China – Taiwan Conflicts: An Emerging Threat to Global Businesses

For decades companies worldwide benefited from the stability and predictability of the Asia-Pacific
region, which enabled them to make wise investment and business decisions. The risks for war with
China and Taiwan have sharply increased in recent weeks – although the potential for violence in the
region has been on an upward trajectory for several years. But even with military tensions at the
highest level in decades, there may be limited economic implications if China’s fleet of ships eventually
heads back to their home ports as they are scheduled. Even before tensions soared over Taiwan this
month, multinational companies active in China faced increasing reputational risk and pressure from
Washington and its allies to diversify away from the mainland market. Business leaders said the lack
of an exodus by foreign companies highlighted the dearth of alternatives to the world’s biggest
consumer market and most important manufacturing base. But some US companies are among those
considering moving parts of their operations out of China, threatening economic ties between the
superpowers.

Global financial firms, still smarting from multi-billion-dollar losses in Russia, are now reassessing the
risks of doing business in Greater China after an escalation of tensions over Taiwan. It is reported that
the global economy will bear the consequences of an all-out economic war between the United States
and China should the latter try to shut off Taiwan. Besides the military implications, an escalation of
the situation is also bound to have economic repercussions, with Beijing showing earlier this month
that it is willing to use economic tools to up the pressure on Taipei, which has remained defiant
throughout the standoff with China. For instance, following Pelosi’s visit, China suspended exports of
natural sand to the island, which are key for construction work, and halted imports from Taiwan of
certain types of fruit and fish.

Taiwan’s approach to these various economic security challenges has been to diversify its trade
relations, such as through the New Southbound Policy, which over the past six years has expanded
economic ties with countries across South and Southeast Asia, as well as Australia and New Zealand.
Taipei has also pushed for greater awareness among world leaders of Taiwan’s position in global
supply chains in various industries, with Tsai Ing-wen discussing the importance of supply chain
resilience in interviews and with various economic partners. Taiwan seeks to reinforce how the
complexity of supply chains means that economic security is a shared challenge for the international
community at a time when ongoing examples abound: The widespread supply chain disruptions during
the pandemic, and more recently the impact on global food supplies of halted Ukrainian grain
shipments, interrupted by Russia’s invasion of the country, provide a clear picture of how instability
in one part of the world has ripple effects.

It is also predicted that the disruption in the event of a blockade of Taiwan Strait that brought shipping
to a complete halt could be enough to spur calls for international intervention.

China- Taiwan Business Integrations: A Contributing Factor to Fuel Conflicts

Now Taiwan’s problem has become everyone’s problem. An import ban on select Taiwanese products
may seem minor when compared to the kinds of military intimidation China carries out in the Taiwan
Strait. But in the context of Beijing’s array of economic coercive tools against Taiwan, an import ban
is better understood as part of a larger strategy with the potential for wide-reaching disruption. For
Taiwan, and for its partners, strengthening economic security is critical for national security.

China is not only Taiwan’s largest export market but also its largest source of imports, accounting for
about 33% of the island’s total foreign trade, meaning that stricter economic measures could have a
significant impact on Taiwan’s economy. However, the two economies are also closely intertwined,
particularly their respective electronics industries, with Taiwan being China’s top source of imported
integrated circuits.

In 2021, 42% of Taiwan’s total exports went to China, including Hong Kong. According to the S&P
Global Market Intelligence report, semiconductors accounted for an estimated 35% of the island’s
overall exports last year, highlighting the importance of Taiwan’s electronics industry not only for
China but also for global manufacturing supply chains.

The strong integration between the Chinese and Taiwanese economies, somewhere indicates a very
little chance of China imposing stricter economic sanctions on Taiwanese businesses, as this would
end up hurting crucial sectors of the Chinese economy. But the factor also considered to disturbed
Taiwan’s global business networks and its outreach.

“If Beijing imposed restrictions on manufactured products from Taiwan, this would be very disruptive
to China’s supply chains and exports. So, it is unlikely that Beijing would choose this route,” said David
Dollar, an expert on China’s economy at the Brookings Institution. “Any major trade sanctions aimed
at Taiwan would hurt the whole East Asian economy.” The global semiconductor industry is now
dominated by Taiwan. The perceptions were created many key officials including economy minister
Wang Mei-hua that the concentration of global semiconductor production in the country ensures the
US would come to the rescue if China were to attack.

As competition between the US and China heats up and the risk of a military conflict over Taiwan
increases, Washington is seeking to both cut Beijing off from supplies of key advanced semiconductors
and reduce its own dependency on Taiwan for chip supplies.

