China Will Pay a Heavy Price If It Sides with Russia

 China Will Pay a Heavy Price If It Sides with Russia

By David Dollar

March 30, 2022 4:00 am ET

Economic and political factors pull China in completely opposite directions when it comes to the West’s economic sanctions on Russia in response to its invasion of Ukraine. These opposite tendencies can be seen in China’s rhetorical support for Russia combined with cautious “self-sanctioning” by Chinese banks and firms that are so far avoiding doing business with Russia.

Economically, Russia is simply not that important for China, which is about ten times larger in gross domestic product. China has a few significant imports from Russia, but they can be replaced. In 2021, 16% of China’s petroleum imports came from Russia, slightly behind Saudi Arabia. The largest importer of oil, China has worked hard to diversify its sources and imports significant amounts from Iraq, Angola, Brazil, Oman, and the United Arab Emirates. Iran and Venezuela are potential replacements if Russian oil is taken off the market. China is also now the second-largest importer of natural gas and got 40% of its imports from Australia last year, along with 11% each from Qatar, Malaysia, and the U.S. The U.S. exported twice as much gas to China as Russia did. Overall Russia is a small market for China with total trade of about $150 billion in 2021. Compare that to nearly $600 billion each for the U.S. and European Union; add in Japan and China’s trade with the West is 10 times larger than its Russia trade. So, if China has to choose between doing business with the West or with Russia, economics dictates that it should stick with the West.

Geostrategic considerations, however, go the other direction. China’s relations with the U.S. are the worst they have been in 50 years. Relations with the EU have deteriorated as well. The Biden administration is trying to build a coalition of democracies to counter China. Communist Party leaders are increasingly convinced that the U.S. will never accept China’s rise, and they bristle at U.S. control of the world financial system. So, rhetorically they are opposed to Western sanctions. They blame NATO and the U.S. as the root cause of the Ukraine war. They even spread clear disinformation, for instance about (nonexistent) bioweapons labs in Ukraine. Chinese leaders see Putin as a fellow resister to the U.S.-led international order. It is easy to dismiss this group as an “axis of authoritarians,” but that misses the point that there is widespread sympathy in the developing world for China’s view that the U.S. is abusing its position as the dominant economic power. Major democracies such as India, Brazil, and Indonesia have not condemned Russia. 

The Ukraine war could lead to major disruption in U.S.-China economic ties. China is trying to walk a middle path with rhetorical support for Russia but implicit support for Western sanctions as its major banks and firms want to remain engaged with the global economy. It would be easy to miscalculate in this situation. If the U.S., say, sanctioned a major Chinese bank because of transactions with Russia, China would likely retaliate and this could easily escalate into more serious mutual sanctions. Alternatively, the squeeze on Russia could tighten in a way that undermines Russia’s war-fighting capability and threatens regime change. The prospect of a clear victory by the West over Putin may draw the Chinese into stronger and more overt support that calls for sanctions against China. Or, in the other direction, Putin may largely win, occupying Ukraine and installing a puppet government. In that case Western sanctions would likely remain for years. China may choose to prioritize its economic relationship with Russia and the developing world, and accept the decoupling with the West. 

It is hard to predict what would happen economically in scenarios with major shifts in the global system, but it seems likely that China would be a major loser. What China gets from Russia is easy to replace—oil, gas, some other minerals, and a small amount of food. The one important exception is advanced military equipment that China cannot get from others. Locking in the relationship with Russia would ensure supplies of commodities that China could easily get from elsewhere. What China gets from the West, on the other hand, is impossible to replace. It consists largely of technology in different forms: advanced equipment such as aircraft, high-end semiconductors, and software, to name a few. China gets these high-tech items directly, plus the joint production and information exchange is building up China’s own technical capability to eventually produce them itself. The phenomenon of convergence that has fueled much of China’s growth over the past 40 years occurs among open economies. If China cuts itself off from the West at this middle stage of development, it is likely to pay a heavy price in terms of slower productivity growth and hence slower increases in living standards.

China faces the difficult choice of at least implicitly supporting the sanctions against Russia versus an open break with the West that would certainly set back its economic convergence with the U.S. The world will be better off if China continues to limit its support to Russia’s cruel invasion of Ukraine. China will too.