Businesses are now rightfully more concerned about the outbreak of hostilities in the Strait of Taiwan and its impact on physical security, assets/investments and business continuity. Given the Chinese response to the visit of US Speaker of the House Nancy Pelosis to Taiwan on August 2-3, 2022, the risk of significant business disruption has moved up one notch from a low probability scenario to a medium probability scenario.
What has changed?
Stimulated by the visit, China launched military exercises in unprecedented proximity to Taiwan compared to the third cross-strait crisis of 1995-6. China effectively closed six zones around Taiwan from August 4 to 7. Unlike 1995-6, this is a step up as three of the practice zones are in Taiwan’s territorial waters and all zones are on Taiwan’s side of the center line. China has also launched ballistic missiles into several training areas, and some of those missiles overfly Taiwan, another unprecedented move. These Chinese military exercises signaled China’s ability to impose a blockade on Taiwan and also demonstrated capabilities in preventing entry into areas to repel invading foreign forces.
China also demonstrated the full range of its non-war options – from economic leverage to cyberattacks. China temporarily halted food imports from over 100 Taiwanese brands and also stopped selling sand to Taiwan. China did not go so far as to stop other types of Taiwanese imports, such as electronics, but began to strictly enforce its customs regulations, which required products with Taiwan-made content to be labeled as made in “Taiwan, China” or “Chinese Taipei.” had to. Chinese state-sponsored groups have also engaged in low-level cyberattacks on government and commercial targets in Taiwan.
Impact on businesses and supply chains
China’s measures have had limited effects on maritime and air traffic in and around Taiwan. China restricted commercial flights that passed through danger zones, but as far as media reports indicated, this only applied for the four-day duration (4-7 August) of the first round of military exercises. Some merchant ships were also affected. Transit traffic (e.g. large LNG ships) through shipping lanes near Taiwan had been diverted to avoid the exercise areas, and cargo ships had also had to seek longer alternative access routes.
No major impacts on supply chains were observed. An AmCham survey of 126 US companies in Taiwan, released in mid-August, found that only a handful of those companies were experiencing supply chain delays. This was likely due to the limited duration of sea and air zone closures and the fact that Pelosi’s potential visit was widely speculated by the media, prompting early warning and likely allowing companies to make adjustments to prepare for disruptions.
Nonetheless, China’s actions have demonstrated how destructive an actual blockade would be. This would have alarmed companies concerned about operational risks and supply chain disruptions. Zone 2 of the practice site, located north of Taiwan, was near the port of Taipei and the city’s main airports. Zone 6 was just off the coast of Taiwan’s southern port of Kaoshiung, a key gateway for ships picking up Taiwanese semiconductor chips and where state refiner CPC Corp produces petrochemicals to supply manufacturers worldwide. During the exercise period, maritime shipping carefully avoided this large area (Zone 6) and called at other Taiwanese ports instead.
What does that mean?
Most analysts have pointed out that developments surrounding Pelosi’s visit and its aftermath represent a new normal of more mini-Taiwan crises. China likely intended to use its response to normalize its military activities around Taiwan. Chinese state media quoted a commentator as saying that the PLA will henceforth conduct regular drills on Taiwan’s side of the center line. Going forward, China will have to respond vigorously to increasingly bold US and Taiwan provocations. Pelosi’s Beijing-defying visit to Beijing has now paved the way and encouraged further unofficial visits, including by US Congressional delegations eager to make their mark ahead of the US midterm elections. A second congressional delegation, for example, arrived in Taiwan on August 15, barely two weeks after Pelosi’s delegation left. This prompted the PLA Eastern Theater Command to announce a continuation of its joint drills across Taiwan.
Given the strategic importance of the Taiwan issue to US-China relations and the escalating dynamics surrounding this perennial flashpoint, we should expect higher levels of US-China tensions over Taiwan. As recent developments have shown, the US and Taiwan have grown much bolder in expanding the boundaries of the gray area to include the One China policy, and in response China’s warnings (although calibrated and on the verge of provoking conflict) become much more energetic. Monitoring should focus on identifying developments that have the potential to trigger misperceptions and action-reaction spirals between the three actors – China, Taiwan and the US.
For those worried about the US and China sleepwalking into World War III, the risk of conflict has indeed increased, but it’s by no means a high-probability outcome. Neither is the US ready for a fight, nor is China on a costly warpath for national revitalization. Conflict is not in the long-term interests of either great power, and there are signs of restraint on both sides. China’s longer-term game plan remains peaceful reunification with Taiwan under a one-country-two-systems model, although trends in Taiwanese public opinion remain a major obstacle. China’s position was spelled out clearly in its third white paper in three decades, released on August 10 after days of military posturing. Similar to the previous two white papers, China stressed that the use of force was a last resort, although it did not rule it out if its red lines were crossed. In addition, any military invasion would impose significant costs on China. China cannot invade Taiwan without seriously setting back not only its economy but also its own technological development, since Taiwan produces the vast majority of advanced chips and is also an integral part of the global semiconductor supply chains that China still relies heavily on for imported chips is.