of funding—26% to the UK, 18% to France, and 11% to
West Germany. Altogether, seventeen European countries received benefits under the plan. US
aid to Europe had previously been run through the UN on an ad hoc basis. The Marshall Plan
funded aid for multiple years and backed it with administrative capacity, technical support, and
a coherent agenda for encouraging European market integration.
Marshall funding and technical support gave Europeans the confidence to dismantle wartime
controls on industrial production and allocation. Washington provided administrative and tech-
nical support through the Economic Cooperation Administration (ECA), which Congress estab-
lished to administer the plan. The ECA was a fully US-run agency that had broad discretion to
deploy Marshall funds, as well as “matching funds” that European states provided themselves.
With only a small amount of aggregate spending relative to Europe’s GDP, it improved produc-
tivity and established functional partnerships with industry and organized labor groups.182
The ECA was able to influence European policy for such a small sum because it gave recipient
countries considerable agency. France poured Marshall funds into machinery and raw materi-
als for manufacturing as part of Jean Monnet’s “Plan for Modernization and Re-equipment.”183
France also maintained many state controls on the economy that left it “the most Eastern
European” of all the Western European economies.184 The ECA tolerated this, knowing that in
the long term France was charting its own course within the Western coalition. Furthermore,
France, Germany, and Italy all imposed tight national controls on agricultural production that
contradicted Marshall’s free-trade goals. Britain used most of its Marshall funding to pay down
debt, bypassing the ECA entirely. “It was undesirable,” the UK Cabinet Economic Policy Com-
mittee noted in January 1948, “that any opening should be given for excessive interference by
United States representatives in our domestic affairs.”185
The Marshall Plan’s organizers emphasized practical areas of cooperation, including the
regulation of trade and customs. One of the lesser-known outgrowths of the Marshall Plan was
the Customs Co-operation Council, established in 1950 to encourage “the highest degree of
harmony and uniformity in their customs systems and especially to study the problems inherent
All told, the Marshall Plan spent less than 3% of the recipient countries’ combined national income
during its active period while successfully achieving its geopolitical goal of building a coherent
Western Europe opposed to Soviet influence.188 The Soviets managed to leverage their military
and political control over Eastern Bloc countries to make them reject the proffered US support.
Crucially, however, former Axis countries and countries that remained neutral in the emerging
Cold War were eligible for Marshall aid, not just former Allies. This decision proved farsighted, as
it prevented neutral countries, such as Austria, from falling under Soviet influence at a time when
communist parties were on the rise. The Marshall Plan also provided incentives to encourage the
political cooperation that France saw as a prerequisite for lifting price controls, rationing, and pro-
duction ceilings in occupied Germany. This decision enabled the reconstruction of West Germany
as an anti-Communist bastion.
In the wake of a Taiwan crisis, different policies would be necessary. Far less US money would
be required relative to the economic size of recipient countries, as the Core would not be in
the business of rebuilding an entire continent ravaged by war. Still, two key elements of the
Marshall Plan’s success are worth highlighting:
• The explicit purpose of the Marshall Plan was to drive European economic recovery, not to
punish the USSR or defeat communism. These were beneficial effects and central to the
logic of the plan—but they were always implicit.
• In both design and implementation, the Marshall Plan gave recipient countries agency.
While the long-term objective of the Marshall Plan was to drive European market integra-
tion and international trade, it accepted that in the short term, Western European states
were going to want to pursue national development strategies at the expense of market
efficiency, and it gave them considerable slack to do so. Implementation involved constant
negotiation, and recipient governments did not always take the ECA’s advice.
On Day One, the United States’ efforts to preserve the rules-based economic system would
be similarly framed not as “sanctions” or “economic warfare” but as economic leadership and
recovery. Its objectives would be political as much as economic. To quote Secretary of State
George Marshall, the United States would aim to restore the “confidence of people in the eco-
nomic future of their own countries and of the [global] economy as a whole.”189
Membership would, in theory, be open to any country not considered by the United States
a systemic security threat. Rules for accession would be agreed upon by the Core. The goal
would be to begin with the biggest tent possible and sustain it over time. Neutral countries
and countries that continued extensive trade with the PRC would be encouraged to join the
ESCB on Day One in return for unconditional dollar aid.
Every effort should be made in advance of Day One to persuade European nations to commit
to joining the Core, but if this proves impossible, a natural compromise would be for Europe
to stay out of the Core but participate in the ESCB. Brussels itself could become an active
member of the ESCB and so possibly could individual EU member states, as membership
of the ESCB would not require agreeing to a particular trade policy but the enforcement of
the trade policy of other members.193 In all break-glass political scenarios, close US allies
in Europe would want to ensure continued US support for Ukraine and other related eco-
nomic security priorities connected to the Russian threat. They would pressure Brussels to
strengthen product identification requirements on products made with PRC components or
re-exported via the PRC. Our base case is, therefore, that EU member states do not join the
Core but need little incentive to participate in the ESCB.
Inspired by the Marshall Plan, the ESCB should distribute aid in tranches to member
states, which could use the aid in consultation with ESCB advisors.194 Before disbursing
Given the political challenge of negotiating the ESCB’s institutional design, the United States
should hold consultations with key stakeholders and allied and partner governments in advance
of Day One. No conclusive agreement is likely to be reached on draft articles of agreement in
peacetime, but many foundational issues can be established by whichever states wish to be
at the table during the consultations. Central bankers, international economists, trade lawyers,
historians, and elected officials, among others, may participate in these preliminary discus-
sions. Participants should bear in mind that the ESCB’s raison d’être is not simply to enforce
rules but also to sustain the political legitimacy of the rules-based trading system in the face of
an all-out assault from a rogue PRC.
The agenda for the initial consultations should include the following points:
• What legal changes would be required in the key member states to enable the ESCB to
operate?
• Beyond national aid, what power should the ESCB have to leverage its own funds for
intervention in global commodities and financial markets?
• How would the staff be selected? Likely participants would include economists
seconded from central banks and finance ministries, as well as academics, and lawyers
nominated by national governments. It would probably be up to national governments
to ensure that industrial and labor voices in their own countries were effectively
represented.
The PRC should be aware of the existence of these negotiations but not necessarily of the
substance. Public statements following consultations should emphasize consensus on the
guiding principles of avalanche decoupling.
BUDGET
The size of the total budget is ultimately a political decision, based on how much Congress
is prepared to spend relative to other priorities. Although the contribution of ESCB funding to
global customs enforcement would be one of its most significant functions, the overwhelm-
ing majority of the budget would be dedicated to discretionary dollar aid. Therefore, there
would be no funding level below which the ESCB would not work at all. The agency’s political
effectiveness at holding together the rules-based trading system would simply depend on
MANDATES
The ESCB would have two primary mandates, each defined and scoped in its articles of
agreement.
Given that the Core’s trade policies and the incentives to transship they inherently create
would grow with time, economic aid would need to continue for a significant period of time.
It might cover states victimized by PRC economic coercion or retaliation, as well as states
facing economic crises resulting indirectly from a PRC economic slowdown or financial crisis
associated with Core states’ actions. Increasing amounts of funding would need to be given
to states struggling to enforce customs rules effectively. As global supply chains would likely
move in advance of ratcheting Core policies, this might mean continuing to provide aid to
states experiencing rapid manufacturing-led growth and states that were continuing to rely
on PRC products simultaneously. Levels of aid would then be reset—and likely substantially
reduced—after the end of the next window.
