For decades companies worldwide benefited from the stability and predictability of the Asia-Pacific region, which enabled them to make wise investment and business decisions. Yet recent events, particularly U.S. House Speaker Nancy Pelosi’s recent trip to Taiwan, underscore growing regional political instability.
Pelosi’s Visit to Taiwan
On August 3, 2022, U.S. House Speaker Nancy Pelosi, a long-time China critic, concluded a much-anticipated trip to Taiwan. And she is now the highest-ranking U.S. official to have visited Taiwan in decades.The trip piqued international attention, with more than 708,000 people tracking Pelosi’s U.S. Air Force jet SPAR19, breaking records of flight tracking sites. Mainland China was no exception: many citizens followed the news late into the night to see whether the People’s Liberation Army (PLA) would launch retaliatory military attacks. When these attacks did not occur, many posts sprung up in online forums voicing dissatisfaction over the perceived weakness of the Chinese Communist Party’s (CCP) restrained actions.
Since the last Taiwan Strait Crisis in 1995-96, the CCP has intensified domestic-facing, nationalistic rhetoric and propaganda campaigns to convince the public that Taiwan was and should always be part of China. Although Taiwan has never been part of the People’s Republic of China (PRC), CCP propaganda has cultivated a more bellicose Chinese public that widely supports a military takeover of Taiwan. Surging nationalist sentiment is grim news for the international private sector, as it indicates that the risk of cross-strait conflict is on the rise.
Since the last Taiwan Strait Crisis in 1995-96, the CCP has intensified domestic-facing, nationalistic rhetoric and propaganda campaigns to convince the public that Taiwan was and should always be part of China.
In the prelude to Pelosi’s visit, the CCP deployed its usual combination of “information assault and military intimidation” (文攻武嚇). Official government statements warned against the visit, saying “those who play with fire will perish by it,” and insisting that China’s response will be “firm, vigorous, and effective.” Additionally, widely-circulated mainland media articles blamed Pelosi’s visit for escalating regional tensions. On August 2, the day of Pelosi’s arrival, China announced it would soon begin a military exercise that would effectively blockade Taiwan, violating sovereign Taiwanese waters.
China is continuing these retaliatory and threatening exercises, reportedly scheduled to end August 7, with live-fire drills in waters close to Taiwan, perhaps closer than ever before. Some experts note that the frequent and aggressive PLA exercises are reminiscent of the tactics used by Russia before it annexed Crimea in 2014. Further retaliation against Taiwan has come in the form of punitive economic measures from mainland China. Weaponizing cross-strait bilateral trade, China’s customs administration recently announced import bans on over 100 Taiwanese food exporters and 2,000 food items. The economic impact of these measures is difficult to calculate at this point, but the weaponization of trade is a frequently employed tool in China’s toolkit withineconomic statecraft and almost certainly a retaliatory response to Pelosi’s visit.
Chinese Economic Woes
This deterioration of cross-strait economic ties is set against a backdrop of domestic economic decline on the Chinese mainland. Many people with means are exiting the mainland in response to the strict lockdowns implemented under a “zero COVID” policy, with the Chinese economy suffering from actions such as the Draconian lockdown in Shanghai from March to June. The Chinese unemployment rate is nearing an all-time high, and is reported to be the highest ever for the 18 to 24 age group, which May numbers put at over 18%. Indeed, both domestic and foreign investment sentiments surrounding Chinese economic growth are generally pessimistic about the next few quarters, owing to a slew of issues, including the real estate market.
According to AmCham Shanghai and AmCham China’s latest survey, 86% of respondents noted recent supply chain disruptions. In addition, the European Union Chamber of Commerce in China’s survey results indicate that almost 1 in 4 respondent companies are considering shifting future investments away from China. This is the highest positive response rate for that question over the past decade and a worrying sign for a Chinese economy highly dependent on international trade and investment.
The Rising Risks of Conflict
While strict pandemic controls have recently been the main reason for foreign companies to rethink their investments in China, the risk of a potential conflict in the Western Pacific is a growing topic for board room discussions, particularly in the wake of the conflict in Ukraine and foreign businesses pulling out of Russia. Rising tensions across the Taiwan Strait has been a topic of increasing concern for many regional analysts over the past two years, most recently crowned by Pelosi’s trip. While this risk is not new, other recent events indicate an increased likelihood of armed conflict in the region.
In March 2022, the CCP’s Central Organization Department (in charge of party personnel placements) issued a new directive banning family members of ministerial-level officials from holding real estate abroad or shares in foreign companies. This directive also stated that the CCP would block senior party members’ promotions if their families held foreign assets. This measure was designed to insulate top officials from sanctions like those imposed on Russia following its invasion of Ukraine and indicates that there are concerns in the Party that the international community could leverage a similar sanction regime against China in the future.
Additionally, in late April, Chinese regulators (including China’s central bank and finance ministry) conducted an emergency meeting with foreign and domestic banks to discuss how they could protect the PRC’s foreign assets from sanctions issued by Western countries. Likely prompted by the vulnerability of Russia’s central bank to U.S. sanctions, the meeting was almost certainly intended to develop a defensive strategy should China risk sanctions by directly aiding Russia or adopting a more aggressive stance towards Taiwan.
The severity of China’s response to Pelosi’s visit is due to a combination of factors. Among them: views on government hierarchy, a lack of understanding of how democratic institutions function, China’s opposition to any official exchanges between the U.S. and Taiwan,and closeness to the timing of the fall 20th Party Congress.
