Are Washington and Beijing on a Collision Course over Taiwan?
This introduction is written by John J. Hamre, CSIS president, CEO, and Langone Chair in American Leadership.
Normally U.S. foreign policy is precise in the outcome it seeks, but quite flexible on modalities to accomplish it. But when it comes to Taiwan and cross-strait politics, the United States has had an unusual inversion of its normal predilections. When it comes to the future of Taiwan and its relations with China, the United States’ position has been consistent: leave it to Beijing and Taipei to work out a political solution that is acceptable to both parties. The United States just insists that this process be conducted through diplomacy, not coercion—in this case, precise in modalities, but not in outcome.
There has been considerable criticism of President Biden for changing the United States’ policy of strategic ambiguity—which is a misunderstanding of the United States’ historic posture. The United States has been quite consistent, and President Biden has not changed anything. The unspoken dimension of this policy is also clear: If China starts a war against Taiwan, the United States is with Taiwan. If Taiwan starts the conflict, it is on its own. Here too, there is no ambiguity.
Much is said about redlines in foreign policy. Generally, redlines should be clearly understood by opponents, but stated publicly in ways that do not lock in future presidents. There has been remarkable consistency on "the Taiwan question" over the past 45 years. And during this period, Taiwan has evolved from an authoritarian structure into a robust democracy. Herein lies the real complexity concerning cross-straits relations. When the Kuomintang (KMT) moved to Taipei to sustain the Republic of China, the KMT leaders thought of themselves as Chinese and legitimate rulers of China. But as Taiwan moved from an authoritarian government to an authentic democracy, the people's will emerges as the fundamental determinant of national identity. Taiwan citizens increasingly think of themselves as Taiwanese, distinct from an identity as a province of China. Taiwan citizens understand this conundrum. Geopolitics does not permit an independent national identity. But authentic democracy inspires Taiwan residents to seek an independent expression of their political future.
Herein lies the wisdom of the framers of the United States’ cross-strait policies. No one knows how the future will be resolved concerning the increasingly divergent trends of thought in Taiwan and China. But the United States does insist on the outcome determined by authentic diplomacy, not violence.
There will likely be an energetic debate in the Congress in coming months. There are many who wish to stand up to the bullying from President Xi, but his sentiments about Taiwan are broadly shared in Chinese society. The United States has never been neutral about the process by which Taiwan's future is resolved. U.S. policies have been remarkably successful over the past five decades in avoiding war that would be devastating to Taiwan, China, and to the United States as well. Prudent reflection should prevail as Congress weighs a redefinition of Taiwan policies. Standing up to Chinese bullying is one goal. Avoiding war is as well.
This series of commentaries explores the many dimensions and nuances of cross-straits relations, allowing a deeper understanding of this complex topic and the implications it poses for U.S. leaders.
A Time for Statecraft
Deterring War in the Taiwan Strait
What CSIS Wargames Tell Us about Deterring China
Mark F. Cancian
The U.S.-Philippine Alliance Is Looking at Taiwan, Too
Gregory B. Poling
What Are the Economic Stakes of a Taiwan Conflict?
Guarding against Overestimating PRC Intent and Ability to Use Force against Taiwan
Bonny Lin, Director, China Power Project and Senior Fellow, Asian Security
As Taiwan becomes a focus in U.S.-China relations and the risk of tension over the island grows, it is important to be careful in our assessments of the situation in the Taiwan Strait. Experts and policymakers need to pay additional attention to several key factors that complicate—and, in some cases, exaggerate—Chinese intent to use force and capabilities vis-à-vis Taiwan.
