Increased tensions around Taiwan

Business risk: Military conflict that would disrupt global supply chains and market access to China and Taiwan.

Chinese President Xi Jinping and Taiwanese President Tsai Ing-Wen (Source: 美國之音合成圖片)

What happened? On March 31, two Chinese J-11 fighter jets crossed the Taiwan Strait’s “median line” this resulted in a standoff with Taiwanese jets in the Taiwanese airspace. Taiwan said it would “forcefully expel” Chinese warplanes next time. US National Security Advisor John Bolton reacted with a tweet pledging US “commitment’“ to Taiwan’s security.

Increasing tensions. This incident is happening in an environment of heightened tensions in the US-Taiwan-China relationship and growing assertiveness on all sides:

  • The state department approved a big arms deal including pilot training, maintenance and logistics for F-16 fighter jets. The last time the US sold jets to Taiwan was 1992. At the same time, Taiwan announced a 5,6% increase in its defence budget. This is a signal to China from both the US and Taiwan that the island is increasing its defences.
  • While the US has no formal obligation under the Taiwan Relations Act to defend the island, the US is becoming much more assertive in resisting China’s claim for dominance in its neighbourhood. The US has increased its trips through the Taiwan Strait. In the past nine months, ships sailed six times through the Strait, under Obama this was only 1-3 a year.
  • In January Chinese President, Xi said that Taiwan must be unified with the mainland. Taiwanese President Tsai reacted by saying that: “Taiwan absolutely will not accept ‘one country, two systems.’”
  • Also, there’s the growing confidence in the Chinese People’s Liberation Army’s (PLA) capabilities. Even in the US the absolute belief in the certainty of victory in a conflict with China is withering away.

“The U.S. could lose,” said Gary Roughead, co-chair of a bipartisan review of the Trump administration’s defense strategy published in November. “We really are at a significant inflection point in history.”

What’s holding everybody back? While avoiding Taiwanese independence is one of the core interests of China, it has shown restraint in its relations with the island and has so far used a softer approach, integrating the Taiwanese with its economy, increasing its dependence on the mainland. While China ultimately wants Taiwan to ‘return’ to the mainland, a major war with Taiwan (and potentially the US) would damage Taiwan’s economy so much that it might end up winning a war and having nothing more to rule.

Besides, China needs economic growth to honour the social bargain it has with its population (increasing prosperity in exchange for standstill (or decline) in political rights. A major war would cause severe economic harm to China and could endanger this bargain.

What could trigger a conflict? Accidental escalation is the main path to war between the US and China. New incursions of the Chinese in Taiwanese airspace and the Taiwanese reaction could escalate the conflict if for example a plane is shot down. Alternatively, incidents at sea (provoked or not) in the Taiwan Strait could escalate. While in the past doubts about its military capabilities hold China back to avoid escalation, its new sense of military confidence could lead to hubris that could lead to further escalation.

What to watch out for? The coming elections in Taiwan (2020) are another potential trigger. China is very sensitive to any candidates supporting (formal) Taiwanese independence. And it’s entirely possible that mainland China could stage a demonstration of its power in the run-off to the elections to let voters think twice who they support through the ballot box.

If you’re interested in receiving updates on how political events cause business risk, subscribe to Political Disruption

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s