As firms made decisions about how and where to reshore production, countries that failed
to attract significant private investment would face an increasing incentive to transship, even
with ESCB aid. Inevitably, some states would end up losing aid and significant access to the
Core market under the ESCB’s second mandate. Over time, some countries may end up as
de facto members of the PRC’s trading bloc. Still, all ESCB member states in good standing
would enjoy ESCB collective insurance policies against PRC economic coercion. There would
be a strategic, political, and economic benefit to keeping the ESCB a large tent—and giving
states a reason to fear expulsion.
Aid allocation would also need to deal with crisis disruptions to commodity prices, which
are closely correlated with PRC demand. The PRC represents over 60% of global soybean
imports, 71% of global iron ore imports, 43% of global copper imports, and so on.195 Upon the
outbreak of a Taiwan crisis, prices of key commodities might collapse. The oil market could
also be severely impacted. The removal of some five million barrels per day of PRC demand—
and potentially millions more in Japan and elsewhere in the Pacific region in some military
contingencies—would create a sharp imbalance with global supply, leading to a collapse of
global oil prices.196 The OPEC+ oil cartel might slash production but volumes might fall so far
and so quickly that prices became unstable. In some circumstances, it may be sensible for
the ESCB to actively intervene to stabilize global commodity markets. How the ESCB could
do this, if at all, would be a question for its charter that founding member states would have
to negotiate.
Although facilitating decoupling would be one of the benefits of the funding, the ESCB should
not seek to direct how supply chains move, or overweight a country’s success in attract-
ing manufacturing from the PRC when allocating funding. The ESCB aid process should not
become a global scheme for “picking winners” or “friend shoring.” This would undermine its
objective of sustaining the rules-based trading system and would lead to enormous inefficien-
cies in global production.
The ESCB might also operate special programs for use as geopolitical “insurance policies”
against PRC economic coercion. This might involve direct dollar aid to compensate victims of
PRC aggression or the accumulation and maintenance of stockpiles of critical-use products,
such as vaccines and active pharmaceutical ingredients. These activities could be structured
separately from the regular schedule of aid distribution to support immediate support for
countries victimized by the PRC. If the PRC engaged in the systemic dumping of manufactures
on particular national markets, this fund might also be used to provide dollar aid to countries
that erected their own retaliatory tariff regimes, covering the adjustment period.
The role of the ESCB would be to support member states in monitoring flows of trade
between members and other states, especially the PRC, and compile centralized reports doc-
umenting the volume and character of that trade. The ESCB would dispatch advisors to sup-
port members with weaker state capacity to digitize records, compile balance of payments
and customs data, and if necessary build administrative and enforcement capacity to prevent
cross-border smuggling and the mislabeling of products. It might encourage states to use
its aid to build up these capacities while providing technical assistance. However, the ESCB
would not force member states to accept help or adjust policies on specific issues. The ESCB
would provide detailed and legitimate sources of data on the character of trade entering the
rules-based trading system.
The details of how the ESCB would initially support customs enforcement are an open ques-
tion that would have to be settled through political negotiation, in consultation with lawyers
and other trade policy experts. The eventual process would need to balance building con-
fidence in the rules-based system with sovereignty and capacity issues. In the ESCB’s most
extensive form, in the event that a Core country believed a foreign firm was violating the dis-
criminatory trade policies discussed in policy pillar one, the Core country might require ESCB
approval to implement the tariff or quota. As the ESCB would not function as a legal body but
as an international agency, judgment would be relatively swift. Appeals would be possible to
a higher body within the ESCB to remove the tariff. Only states, rather than individual firms,
could appeal on the basis of specific evidence that an incorrect decision had been made.
Appeals would likely run to the governing body of the agency in which donor nations (over-
whelmingly from the Core) would constitute a clear majority, although there would also be
representation given to the wider ESCB membership.
Example
Suppose that US Customs and Border Protection comes to suspect that a non-US
company, Arbitrage Unlimited, is importing products made with PRC components and not
declaring them as such. The US government would work with ESCB officials and those of
Arbitrage Unlimited’s home country, Neutralia, to confirm whether the components came
from the PRC. If the ESCB and Neutralia’s customs officials agreed, the US would be free to
impose discriminatory policies against Arbitrage Unlimited’s product, in line with Policy 1.
If the US and Neutralia disagreed, then the ESCB might reach a decision on whether
the part came from the PRC or not. In this approach, if the ESCB decided that there was
insufficient evidence, the United States might be obliged to let the product through. If they
decided there was sufficient evidence, Neutralia’s opinion would be overruled, and the US
In another scenario, suppose that the ESCB, working with Neutralian customs officials,
notices that Neutralia is importing large amounts of a component part via another
company, China Traffickers Incorporated. It might support Neutralia in checking whether
those components were ending up in Arbitrage Unlimited’s final product and advise the
United States to check the finished product. If it found proof independently that there
was a link between China Traffickers Incorporated and Arbitrage Unlimited, it could itself
recommend that the United States act against Arbitrage Unlimited’s products and note that
Neutralia had failed to adequately enforce customs procedures.
The ESCB would give confidence to third countries that discriminatory policies enforced
against the PRC would not be used by the United States as a backdoor industrial strategy
against third countries, leading to a race to the bottom that would undermine the rules-based
trading system. By embedding itself in the development of enforcement capacity, the ESCB
would restrain the use of the national security exemption. By definition, it could not support
the enforcement of a discriminatory policy by one member state against another.
If the ESCB secretariat accumulated repeated evidence of a member state consistently failing
to enforce rules of origin requirements, its first step would be to increase cooperation and to
either provide additional aid for increasing customs enforcement capacity or to mandate a
greater amount of existing aid to be used to strengthen enforcement. If this failed to have
a meaningful effect on the number and scale of transshipment cases, there could be two
enforcement mechanisms:
1. The ESCB could withhold aid tranches against countries that were failing to enforce rules
of origin requirements, either permanently or until there was a meaningful improvement
in customs enforcement.
2. If the governing body of the ESCB found that a member state had been systematically
and consistently violating rules of origin requirements without taking reasonable steps to
remedy the situation, it could declare it legitimate for other member states, including the
Core, to impose discriminatory policies on it under the national security exemption.
The process for determining that a cutoff was justified would be rules based and subject
to the governing board of the ESCB, perhaps similar to the operations of the IMF today.
Withholding aid would itself be an effective response. (In fact, an emerging scholarly litera-
ture has found that withholding aid is a much more effective tool of economic statecraft than
economic sanctions.198) The processes by which the ESCB decided how much aid to withhold
Core allies would be tempted to use ESCB data as a legal basis for enforcing unilateral
export controls on dual-use products, but doing so would be a mistake. To protect its inde-
pendence and legitimacy, the ESCB must be an independent body not associated in any way
with dollar sanctions.
The ESCB would ensure that the avalanche decoupling took place according to the guiding
principles outlined above, with all international aspects of the Day One Plan being based on
incentives in the context of a broad program of economic recovery. The crucial point is to
bind the enforcement of discriminatory trade policy into a wider program of economic leader-
ship, conceived and executed as a response to any break-glass scenario aimed at preserving
the rules-based trading system. Ultimately, enforcement of rules of origin for PRC or Russian
goods entering the bloc would be the hardest part of the Day One Plan to implement. No
system is going to be perfect, and the political complexity and administrative burden would
stress the system over time. The states most at risk would be those with weak state capacity
and land borders with the PRC and Russia. The ESCB would have to pay special attention
to these countries, compensating them as part of its aid formula for the extra administrative
burden that would be imposed upon them and in response to Russian and PRC retaliation.
Some states would inevitably fall out of compliance and become subject to discriminatory
national policies. Nevertheless, the planners of the system should aspire to build the largest
possible coalition. All states that are not currently under US sanctions should receive invita-
tions and initial bilateral support from the United States.
