Business leaders need to act now to protect their people, assets, and supply chains in the event China moves to annex Taiwan.
Western businesses that have a presence in China, Hong Kong, or Taiwan need to start planning now to safeguard their assets, people, and supply chains in the event that Beijing attempts to annex Taiwan. With Xi Jinping on the cusp of securing a historic third term as president of China, U.S. officials and experts believe it is very likely that Xi, who has vowed to reunify the mainland with Taiwan, by force, if necessary, will try to make good on his promise. Presidential elections in Taiwan in 2024 could be a trigger for such action.
In a webinar hosted by Global Guardian on September 28, experts advised business leaders to prepare for the inevitable disruption that would be caused by conflict in Taiwan and draw lessons from the war in Ukraine where Western businesses lost billions of dollars because they failed to heed the warning signs that a Russian invasion was imminent. “Given what we have all experienced in the eight-month-long crisis in Ukraine, businesses must consider the geopolitical risk of something similar occurring in other regions in the world,” said Global Guardian Chief Operating Officer Mark Post. “Nowhere is that risk more pronounced than in Asia and the ongoing tensions between China and Taiwan.”
The Red Flags
The belligerent rhetoric of China’s leadership toward Taiwan, intrusions by its warplanes of the island’s air defense zone, and its provocations in the South China Sea are all signs that it is only a matter of time before a major incident occurs.
Global Guardian President and CEO Dale Buckner predicted Beijing may attempt to take Taiwan by force around the time of the island’s presidential elections. Saying there is a “90 percent chance of escalation from now over the next five years,” Buckner added: “We really think that window from mid-May [2024] to 2026 we should all be watching very, very intently.”
"We really think that window from mid-May [2024] to 2026 we should all be watching very, very intently.”
John M. B. O’Connor, chairman of J.H. Whitney Investment Management and a member of Global Guardian’s advisory board, predicted a scenario in which pro-China actors in Taiwan challenge the outcome of the election and invite China to resolve the issue. This may be China’s preferred method of taking over Taiwan and would catch the West off guard, O’Connor said, adding: “If there is a political body with any degree of credibility inviting the Chinese in, that will truly flummox the U.S. system.”
Tensions between the United States and China escalated over House Speaker Nancy Pelosi’s visit to Taiwan in August. Beijing responded angrily to the visit by blocking food imports from Taiwan, conducting military exercises that effectively encircled the island, and is suspected of being behind cyberattacks that took down Taiwanese government websites. This response provided a glimpse into how China could respond in the event of a war.
China’s reaction made clear that Beijing has come to two conclusions: first, it needs to accelerate the notion of reunification of Taiwan with the mainland, and second, it is increasingly unlikely reunification will be achieved in a bilateral, voluntary way, said O’Connor. “Given that, and given the idiosyncratic risks that come with that, it would really be irresponsible [for businesses] now not to plan and prepare” for war, he said, while noting a “tremendous increase” in requests from companies for tabletop exercises.
“Given that, and given the idiosyncratic risks that come with that, it would really be irresponsible [for businesses] now not to plan and prepare" for war.
Meanwhile, the war in Ukraine has accelerated China’s plans to develop a financial system that will insulate it against the impact of Western sanctions that would likely follow Chinese aggression against Taiwan. Unprecedented Western sanctions on Russia in response to its war in Ukraine have crippled Russia’s economy. O’Connor said that China has been studying ways to activate compensatory systems since as far back as the 2008 global financial crisis. “Within China, they have been building alternative financial systems,” he explained. For example, the Asian Infrastructure Investment Bank (AIIB) is the Chinese alternative to the International Monetary Fund (IMF) and the World Bank, the Cross-Border Interbank Payment System (CIPS) is an alternative to SWIFT, and China has floated the digital renminbi.
China-U.S. Decoupling Is Underway
China has been actively decoupling from the United States over the past few years. O’Connor said this process will accelerate and that it is China, not the United States, that is its primary driver. He explained that as part of this decoupling effort, China has no less than 10 sub-plans—the Belt and Road Initiative (BRI), Made in China 2025, and Military-Civil Fusion (MCF) being among the better known—that roll up to “one very comprehensive, very intentional long-term plan.” The rising tensions over Taiwan are an “incredibly predictable unpredicted event because it is an obvious consequence of this decoupling pressure,” he said.
The key takeaway, said O’Connor, is that the competition between the United States and China is moving from being primarily economic to primarily ideological. Even the terminology used by the U.S. Department of Defense has evolved from describing China as a “collaborator” to “competitor” to “adversary,” he pointed out. He said it is perfectly understandable that the United States and China have an unstable relationship because their two systems are wholly incompatible.
O’Connor said the United States and China are entering the final chapter of active decoupling. To meet this challenge, he underscored three recommendations from the European Union Chamber of Commerce in China for companies:
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Reduce your footprint |
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Localize so you are preparing product exclusively for domestic markets and no longer for export out of China |
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Silo operations to eliminate dependencies |
The Political Situation
On October 16, the ruling Chinese Communist Party (CCP) will hold its twice-in-a-decade congress at which Xi is widely expected to secure a historic third term as president. Xi has described “resolving the Taiwan question and realizing China’s complete reunification” as “a historic mission and an unshakable commitment of the Communist Party of China” and that “no one should underestimate the resolve, the will, and the ability of the Chinese people to defend their national sovereignty and territorial integrity.”
