Unilateral Sanctions and Their Multilateral Impacts: Do America’s Economic Sanctions against China Impact on the Joint Economic Performance of the G7 Countries?

The U.S. is a member of the G7, while China is not. However, the economic sanctions of the U.S. against China are a potential source of influence for the joint economic performance of the G7 countries, due to the increasing importance of China’s international trade and financial linkages. Since economic comovements are a measure of joint economic performance, the objective of this paper is to examine the impacts of America’s trade and financial sanctions against China on the comovements of the real GDPs of the G7 countries. The paper employs the dynamic factor model for the analysis, based on data spanning 1979Q2 to 2019Q4. The results show the following: (i) There is a statistically significant level of comovements of the real GDPs of the G7 countries, due to a common unobserved factor. (ii) America’s financial sanctions against China have a statistically significant negative impact on the comovements. (iii) Conversely, America’s trade sanctions against China tend to impact negatively on the comovements, but the impact is not statistically significant. These findings point to the higher role of America’s financial sanctions against China in the joint economic performance of the G7 countries. Hence, other members of the G7 group need to employ diplomatic tools to guard against America’s sanctions against China, particularly financial sanctions, in that the sanctions are a potential source of economic contraction for the whole group.