PRC COUNTERMEASURES
The obvious PRC response to the ESCB would be to offer its own program of economic aid
to countries that refused to support US trade policy, backed by coercive threats. This might
include aid, debt relief, market access, or the provision of goods at reduced prices, possibly
offered under the banner of the Belt and Road Initiative.199 In most break-glass scenarios, the
PRC would also be facing a major economic crisis—compounded by a US currency interven-
tion—that would limit its capacity to act. In this context, the PRC’s economic offer would likely
focus on the provision of cheap products rather than access to its market—which would come
with some benefits to consumers but would further undermine domestic manufacturing in
those states. If the CNY had become devalued as a currency, this outcome would be inevitable.
To accelerate this process, the PRC might seek to actively undermine or even collapse the WTO.
The PRC could disrupt general business through dilatory procedural techniques by filing or by
rallying a coalition to claim that the United States was destroying the WTO through the establish-
ment of the ESCB. The PRC could not achieve any substantive relief through these efforts, as the
United States has already arranged for a logjam in the WTO’s Appellate Body. However, these
efforts could advance the PRC’s political goals: to persuade neutral countries that US action was
undermining WTO rules and principles and that by joining the PRC in resistance, the ESCB could
In many countries, customs officials would struggle to differentiate PRC from non-PRC prod-
ucts, and cross-border trafficking could become rampant. The states most vulnerable would
be those that share long land borders with the PRC and are already closely integrated into
the PRC economy, particularly those in Central and Southeast Asia. However, it would not be
impossible, particularly for countries outside the PRC’s immediate geographic neighborhood,
to respond to such efforts with ESCB support.
Furthermore, policy could vary based on the products involved. For example, a country might
wish to accept cheap PRC household appliances and conclude the burden of distinguishing
between domestically produced appliances and PRC appliances was too high. This country
might ultimately halt all exports of household appliances to the Core. However, if that coun-
try simultaneously had a thriving plastics industry, it might attempt to actively differentiate
between different plastics products to retain access to Core markets. Alternatively, it might
align with Core decoupling policies in that area to sustain its industry.
The PRC might later try to destabilize other established rules-based institutions, such as
the IMF. Since the United States holds more than 15% of IMF voting shares, it can block the
PRC from co-opting the institution for its own purposes. However, for the same reasons, the
PRC and its rogue state partners could potentially attempt to assemble a counter-coalition
to render the IMF incapable of issuing new emergency loans. In a post–Day One economic
crisis, the United States might therefore lose its ability to use the IMF to channel emergency
support to important countries in need. Without other forms of help, these countries would
become more vulnerable to PRC economic coercion. Regardless of whether the United
States adopts the Day One Plan, in break-glass Taiwan scenarios, it may become impossi-
ble to provide emergency lending to strategically important countries via the IMF. The ESCB
offers one potential mechanism for providing emergency loans, although this would require
an extension of its mandate beyond the scope discussed in this report. In the worst-case sce-
nario, the United States and its Core allies would have to prepare to rescue key countries on
the brink by providing bilateral support.
Over the longer term, if the PRC revealed itself to be an economic rogue actor, and the
Day One Plan succeeded in diminishing the role of the PRC in the global economy, it might
be possible to build support for formally expelling the PRC from the IMF and World Bank,
although this would be an extremely tough ask. Such expulsions are not necessary for the
functioning of the Day One Plan and should not be attempted unless the United States is
extremely confident of success. Expulsion votes would present neutral states with the kind
of binary choice that the Day One Plan generally seeks to avoid. However, in principle, it
is possible to expel the PRC from both the IMF and the World Bank. The IMF’s Articles of
Agreement, Article XXVI, Section 3, Subsections 2(a)–(b), allow for suspension and expul-
sion of a member if it “fails to fulfill any of its obligations under this Agreement.”200 The
Another potential pathway would be for the IMF to vote to transfer the PRC’s rights back to the
Republic of China (Taiwan) from the PRC. 203 Technically, the PRC never acceded to the IMF
or World Bank, just as Taiwan was never expelled. Rather, the IMF executive board “decided
that henceforth the People’s Republic would represent China at the fund,” with the executive
board of the World Bank following suit. 204 By transferring the right to represent China back to
Taiwan, the IMF and World Bank could potentially avoid having to use expulsion mechanisms
that were not designed to be used for geopolitical reasons.
• The ESCB would provide a vehicle for Core economic leadership to preserve the rules-
based trading system in post–Day One and provide an incentive structure to encourage
honest reporting of goods and parts flowing directly from the PRC to the Core allies.
• The ESCB would not enforce policies against the PRC, and members would be free to
continue to trade with the PRC if they wished.
• Provide aid to member states to support them through the economic consequences
of the break-glass scenario.
• The ESCB would have its own secretariat, and rules-based process for adjudicating
whether a country is acting as a transshipment point.
• If the ESCB found that a country had been misreporting exports of PRC goods, it could
withhold aid or, ultimately, give Core countries the green light to extend the same trade
restrictions they imposed on the PRC to the offending country.
• However, rogue PRC behavior would only demonstrate the value of ESCB membership,
as the institution would provide members with insurance against PRC economic
coercion.
In any break-glass scenario, the PRC would have prepared general economic actions
designed to harm US interests, above and beyond countermeasures for aspects of US con-
tingency planning communicated in advance. Most of these would take the form of the PRC
manipulating access to its market through import and export controls, although it could also
buy, sell, or seize strategic assets.
The danger for the PRC is that economic warfare would strengthen the incentives for states to
work with the ESCB. The more economic disruption PRC retaliation caused, the more import-
ant the ESCB would become as an insurance policy for small states in particular.
The PRC could freeze or even seize foreign assets under its jurisdiction. Under the PRC’s
2021 Anti-Foreign Sanctions Law, Beijing might seize assets of individuals or firms from
countries participating in sanctions. 205 Even if the PRC did not freeze foreign-owned assets
within its borders, it could prevent asset owners from liquidating them and withdrawing
capital. However, the PRC would probably not turn to asset freezes unless the G7 coun-
tries froze PRC assets first. The PRC has a net foreign asset position of at least $2.8 trillion,
so it stands to lose from a competitive asset freeze dynamic. 206 If the PRC seized foreign
assets at scale, Core governments would probably need to provide support to companies
with significant exposure. Asset freezes and seizures would be a risk in all break-glass
scenarios.
The PRC could dump its holdings of US Treasury and agency bonds on the open market
to drive up interest rates, but this risk is likely exaggerated.207 The PRC held $782 billion of
Treasuries in November 2023.208 If the PRC abruptly liquidated this position, US government
bond prices would fall, and yields would spike, possibly triggering a global financial panic.
However, the Federal Reserve could, in principle, buy up the surplus Treasuries to stabilize
the market, citing its existing Section 13(3) emergency authorities. There is precedent for
such action: the Fed bought up over $1 trillion in Treasury securities between March and
April 2020.209 Even if Brad Setser’s calculations are correct, and the PRC’s true holdings of
Treasuries, agencies, and other dollar assets are several times higher than reported, the Fed
could, in principle, respond in the same way.210 Moreover, the currency intervention would
create a clear incentive for the PRC to hold rather than sell dollar assets, since if the CNY/CNH
The PRC might also respond to the Day One Plan by imposing export controls on strategic
goods. Beijing has done this before, and the possibility of weaponized export controls is
discussed openly in the PRC media. In 2010, it embargoed rare earth exports to Japan and
Europe, leading to a WTO challenge. It has recently done the same for gallium and germa-
nium, two important metals used in semiconductor production, and for drones produced
by the PRC company DJI. 212 In a Taiwan crisis, the PRC could conceivably impose broader
export controls on products such as rare earth alloys, active pharmaceutical ingredients,
and intermediate electronic components. These measures would cause shortages and
price spikes, contributing to inflation and lost economic activity. Aside from shortages and
higher prices, PRC export controls on critical goods would also have political consequences
around the world. Developed economies would buy up scarce supplies, causing shortages
and a potentially political backlash in developing countries. The ESCB might maintain unity
within the rules-based coalition by regulating hoarding and developing schemes for collec-
tive responses to PRC economic retaliation. Otherwise, member states might adopt autarkic
trade policies, undermining the rules-based trading system over time.
