While the outbreak of war in the Middle East has captured global attention, longstanding tensions between China and Taiwan have not diminished in importance for supply chain planning.
In December 2025, China conducted “Justice Mission 2025,” a large-scale military exercise that encircled Taiwan and included live-fire drills involving 89 Chinese naval vessels and 24 Chinese military aircraft.
Since Everstream Analytics’ last risk report on this conflict in early January, China has continued conducting military maneuvers around Taiwan and in the East China sea off the southern coast of Japan, defending these operations as justified and reasonable.
From March 27 to May 6, China sealed off airspace zones but did not announce military exercises. The affected zones lie offshore to the north and south of Shanghai. They extended from the Yellow Sea facing South Korea in the east and up to the East China Sea facing Japan in the south.
So-called Notices to Airmen (NOTAMs) are not unprecedented as China has issued at least four in the past 18 months; however, the duration was shorter and usually only in place for 3-day blocks. The new notice with a duration of 40 days marks a significant change in approach.
Although an official reason for the notice has not been disclosed, the reserved airspace may provide an opportunity to practice air combat maneuvers to establish control of routes that could be used by the U.S. military in the event of a conflict with Taiwan.
Meanwhile, Chinese People’s Liberation Army (PLAAF) aircrafts have decreased the number of airspace incursions that crossed the median line with Taiwan throughout the first months of 2026. The drop in numbers in March 2026 coincided with the annual meeting of the Chinese Communist Party but the fall in numbers was more prominent than in the past.
Both China and Taiwan have also made significant recent commitments to military funding highlighting the respective government’s focus on these areas.
China has committed an additional 7% in military funding in 2026. Premier Li Qiang also reiterated that China would fight against what China perceives as separatist forces vying for Taiwanese independence.
Meanwhile, Taiwan is currently debating the budget it will allocate for defense spending. On March 13, Taiwan’s parliament authorized the government to sign agreements with the U.S. for four arms sales packages worth around $9 billion (€7.65 billion), which are part of a $11 billion (€9.35 billion) package that the U.S. had announced in December 2025. A separate proposal for an additional $40 billion in defense spending is also under review.
Meanwhile, Cheng Li-wun, the chairwoman of the Kuomintang (KTM) opposition party, visited China from April 7 to 12, the first trip by the party’s leader in a decade, highlighting tensions within Taiwan about how to handle the relationship with China. The governing Democratic Progressive Party criticized the visit and accused the opposition party of undermining Taiwan’s national security.
China could leverage the Taiwan Strait in a conflict with Taiwan
China could use the conflict in the Middle East as a roadmap for a future conflict with Taiwan as a disruption in the Strait of Taiwan would have equally significant impacts on global trade as the current closure of the Strait of Hormuz.
China has been able to gauge the leverage Iran has with the mere threat of future attacks on commercial vessels as well as the U.S. and other western countries’ approach to a conflict that impacts global trade routes.
In the event of an escalation between China and Taiwan, China could impose a blockade on the Strait of Taiwan or set up exclusion zones for commercial maritime traffic. A credible threat of force would likely be enough to deter nearly all commercial carriers from making calls at ports in Taiwan and could even lead to carriers avoiding the strait altogether, as has been the case in the Strait of Hormuz.
China has also been involved in so-called “gray zone” exercises that have seen hundreds of Chinese fishing vessels (outfitted with reinforced hulls and water cannons) make coordinated maneuvers.
The most recent formation occurred in early March, when around 1,200 boats assembled in parallel rows and stayed in place for more than 30 hours. During the most recent incidents, the fishing vessels were so densely packed that cargo ships were forced to carefully thread between the stationary vessels.
In the event of a conflict, Chinese fishing boats operating in coordinated groups could shadow or crowd Taiwanese ships or vessels linked to countries that support Taiwan’s independence. Frequent encounters have been reported between Taiwanese patrol vessels and Chinese fishing boats around the outlying islands and in parts of the Taiwan Strait. These incidents have also caught the attention of Japanese authorities, who seized a Chinese fishing boat and arrested its captain near Nagasaki in February, and have reportedly deployed aircraft to monitor the formations and patrol vessels in the area.
