Some commentators worry about looming military hostilities between China and Taiwan (and the United States, almost certainly). Here are some reasons to think it hasn’t quite happened – at least on the military side. Economically – we’ll have to wait and see.
Geopolitical Risks and the Possibility of Military Action
This is the Caldara and Iacoviello Geopolitical Risk Index (AER 2022) China and Taiwan:
resource: Caldara, Jaco Viello (2022).
resource: Caldara, Jaco Viello (2022).
The most recent peak was in March 2022.
The national security industry has gone all out to analyze the prospect of a full-scale military conflict (not that there is no reason to do so – it’s just that one has to try and see the threat with clarity).This is Michael O’Hanlon (Brookings), in Can China take over Taiwan? Why does no one really know?:
“[O]A plausible set of model inputs, parameters, and assumptions could easily predict a Chinese victory, while another fairly plausible set of models might suggest a US/Taiwan/ally victory. This is true even taking into account a certain degree of geographic and military escalation. As a result, policymakers on both sides cannot be sure that their own war plans will be successful. The danger of escalation would add even more uncertainty to the situation.
Given the advantages of this measure, the authors evaluate a blockade scenario rather than a full-scale invasion:
This is because China can, at least initially, inflict limited physical violence on the Taiwanese people, who are China’s own after all. The blockade also has the obvious advantage of being reversible or at least adjustable if Beijing chooses to de-escalate the conflict at any time.
Given the current and near-future capabilities of both sides, such as the recent wargaming at CSIS, there is much talk of how costly actual warfare is [1], [2]or mock set [3] .
Given the low benefit/risk ratio of an overt Chinese military operation, the likelihood is low (see also Scobell (USIP)) I will focus on the economic aspects of the China-Taiwan conflict, including (1) economic actions as precursors to military action, and (2) susceptibility to Chinese economic pressure.
Economic impact
Di Pippo (CSIS) Note that economic measures presage imminent public military action, such as:
Implement stronger cross-border capital controls, including in response to the apparent capital flight of elites
Freeze foreign financial assets in China
Fast liquidation and repatriation of Chinese assets held overseas, including the sale of U.S. bonds
A surge in stockpiles of emergency supplies, such as medicines or critical technology inputs
Suspension of critical exports such as critical minerals, refined petroleum products or food
Measures to reduce demand or ration key commodities, especially imports such as oil and gas
Prioritize or redirect critical inputs to military production
Restricting outbound travel for Chinese elites or key workers
(If contingencies are required, implementation will obviously be problematic.) On the other hand, measures implemented with an eye toward an eventual conflict would include “industrial policies focused on eliminating foreign dependencies throughout the value chain, efforts to identify and mitigate U.S. Vulnerability Sanctions and Organizing Its Bureaucracy to Implement Counter-Sanctions [and] Accelerate efforts to reduce China’s reliance on the U.S. dollar in international finance through the internationalization of the renminbi,” etc.
As noted elsewhere, China has problems implementing such measures effectively, such as reducing its reliance on the U.S. dollar and Western financial infrastructure, from messaging (SWIFT) to banking (see these slideshowpresented in Panel 2 of the UW La Follette Annual Forum). China still relies heavily on Taiwan for semiconductor chips.
resource: Bloomberg, August 17, 2022.
For the current economic war, the measures taken by Beijing seem to be symbolic (citrus and fish bans) [NYT]. There are also some DNS attacks.
Nonetheless, China could apply more pressure to drive up defense spending (and weaken readiness) by conducting ongoing military exercises near Taiwan (which seems likely), or (Kaushal (RUSI)) pose…
“The question of how Taiwan’s political leaders should respond. One factor slowing the Ukrainian leadership’s decision-making on the declaration of emergency and mobilization in the midst of the Ukrainian conflict is the fear that Russia is using the prospect of war to drive capital flight and economic collapse. , but with no intention of actually invading. Taiwanese leaders may find themselves in a similar dilemma over whether to sound the alarm.”
After risk (as measured by GPR) peaked in March, foreign reserves did decline significantly to $545 billion in April 2022. Nonetheless, foreign exchange reserves have almost recovered to earlier levels, at $548 billion at the end of July. (The financial + capital account surplus, at $32.5 billion in the first quarter, was lower than the fourth quarter, but double what was recorded two years ago.
Beijing admits there are other ways to coerce Taiwan. The challenge for U.S. (and other) policymakers is how to respond to these instruments without destabilizing the situation. (To me it is unreasonable to just argue “Xi Jinping has to step down” and hope God intervenes, because some commentators has been promoted as a “Policy”).
Ideas are important
While the United States needs to protect Taiwan from Chinese coercion, we need to do so in a non-provocative way.from USIP:
… China believes that the Biden administration has made a major shift in its Taiwan policy, resulting in a joint effort to qualitatively improve the relationship between the United States and Taiwan. This perception is diametrically opposed to the signal the Biden administration intends to send to Beijing: U.S. policy toward Taiwan has not changed And it’s exactly in line with what previous administrations have done. Why do misunderstandings occur? In the current toxic atmosphere of Sino-US relations full of mutual suspicion and deep distrust, clear signals and clear messages are extremely difficult.
In this regard, one should consider all possibilities for supporting U.S.-Taiwan economic relations; this includes declaring US-Taiwan trade talks. While not a precursor to a free trade agreement (it would be better if we stayed in the TPP and acknowledged Taiwan, but that ship has sailed – thanks, Trump!), it wassymbol of support (Symbols are important to build confidence, such as preventing capital flight).
