China Economic Deterrence: RAND’s 2025 Analysis

Understanding China’s Economic Deterrence Framework

In September 2025, RAND Europe published a landmark analysis examining how China has constructed a comprehensive economic deterrence system—one that, while never formally codified as doctrine, operates with remarkable coherence and effectiveness. The report, authored by Francesca Ghiretti, Nicholas Taylor, and Conlan Ellis, argues that most existing scholarship has focused on China’s offensive use of economic coercion while overlooking a critical dimension: how Beijing deters economic coercion directed at itself.

The timing of this research proved prescient. Following the “Liberation Day” tariff escalation between the United States and China in April–May 2025, and the subsequent repeated extensions of a 90-day de-escalatory pause, the report found evidence that China had been “somewhat successful in deterring higher and long-term economic costs” even against the world’s largest economy. This finding carries profound implications for global trade architecture, policy analysts exploring geopolitical research, and European policymakers grappling with economic sovereignty.

The RAND Europe framework identifies five main elements of China’s de facto economic deterrence: increasing the resilience of critical inputs and production, fostering leverageable connections with third parties, adopting a promptly deployable cost-imposition toolbox, building credibility through signals that China can absorb economic pain, and preparing the Chinese population for potential economic disruptions. Together, these elements map onto three classic deterrence approaches—denial, entanglement (more precisely, dependence), and punishment—adapted to the economic domain.

Deterrence by Denial: Building Economic Resilience

Deterrence by denial in the economic context aims to persuade adversaries that their economic attacks will not achieve the intended objectives. China has pursued this strategy through a multi-layered approach that combines domestic industrial policy, external supply line security, and talent acquisition programs. The 14th Five-Year Plan explicitly outlines goals for grain and energy production capacity as key indicators of economic and social development, embedding resilience into national planning architecture.

Central to this approach is China’s “dual circulation” strategy, which boosts domestic production and innovation in critical sectors—semiconductors, pharmaceuticals, and advanced manufacturing—while maintaining global trade engagement to access key technologies and resources. This nuanced positioning avoids full decoupling while systematically reducing vulnerability in strategic industries. State subsidies play a crucial role, with China providing extensive support including tax incentives, grants, and preferential loans targeting sectors such as armaments, energy, machinery, construction, and shipping.

Knowledge transfer programs like the Thousand Talents programme offer financial incentives to recruit overseas scientists in key science and technology areas, while industrial clustering policies co-locate emerging technologies such as artificial intelligence and biotechnology into development zones at national, provincial, and local levels. More recently, China has identified the strategic need to diversify productive assets away from vulnerable coastal hubs into the hinterland, reducing geographic concentration risk.

Strategic Supply Chain Control and Dual Circulation

As the world’s largest liquefied natural gas (LNG) importer, China has secured energy supply through long-term contracts, with over half lasting at least 20 years. This supply chain fortification extends across multiple critical sectors, creating a layered defense against economic pressure. The strategy reflects a sophisticated understanding that modern economic warfare targets not just final goods but upstream inputs and midstream components that underpin entire manufacturing ecosystems.

However, RAND’s analysis introduces an important caveat regarding the effectiveness of this approach. While China’s general reputation remains that of a resilient economy capable of withstanding shocks, this perception is eroding. The report documents concerning trends: local government debt accumulation, persistent deflation and low consumption (with final consumption’s contribution to GDP growth dropping from approximately 5% in 2021 to roughly 2% in 2024), the lingering real estate crisis, and CEO confidence dropping to pandemic-level lows according to Conference Board data from 2025.

Chinese nominal GDP growth peaked at approximately 8.4% in 2021 before declining to around 5% in 2024, suggesting that the material underpinnings of deterrence by denial may be weaker than Beijing’s official narrative suggests. For analysts and investors tracking these dynamics, understanding the gap between perceived and actual economic resilience becomes critical for assessing geopolitical risk. Those interested in exploring the full RAND report interactively can access detailed research analysis in our library.

Deterrence by Dependence: Asymmetric Trade Relationships

Perhaps the most strategically significant element of China’s economic deterrence is what RAND recharacterizes as “deterrence by dependence” rather than the more commonly used “deterrence by entanglement.” The distinction matters enormously: entanglement implies mutual vulnerability, whereas China’s approach deliberately creates one-way dependencies where third countries depend on China significantly more than China depends on any individual partner.