However, export controls are a blunt instrument, and using them indiscriminately may not
advance the PRC’s strategic goals. Beijing has no visibility into where its exports go after they
leave its borders. Lacking control of the global reserve currency, it also has limited “long-arm”
capabilities to retaliate against re-exporting firms. Moreover, aggressive PRC export controls
could be counterproductive to the goal of slowing down or reversing avalanche decoupling.
The less foreign firms believed they could trust PRC supply chains, the faster they would try
to reshore production out of the PRC. The United States and the Core would contrast the
PRC’s arbitrary and damaging export controls with their own programs of aid and support.
Over time, markets would also adapt to PRC export controls. Rationing may be necessary
in the short term while private industry developed substitutes, technological work-arounds,
and alternative sources of supply. 213 In the medium to long term, Beijing’s economic lever-
age would dissipate. This logic helps to explain why, in the gallium and germanium episodes,
the PRC seemed most interested in making a propaganda point and chose not to maximally
enforce its export controls after they were first announced. 214
PRC import restrictions would probably be the PRC’s most effective economic instrument
for splitting the US-led coalition. The PRC has used import restrictions for geopolitical coer-
cion in the past, often citing technical customs-related excuses. 215 In a break-glass conflict
scenario, the PRC could cite national security as an excuse for sudden and arbitrary import
restrictions. Since the WTO Appellate Body would remain logjammed, countries victimized
by PRC import restrictions could suffer devastating consequences. The PRC could also
arrange grassroots boycotts of products from ESCB member states. Exporters of finished
It is unclear how PRC import restrictions would affect victim countries, but the United States
would have to prepare for the worst. History provides some encouraging evidence that PRC
economic coercion might backfire. In 2015, before the PRC retaliated against South Korea
in the THAAD dispute, only 37% of South Koreans reported a negative view of the PRC.
Two years later, that number had risen to 61%, and it kept rising thereafter. 217 Similar trends
occurred in Australia, Taiwan, and the Philippines. Still, in a conflict scenario, the PRC might
apply import restrictions of a far greater scale, causing financial market reactions, mass lay-
offs, and other negative effects. The PRC’s goal in applying these punishments would be to
elicit a change in political attitudes, persuading key stakeholders in these democracies that
decoupling is too costly to execute.
The PRC import restriction problem requires an institutionalized and rules-based solution.
The ESCB would serve as an instrument for collective resilience against the PRC’s weapon-
ized import controls, offering generous compensation to affected members. The ESCB could
establish a special administration to assess economic damage caused by PRC economic
warfare and disburse compensation to victimized governments. 218 The ESCB’s program for
compensation against PRC economic retaliation should take account of lost revenue from
PRC tourism, which is an important source of economic activity and FX for many small coun-
tries in the PRC’s neighborhood. 219
Beijing could engage in barter trade and other unconventional deals to manage problems
associated with its exchange rate. If the PRC’s major trading partners did not want to accept
CNH, and its FX reserves ran low, the PRC could issue IOUs denominated in FX. These IOUs
would have some value as long as the PRC had enough FX reserves to make repayment
plausible—and the potential capacity to earn hard currency in the future through exports.
China has a history of using barter agreements to work around US trade restrictions. 220 In a
Day One scenario, the PRC might use barter trade to acquire export-controlled products.
However, barter would not take place on terms favorable for the PRC, and it is not a scal-
able solution in the long run for a major trading economy. Under the Rubber-Rice Pact with
Sri Lanka in the 1950s, the PRC paid a 40% premium over the prevailing market price for
rubber and sold its rice for less than a third of market value. 221 Barter is also less workable as
a system for manufactured products—which could not be re-exported at competitive prices
under policy pillar one—than fungible products such as commodities. The existence of barter
as a fallback option helps to illustrate why no amount of dollar sanctions could cut off the PRC
entirely from global trade networks. However, if the Day One Plan succeeds in eroding the
PRC’s terms of trade over time, barter is not a pathway for the PRC to reverse this trend and
reclaim its lost position in global value chains.
This section discusses problems that could emerge if the policy areas above were imple-
mented incompletely or not at all as a result of change or division in US domestic politics.
These scenarios would mostly result from potential failures of bipartisanship in Congress.
Congress authorizes the tariffs and the industrial policy but not the currency
intervention or ESCB.
In this scenario, Congress decides to stick to more familiar policy instruments on Day One,
emphasizing decoupling into the Core market. Fewer allies would be likely to join the Core.
In the medium to long run, trade tensions would result between the United States and its
allies, which would have to be resolved bilaterally. The rules-based trading system would
fray or break. Most problematically, PRC goods would leak into the US market. The EU and
other major economies outside the Core might adopt their own industrial policies, citing the
national security exemption. They might also impose trade restrictions on US products. After
the crisis period passed, the CNH exchange rate would stabilize, and Beijing would continue
to internationalize its currency in the context of a fractured global trading system, undermin-
ing US sanctions and export controls against rogue states.
Congress authorizes the tariffs and the currency intervention but not the ESCB.
At first, the CNH exchange rates would weaken sharply against the dollar, and the CNY
would probably weaken as well, albeit more slowly. Many industrialized and industrial-
izing economies would probably put up trade barriers against PRC products. However,
as described in detail above, they would lack methods to prevent leakage of PRC goods
and parts into their markets. These countries would either have to accept the leakage,
defeating the purpose of decoupling, or retaliate against the third countries that were
re-exporting the PRC goods. As with the scenario above, the rules-based global trading
system would decay or collapse, and total global trade would probably decline. The United
States might turn inward economically and geopolitically, and Beijing would seek new coa-
lition partners. Of utmost concern in this context is that the currency intervention is a bet
on the US ability to destroy the PRC’s terms of trade over the longer term. If Beijing found
new markets for its exports after Day One and continued to move up the manufacturing
value chain, its currency would eventually appreciate, and the US taxpayer could take a
major loss.
Congress authorizes the tariffs and ESCB but not the currency intervention.
The currency intervention is the most separable of the three pillars. The United States could
probably achieve avalanche decoupling without it. However, avalanche decoupling might be
more costly without it and would take place on less strategically favorable terms.
Without the currency intervention, Beijing would intensify its efforts to internationalize the
CNH after Day One. After stabilizing its domestic financial system from the initial financial
If the CNY basically held its value after Day One, there would be less pressure on many indus-
trialized and industrializing countries to erect trade restrictions on PRC products. This might
reduce the size of the Core. The leakage problem would be less severe, but the process of
Core decoupling would impose less economic pain on the PRC over the long term because
the negative impact on the PRC’s terms of trade would be much smaller.
In this scenario, the United States would probably end up with partial decoupling. Firms
that had already begun to reshore production would likely continue to do so but at a slower
pace. Once the precedent was set that the ratchet could be modified, full bilateral decou-
pling would become unlikely in the future unless Beijing aggressed against a US treaty ally.
The ESCB would continue to operate, but Congress would likely restrict its further funding,
causing it to fade in prominence over time. Without ongoing efforts to prevent leakage, PRC
goods would find ways into the US market, and in time, the world economy might begin to
reglobalize.
