The recent escalation in tensions between China and Taiwan has prompted many multinationals to reassess the risks of doing business in the region as well as the impact of a potential military conflict. In the short term, many will have to adjust to a new norm of elevated tension across the Taiwan Strait.
It’s not just the Taiwan Strait that lies between mainland China and Taiwan; there is also a figurative and metaphorical gulf between them. While the source of tensions between them is not new, events in recent months have signalled a shift in the increased pressure from China to reunify with the island, and Taiwan’s response by its pro-independence leadership.
Recent flare-ups have been triggered by high-level diplomatic engagement by Taiwan, and a reminder that the Taiwan Strait is a flashpoint that could potentially bring the world’s major powers into direct conflict with each other.
Companies – and corporate treasurers – with business interests in Taiwan and the mainland have been watching events closely and reassessing their risk in the process. The ratcheting up in tensions was prompted by US House Speaker Nancy Pelosi’s visit to Taiwan in August 2022. In effect, the US was treating Taiwan as an independent country, something that China finds unacceptable. China reacted with military drills that reportedly simulated an attack on Taiwan. The message was clear: if Taiwan declares its independence, China will push for reunification – by force if necessary.
China and Taiwan’s entangled history goes back decades. “What we are dealing with is the unresolved outcome of the Chinese civil war,” Rupert Hammond-Chambers, President of the US-Taiwan Business Council, tells Treasury Today Asia.
That unresolved outcome is rooted in the events of 1949 when Mao Zedong’s Communist forces took control of the mainland and established the People’s Republic of China. Meanwhile, the government of Chiang Kai-shek – and his supporters – fled to Taiwan. From there Chiang established his Koumintang government and engaged with international leaders as the representative of the whole of China. The international community later shifted its view and began to recognise the leader of the People’s Republic of China instead. Since then, Taiwan’s status – and whether it is part of China or an independent state – has been confused and unresolved. For many years, Taiwan was led by a Koumintang government that favoured reunification with China. Now, however, Taiwan is led by Tsai Ing-wen, the leader of the Democratic Progressive Party (DPP) which favours independence from China.
These issues from the civil war, says Hammond-Chambers, have festered and China has not done anything about it. Now, however, China is in a period of ascendancy and believes it has the economic and military power to resolve the situation, says Hammond-Chambers. He adds that Xi Jinping is different to China’s previous leaders; the others were more practical and were not looking for conflict, whereas Xi has not been afraid to challenge the existing order. The current situation is very serious, says Hammond-Chambers, and it’s not an exaggeration to say the situation could flare up and bring US and China into a direct conflict.
This escalation in tensions has an impact on corporates’ appetite for doing business in Taiwan, although the fears appear to be more muted than one may expect. In a 2023 Business Climate survey of its members, the American Chamber of Commerce in Taiwan (AmCham) found that anxiety about the cross-Strait tensions was moderate, at 2.8 on a scale of 1 to 5. And, of the companies surveyed, 67% said that China’s military drills in 2022 had not affected their operations.
In terms of optimism about Taiwan’s economy, there was a decline. The survey found that 71% of respondents expressed confidence in the economic outlook for the island, but this was a 16 percentage point decrease compared to the year before. Vincent Shih, AmCham’s chairperson, stated, “Confidence remains strong overall, but it has been adjusted downward from the heady days of late 2021.”
Meanwhile in April, S&P Global affirmed and maintained its ratings for Taiwan, and said the outlook was stable, reflecting its assumption that “cross-Strait relations are unlikely to seriously disrupt Taiwan’s economic stability over the next two years.” S&P analyst YeeFarn Phua continued: “While rising geopolitical tensions pose risks to Taiwan’s export-reliant economy, they are unlikely to derail long-term growth in its competitive manufacturing sector.” Also, the researcher noted, “We believe cross-Strait relations will not deteriorate toward a major military conflict. Close economic and trade linkages between mainland China and Taiwan support this assessment. Such conditions remain conducive for economic stability in the region.”
While there may not be any prospect of a military conflict in the near term, many companies have been reassessing their risk, particularly in light of Russia’s invasion of Ukraine. This has prompted questions about whether something similar could happen to Taiwan, along with the ensuing disruption to businesses and their supply chains. The Financial Times reported that the demand for political risk insurance to cover a conflict in the Taiwan Strait has risen sharply, and the president of the EU Chamber of Commerce said that it’s not that companies are anticipating an invasion, but rather they want to check what the impact of a war would be.
