China-Taiwan tensions: What are the risks?

Of all geopolitical risks and threats, the fractious relationship between Asian superpower China and Taiwan, a so-called “first island chain” – a group of islands across the Pacific and East Asia viewed as essential to US foreign policy – has been virtually omnipresent for several decades. 

For many businesses in Asia and beyond, keeping tabs on China-Taiwan relations is common stock in emerging risk planning.

This is especially the case with such vast supply chain reliance on China’s outward economy. Taiwan itself is an essential cog in the international economy, with its semiconductor market powering technology in phones, laptops and consoles across the globe.

With 2022 already witnessing the Russian invasion of Ukraine under claims of historical ownership, focus has intensified on the formerly Chinese-ruled Taiwan after relations between the countries soured and China performed provocative military exercises around Taiwan.

What has risk managers on alert is if such aggravations warrant a unique concern for further escalation, perhaps well beyond the remit of prior tensions.

Escalation of tensions

“The recent tensions between China and Taiwan represent a significant escalation in tensions between both nations,” said Raquel Recuero, senior regional security coordinator at Singapore-based risk consultancy Healix.

“The escalation was preceded by a visit of the US House of Representatives Nancy Pelosi to Taiwan, a gesture perceived as a provocation by Chinese officials, which in response launched a series of large-scale military drills aimed at displaying Beijing’s capacity for a major offensive against Taiwan,” she said.

Recuero noted that such displays of military power have previously occurred, particularly during the 1950s and again in the 1990s.

“China has reiterated its intent to reunify Taiwan, and President Xi Jinping stated in October that China will never renounce force to resolve the Taiwan matter, but will strive for a peaceful resolution in the form of reunification,” said Recuero. “Taiwan responded that it will not back down on its sovereignty.”

Intelligence reports issued by US officials indicate that President Xi may have directed the People’s Liberation Army (PLA) to be ready for an invasion as soon as 2027, though Chinese officials may also consider the 2024 Taiwanese Presidential election as a window of opportunity, said Recuero.

“While there would be indicators for a full-scale invasion, diplomatic, economic, political and military pressures are likely to be the main signs of a further deterioration in the medium to long-term,” she said.

Naval blockade fears

Lou Longo, partner and international consulting practice leader of Plante Moran, said from military drills close to the Taiwan border to Chinese warplanes pushing across the Taiwan Strait, China has become more aggressive in asserting its “One China” principal – the position that Taiwan is an inalienable part of China.

“While Taiwan seeks independence from China, Chinese President Xi Jinping has spoken firmly about China’s resolve for reunification with the self-governed island and has said when it comes to the issue of Taiwan, China reserves the option of taking all measures necessary against interference by outside forces,” he said.

However, Longo cautioned that while military action is a concern, it is important to recognise that the tension between China and Taiwan have persisted for a long time, dating back to the revolution and formation of China.

“Given this history and China’s ties to the global economy, an invasion of Taiwan in the near future seems unlikely. The greater risk is that China will disrupt Taiwan’s supply chain by trying to control the flow of products in and out of the island,” said Longo.

An escalation in existing tensions would translate into a rapid deterioration of the operational environment in Taiwan.

“Due to Taiwan’s location, conducting evacuation operations by commercial means would be extremely challenging and an option likely available only before either a military invasion, closure of airspace or closure of surrounding waters,” said Recuero.

“A naval blockade by Chinese forces would significantly hamper the availability of supplies in Taiwan, and limit Taiwan’s capacity to continue with its exports.”

Supply chain woes

She drew particular attention to Taiwan’s role as the leading manufacturer of semiconductors globally, with 65% of all computer chips produced on the island in 2021.

Any interference to Taiwan’s semiconductor industry would have large consequences at a global scale, severely disrupting the production of electronics and likely causing a worsening of the ongoing supply chain issues and rising inflation. 

“Lastly, a large-scale military operation by the PLA in the South China Sea will affect existing shipping routes in one of the busiest areas in terms of vessel traffic, including the Malacca and Singapore Straits.

“While long-term disruption is unlikely, considering that the largest volume of Chinese oil imports transits this route, shipping companies may temporarily halt operations, reroute their vessels and increase operational costs amid war-risk premium requirements.”

Recuero said that for risk managers, this all implies that business continuity plans should be regularly reviewed, including periodic updates of the existing triggers and protocols in case of evacuation.

Trade impact between Taiwan and mainland China is where the greatest risk lies.

 “Risk managers should study their connected supply chain and consider how it would be impacted by an import/export disruption in Taiwan. Once that assessment is complete, they can look for alternative supply sources and product substitutions where necessary and available,” said Longo.

Future gazing

As 2022 draws to a close, it is inevitable that tensions between China and Taiwan will spill into next year. This keeps the issue on the horizon for risk managers, who must continue to monitor the situation, while enhancing their preparedness.

“While it is likely that China has the military capabilities to take military action against Taiwan, it is unlikely that the situation rapidly escalates in 2023,” said Recuero.

“Current issues at a domestic level in China, such as the recent spike of COVID-19 cases, the economic slowdown caused by the measures imposed to pursue the ‘Zero-Covid’ strategy, and the most recent protests against Xi’s response to the pandemic, represent a heightened political risk for Beijing’s leaders that would increase significantly should they choose to pursue an open conflict with Taiwan in the upcoming months,” she said.

China’s strategy is likely to remain aimed at economic pressure and intimidation through military drills and sporadic incursions into the ADIZ (Air Defense Identification Zone), stated Recuero.

“Risk managers should stay abreast of political and military developments including indicators of a military build-up,” said Recuero.

“The closure of commercial airports and the disruption of commercial flights in the south eastern coast of mainland China, alongside the mobilisation of large convoys of military vehicles, the increase of Chinese aircraft incursions into the ADIZ and reports of missiles crossing over Taiwan’s could point to an invasion being prepared.”

Be prepared

Other indicators could include the positioning of naval forces around the island, pointing at a naval blockade, and the disruption of communications amid increased cyber-warfare attacks aimed at eroding confidence in Taiwanese leaders and their capabilities.

“In 2023, it is likely that tensions between China and Taiwan will continue to increase,” said Longo.

“As President Xi Jinping manages public concern over COVID restrictions and a lack of economic growth, he is likely to strengthen his stance on ‘One China’, which is a popular position among the Chinese.

“To stay informed on the situation, risk managers should subscribe to multiple media sources, including those published in Europe, Asia, and America, to monitor government actions. It is also important to watch for political statements made by Taiwan – the more aggressive Taiwan is, the harder China will push back,” said Longo.

While such a litany of external risks and geopolitical concerns continue – from rising inflation to a potential global rescission and continued Russia-Ukraine conflict – risk managers would be well advised to keep China-Taiwan tensions high on risk overview lists.

As tensions between the nations have such a storied past, in the wake of five to six deeply unpredictable years globally, there is an increased risk of enhanced volatility.