The challenge in this scenario would be unwinding the currency intervention at minimal
loss to the US taxpayer. The Treasury would still be liable for any short positions it had
taken out on the CNH and HKD in the early stages of the avalanche. If Congress altered the
ratchet, the CNH and HKD exchange rates would rally hard versus the dollar, forcing the
Treasury to realize a significant financial loss. This would be the termination fee for revers-
ing decoupling.
Following a drawdown in US support for the ESCB, the other Core allies would have to decide
the organization’s future. Most likely, they would see it as in their interests to keep the ESCB
alive and operating, albeit on a smaller scale, to maintain what they could of the rules-based
trading system without strong US leadership. As these allies’ proportional financial contribu-
tions increased, the institution would begin to focus more on their prerogatives, which may or
may not overlap with US interests. Whether Japan and other major economies would keep the
ESCB operational in the long term without US support would depend on the language of the
organization’s charter and the design of its voting rules. In any case, if Washington sharply cut
its funding, ESCB monitoring of trade flows would probably weaken, and leakage would sub-
stantially increase.
Alternatively, if the United States withdrew, the ESCB might collapse altogether. In the
absence of US leadership, other Core allies could halt their own decoupling programs. The
PRC could intensify economic coercion, especially in the Indo-Pacific region and devel-
oping world. The WTO would likely remain dysfunctional, so countries victimized by PRC
economic coercion would have to appeal bilaterally to the United States for help or submit
to Beijing’s demands. Assuming that the US bilateral decoupling continued, the leakage of
PRC goods into the US market would increase rapidly. Washington could try to compensate
with stricter customs inspections and bilateral threats to countries known for re-exporting
PRC goods. Third countries would individually fear US retaliation but might recognize that
the United States could not afford a trade war against the entire global economy at once.
The risk would be that much of the global economy could organize against the Core, forcing
the United States to choose between abandoning bilateral decoupling or decoupling from
even more of the global economy.
The best deterrent is a credible plan for Day One. This section explains how the Day One
Plan could strengthen deterrence against PRC aggression—if it is developed publicly and in
advance, in a bipartisan fashion, and in consultation with allies and partners.
The Biden administration claims that “integrated deterrence” is a central organizing prin-
ciple of its foreign and defense policies. As the 2022 National Defense Strategy defines it,
integrated deterrence means “working seamlessly across warfighting domains, theaters,
the spectrum of conflict, all instruments of US national power, and our network of alliances
and partnerships. Tailored to specific circumstances, it applies a coordinated, multifaceted
approach to reducing competitors’ perceptions of the net benefits of aggression relative to
restraint.”222 As Defense Secretary Lloyd Austin has put it, “We’ll use existing capabilities,
and build new ones, and use all of them in networked ways—hand in hand with our allies
and partners. . . . Deterrence still rests on the same logic—but it now spans multiple realms,
all of which must be mastered to ensure our security.”223 Colin Kahl, former under secretary
of defense for policy, has said that the concept of integrated deterrence “will inform almost
everything that we do” going forward. 224
Beijing understands that these are euphemisms for inventing new ways to punish it if it moves
against Taiwan. According to Wang Shushen of the Taiwan Research Institute at the Chinese
Academy of Social Sciences (CASS), integrated deterrence “can be regarded as the core con-
cept of the current US strategy of ‘deterrence’ against China.” Its goal is to “convince poten-
tial enemies that the costs of hostilities will outweigh the benefits.”225
Integrated deterrence requires the ability to threaten deeper and longer-lasting economic
punishment than financial sanctions, which failed to deter Russia from attacking Ukraine
in 2014 and 2022. On January 31, 2022, President Joe Biden threatened “swift and severe”
responses if Russia attacked Ukraine. 229 As several leading Russia experts predicted at
the time, this threat was too vague to deter Vladimir Putin, who was strongly motivated to
install a submissive government in Ukraine. 230 The Biden administration telegraphed that it
would impose only such sanctions as could win widespread support from European allies
and avoid increasing energy prices for Americans. 231 Ironically, after Putin invaded Ukraine,
the G7 reached a consensus that would have been inconceivable before the invasion and
gradually ratcheted up sanctions to target Russia’s oil and gas sector. At this point, how-
ever, sanctions were no longer relevant to deterrence. Their goal now was simply attrition:
to starve the Russian war economy and undermine the Putin regime over the long term. 232 In
the case of the PRC, integrated deterrence requires a credible plan to break the country’s
system of political economy over the long term by destroying the country’s terms of trade
and triggering the mass reshoring of supply chains.
The key is to communicate credibly to Beijing that if it moved against Taiwan by force, it
would precipitate a crisis that would probably escalate in ways it could not control polit-
ically. As this crisis mounted, the US political system might eventually reach a bipartisan
consensus that peacetime political considerations no longer held and that extreme mea-
sures were necessary. The PRC must be made to believe that if these costs were imposed,
they would be sufficiently certain, acute, and lasting that they would outweigh the benefits
of seizing Taiwan. Finally, it must be persuaded that it can avoid the punishment if it does
not attack. If Beijing believes that avalanche decoupling will happen anyway, the threat has
no deterrent value.
The Day One Plan, if developed, would strengthen integrated deterrence in several ways.
First, the plan would undermine the PRC’s efforts to erode dollar hegemony in peacetime.
An explicit statement that firms could continue to trade with the PRC in dollars in noncritical
goods, even in the most extreme break-glass scenarios, would undermine the PRC’s efforts to
internationalize the RMB. Simultaneously, the US government would make clear that Day One
of a Taiwan crisis would see the rapid depreciation of the CNH, deterring third countries from
holding too much of it.
Second, the plan would leverage market forces to deal a major financial blow to the PRC on
Day One. If Washington credibly communicated the threat of currency intervention, market
participants might try to get ahead of the US government by shorting the CNH and HKD when-
ever tensions arose in the Taiwan Strait. The PRC would therefore pay a price for fomenting
brinkmanship crises merely to test US resolve. If the PRC moved on Taiwan anyway, market
participants would effectively leverage the US Treasury’s short trade against the CNH and
HKD, multiplying the amount of FX that the PRC would have to spend to defend the exchange
rate and protect its banks. Washington cannot guarantee these favorable effects, but signaling
its resolve in advance could make these effects more likely.
Third, the plan would demonstrate Washington’s ability to build a broad and inclusive coali-
tion for its economic actions after Day One, isolating the PRC politically within the interna-
tional community. This consideration might be more important for deterrence than any of the
plan’s economic impacts. Xi has tried to reduce the relative importance of economic growth
to the CCP’s legitimacy. However, he has also tried to make the PRC’s supposed status in the
international community—and his own personal standing on the world stage—an alternative
source of legitimacy. 233 The US threat would be that on Day One of a Taiwan crisis, it might
swiftly deprive him of both. By focusing on sustaining the rules-based system and leading the
economic recovery from Day One, the Plan also makes it harder for Xi to argue that it is the
United States that is seeking to undermine the rules-based system—a central aspect of the
PRC’s appeal to many countries, particularly in the Global South. 234
Fourth, embracing the Day One Plan’s guiding principles would strengthen US leverage and
credibility in aligning the Core coalition behind a deterrence agenda in peacetime. Most US
allies and partners privately hope that if the PRC moves against Taiwan by force, the economic
fallout can be minimized. They also face political disincentives to negotiate about contingent
punishment strategies in advance. However, a wide range of states are alarmed by the prospect
of hard decoupling and would like the United States to come up with a less destructive alterna-
tive in the break-glass scenario. These countries understand that actions the PRC is currently
threatening to take against Taiwan could bring about the break-glass political scenario in the
United States and that in that scenario, they might require external support in the ensuing finan-
cial crisis. The plan, therefore, would make it harder for Xi to attempt to drive wedges between
potential members of the Core that would, in turn, embolden him to act against Taiwan.