Moreover, if a conflict were to erupt, China, which heavily depends on exports to maintain economic
growth, would likely face an array of international sanctions and boycotts of Chinese-made goods and
services — just as Russia faces now over its war against Ukraine.

The Risk of Conflicts: A learning from Russia – Ukraine fight

While strict pandemic controls have recently been the main reason for foreign companies to rethink
their investments in China, the risk of a potential conflict in the Western Pacific is a growing topic for
board room discussions, particularly in the wake of the conflict in Ukraine and foreign businesses
pulling out of Russia. Rising tensions across the Taiwan Strait has been a topic of increasing concern
for many regional analysts over the past two years, most recently crowned by Pelosi’s trip. While this
risk is not new, other recent events indicate an increased likelihood of armed conflict in the region.
The invasion of Ukraine has rightly drawn the attention and focus of the strategic advisors and boards
in the international business community, and the business sector is now recalibrating its risk
assessments. What was once unimaginable is now a significant risk, and the parallels between Ukraine
and Taiwan are apparent for all to see. Sanctions alone were not the reason for many companies’
departure from Russia. Instead, the reputational risk and a deteriorating economic environment
compelled them to quit the market entirely. Russia’s invasion of Ukraine is estimated to have cost the
world GDP more than $1 trillion, with supply chains and primary inputs for entire industries upended
overnight.

China’s economy is even more integrated into global value chains and vital to the international
economy as the global economy’s powerhouse, especially in industrial manufacturing, and its
presence is felt in almost all economies. In board rooms around the world, corporate leaders are
asking: what will be the cost of a Chinese invasion of Taiwan?
China’s decision-making process is even more opaque than a decade ago, with the Chinese Communist
Party (CCP’s) ‘power vertical’ usurping the limited remaining local autonomy and rendering Chinese
actions more unpredictable. Moreover, as China continues to seek unification with Taiwan, growing
Chinese capabilities will make economic or military conflict over Taiwan increasingly likely. Foreign
companies and international supply chains, which have long relied on Chinese markets and
production, must factor in the growing invasion risk to avoid repeating the March 2022 fallout faced
by companies investing in Russia.

Given the increasing risks involved and the declining possibility of growth in the Chinese market due
to systemic economic pressures, the private sector is sensitive to the regional geopolitical
environment when determining prudent investment and business decisions. International businesses
are aware of the perils of operating in political systems such as China, where the government is not
beholden to its citizenry. Further, these companies understand that their firms would be well-advised
to increase their supply chains’ diversity and redundancy by moving production away from China. Case
in point, the passing of the bipartisan Creating Helpful Incentives to Produce Semiconductors for
America Act (known as CHIPS). It is part of a push for high-tech competition with China and the
reshoring of American tech capabilities to protect the U.S. from the consequences of any future
conflicts involving the Taiwan Strait. The trend to diversify supply chains and divest from China will
only continue with increasing geopolitical instability and rendering Chinese actions more
unpredictable.

In March 2022, the CCP’s Central Organization Department (in charge of party personnel placements)
issued a new directive banning family members of ministerial-level officials from holding real estate
abroad or shares in foreign companies. This directive also stated that the CCP would block senior party
members’ promotions if their families held foreign assets. This measure was designed to insulate top
officials from sanctions like those imposed on Russia following its invasion of Ukraine and indicates
that there are concerns in the Party that the international community could leverage a similar sanction
regime against China in the future.

Additionally, in late April, Chinese regulators (including China’s central bank and finance
ministry) conducted an emergency meeting with foreign and domestic banks to discuss how they
could protect the PRC’s foreign assets from sanctions issued by Western countries. Likely prompted
by the vulnerability of Russia’s central bank to U.S. sanctions, the meeting was almost certainly
intended to develop a defensive strategy should China risk sanctions by directly aiding Russia or
adopting a more aggressive stance towards Taiwan.
The severity of China’s response to Pelosi’s visit is due to a combination of factors. Among them: views
on government hierarchy, a lack of understanding of how democratic institutions function, China’s
opposition to any official exchanges between the U.S. and Taiwan, and closeness to the timing of the
fall 20th Party Congress.

Chinese officials have paired these quiet preparations with forceful international posturing. For
example, at June’s Shangri-La Dialogue, China’s Defense Minister Wei Fenghe made very blunt
statements indicating that the PLA would fight at all costs to ensure territorial integrity, rejecting the
possibility of Taiwanese independence. While the assertion itself is unsurprising and consistent with
prior Chinese government statements, Minister Wei struck a significantly bolder tone than
usual. Following Wei’s declarations in mid-June, an order signed by Xi Jinping claimed the entirety of
the Taiwan Strait as part of Chinese territory. Analysts equate Xi’s move to the July speech Putin made
prior to the invasion of Ukraine in building a casus belli for future military action.