China functions as a hub for global supply chains across three critical tiers: upstream inputs (critical minerals), midstream components, and downstream final assembly. This positioning gives Beijing the ability to impose costs on trading partners while minimizing self-harm—a principle demonstrated vividly in China’s response to the EU’s investigation into Chinese-produced electric vehicles. Rather than retaliating against a major EU export sector, China targeted brandy, pork, and dairy imports, selecting products where the impact on China’s own economy would be minimal: while more than half of Chinese pork imports come from the EU, imports cover only approximately 5% of China’s total pork consumption.

The 14th Five-Year Plan makes this strategy explicit, calling for China to “form a powerful gravitational field to attract global resources and factors of production.” RAND interprets this language as a deliberate aim to deepen third-country dependence on China while reducing China’s own dependencies, particularly on advanced economies like the United States and Europe. Export data from 2019–2023 shows China actively diversifying its export base, with Asian markets growing from roughly $1,200 billion to $1,700 billion while total exports surged from approximately $2,500 billion to over $3,300 billion.

Export Diversification and the Gravitational Field Strategy

China’s export diversification strategy operates on multiple levels simultaneously. At the macro level, Beijing is reducing dependence on any single market by expanding trade relationships across Asia, Africa, Latin America, and the Middle East through initiatives like the Belt and Road Initiative. At the sectoral level, China is moving up the value chain, shifting from low-margin manufacturing toward high-technology exports that create deeper dependencies among importing nations.

An important nuance revealed by the RAND analysis is that China itself is not entirely undeterred by entanglement dynamics. Historically, when selecting targets for economic coercion, Beijing has avoided sectors involving relationships vital to China or where confrontation would lead to high costs for itself. This suggests that while China aims for asymmetric dependence, it recognizes the limits of its own vulnerability and acts pragmatically within those constraints.

The implications for multinational corporations and investment strategists are substantial. Companies operating in sectors where China holds dominant positions—from rare earth mineral processing to pharmaceutical precursors—face a fundamentally different risk calculus than those in sectors where competition provides alternative sourcing options. Understanding these dependency maps is essential for supply chain resilience planning and geopolitical risk assessment across industries.

Deterrence by Punishment: China’s Retaliatory Toolbox

RAND’s analysis suggests that deterrence by punishment may be the most effective element of China’s economic deterrence framework. The mechanism operates primarily through the fear of disproportionate retaliation—a dynamic that has proven remarkably effective in shaping the behavior of both governments and corporations. Over the past decade, China has been “doubling down on efforts to codify many of these responses into policies which can be more promptly implemented as either attack or counterattack,” transforming ad hoc retaliation into systematic, rapidly deployable countermeasures.

The April–May 2025 tariff escalation provided a dramatic demonstration of this capability. When the United States imposed sweeping tariffs following “Liberation Day,” China responded with export controls on rare earth elements—a move that weaponized a critical chokepoint in global supply chains affecting everything from semiconductor manufacturing to electric vehicle production and defense systems. The speed and scale of China’s response significantly increased the credibility of its deterrence posture.

Communication and credibility form the backbone of this strategy. China consistently signals that any economic cost imposed on it will be met with a response, and the progressive escalation of countermeasures over the years has built a track record that potential adversaries cannot ignore. For policymakers and business leaders, this means that the costs of economic confrontation with China extend far beyond the immediate measures and countermeasures—they include the uncertainty premium of not knowing how far Beijing is willing to escalate.

Historical Cases of Chinese Economic Retaliation

The credibility of China’s deterrence by punishment rests on a well-documented track record of economic retaliation. The RAND report catalogs several key episodes that illustrate the evolution and increasing sophistication of Beijing’s approach. In 2010, after Norway awarded the Nobel Peace Prize to Chinese dissident Liu Xiaobo, China blocked imports of Norwegian salmon—a targeted measure that imposed significant costs on Norway’s fishing industry while barely affecting Chinese consumers.

That same year, following Japan’s coastguard arrest of a Chinese fishing boat captain near the contested Senkaku/Diaoyu islands, China imposed restrictions on rare earth element exports to Japan for two months. This episode marked an early deployment of the critical minerals leverage that would become a cornerstone of China’s retaliatory toolbox. The 2024–2025 response to EU electric vehicle tariffs, targeting brandy, pork, and dairy, demonstrated increasing sophistication in selecting targets that maximize pressure on adversaries while minimizing self-harm.

The RAND authors note an important qualification: the costs Beijing suffers and the effects on targeted countries are often overstated in media coverage and policy analysis. Nevertheless, the track record serves its primary purpose by establishing credibility. Each episode reinforces the signal that China will respond to economic pressure, making potential adversaries calculate the full spectrum of possible consequences before taking action. This deterrent effect operates even when individual retaliatory measures have limited economic impact.