Fifth, the plan would threaten a devastating long-term impact on the PRC. Avalanche decoupling
threatens to permanently withdraw manufacturing supply chains from a sector that currently
employs roughly one hundred million people in the PRC and directly constitutes one-sixth of its
GDP. The PRC already faces growing challenges from an aging population and mounting debt.
The long-term impacts of avalanche decoupling could threaten the foundation of the PRC’s eco-
nomic prosperity and financial and social stability, placing greater stress on the CCP regime over
time. The Day One Plan also emphasizes that the PRC could not win a long-term victory over
Taiwan by absorbing short-term economic pain. On the contrary, economic pain would increase
over time, regardless of the military or political outcome of a Taiwan conflict.
Sixth, the plan would provide an option for responding to a quarantine or blockade of Taiwan,
or other scenarios short of direct US–PRC kinetic conflict. In principle, avalanche decoupling is
an appropriate response to an attack on the rules-based economic system in the Indo-Pacific.
The decision would be up to lawmakers at the time and would depend on the political context.
Whatever the political context, having a viable option for avalanche decoupling on the shelf
would bolster the confidence of US and allied forces if they chose to respond forcefully against
a blockade or quarantine of Taiwan.
COMMUNICATING DETERRENCE
The Day One Plan will support deterrence insofar as it can be developed and made politically
credible in public. The goal would be to align a range of relevant stakeholders across the
Democratic and Republican parties and across the political systems of US allied and part-
ner governments that if the United States does choose to decouple from the PRC, it would
be prudent to do so according to the guiding principles of avalanche decoupling. This effort
would involve both public and private diplomacy and policy coordination.
Xi Jinping must be made to understand the plan and fear that it will be carried out. It is there-
fore dependent on Congress. To be effective as a deterrent, Democrats and Republicans
would need to embrace the Day One Plan as a nonpartisan framework for contingency plan-
ning. Allies and partners also play a critical role. The more detailed the public conversation
over contingency planning, and the more consistently all sides emphasize the guiding princi-
ples of the Plan, the more credible the threat becomes.
Preparation for the Day One Plan has no direct relation to the “de-risking” of critical supply
chains currently being pursued by the Biden administration and European and Asian allies,
which is not directly related to deterrence. 235 De-risking and decoupling are completely
The fact that the Day One Plan for decoupling in noncritical trade could not plausibly be
implemented in peacetime means that the United States and its partners can develop it in
public without provoking the PRC. The ESCB could not be established without sixty votes in
the US Senate to join a new multilateral treaty with power over some US trade policy, and to
provide this institution with hundreds of billions of dollars of funding at a time. Such bipartisan
consensus has no precedent in modern American political history, so the PRC would have no
reason to worry about the Day One Plan being implemented unless its own actions brought
that bipartisan consensus together. By focusing attention on the Day One Plan rather than
the threats of dollar sanctions, Washington would therefore reassure the world that if the PRC
refrained from using force against Taiwan, the rules-based trading system would hold.
• The US government’s concept of “integrated deterrence” has the right idea. It is unclear
what combination of threats will deter Xi Jinping, so the United States must not hang
deterrence on a single threat, especially as conventional “deterrence by denial” weakens.
• The existence of the Day One Plan strengthens integrated deterrence by showing
that in the break-glass political scenario, Washington would have an option to trigger
avalanche decoupling from the PRC in a manner that protected all its core economic
interests and those of its allies and neutral nations.
• The Day One Plan provides the first incentive-based concept for how the United States
could get neutral countries to cooperate in an economic plan that punished the PRC
over the long term.
• The Day One Plan will contribute to deterrence insofar as Beijing is convinced that
it would likely be a response to a move against Taiwan. It is therefore essential to
communicate publicly that a range of US allies and partners are aligned with the
guiding principles of the Day One Plan.
After the Cold War, as part of a broader push toward the creation of integrated global mar-
kets, the United States and its allies decided to welcome Russia and the PRC into the rules-
based economic system established after World War II. This decision was a calculated bet
that America’s former rivals could be socialized through trade and engagement to eventu-
ally become responsible stakeholders who resolved differences through negotiation rather
than violence. Vladimir Putin’s decision to broaden his war of aggression against Ukraine in
February 2022 proved that this bet had failed with respect to Russia.
Although the shock caused by the PRC’s accession had profound consequences that were
not fully confronted at the time, the bet has not failed yet. 236 The PRC produces affordable
products for American consumers, holding down inflation, and sustains US employment by
offering access to a large market for American technology, products, and services. Other
countries, including close US allies, have derived even greater benefits from trade with the
PRC. The PRC has violated WTO rules, eroded international norms, and revealed an aspira-
tion to co-opt and, if necessary, replace key multilateral institutions. These malign activities
and strategies require responses within the context of the rules-based system. If the WTO
cannot effectively arbitrate and enforce PRC violations, such as when the PRC dumps subsi-
dized products on its markets to gain strategic advantage or uses economic tools to coerce
smaller countries, the correct responses are trade action, targeted and proportionate indus-
trial policy, and multilateral cooperation to support the PRC’s victims so that they do not have
to capitulate to bullying. Still, expelling the PRC from the system is politically unimaginable as
long as the PRC refrains from outright aggression.
“De-risking” of critical supply chains is fair play under the rules-based system and should be
redoubled in peacetime. 237 Beijing often claims that de-risking is “decoupling in disguise.”238
This is propaganda—an attempt to deter the West from taking common-sense measures
to protect its economic security by hinting that the PRC may misperceive them and attack
Taiwan. WTO rules explicitly allow member states to adopt policies that preserve control over
supply chains relevant to national security. Indeed, the PRC is pursuing its own strategy of
de-risking in reverse. The United States and its allies should play to win this conventional,
peacetime economic competition.
If the PRC moved against Taiwan by force, the situation would change fundamentally.
Depending on the circumstances of Day One, the United States would have to reassess
whether it could coexist with the PRC within the rules-based trading system and continue
trading in noncritical goods over the long term. The rules-based trading system was not
designed to contain a rogue state as economically powerful and sophisticated as the PRC.
Even in the most extreme Taiwan crisis scenarios, the United States might decide that the
PRC’s actions were not sufficient to justify the economic disruption of attempting to decouple
The starting point of this report has therefore been to assume a break-glass scenario in which
Congress decides that full decoupling is necessary. If the PRC moved against Taiwan by force
and suffered no economic consequences, it might conclude that it could trample on existing
economic rules and institutions on a far larger scale. It could ramp up state aid for strategic
industries, continue its campaign of intellectual property theft, and use discriminatory trade
policy to bully other countries to acquiesce. PRC economic coercion would become far more
potent, as it would now be backed by the implicit threat of military force or coercion. Without
a functional rules-based trading system to bind them together, the PRC’s neighbors would
have far less power to resist Beijing’s dictates. US treaty allies—South Korea, Japan, Australia,
and the Philippines—would become key targets for both economic and military coercion.
Once the PRC pacified its neighborhood, it would become far more capable of using its coer-
cive playbook in other regions as well.
From this perspective, the Day One strategy is a contingency plan of last resort to sustain the
rules-based system through the process of decoupling, in light of the astonishing transfor-
mation the last thirty years of globalization has wrought. Decoupling is perfectly compatible
with the rules-based system that emerged after World War II. By showing economic leader-
ship, as it did in those early years after 1945, the United States could revitalize that system
even as it gradually decouples from the PRC. To do so, however, it must recognize the con-
sequences of the decision it took in the 1980s and 1990s to drive forward the most exten-
sive increase in world trade in history in the context of a complex world system of sovereign
nation-states. 239 The PRC may have been the biggest beneficiary of this process, but it was
not the only one. The United States must therefore decouple in a way that recognizes the
agency of third states that have also been transformed by the last thirty years of globalization
and must also create a process that incentivizes them to work with the United States to sus-
tain the rules-based system.