In response to Chinese aggression, the U.S. Government is demonstrating its support for Taiwan by
launching the “US-Taiwan Initiative on 21st Century Trade,” a trade initiative to deepen US-Taiwan
economic relationships and facilitate trade (the first round of talks was held on June 28). The U.S.
Congress also passed an act to assist Taiwan in its unsuccessful attempt to enter the WHO in April
2022, after the PRC had previously blocked Taiwan’s membership. But beyond these efforts, Pelosi’s
visit symbolizes, in her words, “America’s unwavering commitment to supporting Taiwan’s vibrant
democracy.” Furthermore, speaking on behalf of the American people, Pelosi declared that “America’s
solidarity with Taiwan is more important than ever, as the world faces a choice between autocracy
and democracy.” Ultimately, Pelosi’s trip to Asia demonstrates U.S. commitments to its partners in
the Indo-Pacific region.

The severity of China’s response to Pelosi’s visit is due to a combination of factors. Among them: views
on government hierarchy, a lack of understanding of how democratic institutions function, China’s
opposition to any official exchanges between the U.S. and Taiwan, and closeness to the timing of the
fall 20th Party Congress. Pelosi, as Speaker of the U.S. House of Representatives, is second in the
presidential line of succession after the vice president. A recent U.S. Senate delegation to Taiwan that
included Senators Lindsey Graham, Richard Burr, Robert Portman, and Ben Sasse registered
comparatively little reaction from China.

Future Predictions and Other Countries Role

United States:

While it remains unclear whether Beijing would make good on its threat, the world must brace itself
for an all-out economic war between the China and the United States should a Taiwan blockade come
to pass. A cold economic war, while not as devastating as a “hot” conflict, would be disruptive and
costly for the global economy and almost all of us. Ships would have to divert from the Taiwan Strait,
the primary route between East Asia and the rest of the world. Consumers and companies would pay
more for goods that would take longer to ship. Like in the Russia-Ukraine conflict, governments and
multinationals would be forced to take sides and bear the consequences as the US and its allies impose
sanctions on China.

China, after all, sits at the heart of the global economy. Commodity prices have been falling because
of faltering growth in the world’s second-largest economy due to strict Covid lockdowns and a crisis
in its real estate sector. The world also looks to China and the US to cooperate to tackle critical global
challenges including climate change, AI ethics and pandemics.

But perhaps the biggest losers would be the two superpowers themselves. The US and China remain
connected by a dense web of mutual dependence despite their “decoupling” and years of
hawkishness by Washington towards Beijing. The two countries are still each other's top trading
partner – an estimated US$650 billion worth of goods flowed between them last year. Nearly 350 US
multinationals run operations in China where they employ some 2 million workers. A cold economic
war would be catastrophic for both sides.

To keep the peace both China and the US would have to reframe their relationship as one of
competitive interdependence. No doubt they compete in some realms but in others they are mutually
dependent. Competition should not be the sole or defining attribute of the relationship as it skews
the picture and creates a zero-sum mindset where each side perceives the other’s every action as
threatening even if it does not affect its own vital interests.

Singapore

Singapore is one of the closest bilateral partners of the US in South-east Asia while also maintaining
deep historical ties to China. For decades the city-state has skilfully negotiated a delicate balance in
its relationships with the two powers. Successive Singaporean prime ministers have served as a
valuable sounding board for US leaders and the foreign policy establishment; Singapore’s foreign
policy wonks have far deeper insights into China than any foreign policy hand in Washington.

Going forward, Singapore should add a dose of realism to US-China tensions. It can emphasise that
both parties have everything to gain from keeping the status quo and everything to lose from going
to war. It should emphasise cooperation over competition. Singapore can tell the US that it does not
get to impose its will on China and convince China that it has benefitted immensely from the current
world order and stability is in its own best interests. Cooler heads can yet prevail.
India

In the past, though India and Taiwan had de facto diplomatic relations, most agencies in the Indian
government barely recognized Taiwan as a separate country. Several years ago, India adhered so
strictly to a “one China” policy that it did not recognize Taiwanese credit cards and banks. In 2018, the
two countries signed a bilateral investment treaty to encourage commercial ties. From nearly zero,
Taiwanese foreign direct investment (FDI) in India has increased to about $400 million and trade to
about $7 billion. These numbers are heading for a quantum leap as Taiwanese firms like Foxconn and
Wistron – contract manufacturers for electronics firms like Apple – are investing $1 billion in India to
diversify their manufacturing away from mainland China.

