China and Taiwan relations remain strained as rising geopolitical tensions increase the risk of a major economic and/or military escalation in the Taiwan Strait. A sudden deterioration in cross-strait relations remains high, and escalation could create one of three different scenarios sparking different political, economic, and military intervention measures.
Scenario 1: China increases trade restrictions against Taiwan
China could add trade restrictions on Taiwanese products and companies to place economic pressure on Taiwan. Previous Chinese trade restrictions against Taiwan were largely symbolic, with the previous round imposed during China’s military exercises in August 2022 only impacting around 0.04% of cross-country trade covering products from the food and construction sectors. However, more severe trade restrictions may significantly disrupt Taiwan’s economy given that China remains Taiwan’s largest import and export partner, accounting for around 38% of all Taiwanese exports and around 20% of all imports in 2022.
In the event of a major escalation in tensions, China could target Taiwan’s semiconductor and electronics industries with trade restrictions. Taiwan’s semiconductor sector is the country’s largest and most valuable industry, with between 40-55% of Taiwan’s $479.5 billion export market plus half of the country’s top 10 exports in 2022. Taiwan is responsible for producing around 90% of the world’s most advanced chips smaller than 10 nm, while Taiwanese companies represent around 63% of worldwide foundry revenue and around 57% of worldwide chip packaging and testing revenue.
Chinese attempts to target Taiwan’s semiconductor industry could focus on restricting the island’s supply of silicon wafers needed for the chip lithography process. Silicon wafer imports accounted for the island’s third largest imported product by value in 2022 at around $18.8 billion, indicating that the country is still dependent on imports of external silicon wafers for its chip foundries. Trade statistics indicate that China supplies roughly a third of Taiwan’s wafer imports, indicating that China could attempt to pressure Taiwan economically by restricting the supply of silicon wafers to chip makers.
China could also threaten to revoke operating licenses or import/export permits for Taiwanese companies operating within the mainland as a way of placing economic pressure on the island. Such a move by China is possible given that an estimated 50% of Taiwan’s total foreign direct investment is currently located in mainland China.
Scenario 2: China sets up a military blockade of Taiwan
China could attempt to increase pressure on Taiwan by using its military to impose a partial or full blockade of the island. In this scenario, Beijing could adopt more aggressive manoeuvres than the military exercise of August 2022. China would leverage repetitive or lengthened naval exercises to restrict cargo movement to and from Taiwan’s major ports and airports, cutting the island off from vital imports and exports needed to sustain its economy.
A Chinese blockade of Taiwan could prove effective in targeting the island’s energy security. Taiwan’s energy sufficiency is a key strategic weakness for the country as the island nation relies heavily on fossil fuel imports of bituminous coal, LNG, and petroleum for energy generation. Taiwan relied on fossil fuel imports for an estimated 97.7% of its total energy supply in 2021 and the country had stockpiles of around 39 days for coal, 146 days of oil, and 11 days of natural gas in September 2022, just a month after China’s partial military exercises around the island. Trade data indicates that Taiwan is not dependent on China for its energy imports, but the country remains vulnerable to an energy crisis if China is able to mount a prolonged blockade and suspend the island’s access to global imports.
Even a brief blockade on energy imports into Taiwan could cause severe disruptions to the country’s petrochemical industry. Taiwan is a major exporter of processed products in the oil and gas industry, exporting around $11 billion worth of diesel and gasoline exports in 2022 in addition to petrochemicals including ABS polymers, p-xylene, and other plastics including polyvinyl chloride and polyethylene.
A Chinese blockade around the island could result in a partial or full closure of Taiwanese ports including the Port of Kaohsiung. Chinese military drills in response to the U.S. House Speaker’s visit to Taiwan last August resulted in a 28% decrease in the number of vessels calling at the Port of Kaohsiung, indicating that China could also attempt impose a partial blockade of the island under the guise of prolonged and extensive military drills.
The Chinese military could also attempt to hamper international flight operations over Taiwan by launching incursions deep into the country’s airspace or by conducting air exercises around the island.
In the worst-case scenario, a complete military blockade of the island could also cause a full suspension of flight services while the Taiwan Strait could become inaccessible to container vessels. The strait remains one of the world’s most important waterways with an estimated 50% of container traffic passing through the waterway each year.
Scenario 3: China attempts to invade Taiwan
A Chinese invasion of Taiwan would cause severe disruptions to global supply chains. In this scenario, critical infrastructure across Taiwan would likely be destroyed due to Chinese military strikes and cyberattacks. Additionally, military fighting on and around the island would likely destroy of much of the country’s production facilities. A Chinese invasion of the island would also likely lead to seizures of Taiwanese-owned assets in mainland China.
In addition to physical attacks on Taiwanese infrastructure, a Chinese invasion of the island would probably be accompanied by cyberattacks aimed at disabling Taiwan’s key infrastructure. This could result in sustained attacks on the country’s power grid, port, and airport systems. Taiwanese companies could also find themselves exposed to additional cyberattacks from cybercriminals and third-party actors.
Lastly, a Chinese invasion of Taiwan could drive military intervention by the United States and its allies including Japan and South Korea. Military intervention by the United States would probably extend the conflict beyond the Taiwan Strait to include areas of the South China Sea and the Pacific, rendering vessel movement through the Malacca Strait extremely difficult and bringing global trade to a virtual standstill. An invasion of the island would effectively plunge the world into a major economic crisis as all trade and manufacturing operations involving China would be halted due to widespread global sanctions.
Which scenario is China most likely to choose?
The likelihood of any of the above scenarios occurring remains dependent on China’s willingness to tolerate potential disruptions to its own domestic economy. For example, severe trade restrictions on Taiwan could lead the United States and its allies to impose their own trade controls on essential Chinese exports. U.S.-China trade is currently valued at around $700 billion and both South Korea and Japan remain top trading partners for China, indicating that Chinese authorities could be hesitant to increase tensions with Taiwan due to the potential economic costs that escalatory measures could incur.
China also remains highly dependent on imports of advanced semiconductor chips from Taiwan, so China’s own domestic manufacturing operations would be impacted if Taiwanese electronics companies halt all foreign investment in the mainland or withdraw from China altogether due to open conflict. The worst-case scenario of an open conflict between China and Taiwan would likely be catastrophic for the Chinese economy as global trade sanctions and reputational risks would effectively force multinational corporations to pull out of the world’s largest manufacturer, potentially threatening around $3 trillion worth of global trade.