Companies and Investors Need to Prepare for a Potential Conflict Over Taiwan

From governments to companies, the world is increasingly concerned about Cross-Strait relations between China and Taiwan. Since the mid-1990s, China has grown more intent on reunification – both diplomatically and militarily – while Taiwan has grown more independent-minded. China’s continued economic and military rise and the Democratic Progressive Party’s (DPP) leadership on Taiwan have accelerated these trends. Similarly, transformations in the international order – the resumption of great power politics, COVID-19, and Russia’s invasion of Ukraine – will hasten China’s desire to resolve the Taiwan question. Moreover, US President Joseph Biden’s four separate statements indicating support for Taiwan’s self-determination or a pledge to defend Taiwan with US forces in the event of a Chinese attack are adding to China’s shifting calculus. As a result, Beijing is evolving its views on how to resolve the Taiwan question in its favor across economic, diplomatic, and security domains.  Businesses operating in China, Taiwan, and the wider Indo-Pacific region should understand a conflict over Taiwan is possible – even if a somewhat similar conflict between Russia and Ukraine appears to be moving in favor of Ukraine and the West – and need to adjust their strategic plans accordingly.

China’s View of the Russian War in Ukraine is Complex and Plays Into Mitigating Risks from a Potential Taiwan Conflict

Since Russia’s invasion of Ukraine began, China provides Russia with rhetorical and diplomatic – not substantive military or technological – support. Beijing opposes sanctions – including trade and investment controls – on Russia and accuses the West – primarily NATO members – of exacerbating the conflict. China also supports the argument that NATO is mainly responsible for the war, thus Russia is acting to defend itself. Despite the rhetorical support, Beijing wants the conflict to end and regularly calls for a negotiated settlement to advance its interests.

Yet, Beijing is learning from Russia’s actions and the West’s response. Taiwan and Ukraine are not identical, but China will apply lessons learned from the Ukraine war to a Taiwan conflict. The primary lessons are to:

• deter Western sanctions and investment and trade restrictions with global market advantages and mitigate their impact;
• utilize various diplomatic channels to create greater legitimacy and moral high ground for coercive means; and
• leverage all available security tools and methods to fight and win.

China Seeks to Create a Fortress Economy to Insulate Itself from Sanctions and Trade and Investment Controls

In response to Russia’s war in Ukraine and the Western reaction, Beijing is speeding up its economic self-sufficiency. These measures are designed to build up domestic economic capacity, create self-reliance in strategic sectors, diversify sources of trade, and diminish the impact of Western sanctions. They include:

• hastening domestic self-sufficiency capabilities in defense-related and other high-tech sectors;
• reducing reliance on the US dollar and internationalizing the renminbi to mitigate sanctions risks;
• integrating trade and investment with Southeast and Central Asian states, as well as the Global South to reduce dependence on Western economies; and
• highlighting its global economic, trade, and supply chain position – especially with critical minerals – to deter sanctions.

Beijing is Bolstering Its Diplomatic Activities to Maximize the Legitimacy of Its Claims and Political Successes

Unlike the diplomatic situation between Russia and Ukraine prior to the Russian invasion, China seeks to strengthen its more advantageous diplomatic position vis a vis Taiwan, an entity with little international recognition. A stronger diplomatic hand, moral authority, and a measure of international legal justification will mitigate negative foreign responses. China is doing this by:

• emphasizing the clear and direct One China Principle [1] – that Taiwan is part of China, the government in Beijing is the rightful sovereign, and most of the globe has accepted these principles as a condition of relations with China to establish a stronger moral high ground;
•  clarifying its position through white papers, diplomatic statements, and propaganda to establish clear red lines; 
• referring to international documents accepted by the UN and Western powers to build an international legal basis for its claims; and 
• stressing that the People’s Republic of China (PRC) is the true heir to Sun Yat-sen’s – the founder of the Republic of China (ROC) [2]  – legacy, creating a firmer link to the entity that fled to Taiwan.