Credibility Building and Population Preparation

A distinctive feature of China’s economic deterrence framework is the systematic preparation of the domestic population for potential economic disruptions. Chinese state media messaging reinforces narratives of resilience and readiness through carefully calibrated communications. During the March–April 2025 tariff escalation, state outlets delivered a coordinated message: China Daily emphasized the country’s “vast market and sound industrial chain,” Xinhua declared that “any attempts to suppress or contain China are doomed to fail,” and The Observer characterized the United States as “more dependent on trade with China” and likely to “suffer greater losses in a trade war.”

This population preparation serves dual deterrence functions. Internally, it builds social resilience against potential economic pain, reducing the domestic political cost of economic confrontation. Externally, it signals to adversaries that the Chinese government retains public support for retaliatory measures and will not be pressured into concessions by economic hardship. The Economic Daily’s statement that “China has not closed the door on negotiations, but is also prepared to deal with the impact” encapsulates this dual messaging—openness to dialogue combined with demonstrated readiness for escalation.

The effectiveness of this approach depends partly on the credibility of the underlying narrative. As RAND’s analysis of economic indicators suggests—with declining GDP growth, consumer deflation, and real estate sector distress—there exists a growing gap between the official narrative of invulnerability and economic reality. Whether this gap will undermine deterrence credibility over time remains one of the most consequential questions in geopolitical risk assessment. Professionals analyzing these dynamics can explore interactive research tools to engage with this type of complex geopolitical content more effectively.

European Economic Security: Gaps and Opportunities

Perhaps the most urgent finding in RAND’s report concerns European economic security—or the alarming lack thereof. The assessment is blunt: Europe remains “extremely weak” in adopting economic deterrence approaches, with the report identifying three critical gaps. First, European nations lack communication strategies directed at both domestic populations and potential adversaries. The UK and EU have shown “very little appetite for enacting any form of economic deterrence, a fact which is likely visible to potential attackers.”

Second, the policy toolbox remains insufficient. While the EU has developed the Anti-Coercion Instrument (ACI), the UK lacks an equivalent mechanism. RAND recommends the UK adopt a comparable instrument with built-in coordination guidelines with the EU’s ACI. Third, Europe lacks clear plans for increasing resilience and identifying economic levers—a strategic blind spot that leaves the continent vulnerable to pressure from both China and other economic powers.

Crucially, RAND argues that the material basis is not Europe’s biggest problem—lack of credibility is. Europe possesses underleveraged strengths in regulatory power, innovation capacity, and services sectors that could form the basis of a credible deterrence posture. However, translating these assets into effective deterrence requires what the report calls “a narrative and path to put countries in a position where they are able to wield their economic power.” The geopolitical environment of 2025 makes this task harder, not easier, with the possibility of collective economic security among partners becoming “even more remote” as international rules weaken and unilateral actions proliferate.

Implications for Global Trade Policy in 2025 and Beyond

The RAND Europe analysis carries transformative implications for how governments, corporations, and investors approach global trade policy. The report’s central insight—that economic deterrence requires not just capabilities but credibility, communication, and strategic coordination—applies far beyond the China-specific context. As economic statecraft becomes an increasingly prominent feature of international relations, every major economy must assess its own deterrence posture.

For policymakers, the report underscores that economic deterrence “is not only about isolation and self-reliance but also about knowing one’s country’s economy, understanding how to leverage strategic interdependence and collective strength, and building a credible basis and toolbox for economic deterrence.” This framing moves the conversation beyond simplistic decoupling narratives toward a more sophisticated understanding of how interconnected economies can protect their interests while maintaining beneficial trade relationships.

For business leaders, the implications center on supply chain risk management and geopolitical scenario planning. Companies must map their exposure to potential economic deterrence measures—both as targets and as collateral damage—and develop contingency strategies that account for the asymmetric nature of modern economic coercion. The RAND report’s detailed analysis of how China selects retaliatory targets (minimizing self-harm while maximizing adversary costs) provides a valuable framework for assessing which industries and trade flows face the highest disruption risk.

Looking ahead, the trajectory of China’s economic deterrence capabilities will be shaped by the tension between its strategic ambitions and domestic economic challenges. If the eroding fundamentals documented by RAND—deflation, real estate distress, falling business confidence—continue to worsen, the credibility of deterrence by denial will diminish even as deterrence by punishment grows stronger through an expanding retaliatory toolbox. This creates a potentially unstable dynamic where Beijing may increasingly rely on aggressive countermeasures to compensate for weakening economic foundations—a scenario that demands careful monitoring by all stakeholders in the global economy.