Overview

As I take stock of the unprecedented year just past and decide what to bring to your attention first in 2021, I feel bad that I am about to focus on a conflict that may prove even more damaging for the world economy in the long run than Covid-19.

We are all desperate for good news and a return to a more normal life, and with the rolling out of vaccines and advances in therapeutic treatments, this year does look brighter. But the coronavirus pandemic has exacerbated the Sino-US contest for power, which Enodo sees as the defining force shaping global politics, economics and markets for the foreseeable future.

The far-reaching geopolitical confrontation between the existing superpower, the US, and the aspiring superpower, China, may take a different form under a Biden presidency, but it is neither going away nor diminishing.

Were it not for one small piece of land, we could have envisaged a peaceful Great Decoupling – the bifurcation of the world economy into Chinese and American spheres of influence. Sadly, Taiwan’s existence makes it much more likely that the outcome of this struggle will be a Thucydides Trap – the historical tendency towards war, first identified by the Greek historian and general, when an emerging challenger threatens to displace the incumbent great power as international hegemon.

The Great Decoupling: Taiwan War Timeline

Enodo Assessment in Probabilities 2019-2024

Two and a half years ago, when we first started bringing this long-term risk to investors’ attention, I was met mostly with incredulity. So much so that I decided it would be easier for others to take this risk seriously if I defined the proposition as “The US and China avoid military conflict over Taiwan or the South China Sea” rather than as “The US and China go to war over…”.  

Not only have the chances of avoiding conflict fallen from 90% in early 2019 to 40% now, but this geopolitical risk has come into much greater focus for investors.

At the start, we were examining probabilities for the period 2019 to 2022, but as we are now two years into that time span we will move on and assess the likelihood of conflict over the three years from 2021 to 2024. 

Typically, investors look to central banks in determining their “risk-on/risk-off” stance. However, in our view, geopolitical considerations have begun to play a much bigger role in driving risk appetite and are set to be critical in the next few years.

Rational counsels will argue against hot war, as neither China nor Taiwan has a devastating military advantage. But the risks are not just a matter of logical calculation: as Thucydides also observed, the drivers of war are fear, honour and advantage.

For China the recovery of Taiwan is as much as anything a question of morality and national prestige, while for the US its willingness and ability to defend Taiwan are critical to maintaining its status as the leading global superpower.  

A military invasion of Taiwan by China and the US response would be a grave situation to analyse in the heat of the moment. Clearly, there would be major implications for asset markets around the world. It is therefore imperative to build up knowledge and understanding ahead of such an eventuality. That is why I decided it was time to “look into the abyss”, as my colleague Nigel Inkster put it, and present this primer on how to think about the issue.

We have also set up a dedicated team and launched a specialised service called Enodo Taiwan Watch. This service aims to assess in real time the threat level of imminent conflict, including armed conflict, between China and Taiwan as well as between China and the US and its allies. If you are interested in this type of intelligence to guard against the risks involved and to maximise any opportunities that arise, let me know. 

Let’s now dive in and get a better grasp of the position of each of the main players and why the situation is so intractable.

The Nature of the Conflict 

War with the United States is inevitable…the Chinese armed forces must control the initiative…we must make sure that we would win this modern high tech war that the mighty bloc headed by the U.S. hegemonists may launch to interfere in our affairs.”

General Chi Haotian, Minister of Defence, PRC, 1999

Taiwan independence goes against the trend of history and will lead to a dead end… We make no promise to renounce the use of force and reserve the option of taking all necessary means.”

Xi Jinping, General Secretary of CCP, 2019

We will not accept the Beijing authorities’ use of ‘one country, two systems’ to downgrade Taiwan and undermine the cross-Strait status quo. We stand fast by this principle.”

Tsai Ing-wen, President of ROC, 2020

We don’t know and you don’t know; it would depend on the circumstances.”