First, Chinese decisionmaking is increasingly opaque and nationalistic under its leader Xi Jinping. The opacity means that understanding Beijing’s approach towards Taiwan will involve patient and detailed analysis of a variety of information and sources, such as leadership speeches, government white papers, Chinese military modernization, and training progress and targets. Assessments of China’s intentions for Taiwan cannot just rely on People’s Republic of China (PRC) rhetoric or public threats. Indeed, nationalism within China means that it is safer for Chinese media outlets, Chinese experts, and likely even Chinese government officials to publicly advocate that Beijing should adopt tougher and stronger measures against the United States and Taiwan (rather than adopt accommodating, balanced positions). Such vehement public PRC rhetoric is also intended to make countries think twice about whether their actions could result in a potentially large and angry PRC response. But behind closed doors, Chinese leaders do weigh the costs of aggression. The PRC response to House Speaker Nancy Pelosi’s visit to Taiwan, for instance, was less aggressive than what many Chinese netizens and some PRC news outlets called for.
Second, it is incredibly difficult to assess Chinese People’s Liberation Army (PLA) capabilities, and Beijing has played that to its advantage by seeking to portray the PLA as powerful and capable (likely more capable than it actually is). Beijing is keen to show off its advanced military equipment to achieve a psychological deterrence effect. Just focusing on the hardware, however, overlooks the fact that Chinese military personnel may not have the training to operate effectively. Even if the PLA performs well during a large-scale, joint military exercise, an exercise is still vastly different from the extraordinarily challenging conditions of war.
U.S. wargames are not the solution to understanding PLA capabilities vis-à-vis the United States. Wargames can help U.S. policymakers think through different escalation dynamics, operational plans, and capabilities. However, individual wargame results—which vary significantly based on the design and purpose of the game—are far from an accurate indicator of whether the United States or China can win in a Taiwan conflict.
Finally, a portion of the media coverage in the United States and other countries is misleading because of the focus on flashy news headlines or surface level comparisons. Shortly after Russia launched its invasion of Ukraine in February, for example, a number of outlets asked the question if Taiwan is next. Although the attention to Taiwan was helpful in highlighting the threat the island faces, it inaccurately equated Taiwan with Ukraine and China with Russia. This unnecessarily hyped up concerns that China would immediately invade Taiwan and that the United States would not be willing to send troops to defend Taiwan. Neither scenario is true. Indeed, CSIS’s recent survey of 64 leading U.S. experts on China and Taiwan show that the majority believe that China is willing to wait to achieve peaceful or force unification with Taiwan and China believes that the United States would come to Taiwan’s defense.
A Time for Statecraft
Jude Blanchette, Freeman Chair in China Studies
The August 2 visit to Taiwan by House Speaker Nancy Pelosi and the ensuing military exercises and missile firings by the People’s Liberation Army (PLA) may well have marked the beginning of a prolonged period of crisis between the United States, China, and Taiwan. All three sides appear locked into a cycle of action and reaction, with their respective domestic politics evolving in ways that make maintaining the peace and stability in the Taiwan Strait increasingly difficult. If the current trajectory holds, military conflict between the United States and Taiwan on one side, and China on the other, looks increasingly plausible. Such an outcome would be devastating for Taiwan and its 23 million inhabitants, but also for the broader region and indeed, for the entire world.
Yet while both sides understand the gravity of the current situation, the policy and strategic discourse in all three capitals remains locked in outdated or narrow thinking. In the United States, the conversation has become fixated on how to deter a perceived imminent Chinese invasion of Taiwan, even though this is least likely of the challenges the United States will need to confront. In Beijing, the focus continues to be on using economic and military coercion to pressure the Taiwan people into submitting to China’s will, without understanding how this same aggression obstructs the path to a long-term political settlement between the two sides. And in Taipei, stark warnings of Chinese belligerence by some in the government and military are undermined by the continued unwillingness to make fundamental reforms to the island’s defense capabilities.
To be sure, Beijing’s outright threats toward Taiwan are the fundamental cause of the tensions across the strait. But this blunt fact only serves to highlight just how critical it is for the United States to act with strategic foresight, resolve, and flexibility. Ultimately, the United States can only control its own actions. Here, a fundamental and bold rethink of its approach to managing cross-strait tensions is necessary if war is to be avoided. Anything less and the United States will be caught in a cycle of repeated crises that will escalate toward a military conflict.