India has already begun a slow and painful process of trying to de-Sinicize its economy. It sees the
slow-motion decoupling of the U.S. and China as a chance to capture some of the investment fleeing
its eastern neighbour. But India is carrying out its own economic distancing from China, especially in
critical infrastructure and overall Chinese investments. The worse the Taiwan situation is, the better
chance of India to be an investment beneficiary.

In the case of an actual military conflict, India would probably follow the U.S. in imposing financial
sanctions against China as it has done when the U.S. has imposed sanctions on Iran. If Taiwanese
electronics investments in India are large and strategic enough, New Delhi could contemplate seizing
some of these assets rather than letting them slip into Chinese hands following a Chinese takeover of
Taiwan. Trade sanctions would be more difficult so long as critical Indian sectors like pharmaceuticals,
renewable energy and automobiles remain dependent on Chinese components.

Conclusion:

Over the past few months, firms have been stress-testing to see if they can handle the risk of a sudden
market plunge — examining their exposure across the currency, bond and stock trading desks, people
familiar said. While banks often draw up contingency plans without putting them into action, the
escalating tensions are adding some urgency. The recent flare-up in tensions over Taiwan should
awaken companies to the biggest risk of all — a military confrontation or conflict with the U.S. over
the Chinese-claimed island. While the immediate crisis has eased, the long-term trend of an
increasingly assertive Chinese military threatening vital U.S. interests in the Pacific is very much in
place. Any conflict would dwarf the impact of the Ukraine war given China’s economic clout and its
deep integration into global supply chains. A closure of the Taiwan Strait, one of the world’s busiest
routes, would have a severe impact on shipping capacity. Reports suggest that short-term rates for
sending freight on maritime routes between Taiwan and mainland China had risen by 11% in early
August from July following Mrs. Pelosi’s Taipei trip, because of heightened risks to shipping in the area.
A China-Taiwan conflict would make it difficult to trade through the widely used South China Sea, as
the passage to the north would be challenging to move through. The South China Sea is a critical
maritime pathway that connects Asia with the rest of the world.

The mutually catastrophic implications of a conflict help to stop it from happening, but it’s a real and
growing long-term risk. Against this backdrop, any hopes that Washington would reverse tariffs on
Chinese imports have evaporated and the White House is talking tough on China. While new tariffs
are unlikely in the near term, we’re likely to see more customs enforcement actions on products and
more actions against intellectual property from both sides. There’s plenty of room for things to get
worse considering China has yet to impose any major new restrictions on U.S. imports.

Companies with operations in China need to thoroughly assess their vulnerability and act
accordingly. The key point to consider is how a company is viewed by the Chinese government at both
the national and local levels. It could be beneficial for an organization to downplay U.S. identity,
perhaps through a different ownership structure, and to have strong partnerships with favoured local
firms that align your economic interests with their own.
CEOs should be leading this risk review with input from CFOs and COOs to analyse how to change the
company’s investment profile while seeking new partnerships and continuing to meet customer
demand. Even before the recent wave of tensions, supply-chain concerns had prompted more
companies to leave China, at least partially, seeking some balance in countries like Vietnam, India, and
Malaysia.

Now, the climate bill has helped put the U.S. at least in the game as a manufacturing destination for
the first time in a generation. The bill’s incentives are likely to have a big impact in attracting local
investments in new technology such as electric vehicle batteries. U.S. automakers like Ford and GM
are already preparing huge battery-making plants to power their growing electric fleets.

The world’s two biggest economies are competing to secure the same finite materials, and both want
to dominate the enormous new markets that will emerge for electric vehicles and other renewable
energy industries.

Reshoring existing strategic industries — such as the chipmaking factories that are heavily based in
Taiwan — is a tougher proposition because of the huge costs and long lead times required, as well as
the labor constraints in the U.S.

Overall, war risks are indeed elevated. This does not mean that war could occur in the very immediate
future. However, events, policies and politics in the region all raise the potential for war. While a
conflict could be averted, the risks of mistakes and missteps remain high. Put simply, a war between
China and Taiwan is not a foregone conclusion or inevitable. However, if we think about where war
and inter-state conflict could occur, the risks are significantly higher in and around China and Taiwan.

Should conditions deteriorate, businesses should:

• Stay abreast of political developments and monitor reliable news or intelligence sources.
Follow output from local media, embassy bulletins and establish a direct information network.
• Ensure that detailed contingency options, business continuity, crisis management, and
evacuation plans are in place.
• Maintain an organizational public stance of neutrality to avoid unwanted attention where it
does not compromise wider business initiatives.
• Establish an internal communications plan. Consider setting up instant messaging groups
where information can be quickly disseminated to employees in the event of a deterioration
of the security environment.
 • Discuss and review Political Risk Insurance (PRI) coverage for policyholders in case of business
losses in the event of a China-Taiwan conflict.

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