                                                                                                             Joseph Nye, Assistant Secretary of Defence, Dec 1995, in response to Chinese military officials asking about the US reaction to a potential Chinese invasion of Taiwan

The United States:

• Has not agreed to set a date for ending arms sales to Taiwan
• Has not agreed to consult with the PRC on arms sales to Taiwan
• Will not play a mediation role between Taipei and Beijing
• Has not agreed to revise the Taiwan Relations Act
• Has not altered its position regarding sovereignty over Taiwan
• Will not exert pressure on Taiwan to enter into negotiations with the PRC”

A cable, sent on August 17, 1982 and declassified in August 2020, from then U.S. Secretary of State George Shultz to then AIT Director Lilley, offering six assurances to Taiwan

China has already achieved parity with—or even exceeded—the United States in several military modernization areas, including shipbuilding, land-based conventional ballistic and cruise missiles, and integrated air defense systems.”

The Pentagon’s 2020 Chinese military power report

The biggest risk with regard to the Chinese Communist Party is appeasement.”

Mike Pompeo, US Secretary of State, September 2020

China has already achieved parity with—or even exceeded—the United States in several military modernization areas, including shipbuilding, land-based conventional ballistic and cruise missiles, and integrated air defense systems.” The Pentagon’s 2020 Chinese military power report

For the Chinese Communist Party (CCP) national reunification constitutes a significant part of its “offer” to the Chinese people and a raison d’être since the Republic of China was established in 1949. The military option to seize Taiwan has been a constant focus of preparation and discussion for China’s Communist Party since then.

In 2015, Beijing revealed its new military strategy: a more “active defence posture”, especially in cyberspace, maritime power and missile development, both to keep the US at bay and to consolidate the mainland’s advantage over Taiwan. Beijing’s focus on enhancing military readiness to prevent Taiwanese independence has increased in tandem with the growing assertiveness and confidence of Party leader Xi Jinping.

Xi believes himself to be a man of manifest destiny. His words and actions suggest that he sees that it falls upon him as China’s current leader to bring Taiwan back into the fold. He is just waiting for the opportune moment.

He will not renounce the use of force. Taiwan has been offered the same ‘one country, two systems’ formula intended to ensure autonomy in Hong Kong, but the imposition of a national security law there in June suggests Beijing now accepts Taiwan will never warm to that deal, so force must prevail.

Of course, China’s leadership also know that an attempt to reunify Taiwan by force is not yet guaranteed to succeed and that failure could have dire consequences for the Party’s credibility and hold on power.

Meanwhile, Taiwan’s own population has grown apart from China with 60% now identifying as Taiwanese rather than Chinese, a tendency that has increased in the face of Xi’s growing authoritarianism. China’s crackdown on Hong Kong has now fully discredited ‘one country, two systems’ as an option in Taiwan’s eyes.

Tsai Ing-wen’s resounding re-election as Taiwan’s president and the landslide parliamentary victory of her Democratic Progressive Party at the start of 2020 leaves Xi with no option for reunification but the military one.

In a speech after being sworn in for her second and final term in office, Tsai reiterated that Taiwan rejected becoming part of China under its ‘one country, two systems’ offer of autonomy and said relations between Taiwan and China had reached an historical turning point.

The inherent advantages of Taiwan's geography and existing technology mean that if the Taiwanese willed it, they could make their island a near-impenetrable fortress.

But while Taiwan has doubled down on expensive, high-end military platforms and has a high-class air force, its army’s military strategy and preparedness fall short of what’s needed to fight tooth and nail against an invasion by the People’s Liberation Army (PLA) for as long as possible.

In the face of China’s overwhelming military superiority, President Tsai has championed the concept of “asymmetric warfare” in Taiwan, using newly supplied US weapons that are mobile and harder to hit, thereby making a PLA invasion more costly and more difficult.

The risk of a Taiwan crisis has grown significantly over the past two years, not least because the island has increasingly become a pawn in a great-power conflict between China and America.

With China under Xi becoming ever more assertive and the US under Donald Trump orchestrating a push-back, what was once a clear and comfortable status quo in relation to Taiwan has given way to growing uncertainty. China, the US, and Taiwan itself have all begun to redraw their red lines, thereby increasing the risks of inadvertent escalation. 