It is impossible to know in advance whether the United States would have the strategic inter-
est, political will, or political capability to execute the Day One Plan. The bar is clearly high.
However, the United States needs a plan to decouple in a way that preserves the rules-based
The Day One Plan described in this report would commit the United States to preserving the
rules-based trading system—even though the process of avalanche decoupling would inevita-
bly transform the system through time. Through bilateral trade policy, the United States would
completely decouple its trading relationship with the PRC over a period of years. It would do
so legally under WTO rules, citing the national security exemption that began with Article XXI
of the original GATT Charter. Like-minded allies and partners would do so in tandem, if they
wished. As they decoupled, the Core allies would demonstrate their commitment to global
macroeconomic stability by allowing all noncritical trade with the PRC to continue normally
on Day One and giving private firms adequate time to reshore supply chains. They would fur-
ther prove their commitment to the rules-based system, abiding by WTO rules and refraining
from coercing other countries to impose their own trade restrictions on the PRC. Countries
that wished to keep trading freely with the PRC under WTO rules could continue to do so
indefinitely. Simultaneously, a US-led currency intervention would fatally undermine Beijing’s
RMB internationalization strategy and derail its efforts to build a broad geopolitical coalition.
To support the global economy through the consequences of Day One, including the United
States’ decision to decouple from the PRC, the Core allies would establish a new rules-based
agency: the ESCB. The ESCB would have two objectives. First, it would give confidence to
the global economy and encourage partnerships between the public and private sectors to
respond dynamically to the economic consequences of Day One within the dollar system.
Second, it would incentivize as many countries as possible to meet the minimum bar to allow
the Core to continue to trade with them normally during decoupling. This minimum bar would
be a full and accurate reporting of data on the re-export of PRC products. The ESCB would
provide considerable aid to member states and help them build the customs enforcement
administration to monitor the flow of PRC goods and components. If member states failed
in their obligations or were caught cheating, the ESCB would investigate and adjudicate the
trade disputes that would inevitably arise as a result. ESCB member states would be incentiv-
ized to participate by offering direct aid and ultimately retaining access to Core allies’ markets
as supply chains reshored from the PRC.
Implementing the Day One Plan in full would be possible only under unique political and
geopolitical circumstances. Establishing the institution would require a bipartisan agreement
in the US Senate, as well as significant and ongoing financial commitments from the United
States and other Core allies to fund the ESCB. If the political winds subsequently shifted in the
United States, the enterprise could collapse. Making the ESCB succeed would also require
multilateral coordination between the Core allies, which would at minimum have to include
Japan, the UK, Australia, and Canada.
As no one knows how the PRC might move against Taiwan, it is impossible to make predictive
statements about the probability that the Day One Plan would be implemented in full. The
purpose of the contingency planning would be to provide the people’s representatives at the
1. Ruling out countrywide dollar sanctions on the PRC would reassure allies, demonstrate
to the PRC an awareness of the current economic situation, and undermine its efforts to
internationalize the RMB.
2. Public communication about the principles underlying the ESCB would reassure third
countries that the US economic response on Day One of a Taiwan crisis would not
impoverish them in the process of punishing the PRC or attempt to force a binary choice
that in practice does not exist.
5. If Day One arrives, and political and strategic considerations demand a decisive
economic response, the guiding principles and policy approaches in this report would
serve as a starting point. On the basis of whatever had been agreed upon in advance,
the details could then be decided through political negotiations within and between the
US executive and legislative branches and key allies and partners.
Developing the Day One Plan would also contribute to the US strategy of integrated deter-
rence in advance of a potential crisis. Even if the PRC concluded that the United States
probably could not pull off the Day One Plan in the quarantine scenario, it would not be sure
of this fact, because the PRC, too, is uncertain of how the US political context might change
on Day One. The challenge is to demonstrate to the PRC that the United States understands
the scale of the economic and political challenge that decoupling would pose and is not
pinning its strategy solely on threats that, if executed, would devastate its own economy and
those of its allies. Even if the PRC is not persuaded that an attack on Taiwan would inevita-
bly trigger avalanche decoupling, public communication that the United States and its allies
are devising a plan for gradual and orderly decoupling would force the PRC to reckon with
the potential long-term costs of upending regional stability. It would become harder for Xi
to persuade himself that the PRC’s financial system could survive the shock of the Day One
crisis or that the PRC could prevail in a long conflict simply by tolerating economic pain for
It is in everyone’s interest—including the PRC’s—to find a solution to the Taiwan issue that
maintains an honorable peace. Xi Jinping is clearly more determined than his predeces-
sors to extinguish Taiwan as a free, liberal, and democratic society. However, if the United
States keeps its resolve and strengthens its policy of integrated deterrence, it has a strong
chance of preserving that honorable peace for another generation. It is in that spirit that
we offer the Day One Plan: in the hope that by virtue of existing as an idea, it need never be
made manifest.
RECOMMENDATIONS
Operationalizing the Day One Plan would pose enormous administrative challenges and
demand up-front fiscal commitments, equivalent to reconstruction efforts after World War II.
Planning and preparing for implementation in advance will require achieving a high level
of alignment between the legislative and executive branches, and between the United
States and close allies. This report has sketched out the basic principles that should guide
the process. To translate these principles into an actionable policy agenda for the break-
glass political scenario, a range of US federal government agencies and institutions would
need to lead studies and planning in their own functional areas. Broadly, this would work in
three stages.
In Stage 1, Congress and the executive branch should comprehensively investigate US eco-
nomic vulnerabilities for Day One of a Taiwan crisis and determine the guiding principles
that should shape US planning and action in a break-glass scenario. Congress must play a
leading role in shaping the policy planning process. The executive branch can conduct its
own reviews simultaneously with Congress’ investigations, but the executive branch should
not begin coordinated planning for implementation until Congress has achieved bipartisan
consensus on the guiding principles. Stages 2 and 3 below assume that Congress achieves
agreement around a version of the Day One Plan that is substantially similar to the one pro-
posed in this report.
In Stage 2, Congress and the executive branch should work together to plan implementation.
They should consider how responsibilities and resources would be divided across agencies
in a break-glass scenario, determine which actions would be necessary and which would be
optional, and assess US vulnerabilities. They may set up a coordination committee within the
National Security Council. Regular consultations with allies will be essential.
• A commitment to aid and support third countries from the economic and financial
consequences of any Taiwan crisis.
• Evaluate existing policy tools and potential new ones, including the proposals in
this report.
• Hold classified and unclassified hearings to evaluate the political implications of possible
Day One plans for key US trading partners and strategic countries and regions.
• Produce a report assessing the potential impacts on the global financial and trading
system of a kinetic war in the Taiwan Strait and the PRC’s options for responding to
currency intervention and economic sanctions of various degrees of severity.
• Classified versions of this report should be cleared for sharing with US treaty allies
and Taiwan.
• Produce shorter reports evaluating the potential effects on potential members of the
Core alliance group for sharing with their governments.
• Evaluate in detail the costs and benefits of the Day One Plan and compare them to
alternative approaches, presenting those findings to Congress.
TREASURY DEPARTMENT
• Produce a classified report for Congress and the president assessing the vulnerability
of the CNH capital market and the PRC’s capital control regime in general to large-scale
and sustained currency intervention by the US government.
ALLIED NATIONS
• Assess strategic options for responding to the economic shock on Day One of a Taiwan
crisis, conditional on how the United States, the PRC, and financial markets might react.