China Will Also Continue Improving Its Security Posture to Win a Cross-Strait Conflict

Contrasting with Russia’s war in Ukraine, Beijing expects the US – and potentially its Indo-Pacific treaty allies – to come to Taiwan’s aid and is working to ultimately prevent US-led military forces from stopping reunification. Although China desires reunification to be peaceful, it seeks to maximize its strengths during a conflict by increasing the likelihood of surprise and minimizing losses, but also using overwhelming force to fight to win. Many of these measures appeared or increased during Russia’s invasion of Ukraine, including:

• increasing regular incursions in Taiwan’s airspace and across the Median Line to demonstrate strength and prepare for an eventual surprise strike;
• displaying blockade capabilities to both cow Taiwan into submission and prevent foreign assistance;
• accelerating military modernization to prevent US and other foreign forces from military intervention; and
• socializing a potential conflict with the population to prepare for full social and military mobilization to win.

A Military Conflict Over Taiwan is Possible After 2027 – Increasing Through Mid-Century

The risk of a conflict over Taiwan is increasing. To be clear, China has not set a date for reunification – preferably through peaceful means, falling back to coercion as a next-best option. Beijing’s Anti-Secession Law states that should Taiwan declare formal independence or China determine peaceful reunification impossible, reunification could be achieved by force. The odds of a forceful reunification increase after 2027 when China’s military modernization should be completed. Triggers for such a scenario include:

• While a formal declaration of independence is unlikely so long as the people on Taiwan support the status quo, the ruling DPP’s platform supports Taiwan’s independence. Barring a surge in support for the center-right Kuomintang, the DPP could eventually support independence through government policy – triggering a Chinese invasion – if the people’s views change or powerful countries formally guarantee Taiwan’s independence.
• Government debates about a formal declaration of independence or a change in popular support for independence could also signal to Beijing that peaceful reunification is impossible – again triggering the Anti-Secession Law and Chinese military action.
• Potential changes in the US One China Policy – either through Congressional measures or President Biden’s modifications – could encourage China to act with force before a US security commitment or military aid toward Taiwan is established.
• Xi Jinping may also have an incentive to initiate forceful reunification to accomplish his “China Dream” of the “great rejuvenation of the Chinese nation” by 2049.
• China could also reignite conflict with Taiwan to rally the Chinese people around the Communist Party during a legitimacy crisis – a falling economy, another pandemic, or a period of environmental disaster.

China will do its best to avoid a conflict until it can almost guarantee success – which means waiting until after the 2027 deadline for military modernization. Even in light of the West’s response to the war in Ukraine and a potential Russian loss, Beijing may not be deterred since Taiwan is a key part of the “Century of Humiliation” narrative and government legitimacy. If the civil war resumes after 2027, China would prefer to:

• Keep the conflict as limited as possible – ideally solely between China and Taiwan – but realistically keep direct foreign involvement to the US;
• Obtain diplomatic support – or at least acquiescence – from Southeast Asia, Central Asia, and the Global South;
• Blockade Taiwan into submission and use anti-access/aerial denial capabilities to eliminate all foreign assistance;
• Invade with overwhelming force to occupy the island likely combining conventional military and paramilitary operations if a blockade fails;
• Decapitate Taiwan’s leadership to hamper Taiwan’s command and control and demoralize the people; and
• Capture the seals of the ROC to symbolically transfer authority from the ROC to the PRC;
• Rely on propaganda, cyber, and fifth column capabilities throughout the conflict to sow chaos, distrust, and behind-enemy-lines support.

Firms and Investors Need to Prepare Their Taiwan Conflict Strategies Now

[1] Also includes the more ambiguous One China Policy some countries – the US in particular – adopt in that governments acknowledge China’s claims, but don’t necessarily accept them.

[2] The official name of Taiwan.

© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.