No-one gains from a crisis in the Taiwan Strait

 US House of Representatives Speaker Nancy Pelosi leaves the parliament in Taipei with Legislative Yuan Vice President Tsai Chi-chang (right). Photo: Reuters

If one thing is clear, the much publicised visit to Taipei by the veteran US House of Representatives Speaker Nancy Pelosi has enraged China sufficiently to remind the world of its threats, with cyberattacks and military exercises encroaching on Taiwanese territorial space.

Just as the drills seem to be reaching a conclusion, Beijing has issued a new official document reaffirming its threat to take the island by force and highlighting how it will keep the pressure up as it firmly rejects outside interference in a matter that it considers a local dispute.

This comes at a time when China’s economy is faltering, its debts are mounting, there are banking issues, and President Xi Jinping is eyeing up a third term at the Chinese Communist Party’s twice-a-decade National Congress, to be held in November.

If anything, it serves as another reminder there is always the danger of a misstep and that investing in Taiwan is not a risk-free option.

Attractive option

Taiwan is nevertheless fairly low risk, lying 21^st in Euromoney’s country risk survey global rankings. That puts it on a par with Germany, the US, Luxembourg and Portugal.

Much of that is down to its low domestic political risks, and not least to favourable scores for economic risk indicators, underpinned by the island’s highly successful exports-driven economic model and currency stability.

Taiwan’s semiconductor industry and its managed floating exchange rate system are conducive to strong GDP growth, a robust fiscal trend and high degree of prosperity.

The Taiwan Semiconductor Manufacturing Company is a giant in the foundry industry, accounting for more than 50% of the market.

Together with other semiconductor factories located there, the island makes up two-thirds of the world's production capacity.

Its semiconductor industry has advanced competitive advantages. Other countries want to accelerate the resilience of their own semiconductor supply chains, but it is impossible to achieve this in the short term, so they still rely heavily on Taiwan.

All of this highlights the island’s strategic economic importance, and it shows there is much to lose from the squabble over sovereignty claims worsening.

Sabre-rattling

Li Yan, a professor at the Université du Québec en Outaouais, commenting in a personal capacity, says the geopolitical risk to Taiwan has been rising as the US Asia-Pacific rebalancing strategy has been implemented.

“Nancy Pelosi's visit significantly and directly exacerbates Taiwan's overall risk, but whether and when a war will break out in the Taiwan Strait is almost entirely up to the US.”

The mainland wants peaceful reunification, she says, not through war, because the mainland regards the Taiwan issue as an internal affair and the cost of war can be very high. What cannot be forgotten, she adds, is that the Chinese civil war did not officially end in 1950.

The objective of America's Asia-Pacific rebalancing strategy is evidently to hold back the pace of China's rise at such high costs. The US and its allies will support Taiwan in some way, which also means that conflicts between these countries and China will lead to a general increase in geopolitical and other correlated risks for all parties.

“Considering China's economic size and position in the global economy and trade, if there is a war in the Taiwan Strait, the impact on the global economy will be dozens of times the impact of the war in Ukraine.”

If there is a war in the Taiwan Strait, the impact on the global economy will be dozens of times the impact of the war in Ukraine

 - Li Yan

Euromoney survey contributor Wei-Jen Hsieh, assistant vice-president of the Export-Import Bank of the Republic of China, believes that Beijing’s response to Pelosi’s visit, while seemingly radical and illegal by violating Taiwan's territorial waters, is not a prelude to war. In fact, it may have exposed some of its own weaknesses.

“The Chinese People’s Liberation Army’s display of military muscle gives its opponents a chance to measure its military strength,” says Hsieh.

“By doing this, they are actually leaking their military operations so that Taiwan or other countries (US, Japan, Australia, etc) can develop military strategies to disrupt their operations in the future.”

Hsieh believes that whether China can coordinate the actions of its naval, air and cyber forces in a crisis, it is almost certain that the People’s Liberation Army will use this opportunity to resolve its joint command and control issues, as military experts argue they are decades behind the West in organizing such operations.

The potential woes of this Chinese military exercise have drawn renewed attention, he says, and it is perhaps something that Xi Jinping would like to see, given that the National Congress is looming, so he can't show any weakness while maintaining stability.

In that respect, Hsieh believes these military exercises should be understood more as intimidation than a prelude to war, and they will only serve to accelerate Taiwan's efforts to build up its defence capabilities.

Resolve

Friedrich Wu, a professor at the Nanyang Technological University, says that Beijing’s furious, multiple responses to the visit were predictable.

“Xi Jinping had to demonstrate his resolve, or his strongman reputation would be tarnished, and he could kiss goodbye to his ambition of winning a third term as PRC president and general-secretary of the Chinese Communist Party.”

Wu doubts the military drills will last long, assuming there are no further provocations from Washington.

“After letting the PLA and the country’s nationalists blow off steam, Xi needs to refocus on tackling urgent domestic issues, such as zero-Covid-related problems, real estate sector meltdown, solvencies of small banks, high youth unemployment, etc, before the 20th CCP Congress in the autumn.”

The irony of Nancy Pelosi’s Taiwan visit, he says, was that it had little support in Washington, except from a few China hawks – ironically, mostly Republicans.

“Even in Taiwan, the Tsai Ing-wen government knew very well that Pelosi’s freelancing of US foreign policy would not necessarily translate into stronger military support from the White House, especially when both President Biden and the Pentagon had voiced their objections to Pelosi’s Taiwan stopover.”

Wu points out that, in Asia, no government had expressed support for Pelosi’s adventure. South Korean president Yoon Suk-yeol even declined to meet her, while delegates at the ASEAN Foreign Ministers’ Meeting in Cambodia were upset with her visit because it hijacked the meeting’s agenda and undermined the region’s geopolitical stability.

After letting the PLA and the country’s nationalists blow off steam, Xi needs to refocus on tackling urgent domestic issues

 - Friedrich Wu

As for the Tsai Ing-wen government in Taiwan, Wu says it is not too late to recognize that a symbolic publicity stunt might only score a short-term win.

He adds that the long-term costs might just be waiting to unfold: “Taiwan’s economy might face slow strangulation, foreign investors might stay away, young people might emigrate, and worst, its presumed backer the US might lose the nerve to confront China, a nuclear power, just as it is deterred by Putin’s nuclear threat from direct military intervention in the Ukraine war.”

Chien Szu-Min, associate research fellow at the Taiwan Institute of Economic Research, says the risk of this crisis is higher than the previous ones. However, assuming self-control on both sides, the probability of a violent conflict is very low, even if a high-pressure situation lasts for a while.

She goes on to say that the impact on Taiwan's economy is that China will restrict imports of Taiwanese agricultural products, but this is not a big share of exports for Taiwan (which is invariably dominated by its electronics industry).

“Taiwan has set a record of positive export growth for 26 consecutive months. The future factor affecting exports will be changes in international consumption affected by inflation,” she says.

However, although Szu-Min believes the crisis will not have much impact on exports, it will shake investor confidence. That much is clear from the number of CEOs taking advice on the risk of a war, not least because of the crisis in Ukraine.