Impact of Middle East war on regional tensions in Asia
As the conflict in the Middle East has fundamentally shifted global trade flows, it has also become the paramount area of focus for global powers. Shifting attention provides China with a window of opportunity to increase coercion or aggression against Taiwan while potentially facing less resistance from countries like the U.S. and Japan.
The hesitancy of the U.S. to commit to a ground offensive in Iran or to impose a new government order by military means could indicate that the current administration has a low tolerance for prolonged military commitments. However, there are reasons to believe that China will not use this window of opportunity to significantly advance its unification with Taiwan through force.
Firstly, while China maintains significant oil reserves of approximately 1.3 billion barrels, it also imports 13.4% of its crude oil from Iran. China has benefited from western sanctions on Venezuela, Russia, and Iran and has been one of the largest buyers of oil from all three. The U.S. operation to overthrow the Venezuelan government and the closure of the Strait of Hormuz have impacted two key sources of crude imports, which totaled almost one-fifth of its crude imports, and the Chinese government will have to expand some resources to maintain supply levels.
China’s active encouragement of Iran and other countries to look for an off-ramp towards a ceasefire suggests that China desires cargo and tanker traffic flows through the Strait of Hormuz to resume. Chinese authorities must balance the political goal of unification with Taiwan and economic stability within China. Moving into the uncertainty of an escalated conflict with Taiwan would only add to economic uncertainly for countries worldwide, China included.
Secondly, the U.S. has been able to severely damage Iranian naval forces and other targets while penetrating the country’s air-defense systems, some of which were supplied by China. The U.S. intervention in Iran removes some certainty that China may have had about the performance of its equipment and the general willingness of the Trump administration to engage in conflicts abroad. These are major deterrents to the Chinese government taking more forceful military action in the short-term.
Scenario 1: Political tensions remain high with no open conflict
At present, the most likely scenario moving forward is increased political tensions between Taiwan and China, with a continuation of current coercion tactics employed by China, such as an increased military presence, more drills, and possible trade restrictions on Taiwanese products or the products of other countries supportive of Taiwan.
The conflict in the Middle East has caused new challenges for the Chinese economy that seem to outweigh any benefits that would come from ramping up tensions beyond the current situation. China seems likely to continue signaling its military readiness for conflict in Asia following recent NOTAMs and naval exercises. However, events like this will pose risks of accidental escalation as incursions into Taiwan’s airspace and waters create potentially charged scenarios where accidental fire or damage could spark retaliatory actions from Taiwan.
China could also impose further trade restrictions on Taiwanese products, which would have a substantial impact as China is Taiwan’s largest trading partner. China has already demonstrated its willingness to impose trade-related measures on Taiwan in the past.
One of the most economically damaging measures China could take would be targeted export restrictions on supplies of rare earth materials. Supplies of germanium from China to Taiwan have already fallen by over 97% since China’s imposition of rare earth controls in 2023. China’s dominance of many raw materials would leave Taiwan with little to no alternatives for the supply of these materials that are critical for semiconductor manufacturing and current production levels could fall significantly.
The impact would also be felt by China, however, as the country is heavily reliant on Taiwan for integrated circuits and electronics such as computers and telephones. For example, Taiwan’s exports of integrated circuits to China make up roughly 50% of exports from Taiwan to China.
More forceful trade restrictions would very likely come with harms to the Chinese economy, making their deployment status uncertain as the impact of the crisis in the Middle East continues to ripple through supply chains globally
Scenario 2: Increased coercion from China towards Taiwan
Another possible scenario is that China increases its coercive activities towards Taiwan but stops short of open conflict. Measures that would fall under this scenario could include a naval blockade of parts of the Strait of Taiwan. A naval blockade would have an immediate impact on energy supplies in Taiwan and other countries in the region. Taiwan relies on imports for over 95% of its energy needs, however, if Taiwan was cut off from maritime trade, the impacts would likely be far more severe following the conflict in the Middle East.
Taiwan sourced 38% of its annual natural gas supply and 70% of crude oil supply from the Middle East before the conflict. The country has enough reserves to last through April but could face shortages if the conflict lasts beyond then. Even a very selective blockade of tanker vessels destined for Taiwan by the Chinese navy could have severe consequences for industrial production in Taiwan, especially in energy intensive sectors like semiconductor manufacturing.