If Taiwan were to fall to China, America’s ability to continue operating militarily in the western Pacific would come into question with important knock-on consequences for US allies such as Japan, South Korea and the ASEAN states. The entire balance of power in the Indo-Pacific region would undergo a massive shift.   

Past US administrations have sought to manage relations with Taiwan with caution to avoid unnecessary damage to ties with China. They have been at pains to maintain a posture of strategic ambiguity about US readiness to come to Taiwan’s aid in the event of a Chinese attack.

But Trump started angering China even as president-elect, breaking decades of protocol by taking Tsai’s congratulatory phone call in December 2016. A new US security assessment in 2017 called China a strategic competitor and disruptor. The gloves came off as Trump initiated a trade war and then a tech war with Beijing amid a fundamental decoupling and reset of relations between the world’s two largest economies.

US defence chiefs have stated that the gap between US and Chinese military capabilities is rapidly closing. America’s withdrawal from the INF missile treaty in 2019 was partly aimed at engaging China in a new arms control pact. But Beijing views such moves as restricting its ability to defend itself, the same reason why it opposed US deployment of the THAAD missile defence system in South Korea in 2017.   

The Taiwan Relations Act (1979) provides no guarantee that the US will intervene militarily in defence of the island, but the release in September 2020 of the classified “Six Assurances” underscored strong security co-operation.

More intense recent US engagement with Taiwan – major arms sales, high-level visits and bills in Congress – reflect a more activist relationship that enjoys strong bipartisan support within the US.

The US was losing its appetite for acting as the world’s policeman before Trump declared “America First”, but it is not yet ready to relinquish that role. It had, however, begun increasingly to utilise the levers of power at its disposal for selfish ends while adopting an a la carte approach to relations with key allies.

Then Covid-19 hit, catalysing and speeding up these processes with far-reaching implications for international relations and the global balance of power. Trump’s America First strategy has begun to look like America Last, as his temporising, inconsistent and uncoordinated response to Covid-19 has enabled the virus to take rapid hold in the US.

The US’s inadequate handling of the pandemic may deepen Beijing’s perhaps premature perception that America is a superpower in terminal decline.

Xi is now awaiting the arrival of President Biden, a known quantity, in the hope of being able to restore some stability to US-China relations.  But any reset of the relationship is likely to amount to no more than a tactical pause.

A Communist Party plenary meeting in late 2020 showed Biden he must deal with a China preparing for war, after years of preaching about its “peaceful rise”.

How We Got Here

It was only in the 17th century that Taiwan became an integral part of the then Qing empire. Prior to that, successive Chinese dynasties had regarded Taiwan as coming within China’s sphere of influence but had made no serious effort to administer the island.

Taiwan’s population consisted of Malayo-Polynesian peoples, though in the early 17th century some Chinese immigration began to take place. From 1642 to 1662 Taiwan was administered by the Dutch East India Company. The Dutch were displaced by the half-Japanese Ming loyalist Zheng Chenggong, better known by his westernised honorific name Koxinga, who used the island as a base from which to raid the mainland. In 1683 he was defeated by Qing forces and Taiwan was incorporated into the Qing empire.     

Following the first Sino-Japanese war in 1895 the Qing empire ceded Taiwan to Japan, which retained control of the island until 1945. Japanese rule in Taiwan was relatively benign and enjoyed widespread acceptance. By that point, Taiwan’s indigenous population had been augmented by a significant minority population of Hokkien-speaking Chinese immigrants.      

Following its defeat in China’s civil war in 1949, Chiang Kai-shek’s Nationalist government fled to Taiwan. There Chiang re-established the Republic of China and pledged to retake the entire country, maintaining “representatives” of each Chinese province in Taiwan’s Legislative Yuan, its unicameral parliament.      

US support enabled Chiang’s Nationalists to hold China’s seat at the United Nations and to resist efforts by Mao Zedong to retake the island militarily. In 1971 the PRC took Taiwan’s UN seat and the US rapprochement with the PRC begun under President Nixon led to the US government de-recognising Taiwan as, in 1979, it established full diplomatic relations with Beijing.    

