In the short term, you are correct that the Chinese will not take the bait and invade Taiwan. However, if the U.S. were to embargo China beyond the vicinity of China, the following could be the reaction.
1. China can declare embargo against Japan and South Korea, both U.S. allies. Since now Taiwan is in Chinese hands, they could easily accomplish this with minimal effort.
2. They could aid Iran with more and better weapons, upsetting the balance between Iran and Israel. They will ramp up the purchase or Iranian oil to be shipped mostly on land. If sea shipping is done, it will be done within the protective shield extended from both Iran and Pakistan.
3. If this happen in one or two decades, where the Chinese military is stronger, and if during this process the Australians also join in with the embargo (an almost certainty), China can use this to take out Australia. This may sound preposterous, but Singapore is connected to China by land, albeit separated by several countries. Under such extreme circumstance, it would not be difficult for China to say to these countries, we need to transit through your country to get to the Strait of Malacca. Between military coercion and some economic enticement, these countries would have no choice but to accept this request. Singapore would thus fall to China. After that it would not be too hard to convince Indonesia to allow passage, especially given that Indonesia and Australia are not in the best of terms, and the Chinese military staring at them from across the strait. If Indonesia were to not accept such a request, they stand to lose many islands. On the other hand, if they allow transit, they stand to make gains at the expense of Australia (East Timor returning to the fold of Indonesia?).
4, Once they are inside Indonesia, they can quickly establish a foothold in Northern Australia. With a population of just twenty million and fighting on their own soil, Australia would be no match against China. Under this scenario, what can the U.S. do to help Australia? We can certainly send in our subs, but these subs would be quite useless against a mostly land based operation. With the Chinese missile defense extending to Australia, there would be no U.S. surface ship going to Australia any time soon. The subs would be hunted down by the Chinese surface ships.
Any politician making a decision to do an embargo would be foolish indeed. The longer into the future, the more foolish this decision would look after it is all said and done.
