A China-Taiwan conflict may seem distant to many businesses, but corporate leaders should be keeping an eye on this brewing geopolitical crisis—and preparing their emergency response and business continuity plans now.
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November 16, 2023 INSIDE THIS ARTICLE, YOU'LL FIND: |
Heading into 2024, tensions continue to simmer in the Taiwan Strait. China’s military has increasingly taken steps to provoke Taiwan, heightening concern about the prospect of an all-out war between the two.
“Just in the last year, there has been a material pivot in the U.S. government to China and they are now taking this much more seriously, and the predictions [of a China-Taiwan war] are much more aggressive” than they were a few years ago, Dale Buckner, president and CEO of Global Guardian, said in a webinar on October 26. “This really has become top of mind,” he added.
Corporate America, too, is taking note.
“Corporate America has now realized this is real, it is happening, and it is a direct threat. And corporate America is now taking this in a much more serious fashion,” Buckner said.
The China-Taiwan conflict today seems distant to many businesses and individuals, and the dispute may be temporarily lost amid other global conflicts. Here’s why everyone should be keeping an eye on the possibility of war in Taiwan.
The Chinese Communist Party (CCP) has long claimed that Taiwan, which it identifies as a “core” national interest, is an inalienable part of China. The CCP has vowed to “reunify” mainland China with the island — by force if necessary — and in 2021, Chinese President Xi Jinping said “resolving the Taiwan question and realizing China’s complete reunification is a historic mission and an unshakable commitment” of the CCP.
Describing Xi as the most powerful leader by far in the CCP’s history, Zev Faintuch, Global Guardian’s senior intelligence analyst, said: “Xi’s will is now synonymous with China’s national interest.” However, popular opinion in Taiwan “is not for reunifying with China,” Faintuch added.
The United States does not support Taiwanese independence and expects cross-strait differences to be resolved peacefully. However, Taiwan is an important trade partner of the United States and a critical source of semiconductors. And, consistent with the Taiwan Relations Act, the U.S. supplies defense equipment to Taiwan for it to maintain self-defense capabilities.
According to Faintuch, revisionist powers such as China become a lot more aggressive after they have peaked — as China appears to have done following the COVID-19 pandemic and the slowdown of its economy. “Humiliation on the battlefield is better than the humiliation of a ‘great’ nation in open decline, especially for a leader so concerned with his historical legacy,” he noted.
As a consequence, Faintuch said there is a:
The most likely scenario, according to Faintuch, is a limited conflict, similar to Russia’s grayzone activity in Ukraine and its annexation of Crimea in 2014. Key trigger points for a China-Taiwan conflict could include the Taiwanese presidential elections in January 2024, U.S. presidential elections in November 2024, or future dates such as the China’s People’s Liberation Army centennial in 2027. Other triggers include changes to U.S. policy, or the approach of U.S. semiconductor sovereignty (which is expected by the end of the decade).
Faintuch also listed key considerations that will factor in China’s calculations. One major consideration is a perception of U.S. weakness or distraction. The U.S. may face a tumultuous 2024-2025 presidential transition period, and may continue to focus on Israel and Ukraine rather than seeing China-Taiwan's conflict as a preeminent national security threat. There are other factors that China will consider, including logistical and seasonal factors like sea levels and military readiness.
Taiwan is part of the First Island Chain, which also includes Japan, parts of the Philippines, and Indonesia. If China succeeds in breaching this First Island Chain, it would allow China to “bully” Japan and South Korea, and “completely disrupt the U.S. security architecture in the region,” said Faintuch.
“Losing Taiwan would completely discredit the U.S. security guarantee for its allies abroad and might encourage further erosion of America’s broader power,” he added.
A China-Taiwan conflict would have wider global implications beyond the South China Sea as well. Global Guardian’s Taiwan Shock Index shows how such a conflict would destabilize most countries, especially those in the Global South that have high degrees of dependence on China.
A Chinese blockade in the Taiwan Strait and subsequent sanctions would disrupt supply chains, including the export of critical Taiwanese semiconductors, resulting in an economic loss on par with that caused by the global financial crisis and the Great Depression, according to Faintuch and John O’Connor, chairman and CEO of J.H. Whitney Investment Management.
Noting China’s dominant position in global trade, O’Connor said this “has profound implications, because where we trade also dictates where we manufacture and who sets the standards of trade terms and technology terms.” Other areas of U.S.-China competition include technology and capital markets.
“China chose to initiate a competitive strategy in the economic domain really because they have no desire to fight the U.S. militarily,” O’Connor explained. He said the U.S. private sector will need to actively participate if the United States is to prevail in this competition.
O’Connor said more than 50 percent of the world’s top 1,600 companies have relatively high degrees of risk arising from their “entanglement” in China. “Should there be a sudden, sharp decoupling, it could impinge on their resilience in the worst case and in any case would more likely than not be material on their profitability,” he said.
The risk of U.S.-China decoupling has become “front of mind in the board room,” said O’Connor. He attributed this shift in mindset to the fallout from Russia’s war in Ukraine as well as the very real possibility of the United States and China decoupling. Companies now want “a risk management strategy within [their] enterprise risk management system that helps [them] both illuminate [their] risk, measure [their] risk, and come up with mitigation plans for [their] risk,” he said.
A similar phenomenon is occurring in investment committees of institutional investors. “Whether you’re a retirement system, a foundation, an endowment, a 401(k)-management company, given what happened in the aftermath of [Russia’s invasion of Ukraine] all fiduciaries are having to begin to think about how to recharacterize this,” said O’Connor. “Technology companies, particularly, have an obligation to drill deep into [their] strategy in the context of [their] supply chain and [their] value chain.”
To address the security threats that inevitably accompany a conflict, Buckner advised companies:
From a duty of care standpoint, Buckner said, if companies are prepared for the worst case — in this instance a China-Taiwan conflict — “it is all upside.”
“But if you dismiss this [likelihood]… then you fail materially,” he warned, adding, “It doesn’t make a lot of sense ultimately not to plan for this.”
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