President Carter’s administration committed itself to a “one-China policy” and repealed the Sino-American Mutual Defence Treaty, which had served as an important guarantee of Taiwan’s security. It passed the Taiwan Relations Act, which stipulated that under US law Taiwan was to be treated like other “foreign countries, nations, states, governments or similar entities”.

The legislation established a substantial quasi-diplomatic presence in the form of the American Institute in Taiwan (AIT) and stipulated that “the United States will consider any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific and of grave concern to the United States”. The act also required the US to provide Taiwan with “arms of a defensive character” and to maintain the capacity to resist any use of force or coercion that would jeopardise the security of Taiwan. 

Once Mao had accepted that forcible reunification was infeasible, he moved towards an approach based on persuasion rather than coercion.

This policy was further developed by Deng Xiaoping, whose formula of ‘one country, two systems’ - the basis on which Hong Kong reverted to Chinese sovereignty in 1997 - was conceived with Taiwan as the main prize.     

China under Deng was prepared to exercise strategic patience in relation to Taiwan, believing that in due course China’s growing economic influence would exercise an irresistible pull.

Talks between the two sides led to a “consensus” that maintained there was only one China but left open the question of which China they were talking about.    

For China the red line was a declaration of independence by Taiwan. As Taiwan evolved in the 1990s from a regime just as autocratic as that of the PRC into a genuine multi-party democracy, the main opposition Democratic People’s Party (DPP) proclaimed its ambition to do precisely that, though once in office it stopped short of doing so.

Since then, cross-Strait relations have been characterised by ambiguity and uncertainty with China applying a combination of carrot and stick to bring Taiwan into the Greater China fold. The carrot consists of economic incentives, favourable treatment for Taiwanese investment in the PRC and the encouragement of tourism.

The stick comprises efforts to close down Taiwan’s international space by such means as denying it participation in international organisations including the World Health Organisation; penalising governments which conduct high-profile exchanges with Taipei; and persuading the handful of states still maintaining diplomatic relations with Taipei to switch to Beijing.   

But China’s approach has not worked, and under Xi Beijing’s harsh treatment of Hong Kong has left Taiwan with no illusions as to how China truly views reunification. The protests that erupted in June 2019, triggered by a proposed extradition bill which would enable Hong Kong residents to be sent to mainland China, have significantly discredited the ‘one country, two systems’ concept.

So has Beijing’s decision in July 2020 to enact national security legislation for Hong Kong via the National People’s Congress rather than through Hong Kong’s own Legislative Council. Taiwan has since offered asylum to Hong Kong opposition activists.   

China’s own leaders, starting with Jiang Zemin in the late 1990s, have periodically indicated that their patience is not unlimited and that Taiwan cannot expect to continue kicking the reunification can down the road indefinitely.

This line was most recently reiterated by Xi, who said in 2019 that Taiwan would have to accept reunification under the ‘one country, two systems’ formula or face the military consequences.   

If Xi’s two centenary goals are to be taken at face value, reunification would have to have been accomplished by 2049.  But there is a strong case to be made for Xi wanting to achieve this goal during his own tenure of office.   

The Taiwan Strait Crisis of 1995-96

Over the years Taiwan had evolved from an authoritarian state into a pluralist political democracy. Its standard of living had risen tremendously. Not only is it higher than China’s, but Taiwan has one of the most equitable distributions of income in the world.

The free and open presidential elections in March 1996 were the last step in this decade-long process of political liberalisation.

In the run-up to the election, President Lee Teng-hui informally visited South-East Asia, the Middle East and Central America and engaged in pragmatic diplomacy to enhance the status of Taiwan as a political entity. Taiwan also aimed to return to the UN and pledged to contribute $1bn for economic cooperation.

In early 1995, President Jiang made a speech that became known as the “eight point proposal”, in which he said that China’s policy of ‘one country, two systems’ would guarantee that the people of Taiwan could continue to maintain “their way of life” after “returning to the mainland”.

