This year, the potential for economic turmoil or a military escalation in the Taiwan Strait has persisted as relations between China-Taiwan have remained strained after several notable developments in both countries. Cross-strait trade tensions have spiked since June, when Taiwan added several Chinese companies including Huawei Technologies Company and Semiconductor Manufacturing International Corporation (SMIC) to its export control list. Tensions mounted with China’s retaliation, imposing its own export controls on dual-use products made in Taiwan, such as equipment used in submarines, drones, and bulletproof vests.
China-Taiwan relations have also been strained by Taiwanese President Lai Ching-te’s vocality on Taiwanese sovereignty in recent months and Chinese military exercises in the Taiwan Strait. An assessment conducted by Everstream Analytics shows that as of July 31 this year, a total of 2,357 such aerial incursions past the median line of the Taiwan Strait were observed by Taiwan’s Ministry of National Defense, with the incursions taking place almost daily.
Escalating China-Taiwan tensions could manifest in different economic and military outcomes with varying degrees of likelihood. More drastic military action on China’s end, such as a naval blockade of the island or a full-scale invasion, would lead to global sanctions and severe disruptions to regional trade and diplomatic relationships.
An assessment conducted by Everstream Analytics hence indicates a lower likelihood for these adverse scenarios due to the immediate negative economic and political impact they would have on both China and Taiwan. Given the high economic and political costs of a full-scale escalation, a scenario in which a growing number of restrictive trade-related measures, such as export controls or duties on selected goods or industries, are imposed in retaliation for political disagreements, appears to be the most likely case for the foreseeable future.
Scenario 1: Increased trade restrictions
On June 14, Taiwan added China-based Huawei Technologies Company and its chip manufacturing partner SMIC to its export control list. As a result, local companies must now obtain government licenses to export shipments to these firms. The measures could, at least in part, restrict the two companies from accessing Taiwan’s advanced chip technology, materials, and products. Overseas subsidiaries of Huawei were also added to the export control list, creating further difficulties for Chinese companies aiming to produce their own AI chips.
In response to the blacklisting of Huawei and SMIC, Chinese authorities vowed retaliatory measures and condemned the restrictions, labelling them as technological blockades. On July 9, China’s Ministry of Commerce announced a ban on the export of dual use products of eight Taiwanese aerospace and shipbuilding companies, impacting goods such as metal nuts, plastic molds and other materials used in both commercial and military vessels. The companies listed include Aerospace Industrial Development Corporation (AIDC), Geostat Aerospace & Technology Incorporated, National Chung-Shan Institute of Science and Technology (NCSIST), JC Technology, CSBC Corporation Taiwan, Jong Shyn Shipbuilding, Lungteh Shipbuilding, and Gong Wei Company. Almost all Taiwan-based firms named in the measure are reportedly expecting limited impacts due to the island’s existing practice of using non-mainland suppliers in the production of military equipment. The civilian operations of the companies are also expected to avoid major disruptions, though potential impacts will become clearer as the details are specified.
In the scenario that the tensions between both countries intensify, China could escalate its trade-focused retaliatory measures by imposing tariffs, bans and other economic restrictions on a wider range of Taiwan’s products. China could apply pressure to Taiwan’s semiconductor industry as the sector makes up 40% of the island’s total exports. However, China still relies on Taiwan for 60% of its chip imports, with $85 billion worth of Taiwanese semiconductor exports bound for mainland China and Hong Kong in 2024. To mitigate the impact of potential economic measures against the sector, Taiwanese companies like TSMC started diversifying its chip production operations, investing in manufacturing facilities in the U.S., Japan and the E.U.
In the most likely scenario, China will continue to impose sanctions on non-semiconductor products and companies to apply pressure to the island without risking its access to needed advanced technologies. Products previously protected by the Economic Cooperation Framework Agreement (ECFA), a 2010 free trade agreement aimed at reducing tariffs and commercial trade barriers across the Taiwan Strait, have been one target of Beijing’s economic measures in the recent past. In the lead up to Taiwan’s 2024 presidential election, China suspended tax concessions on 12 Taiwanese chemical imports protected by the ECFA, primarily consisting of petrochemicals such as propylene and paraxylene. After the inauguration of Taiwanese President Lai Ching-te, China eliminated preferential tariff rates for an additional 134 items imported from the island, impacting goods like machinery, textiles, plastics, automotive parts and more petrochemicals. This is a likely move that China will take if tensions escalate further.
Scenario 2: Taiwan Strait blockade or quarantine
Beyond applying pressure through economic means, China could implement a quarantine or blockade around Taiwan to influence the island’s policies. In the scenario of a blockade, China would prohibit ships from accessing Taiwan and its surrounding waters, using its naval and air forces to target critical infrastructure including ports, airports, energy terminals and military facilities.
On April 1 and 2, in a large-scale military exercise around Taiwan, the PLA practiced its ability to isolate the island through exercises blockading critical supply chain routes, as well as precision strikes on simulated targets of key ports and energy infrastructure. The action followed similar military drills and exercises conducted by China around Taiwan in April 2023, May 2024 and October 2024. Taiwanese authorities have repeatedly vocalized concerns over the increased presence of Chinese military planes, ships and drones in its airspace and waters as potential indicators of future acts of aggression. A full blockade by China, however, is unlikely in the short-term given the significance of the potentially affected supply routes and the substantial risk of an escalation to war. An official blockade by Beijing would be considered an act of war by Taiwan, according to statements from the island’s Defense Minister Wellington Koo in October 2024. As a result, China is unlikely to carry out a complete blockade unless ready for a complete invasion of the island.