When it comes to assessing what the impact of the tensions in the Taiwan Strait mean for companies, Hammond-Chambers says there has been a debate around decoupling and how companies can be less reliant on trading with China. This, Hammond-Chambers argues, is impractical as China is an important engine of economic growth. “We want China engaged as a productive player in the global economy for all our markets – for us and for them,” he comments.
Also, notes Hammond-Chambers, companies are paying a great deal of attention to derisking, particularly in terms of supply chain disruption. The semi-conductor industry has already suffered disruption in recent years, with a global shortage wreaking havoc on the auto sector, for example. Taiwan plays a critical role in the semiconductor industry, with the Taiwan Semiconductor Manufacturing Company (TSMC) producing almost all of the world’s high-end chips, as Treasury Today has previously reported.
If Taiwan were involved in a military conflict, the disruption to global supply chains would be immense. This has prompted calls for TSMC to diversify so that its operations are not focused in Taiwan. On the other hand, it is in Taiwan’s interests to have the risk concentrated in this way because if TSMC was harmed, the consequences would be catastrophic for everyone. This has been described as Taiwan’s ‘silicon shield’, a term that was first created by author Craig Addison in a book that outlines how, as the world’s supplier of chips, Taiwan is protected from a Chinese attack.
On the role of this silicon shield, Wang Chih-Sheng, Secretary-General of the Association of Chinese Elite Leadership, was quoted as saying: “TSMC will make countries around the world confer Taiwan with an increasingly higher status. Taiwan now has an absolutely indispensable role in geopolitical competition. Through this process, the company has become a shield. If TSMC is attacked by China, it would cause the whole world to condemn and oppose China.”
In the face of Chinese pressure, many governments and companies have accommodated China’s requests so they can continue to do business on the mainland. According to those Treasury Today Asia spoke to on the condition of anonymity, this extends to companies not being allowed to describe Taiwan as a country on their website. If they do, the implicit threat is they won’t be able to do business in mainland China.
Under these circumstances, Taiwan is often not treated as a sovereign state that can engage in diplomatic relations with other countries. The US, however, has recently been strengthening ties with Taiwan. In June it signed a trade agreement under the Taiwan-US Initiative on 21st Century Trade, which provoked the ire of the mainland. China warned politicians in Washington not to sign a deal “With connotations of sovereignty or of an official nature with China’s Taiwan region,” according to news reports.
When the trade negotiations were concluded in May this year, the US Trade Representative Katherine Tai said, “This accomplishment represents an important step forward in strengthening the US-Taiwan economic relationship.It demonstrates how we can work together and advance mutual trade priorities on behalf of our people.”
The agreement comes in the context of many policymakers around the world accommodating China’s demands. Although the deal is modest, it does signal confidence in Taiwan, comments Hammond-Chambers.
Ultimately, he argues, China’s goal is to absorb Taiwan – ideally without any military conflict – by pressuring it with a sense of inevitability. What governments around the world can do to alleviate that pressure is to indicate their confidence in the market by signing trade deals with Taiwan.
Taiwan has also been involved in discussions about joining the CPTPP, [the Comprehensive and Progressive Agreement for Trans-Pacific Partnership], which grew out of the Trans-Pacific Partnership initiative after the Trump administration pulled the US out of the TPP pact. Taiwan applied to join the CPTPP in September 2021, but China got in first with its application a few days prior, making the decision for the members more complex because of the political sensitivities involved. Other countries have a tightrope to walk with their relations with China. Jennifer Hsu, Research Fellow, Public Opinion and Foreign Policy Program at the Lowy Institute previously told Treasury Today Asia that Taiwan could, for example, become a sticking point with Australia’s relations with China. Taiwan had made good case to Australia about its accession to the CPTPP and, if China were also to join, it would be expected to meet stringent requirements.
In a piece for the Asia Pacific Foundation of Canada, Hugh Stephens and Jeff Kucharksi write that China’s and Taiwan’s accessions raise many issues and it is a critical decision for the future of the bloc and the relations among its members. Stephens and Kucharski explain that Taiwan used its status as a separate customs territory to apply to the CPTPP – which was also the basis for its membership to the World Trade Organisation – which allows the members to avoid the thorny issue of Taiwan’s independence and doesn’t require them to technically view it as a state.
This kind of dilemma is a balancing act for the member states, but it points to the wider issue of how to approach and think about cross-Strait tensions. Hammond-Chambers advises people to think of it in the same way as the Cold War when there was a prolonged period of heightened tensions that everyone became accustomed to. This, he says, is going to require an adjustment to the high state of anxiety and tension, as well as the derisking that goes along with it.