Meanwhile, the culmination of Lee’s pragmatic diplomacy was his visit in May 1995 to the US, in a break with the established practice of denying visas to serving Taiwanese politicians. Having assured Beijing that Lee would not be allowed entry, the Clinton administration had to reverse its decision under pressure from Congress.

Following Lee’s US visit a crisis erupted in the Taiwan Strait. In response the PRC undertook naval exercises in July and August, including a series of unarmed ballistic missile tests in the seas off Taiwan.

The initial reaction of the Clinton administration was ambiguous. At a meeting in Brunei in August 1995, Secretary of State Warren Christopher reportedly delivered a letter from Clinton to Jiang. In the letter, which has not been made public, Clinton is said to have given assurances that the US would (1) “oppose” Taiwan independence; (2) would not support “two Chinas”, or one China and one Taiwan; and (3) would not support Taiwan’s admission to the UN. 

At the same time, with the presidential election on the horizon, Clinton retreated on his proposal for conditions on Chinese trade access. In late 1995 he instructed his secretary of commerce to take action to “streamline and liberalise”, that is, reduce controls on US high technology exports to China.

Ultimately, however, the Clinton administration took China’s activities seriously. It sent the aircraft carrier Nimitz through the Taiwan Strait in December 1995 and then, as China continued to increase its coercion of Taiwan, dispatched two carrier battle groups to the Taiwan Strait in March 1996 to prevent the situation from escalating.

This was humiliating for the PLA, which had no idea the carrier battle groups were heading for Taiwan until they actually arrived in theatre.

To make the purpose of this largest naval deployment to Asia since the Vietnam War crystal clear to the CCP leadership, Secretary of Defence William Perry said, “Beijing should know, and this US fleet will remind them, that while they are a great military power, the strongest, the premier military power in the Pacific is the United States.”

The two aircraft carrier battlegroups did not enter the Taiwan Strait but remained near the island, ending China’s escalating military threats. The sense of crisis passed.

The people of Taiwan elected a new president in free, fair and open elections, thereby completing the island’s peaceful transition to political democracy.

The Taiwan Strait crisis was the catalyst for a major military modernisation effort in China based on a strategy that became known as Anti-Access, Area Denial (A2AD) – though this is in fact a US term and not one used in PLA strategic documents.

The aim of this strategy is to develop a suite of capabilities which would, in the event that China sought to reunify Taiwan by force, keep US forces out of theatre long enough to ensure success.    

The Balance of Military Power

Taiwan

Although Taiwan’s armed forces have always been much smaller than those of the PRC, for most of the Cold War period they were qualitatively superior due to Taipei’s ability to access US military technology. That balance, however, began to shift from the mid-1990s.    

Since then, Taiwan has been unable to keep pace with the PRC’s conventional military strengths. It has also persistently failed to invest in the kind of unconventional guerrilla-style capabilities that outside experts have always seen as representing Taiwan’s best option for staving off a Chinese invasion.    

Taiwan’s annual defence budget has remained unchanged for the past two decades at $11bn. In both manpower – Taiwan has abandoned national service and has all-volunteer armed forces – and materiel it is comprehensively outmatched by the PRC. Key areas of disparity include submarines, fixed-wing aircraft and missiles.    

In terms of national defence Taiwan has been coasting for some years, hoping the prospect of US intervention would act as a deterrent to China. This may no longer be the case.

To perfect Taiwan’s “porcupine” defensive strategy, the ROC needs more, better “spines” of advanced missile defence to target China’s own missile capability, deter any attack and buy the island time.

Since May last year, the US has approved six batches of arms sales to Taiwan totalling $5.6bn. The most sensitive weapon is an air-to-ground missile - the AGM-84H/K SLAM-ER – made by Boeing. Because of its range, it can be fired by jets flying beyond the reach of China’s air defence system. The missiles can be used with F-16 fighter jets that the US sold Taiwan in 2019, although those won’t arrive until 2024-2026.

Chinese Military Superiority

Data as of Jan 2020

Source: FT & IISS

China

China’s armed forces have undergone a remarkable transformation since the early 1990s when the First Gulf War demonstrated how far behind they had fallen. From a low-tech, mass-mobilisation, land-based force the PLA has evolved into a modern, all-arms force capable of conducting sophisticated network-enabled joint operations and projecting military power beyond China’s periphery.    