Disruptions to the Taiwan Strait, the 180 km-wide channel that separates Taiwan from China, would have major consequences for the global economy. In 2022, over a fifth of global maritime traffic, amounting to $2.45 trillion worth of goods, transited the waterway. Without access to advanced chips from Taiwan, a wide array of industries reliant on such technologies would face disruptions, including the electronics, automotive, health, and telecommunications sectors. The electronics industry is at particularly elevated risk of supply disruptions if Beijing closes access to the Taiwan Strait because Japan and South Korea, the country’s leading the sector globally, rely on the trade route for around 32% and 30% of their imports, respectively. A blockade of the Taiwan Strait by China would also negatively impact its own trade flow. Approximately $1.4 trillion worth of Chinese imports and exports travelled through the passage in 2022. Moreover, mainland China receives almost a third of its imports through the strait, including shipments of oil, coal, natural gas, and manufacturing materials like ores and metals.
To avoid the consequences of a complete blockade, a more likely scenario involves China imposing a partial or full quarantine around Taiwan. The quarantine would differ from a blockade by placing controls on the movement of ships to and from the island instead of restricting access completely. Beijing, in this case, could assert the right to inspect ships bound for Taiwan citing national security concerns.
Compared to a blockade, a quarantine would cause significantly less disruptions to China’s own trade as shipping companies would not be at risk of military confrontation. To enforce compliance with ship inspections, Beijing could leverage the significance of the country’s ports to global maritime trade, as they account for approximately 40% of global container traffic. Chinese firms own and operate at least 117 ports across 43 countries, with a particularly strong presence in the Global South. At risk of being banned from ports owned and operated by China, shipping firms are likely to comply with quarantine measures targeting Taiwan.
In an even more limited approach, China could enforce a partial quarantine, targeting only specific ports or goods with additional controls. Taiwan’s largest port, the Port of Kaohsiung, is especially vulnerable to being targeted as it handles 57% of the island’s maritime trade. Disruptions to the port could have serious repercussions for the island’s economy, which is heavily dependent on exports. A quarantine could also restrict Taiwan’s access to life-sustaining imports. In 2024, the island relied on imports for 97% of its energy needs. Without access to energy imports, total electricity production could potentially be reduced by 80%, ceasing all manufacturing activities. Similarly, Taiwan imported about 70% of its food supply in 2023, with stockpiles of about 7 months and 12 months for rice and meat respectively.
Furthermore, a quarantine could act as a test for the eventual implementation of a blockade, allowing China to assess the international response and economic costs before deciding to escalate. Despite a blockade or quarantine being unlikely in the short-term, instances of “grey-zone” harassment are likely to become increasingly frequent. “Grey-zone” activities refer to actions taken by China that are below the threshold of war but aim at reenforcing its claim to Taiwan and its waterways. On January 9, 2025, for instance, a Chinese-owned vessel cut an undersea optic cable near the island causing minor network disruptions, which Taiwanese authorities condemned as an act of grey-zone harassment.
Scenario 3: An attempted invasion of Taiwan
The likelihood of any military action taken by China remains hampered by economic and military deterrents China faces in initiating it, especially if it cannot secure a Taiwanese surrender quickly. However, a full-scale invasion remains a possibility, as it could be a mechanism for Beijing to escalate pressure on Taiwan in a bid to coerce its surrender for an immediate unification of both territories.
Such an operation could be mobilized under the guise of a large-scale joint military exercise. The operation could encompass acts of subversion by individuals from within Taiwan to instigate civil unrest, cyberattacks compromising critical infrastructure and power resources across Taiwan, and precision strikes on government and key logistics and production facilities. The impact of potential stoppages in production processes nationwide would be most acute in the semiconductor and manufacturing supply chains, with Taiwan’s semiconductor industry potentially losing an estimated $1.6 trillion in yearly revenue, while downstream industries in the tech, consumer electronics and automotive sectors would be likely to experience widespread delays and surging prices.
Economies dependent on semiconductor-related value chains could witness falling production levels and potential economic decline. This would include China, the U.S., Japan, Germany, parts of Central and Eastern Europe, as well as Southeast Asia. Naval and air freight routes via the Taiwan Strait, East and South China Seas could also be suspended during a conflict, leading to outsized costs for logistics operators needing to find alternative routes around the conflict areas.
Regional trade across Asia may also see severe disruptions, with this outcome likely to heighten tensions between China and its neighbors over existing territorial disputes in the South China Sea. Meanwhile, international sanctions on China would further erode its demand for global inputs, machinery, fuels, and metals, possibly engendering a global economic shock and a financial crisis in China. Ultimately, the high risk of an invasion escalating into a regional conflict leads to a lower likelihood in the medium-term for any large-scale military action, or any diplomatic moves that could trigger such an outcome.
Everstream clients are receiving more detailed insights and recommendations about this risk.
Don’t miss key supply chain risk updates! Subscribe now to get supply chain news, weather updates, forecasts, and other insights.