China and Taiwan conflict

Is war between China and Taiwan inevitable?

  • While tensions across the Taiwan Strait have intensified, a direct Chinese military assault on Taiwan remains very unlikely. The potential cost of any such operation continues to outweigh the benefits for the Chinese leadership.
  • Risk factors that could trigger Chinese military escalation include any perceived steps towards either a declaration of Taiwanese independence or the formalisation of US‑Taiwan ties. There is also a risk of increased Chinese incursion into Taiwan’s claimed territory leading to an accidental clash that proves difficult to defuse.
  • China’s strategy remains one of increasing strategic and economic pressure on Taiwan, with a view to forcing negotiations over unification—but under its terms. With conditions for such an occurrence still far away, the cross-Strait status quo is likely to hold.

In early April China dispatched 25 jets into Taiwan’s air-defence identification zone (ADIZ), in its largest incursion in a year. Those drills reflect a sharp deterioration in cross-Strait relations, which have included several years of Chinese punitive economic measures—the latest (in February) being a ban on imported Taiwanese pineapples, over alleged pest concerns. China’s intimidation has come amid a warming of US‑Taiwan ties, raising questions over whether the three sides are spiralling towards conflict.

An attempt to take Taiwan by force remains very unlikely

We nevertheless continue to expect China to refrain from purposefully initiating a direct conflict with Taiwan. China’s president, Xi Jinping, is sometimes described as seeing cross-Strait unification as a legacy issue, and one to facilitate the indefinite extension of his own term in power. In addition to political factors, Taiwan holds economic assets that could be valuable for China, including its cutting-edge semiconductor production capacity. Capturing such assets could potentially help China to accelerate its chip self-sufficiency goals.

However, the potential costs of a move to take Taiwan by military force significantly outweigh the benefits for China. While the cross-Strait balance of military power tilts significantly in favour of China, it would still be a highly risky operation. The US retains a position of strategic ambiguity in relation to Taiwan’s defence, but we believe that it would intervene militarily to support Taiwan in the face of Chinese aggression. US regional security partners, such as Japan and Australia, could also have some level of involvement. Alongside Taiwan’s own defence capabilities, this would mean that a Chinese attack would involve significant cost and would risk failure.

Even if China took Taiwan militarily, it would subsequently face international isolation as at least Western, democratic countries implemented reprisal measures, including sanctions and (potentially) trade embargos. This would have a significant economic cost for China and upset its development and global leadership plans. The integration of Taiwan into China’s governance structures would also be a daunting task, and Chinese authorities would probably have to contend with a restive and potentially rebellious local population. 

A devastating military conflict would probably also risk wiping out Taiwan’s semiconductor industry, through either collateral damage or deliberate self-sabotage, thus eliminating the perceived economic or technological benefits of an invasion. At the very least, disruption to Taiwanese manufacturing clusters, infrastructure, logistics networks and talent bases would inevitably shock the island’s industry, while US economic reprisals could include export controls targeting Taiwanese fabrication plants that fall under Chinese control. For such reasons, a direct attack remains a very unlikely course of action, despite the presence of some political and economic drivers.

Potential triggers for a military escalation

A shift in rationale in China’s calculus in favour of military intervention would require fairly unlikely developments. Potential triggers or “red lines” for stepped-up Chinese actions probably include:

  • Rhetorical or practical steps towards a formal declaration of Taiwanese independence. Taiwan’s president, Tsai Ing‑wen, has explicitly rejected this as a policy goal, but there is a risk that future politicians will back a more pro‑independence stance (Ms Tsai will step down in 2024). These could include the current premier, William Lai Ching‑te, who is more openly sympathetic to independence and who we expect to run as a presidential candidate in 2024.
  • The offering of an overt US security pledge to Taiwan, or the elevation of government visits to the highest levels (such the dispatch of the US secretary of state to Taiwan). While the administration led by the US president, Joe Biden, will deepen ties with Taiwan, we expect it to tread cautiously on the most sensitive issues.
  • A clear indication that the US was unable or unwilling to come to Taiwan’s defence. This would run against the grain of US defence policy, which is increasingly centred on the Asia-Pacific region, but could alter China’s calculus by reducing the cost of military engagement.
  • The removal of domestic political constraints on Mr Xi induces overconfidence and irrational decision-making. However, our baseline view is that there would still be sufficient internal pushback against any proposed rash move in relation to Taiwan.

Given the low probability attached to such triggers, the most immediate risk in our view is a military miscalculation, including a collision between Chinese and Taiwanese fighter jets or the accidental firing of a surface-to-air missile by Taiwan’s defence forces during a Chinese aerial incursion into its ADIZ. The ability of the two sides—as well as the US—to communicate quickly and decisively to defuse any such an incident is unclear. This means that it could spiral into a more significant incident, if not outright conflict.

Ongoing strategic and economic pressure

Still, even outside a direct conflict there remains significant scope for cross-Strait relations to worsen. We expect China to maintain its tactics of intimidation, including regular incursions into Taiwan’s claimed airspace. These moves will complement China’s other “grey zone” tactics against Taiwan, which include international isolation and the poaching of diplomatic allies, along with disinformation via Taiwanese media channels and cyberattacks on government (or corporate) targets.

We also anticipate intensification of economic pressure. This will include poaching the island’s talent and intellectual property. Complementing these threats will be China’s industrial policy ambitions, aimed at achieving self-sufficiency in semiconductors, particularly at the low-to-medium end of the supply chain. This should ring alarm bells for Taiwanese companies and officials, particularly as US export controls restrict commercial dealings between China and the island’s most innovative firms, effectively squeezing the island’s chip industry from both sides.

The goal of China’s strategic and economic pressure is to position cross-Strait unification as Taiwan’s sole choice for future preservation. China hopes that this will eventually create the conditions necessary to force Taiwan into such negotiations, under its terms. In reality, given domestic opposition within Taiwan, this scenario is unlikely to occur, suggesting that the cross-Strait status quo will continue to hold.

Managing cross-Strait risk

A wholesale shifting of supply chains is probably too extreme a risk-mitigation strategy in response to heightened cross-Strait tensions, considering the low likelihood of conflict. Nevertheless, we counsel firms to monitor the level of anti-Taiwan rhetoric in Chinese state media. As the diplomatic impression of US-Taiwan-China ties becomes increasingly complex, companies should also be aware of how they list “Taiwan” in their public-facing materials (including marketing and merchandising activity), including by understanding the risks facing their China-based operations should the Chinese government weaponise public sentiment against them. Firms should also ensure clarity over the durability of supply chains linked with Taiwan, including by understanding where key vulnerabilities exist (especially for just-in-time inventory and sourcing). This should also involve mitigation strategies that consider alternative or back-up partners and shipping routes in the event of a conflict. 

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