With the Russia-Ukraine conflict disrupting supplies of oil, gas and wheat and compelling price rise across continents, international businesses are busy assessing the implications for global trade in a possible Taiwan conflict scenario.
An authoritative current affairs website, neican.org, which specializes in China, predicts that if a China-Taiwan conflict were to ensue, “Asia-Pacific supply chains would enter a period of intense disruption and reconfiguration”.
Both western and Asian analysts agree that while several possible scenarios exist for the Taiwan conflict to play out, the end result will be the same. It will “likely involve an economic or military blockade of Taiwan or its outlying islands”. The immediate impact of such a blockade will be that Taiwan may lose access to the freight supply routes by sea. These routes include one passing through the Strait of Malacca — a trade chokepoint between the Malay Peninsula and Sumatra – and the other through the Luzon Strait, south of Taiwan’s main island of Formosa.
If the Luzon Strait is blockaded, it can result in disrupting telecommunication and financial services in Taiwan. This is because miles of fibre-optic cabling runs through the strait, connecting mainland China, Japan, Hong Kong and Taiwan with the United States.
Blockading the Strait of Malacca may mean huge quantities of products meant for export to the United States and Europe for the semi-conductor and sporting goods industries from Taiwan may languish in the latter’s ports, debilitating the island nation’s economy.
One of the first acts of China in a conflict scenario would be to lay siege to the sea around Taiwan. As Neican points out: “China will likely conduct denial of service cyber-attacks on critical Taiwanese infrastructure as part of a hybrid warfare strategy, compounding logistical difficulties for businesses. As a result, increased freight costs and circuitous supply routes would quickly ramp up inflationary pressure on consumer technology and renewable energy products.”
Then comes the second stage when in retaliation to the aggression against Taiwan, the US, the UK and the EU will impose sanctions against China. Beijing will reciprocate at once. Both these actions are bound to hamper international trade, putting businesses at risk.
So, what should international businesses do to mitigate their losses in such a conflict scenario? Three broad ideas are proposed.
One, before any hostilities break out, “businesses should carry out stress tests to measure the exposure of their supply chains to different scenarios within a potential conflict, such as an economic or military blockade”.
Two, “businesses should also diversify their supply chains in the medium term to include production and export through neutral jurisdictions, such as manufacturing centres in India or Vietnam”.
Finally, “decision-makers should also incorporate medium-term volatility into strategic planning and assume a realistic possibility that new US-led divestment orders and an added layer of dollar-denominated reporting compliance standards on their links with Chinese entities will form part of their operating costs in Taiwan and the wider East Asian region”.
According to Asia-Nikkei.com, a majority of industrialists and traders in Japan are already noticing “growing risks in China as supply chain disruptions from strict COVID-19 restrictions and mounting tensions over the Taiwan Strait loom large over the supersized market”.
Nikkei’s conducted its latest survey of business leaders between June 16 and June 30 and received responses from representatives at 143 major Japanese corporations. Of them, “55.7% said business risks in China were on the rise — outnumbering the 38.9% who saw no change, and 0.8% who saw a decline”. The survey assessed the traders’ reaction to the stringent Covid lockdowns in China.
However, the same risks are being spelt out in a conflict scenario as well. The survey respondents saw Russia’s invasion of Ukraine stoking “concerns that China could attempt to take control of Taiwan by force”. When asked if their businesses would be able to exit China under such a scenario, “76.4% said they did not know, over 13% said they could not, while 10.4% said they could”.
In response to both Covid lockdowns and the possibility of a Ukraine-like conflict involving Taiwan, “71.3% of respondents said they were cultivating alternative supply chains, 60% said they were diversifying their suppliers, and 58.8% said they were stockpiling more inventory”.
On its part, Taiwan is keeping a close eye on China as the Ukraine conflict continues. President Tsai Ing-wen is saying repeatedly that Taiwan must “raise its surveillance and alertness”.
Western news agencies report that “while Taiwan’s government has said the region’s situation is ‘fundamentally different’ from Ukraine, Tsai has expressed ‘empathy’ for Ukraine because of the military threat Beijing could pose to Taipei”.
Tsai is on record saying, as quoted by agencies: “However, in the face of external forces attempting to manipulate the situation in Ukraine and affect the morale in Taiwan’s society, all government units must be more vigilant against cognitive warfare.”
China, however and as expected, dismisses these scenarios as rumours. Chinese Foreign Ministry spokesperson Hua Chunying saw no connection between “issues of Ukraine and Taiwan”.
She says in a statement: “Taiwan is not Ukraine. Taiwan has always been an inalienable part of China. This is an indisputable legal and historical fact.” Taiwan responds at once, with its Foreign Minister Joseph Wu telling the UK’s ITV News: “China may think about using military action against Taiwan at any moment, and we need to be prepared for that.”
Whatever China says, the businesses are making their preparations because they understand China’s intentions. Even before the Russia-Ukraine conflict, China was repeatedly intruding into Taiwan’s territory by air and sea in a provocative fashion. Data shows, by Taiwan witnessed over 900 Chinese incursions in 2021, compared to 2020 in 2020.
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