Assuming that Congress can reach bipartisan consensus around the guiding principles of the
Day One Plan outlined in this report, the president should issue an executive order requesting
an interagency review. The following sections describe specific recommended areas of focus
for each agency.
• Produce a menu of tools for currency intervention that would be operationally possible if
Congress revised relevant statutes.
• Working with USTR, draft articles of agreement for the ESCB, specifying mandate,
budget, governance structure, and operational procedures.
STATE DEPARTMENT
• Consult with allied and neutral countries, both individually and in relevant regional
groups, to inform them about the key findings of these reports.
US TRADE REPRESENTATIVE
• Consult with industry, labor groups, and foreign governments about the possibility of
avalanche decoupling in a Taiwan crisis.
• Consult with industry, academic economists, and the Commerce Department to produce
a report that develops several baseline scenarios for ratcheting discriminatory trade
policies.
• Produce a classified report assessing how quickly supply chains for critical categories
of goods could withdraw from the PRC under these scenarios, assuming no physical
restrictions on trade.
• Collaborate with State, Treasury, and Commerce to consult with US treaty allies on this
report to evaluate potential membership in the Core.
DEPARTMENT OF DEFENSE
COMMERCE DEPARTMENT
• Review the capacity of federal agencies in the event of a Taiwan crisis and rank the
shortfalls in order of urgency.
• Evaluate the reports discussed above and compare them with the Day One Plan.
• Compile the United States’ final economic contingency plan for Day One.
• Produce a classified memo for the House and Senate Finance and Armed Services
Committees describing the plan and the legislative action required to enable it.
ALLIED NATIONS
• Investigate domestic administrative and legal changes that might be required in various
contingencies.
• Support the United States’ administrative and diplomatic outreach to third countries in
specific areas of diplomatic knowledge and expertise.
STAGE 3: COMMUNICATION
Members of Congress should circulate—but not pass—draft legislation that would authorize
the Day One Plan in the break-glass scenario. This legislation should cover the following
elements:
• Call for the creation of the ESCB, described along the lines presented in this report.
Further, the US government and the governments of allies and partners should publicly and
repeatedly emphasize the following:
1. The United States and its allies are fully committed to the One China Policy, with an
abiding interest in peace and stability in the Taiwan Strait.
2. If the PRC goes rogue, the United States has a viable plan to trigger avalanche
decoupling on Day One while harnessing market forces to preserve dollar hegemony.
3. In this scenario, the United States would be prepared to exercise economic leadership.
Washington and its Core allies would stabilize the global financial system and show the
world that they had the confidence to achieve decoupling successfully.
4. Third countries could keep trading noncritical products with the PRC, but the United
States would incentivize them to help enforce its anti-PRC trade policy.
5. The rules-based trading system would survive, but the PRC would lose its protection and
privileges. Over time, the PRC would lose its most important external markets and face
escalating domestic economic pressure.
To enhance the credibility of the threats, it is important that Democrats and Republicans
describe them in a similar way. It is also important that US talking points about the Day One
Plan align with those of allies and partners.
NOTES
1. Michael Martina and David Brunnstrom, “CIA Chief Warns against Underestimating Xi’s
Ambitions toward Taiwan,” Reuters, February 3, 2023, https://www.reuters.com/world/cia-chief
-says-chinas-xi-little-sobered-by-ukraine-war-2023-02-02.
2. Select Committee on the Strategic Competition Between the United States and the Chinese
Communist Party (hereafter, Select Committee on the CCP), “Reset, Prevent, Build: A Strategy to
Win America’s Economic Competition with the Chinese Communist Party,” December 12, 2023,
https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp
.house.gov/files/evo-media-document/reset-prevent-build-scc-report.pdf.
3. Hugo Bromley and Eyck Freymann, “The Malacca Myth: Lessons from the History of Naval
Blockades,” forthcoming.
4. Bradley C. Parks, Ammar A. Malik, Brooke Escobar, Sheng Zhang, Rory Fedorochko, Kyra
Solomon, Fei Wang, Lydia Vlasto, Katherine Walsh, and Seth Goodman, Belt and Road Reboot:
Beijing’s Bid to De-Risk Its Global Infrastructure (Williamsburg, VA: AidData at William & Mary,
November 2023).
5. American Institute in Taiwan, “Taiwan Relations Act (Public Law 96-8, 22 U.S.C. 3301 et
Seq.),” March 30, 2022, https://www.ait.org.tw/taiwan-relations-act-public-law-96-8-22-u-s-c
-3301-et-seq.
6. Bonnie S. Glaser, Jessica Chen Weiss, and Thomas J. Christensen, “Taiwan and the True
Sources of Deterrence,” Foreign Affairs, January/February 2024, https://www.foreignaffairs.com
/taiwan/taiwan-china-true-sources-deterrence.
7. We use this history not as a rigid analogy but as an indication of potential incentives,
strategies, and collective action problems that characterize economic statecraft in a time of
geopolitical crisis.
8. Mira Rapp-Hooper and Rebecca Friedman Lissner, An Open World: How America Can Win
the Contest for Twenty-First-Century Order (New Haven, CT: Yale University Press, 2021), 12–26.
9. For a readable history of the system, see Barry Eichengreen, Globalizing Capital: A History of
the International Monetary System (Princeton, NJ: Princeton University Press, 2019).
10. For a balanced perspective on this process, see Petros C. Mavroidis and Andre Sapir, China
and the WTO: Why Multilateralism Still Matters (Princeton, NJ: Princeton University Press, 2021).
11. Michael A. Glosny, “Strangulation from the Sea? A PRC Submarine Blockade of Taiwan,”
International Security 28, no. 4 (Spring 2004): 125–60, http://www.jstor.org/stable/4137451.
12. Robert D. Blackwill and Philip Zelikow, The United States, China, and Taiwan: A Strategy to
Prevent War (New York: Council on Foreign Relations, 2021), 35–37.
13. Thomas Schelling, Arms and Influence (New Haven, CT: Yale University Press, 1966), 1–12.
14. “The History and Limits of America’s Favorite New Economic Weapon,” The Economist,
February 8, 2023, https://www.economist.com/united-states/2023/02/08/the-history-and-limits
-of-americas-favourite-new-economic-weapon.
Copyright © 2024 by the Board of Trustees of the Leland Stanford Junior University
The views expressed in this essay are entirely those of the authors and do not necessarily reflect the
views of the staff, officers, or Board of Overseers of the Hoover Institution.
30 29 28 27 26 25 24 7 6 5 4 3 2 1
HUGO BROMLEY
Dr. Hugo Bromley is a research associate at the Centre for Geopolitics
at Cambridge and an affiliated research associate at Robinson College,
Cambridge. He is a historian of British manufacturing and global economic
statecraft in the early modern and modern periods. Dr. Bromley received his
PhD from the University of Cambridge in 2022.
EYCK FREYMANN
Dr. Eyck Freymann is a Hoover Fellow at the Hoover Institution, Stanford
University, and a nonresident research fellow at the China Maritime Studies
Institute at the US Naval War College. He is the author of One Belt One Road:
Chinese Power Meets the World (Harvard University Press, 2021).
The Hoover Institution’s project on China’s Global Sharp Power (CGSP) delivers data-driven analysis and
actionable solutions that equip decision makers for striking more resilient, balanced, and vigilant relation-
ships with the People’s Republic of China (PRC). CGSP’s principal lines of effort include documenting the
PRC’s malign influence and information operations around the world; tracking its progress in critical tech-
nologies; and safeguarding the security and integrity of America’s research enterprise, specifically its cen-
ters of academic, corporate, and government research.
For more information about this Hoover Institution project, visit us online at www.hoover.org/research
-teams/chinas-global-sharp-power-project.