Describing Xi as a dictatorial leader, O’Connor said: “He tends to tell you precisely what it is he expects to do, and he has stated quite clearly that it is his priority and his mission to complete a reunification.” O’Connor noted that this intention was reiterated in the announcement of the CCP’s October 16 congress and in an August white paper by the Taiwan section of the CCP that stated that the reunification of Taiwan would be under the principles of one country, two systems—the Hong Kong model. In Taiwan, meanwhile, popular support for reunification has dipped, while support for independence has increased.
In the United States, there is new legislation aimed at China. The Uyghur Forced Labor Protection Act, for example, has frozen the import of solar panels into the United States causing significant disruption in the renewable energy industry. [Xinjiang, where China is accused of committing genocide against the ethnic minority Uyghur population, is the source of nearly 50% of the world’s polysilicon, a raw material used in the manufacture of solar panels.] In addition, U.S. Sen. Bob Menendez (D-NJ) and U.S. Sen Lindsey Graham (R-SC) have introduced the bipartisan Taiwan Policy Act of 2022 that would impose broad economic sanctions on China if it were to attack Taiwan. “Essentially, it is a one-button declaration of economic conflict,” O’Connor said of the pending legislation.
“Essentially, it is a one-button declaration of economic conflict.”
In the European Union (EU), supply chain practices proposals would “cause a dramatic increase in corporate compliance requirements and give rise to a situation where it will be extremely difficult for Western companies operating in China to be aware if they are in compliance with Chinese regulation, U.S. regulation, and European regulation at all times because the scope of all the regulations is increasing dramatically and all of them contain material ambiguity,” O’Connor said.
The West has some important dependencies on China and Taiwan: semiconductors from Taiwan; active pharmaceutical ingredients, including 75 percent of all U.S. antibiotics; and trade routes in the South China Sea that are critical to U.S. and global GDP, being just some of them.
Plan for the Worst
Buckner emphasized the importance of preparation. Unlike in Europe, he said, there is no organization similar to NATO in Asia through which the West can channel support to Taiwan, and since Taiwan is an island there are no safe havens on land to which to evacuate people by road in an emergency. A conflict in Taiwan will primarily be a naval fight, he said, adding oceans are unpredictable. Buckner said evacuations by boat would also be hard as one of China’s first moves would be to cut off Taiwan. Further, these boats could become targets for Chinese missile strikes. “If you miss the window to get your people off the island, it is going to get hard,” said Buckner.
While Taiwan is “outgunned” by China militarily, Buckner said, “just because you have more assets does not equate to winning.” But does China have enough assets to take over Taiwan? Buckner said the answer to that question is yes. The United States regularly sells weapons to Taiwan in an effort to shore up the island’s defenses and deter a Chinese attack—what is known as a “porcupine” defense strategy. Buckner noted that since 1992, China has ramped up its military expenditure by 800% in an effort to achieve military parity with the United States. “That alone should alarm you,” he said.
Buckner said corporate headquarters should consider the following as they develop their crisis plans:
- Logistics
- Geography
- Economic interdependence
- Preemptive planning
Emphasizing the significance of assets, people, and production, Buckner said that when it comes to assets, Western businesses learned some hard lessons in Russia and Ukraine when they lost billions of dollars because they were unprepared for the war. He said it is important that companies take a look at their assets—both hard and financial. “What you’re willing to do with them in the short, medium or long term now matter,” he said. If companies have assets in mainland China, Hong Kong, or Taiwan that can be shut down and taken over by the Chinese government—as happened in Russia—then they have a vulnerability that they need to start planning for today.
When it comes to people, Buckner said companies need to consider reducing their expat exposure in China, Hong Kong, and Taiwan. He recommended companies conduct tabletop exercises that will help them take stock of their assets and people and identify triggers to start an evacuation.
Finally, on production, Buckner noted the high degree of intertwined production in Asia. Companies should consider three questions, he said: What can you lose? What do you risk? And what can you relocate now? “If you go through that calculus and then you have a short-term plan, a medium-term plan, and a long-term plan, I think you are going to end up in the right spot,” Buckner said while emphasizing a sense of urgency when approaching this challenge.
“If you go through that calculus and then you have a short-term plan, a medium-term plan, and a long-term plan, I think you are going to end up in the right spot.”
Buckner has a message for corporate leaders: “If you wait too long, if you don’t have well-defined triggers, ultimately your people and your assets will be stuck. [You] won’t have the opportunity a week or two weeks or three weeks after the conflict starts to get them out safely.”
Just as no one predicted the Japanese attack on Pearl Harbor or al Qaeda’s attacks on the United States on 9/11, Buckner said it is hard to make a precise prediction about the timing of Chinese aggression against Taiwan. But, he advised, “when you see indicators going the way they are right now, you should plan for the worst and hope for the best.”
STANDING BY TO SUPPORT
Global Guardian is actively supporting global businesses with personnel and assets in Taiwan and China with business resiliency assessments, contingency and emergency response planning, and tabletop exercises. To learn more, click below to contact Global Guardian's 24/7 Operations Center or call us directly at +1 (703) 566-9463.
