Taiwan’s fate is entwined with the prospects for the world economy and global freedom. With rising tensions between the West and China and recent large-scale military exercises around Taiwan, it’s essential to assess whether an invasion of Taiwan presents a real risk in the coming years or whether the alarm being sounded by many analysts is false.
Chinese muscle flexing
Both China and the U.S. are flexing their muscles more and more. Starting with China:
- In several important speeches, President Xi Jinping seemed to be preparing China for a (possible) war, portraying America as China’s great antagonist, calling on companies to commit themselves to Chinese strategic and military goals, pushing for China to become more self-sufficient in food supplies and describing a reunification with Taiwan as an essential component of China’s great revival.
- China’s defense budget has nearly doubled in the past decade, according to the Department of Defense. It now exceeds the combined military budgets of all official U.S. allies in the region (Australia, Japan, the Philippines, South Korea and Thailand).
- Various laws have been passed that significantly increase China’s military preparedness and greatly accelerate mobilization.
- Many new bomb shelters have been built on the mainland closest to Taiwan.
- Chinese military exercises near Taiwan are being scaled up more and more, and are going increasingly further in terms of objectives.
American gloves are off
It is not only the Chinese who are creating a reason for concern; the Americans are also stirring things up:
- Under President Trump, China-U.S. relations already deteriorated considerably. His successor Biden takes a more diplomatic stance but basically continues the Trump line, and in some ways even hardens it. In addition, anti-Chinese rhetoric from Congress is growing increasingly louder. Furthermore, America has actively, and in barely veiled terms, set itself the goal of slowing down China’s advance, for example by banning exports of sophisticated technology and components for it to China, and by thwarting Chinese companies in the U.S.
- Senior U.S. officials have caused a stir on quite a few occasions of late with statements in which they do not rule out an invasion of Taiwan at some point in the coming years. For example, the U.S. Navy chief suggested in October last year that China could decide to attack before 2024.
- Military exercises in the waters around China by the U.S. and allies are becoming increasingly extensive and openly directed against China.
- Several U.S. politicians are willing to go a few steps further than exercises. Sen. Lindsey Graham (R-S.C.) wants to station more troops in Japan and South Korea to deter China. He also advocates supplying F16s to Taiwan, equipping all U.S. submarines with nuclear warheads and deploying U.S. troops to defend Taiwan in the event of an invasion.
- High-ranking politicians such as Rep. Nancy Pelosi (D-Calif.) and House Speaker Kevin McCarthy (R-Calif.) did not shy away from provoking Beijing with a visit to Taiwan and a meeting with the Taiwanese president on U.S. territory, respectively.
No war … for now
One might believe that we are on the eve of a gigantic geopolitical crisis, compared to which the Ukraine war is a neighborly dispute that has gotten out of hand. However, the scenario of a Chinese invasion of Taiwan still seems unlikely, at least for the next couple of years:
- Some experts claim that an invasion is likely because Xi is contending with major domestic problems, and using an invasion of Taiwan could divert attention away from these problems and create goodwill with the Chinese population. However, various researchers have explained that China has rarely, if ever, pursued an aggressive foreign policy in times of domestic adversity. On the contrary, Beijing would usually moderate its tone on the world stage. One study found that China made concessions in 15 of the 17 territorial conflicts it has settled with neighbors since 1949. Another paper covering the period of 1949-1992 shows that there is no connection between domestic turmoil and China’s military actions.
- Beijing has also noticed that the West is still acting in a fairly united way in the Ukraine war and that this is causing Russia considerable pain. Putin clearly misjudged his ability to play off Western countries against each other (although this could still happen, of course).
- Even though China wants to steer its own economy away from export dependence towards more services-driven and domestic consumption-driven growth, China is still relying heavily on exports. They will collapse in the event of an invasion — because of sanctions and so on, but also since it would cause such unrest and instability that the global economy would sink into a deep recession, if not a depression.
- If China invades Taiwan, it will face great difficulty in maintaining its own production and in getting these products into the world, even in the absence of sanctions. Taiwan is by far the largest producer of semiconductors and chips. Because production is a very complicated process, in which numerous companies from outside Taiwan are also essential to keep production going, China could probably do very little with these factories for a long period of time, even if it gained production facilities intact. As many of China’s exports are products with chips in them, and since China sources the majority of its chips from Taiwan, a very large part of Chinese exports would evaporate as a result. In addition, most exports take place via ships (more than 60 percent) crossing the South China Sea. In the event of an invasion, a substantial proportion of shipping would come to a standstill because shipwrecks and mines impede passage and/or because the insurance of transports becomes unaffordable.
- China may be advancing rapidly (and in some respects, it already equals or surpasses the U.S.), but the U.S. is still the number one military power — certainly when considering that, in terms of military alliances and partnerships, China is a very lonely, pitiful child in the classroom compared to the U.S., which has plenty of friendships.
- Moreover, Taiwan, the U.S. and their allies almost certainly have time to get ready to counter a Chinese invasion, as it is virtually impossible for China to make preparations for the attack without being noticed.
Given all of the above, the chances of Beijing deciding to launch a military strike against Taiwan in the next few years still seem remote. Nevertheless, beware of too much optimism. Xi Jinping may want to avoid conflict for now due to domestic considerations and, given the military balance that is still in favor of the U.S. and its allies, with the idea that China’s military opportunities will improve significantly in the longer term. In spite of these considerations, however, Beijing could still decide to take action sooner if the idea takes hold among Chinese leadership that Taiwan is slipping out of sight due to a far more nationalistic course in Taipei, and much greater support for Taiwan from Washington.
Andy Langenkamp is a senior political analyst at ECR Research which offers independent research on asset allocation, global financial markets, politics and FX & interest rates.