Taiwan Semiconductor Manufacturing Company Limited (TSMC) alone accounts for 10% of Taiwan’s energy consumption, highlighting the vulnerability of these crucial sectors to disruptions in energy supply.
Other countries in the region could also see energy supplies impacted if China was to impose a broader blockade of the Strait of Taiwan. 95% of Japan’s imports of crude oil and 65% of South Korea’s crude oil imports arrive via the Taiwan Strait. Both countries are already seeing supply shortages amidst the Middle East conflict. However, the imposition of a broader blockade would also increase the risk of other countries intervening in the situation to safeguard their own interests, a risk that could force China to limit any coercive activities to Taiwan-bound vessels.
Similarly, an increase in coercive actions from Chinese aircraft could lead to flight cancelations and disruptions at important Taiwanese airports like Taoyuan International Airport (IATA: TPE) near the country’s capital Taipei. This could affect high-value and just-in-time shipments of critical components like semiconductors, data servers, and high-performance electronic components, which dominate Taiwan’s air freight exports.
Air-related disruptions in and out of Taiwan could also be felt in other parts of the world. Air cargo flows from Taiwan to the U.S. have reached record levels amid a surge in demand for AI infrastructure-related products like advanced semiconductors in early 2026.
Taoyuan International Airport is among the busiest cargo airports in the world, with a significant share of its volume coming from semiconductor shipments. Even flight disruptions for just a couple of days could significantly impact the supply of these advanced components to the rest of the world.
Targeted sabotage of critical Taiwanese infrastructure is also a possibility. Taiwanese authorities have previously accused China of hiring vessels to damage and cut undersea network cables around Taiwan. Damage to these cables carries a significant risk of communications-related disruptions for Taiwan, as the island utilizes only 24 undersea cables for internet traffic and other communication needs. Damage to these cables could paralyze IT systems, which in turn could have widespread consequences, including impacts on companies’ ability to send and receive orders, cargo processing at customs, and communication activities needed for incoming and outgoing flights.
Notably, Taiwan has claimed that Chinese cyber-attacks on the country’s critical infrastructure rose by 6% in 2025 to over 2.6 million attacks each day on average. Cyber-attacks are another coercive tactic that could disrupt production and trade in Taiwan without escalating the current political tensions to an all-out military conflict.
Scenario 3: Open conflict leads to severe economic repercussions
Open conflict in the area around Taiwan would have significant and immediate impacts on the global economy. Although theoretically this scenario could involve a land invasion of Taiwan, U.S. intelligence agencies released an assessment on in March suggesting China is not planning to invade Taiwan in 2027 but is looking to gain control of the island without force.
According to one estimate, a major China-Taiwan conflict could cost the PLA 100,000 troops, in addition to triggering sanctions, economic disruption, and a collapse in the global semiconductor supply chain. In the event of an open conflict, companies in Taiwan would be forced to severely curtail production and exports as they grapple with closed ports and airports, potential military strikes on industrial sites, and energy shortages.
Taiwan’s largest exports are high-tech electronics, with a disproportionately high concentration of advanced semiconductor manufacturing companies like TSMC operating in the country. A reduction in production or exports from these companies would have ripple effects across some of the largest companies in the global electronics, automotive, and medical devices sectors.
The importance of the Taiwanese economy for global supply chains could also force military involvement from countries like the U.S. and Japan, potentially escalating a military standoff further. Any open warfare would lead to severe economic consequences, with estimates suggesting that a war between China and Taiwan could cost $10 trillion (€8.6 trillion), or roughly 10% of global GDP.
Disruptions to ocean shipping in the Taiwan Strait due to a military conflict could also lead to severe supply chain impacts for the approximately $2.45 trillion (€2.1 trillion) of trade that passes through the Taiwan Strait each year.
Taiwan announced that it is planning to conduct drills designed to break a blockade of the island and protect energy imports, however, the almost complete halt of maritime traffic through the Strait of Hormuz amid the conflict in the Middle East indicates that even the threat of danger is enough for many ocean carriers to avoid the affected area and insurance companies to decline to cover vessels.
U.S. President Trump’s offer in March to provide naval escorts and insurance in the Strait of Hormuz was met with a muted response by the shipping community and it is likely that a similar response would follow if a situation like that was to occur in the Taiwan Strait.
Everstream clients are receiving more detailed insights and recommendations about this risk.
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