At $181bn China’s official annual defence budget is still little more than a quarter the size of America’s, accounting for just 2% of GDP. But the IISS estimates total outlays at $240bn.

In most spheres China still lags America but has overtaken it in some important areas. These include naval vessels (China has 350 to the US’s 293), land-based conventional ballistic and cruise missiles with ranges between 500 and 5,500 km, and integrated air defence systems.  

Regarding Taiwan, China’s main areas of deficit are a lack of amphibious attack capabilities – it is only now trialling its first amphibious assault vessel – and a shortage of silent submarines. China’s cyber defences are also weak, making their networks vulnerable to US and Taiwanese disruption.

Comparative Defence Statistics

Defence spending: top 15 in 2019 $ bn

Source: IISS

The PLA’s modernisation has been driven to a significant extent by the anti-access area denial strategy to keep the US away from Taiwan long enough to achieve its objectives.

This strategy includes deploying batteries of short-range missiles along the coast opposite Taiwan; long-range ballistic missiles that could target both US carrier battle groups and US bases in the western Pacific; and drone swarms. In order to build its blue-water naval force and increase survivability, the PLA Navy has also invested heavily in shipbuilding, submarines and ship-launched ballistic missiles.

United States

With an annual military budget of $684bn America spends more on defence than all Asian countries combined and remains militarily pre-eminent. The US way of war relies on being able to project military power from distant bases that until recently have been beyond the reach of adversaries.     

Power projection relies on 11 carrier battle groups, each of which requires many surface and sub-surface vessels to protect the aircraft carrier. It also depends on a global network of satellites that enable precision-guided conventionally armed missiles. These capabilities are now coming under challenge. China’s significant expansion of missiles (including anti-ship variants) and drone swarms makes the deployment of carrier battlegroups a much riskier proposition.

It also threatens US bases in western Pacific locations such as Guam whose facilities are not hardened against missile attack and lack adequate air defence systems.   

China has also developed ground-based anti-satellite capabilities. US efforts to persuade regional allies to accept missile deployments following the demise of the Intermediate-range Nuclear Forces (INF) Treaty in August 2019 have to date been unsuccessful. Meanwhile, US military modernisation involves a shift towards more flexible and resilient systems that take account of the increased strengths of America’s adversaries. 

The US administration, recognising the threat posed by the PLA, has commenced a review of its regional combat commands and is seeking to rebalance its global commitments and deployments in order to prioritise the Indo-Pacific theatre.

In the event of a conflict with China, America’s greatest strength may prove to be its sophisticated cyber capabilities, which may be sufficient to disable China’s military networks at critical junctures.

Taiwan in the Era of The Great Decoupling

The Taiwan situation has become increasingly complicated as a consequence of the marked deterioration in US-China relations that began in 2018 with President Trump’s decision to impose tariffs on Chinese imports and reached a nadir over the summer of 2020 due to the Covid-19 pandemic.    

The relationship between the US and China has never been stable or predictable, and over the past 12 years the two sides have been moving further apart. The rise to power of Xi and Trump has simply accelerated this trend; in particular, the US president’s trade and tech war has crystallised mutual distrust and differences in ideology and values.

China has progressively laid claim to global leadership, a claim that it sought to enhance during the coronavirus outbreak.

But its rhetoric of a common future for mankind is patently at variance with its nationalistic, self-interested behaviour. Meanwhile, in an otherwise bitterly divided Washington, there has been rare bipartisan agreement on the need to get tough on China.

Previous US administrations have sought to manage relations with Taiwan with caution to avoid unnecessary damage to ties with China.

By contrast, the Trump administration has significantly stepped up pressure on China, especially in the past year.

Hawks in Washington, who had already concluded that the US should “stand on the CCP’s neck till it breaks”, to quote an anonymous mid-ranking official, have been reinforced in their conviction that the time has come to put the CCP out of business.