Chinese officials have paired these quiet preparations with forceful international posturing. For example, at June’s Shangri-La Dialogue, China’s Defense Minister Wei Fenghe made very blunt statements indicating that the PLA would fight at all costs to ensure territorial integrity, rejecting the possibility of Taiwanese independence. While the assertion itself is unsurprising and consistent with prior Chinese government statements, Minister Wei struck a significantly bolder tone than usual. Following Wei’s declarations in mid-June, an order signed by Xi Jinping claimed the entirety of the Taiwan Strait as part of Chinese territory. Analysts equate Xi’s move to the July speech Putin made prior to the invasion of Ukraine in building a casus belli for future military action.
In response to Chinese aggression, the U.S. Government is demonstrating its support for
Taiwan by launching the “US-Taiwan Initiative on 21st Century Trade,” a trade initiative to deepen US-Taiwan economic relationships and facilitate trade (the first round of talks was held on June 28). The U.S. Congress also passed an act to assist Taiwan in its unsuccessful attempt to enter the WHO in April 2022, after the PRC had previously blocked Taiwan’s membership. But beyond these efforts, Pelosi’s visit symbolizes, in her words, “America’s unwavering commitment to supporting Taiwan’s vibrant democracy.” Furthermore, speaking on behalf of the American people, Pelosi declared that “America’s solidarity with Taiwan is more important than ever, as the world faces a choice between autocracy and democracy.” Ultimately, Pelosi’s trip to Asia demonstrates U.S. commitments to its partners in the Indo-Pacific region.
The severity of China’s response to Pelosi’s visit is due to a combination of factors. Among them: views on government hierarchy, a lack of understanding of how democratic institutions function, China’s opposition to any official exchanges between the U.S. and Taiwan, and closeness to the timing of the fall 20th Party Congress. Pelosi, as Speaker of the U.S. House of Representatives, is second in the presidential line of succession after the vice president. A recent U.S. Senate delegation to Taiwan that included Senators Lindsey Graham, Richard Burr, Robert Portman, and Ben Sasse registered comparatively little reaction from China.
Implications for the Private Sector
Given the rising geopolitical tensions in the region, companies worldwide are also recalibrating their risk portfolios regarding their investments in China. Domestically, China is facing several compounding challenges: the impact of the “zero COVID” policy, a gloomy Chinese economic outlook, a real estate industry beset by debt and opaque financing, and a debt crisis spilling over from the financial sector to local governments. Externally, the increasing likelihood of miscalculation during live-fire military drills is not insignificant, and miscalculations could lead to outright conflict. As a result, both domestic and foreign companies are moving assets to safer, stabler, and more mature markets.
China’s decision-making process is even more opaque than a decade ago, with the CCP’s ‘power vertical’ usurping the limited remaining local autonomy, and rendering Chinese actions more unpredictable.
The February 24 invasion of Ukraine has rightly drawn the attention and focus of the strategic advisors and boards in the international business community, and the private sector is now recalibrating its risk assessments. What was once unimaginable is now a significant risk, and the parallels between Ukraine and Taiwan are apparent for all to see. Sanctions alone were not the reason for many companies’ departure from Russia. Instead, the reputational risk and a deteriorating economic environment compelled them to quit the market entirely. Russia’s invasion of Ukraine is estimated to have cost the world GDP more than $1 trillion, with supply chains and primary inputs for entire industries upended overnight. China’s economy is even more integrated into global value chains and vital to the international economy as the global economy’s powerhouse, especially in industrial manufacturing, and its presence is felt in almost all economies. In board rooms around the world, corporate leaders are asking: what will be the cost of a Chinese invasion of Taiwan?
China’s decision-making process is even more opaque than a decade ago, with the CCP’s ‘power vertical’ usurping the limited remaining local autonomy, and rendering Chinese actions more unpredictable. Moreover, as China continues to seek unification with Taiwan, growing Chinese capabilities will make economic or military conflict over Taiwan increasingly likely. Foreign companies and international supply chains, which have long relied on Chinese markets and production, must factor in the growing invasion risk to avoid repeating the March 2022 fallout faced by companies investing in Russia.
Given the increasing risks involved and the declining possibility of growth in the Chinese market due to systemic economic pressures, the private sector is sensitive to the regional geopolitical environment when determining prudent investment and business decisions. International businesses are well aware of the perils of operating in political systems such as China, where the government is not beholden to its citizenry. Further, these companies understand that their firms would be well-advised to increase their supply chains’ diversity and redundancy by moving production away from China. Case in point, the passing of the bipartisan Creating Helpful Incentives to Produce Semiconductors for America Act (known as CHIPS). It is part of a push for high-tech competition with China and the reshoring of American tech capabilities to protect the U.S. from the consequences of any future conflicts involving the Taiwan Strait. The trend to diversify supply chains and divest from China will only continue with increasing geopolitical instability.
Catherine Tai is the Deputy Director for CIPE Asia and the Pacific. Her portfolio includes projects with business associations throughout the region to strengthen the role of the private sector and mobilize local networks of small and medium enterprises for constructive policy reform.
Eric Hontz leads CIPE’s Center for Accountable Investment and oversees programs that address the impact of investment on democratic and market institutions, including the well-known Corrosive and Constructive Capital initiatives.
Special thanks to CIPE’s Jeff Lightfoot, Nora Wheelehan, Kendra Brock, and Laura Maclay for their contributions to this article.