In the past, the US has been at pains to maintain a posture of strategic ambiguity about its readiness to come to Taiwan’s aid in the event of a Chinese attack. But the Trump administration has taken several initiatives calculated to cause China concern.

Alongside the large arms sales it made in 2019, it sent the health secretary to Taipei - the most senior official to visit the island in 41 years - and has initiated discussions on a bilateral trade treaty. These steps are in addition to the passage of legislation designed to thwart Chinese moves to constrain Taiwan.

Biden may adopt a less openly confrontational approach with Beijing, ending the era of “America First” and increasing the use of diplomacy to bring European and other allies on board. But we expect him to broadly maintain the current tough line and continue to support Taiwan, while avoiding unnecessarily provocative actions. 

Beijing has stepped up military preparations by air, sea and land over the past few months, to improve its capability of carrying out a successful invasion and to exert increased pressure on the Taiwanese government.

China has also maintained global political pressure to isolate the island, such as preventing its attendance at a key WHO meeting on Covid-19, despite Taiwan’s success in handling the pandemic.

But Beijing did not exploit the US election and its uncertain aftermath by invading Taiwan, as a few had speculated. Xi took his time before allowing Chinese diplomats to congratulate Biden, and Beijing will be hoping the new, presumably less confrontational US administration gives China time too. Beijing is looking for a tactical pause to discuss an (unlikely) reset of relations while it puts its economic recovery on a more sustainable basis and continues to upgrade its military.

The Next Taiwan Crisis

A determination by Beijing to take Taiwan by military force would be a major step, to put it mildly. The military balance between China and Taiwan has shifted massively in China’s favour. But the practicalities of an invasion are still daunting: a contested amphibious assault is the most difficult military operation to carry out even in the best of circumstances.    

And in the case of Taiwan the circumstances are anything but optimal. With high cliffs on its eastern side and mud flats on the west, the island offers only a handful of potential beachheads. Moreover, difficult weather conditions – high winds coming down from Siberia in winter and tropical storms in summer – mean there are only two narrow windows for such an assault: late March to late April and late September to late October.   

While a direct assault cannot be ruled out, it is more likely that Beijing will resort in the first instance to coercion short of war.

If such coercion extended to a full-blown economic blockade, it seems improbable that the US would not intervene. In that case, the risks set out above equally apply.      

Were such a conflict to occur the costs to both parties would be severe. The impact would be felt on a global scale as each side inflicted substantial damage on the other’s infrastructure and economy as well as US bases in the region. The implications for the rest of the world would include a massive decline in international trade. Destruction of satellites and cyber networks could disable many of the services on which the modern world depends, such as GPS. At worst, the conflict could escalate to a nuclear exchange.  

Even if China does not launch a direct assault on Taiwan there is growing potential for conflict to be sparked by a relatively minor incident.

PLA naval and military operations in the waters around Taiwan are increasing, as are US naval transits. Furthermore, PLA Air Force (PLAAF) and PLA Naval Aviation Force (PLANAF) aircraft are now starting to cross the median line – the halfway point between mainland China and Taiwan. In the past China used to acknowledge tacitly the Taiwan Strait median line. But, in a significant departure, its Ministry of Foreign Affairs said in September 2020 that there is actually no such thing as the median line.

Against this background, an event such as an aircraft crashing or a ship sinking could be misinterpreted as a deliberate act, leading to escalation. Near-misses have already happened. In 2016 a Taiwanese naval vessel accidentally fired a live missile while docking in Kaohsiung. The missile struck a Taiwanese trawler, causing several deaths. Had it not done so, the missile could easily have gone on to strike a Chinese civilian or military vessel or even the Chinese mainland.    

China and Taiwan have no functioning mechanisms for consultation and de-escalation. Hotlines exist, but when the Taiwanese have sought to use them the Chinese do not pick up or respond.  By contrast, the US and China do have some de-escalation mechanisms but, mutatis mutandis, the risks of inadvertent escalation apply equally and with potentially greater consequences.   

Taiwan is no longer a niche issue for specialists but an issue of growing concern for investors, the international business community and humanity more broadly.