Such an approach must begin with the recognition that the United States faces a political and strategic challenge, not a military one. While maintaining a credible military deterrence remains necessary, it is not sufficient, and the more oxygen is consumed with narrow discussions of how to repel beach landings by the PLA, the less time being spent on the more likely and near-term threats the United States and Taiwan will face. What would be the U.S. response if the PLA occupies one of Taiwan’s outer islands? How should the United States respond if a Chinese military aircraft conducts an overflight of Taiwan’s main island? What tools does the United States have—nonmilitary and military—to truly deter Beijing? How should it reestablish an equilibrium of peace and stability in the Taiwan Strait such that Taiwan can continue to develop as a prosperous and resilient democracy? Most importantly, how can the United States support Taiwan while avoiding a direct military confrontation with China?
The answer to all these questions will only emerge when the United States flexes all its formidable statecraft muscles.
The Potential Consequences of a Crisis of Confidence in the Taiwanese Business Community
Scott Kennedy, Senior Adviser and Trustee Chair, Chinese Business and Economics
It is far too premature to conclude that the United States and China are inevitably going to have a military conflict over Taiwan. There are still too many variables and potential off-ramps to be so fatalistic. That said, recent signals and the current trajectory are deeply worrying, and one certainly cannot rest easy on the assumption that war is in no one’s interest because of the extensive multidirectional interdependence and the high costs a war would bring.
One of the least understood elements of the ongoing developments is the perspective of Taiwanese companies. Their views and actions may be decisive in determining whether the United States, Mainland China, and Taiwan can achieve some form of stable equilibrium or whether things continue to deteriorate.
A survey of 525 Taiwanese businesses the CSIS Trustee Chair in Chinese Business and Economics conducted in late July 2022 on the eve of House Speaker Nancy Pelosi’s visit, which is featured in a new CSIS report, finds that Taiwanese companies are deeply worried about over-dependence on China, the effects of China’s zero-Covid-19 policies, the chances of war, and other problems. When asked if there will be some sort of military conflict between the United States and China within the next five years, 8.6 percent answered “strongly agree,” 30.1 percent “somewhat agree,” 37.5 percent “somewhat disagree,” and 13.0 percent “strongly disagree.” There is no consensus, but the survey reflects a high level of concern.
As a result of these anxieties, Taiwanese companies are responding in a variety of ways, including encouraging Taiwan to enter more trade and investment pacts with others and strengthen Taiwan’s technological edge. But the most significant step they are taking is physically moving their businesses. Almost 26 percent of the companies with operations in Mainland China have already moved at least some of their production or sourcing out of the mainland, while another 33 percent are considering doing so. And 13 percent of the surveyed companies have already moved some business out of Taiwan and another 21 percent are considering doing so. Most companies moving from China are going to Southeast Asia, and then to Taiwan. Those shifting from Taiwan are also primarily moving to Southeast Asia, but there are also companies shifting to Northeast Asia (South Korea and Japan) and into China. This is not outright decoupling—Taiwanese firms are deeply connected to China—but it is a resorting of companies’ business operations across multiple geographies.
Taiwanese companies appear to be moving at a more rapid rate than their counterparts from the United States, Europe and elsewhere, but anxiety levels for all are at an all-time high. If these trends persist, the consequences for China’s economy will be substantial, as the People’s Republic of China’s (PRC) successful development has been intimately tied with extensive globalization and its integration into global production and innovation networks.
Equally significant, but perhaps less appreciated, Taiwanese firms with ties to China tend to be important advocates for stable cross-strait ties. In that regard, they have had a voice akin to Wall Street in the United States. But if they lose confidence in the China market and move, they very well could become less committed to defending the status quo and stable commercial and people-to-people ties. The same shift could also occur among the Mainland Chinese companies and local governments they have been partnering with in regard to the policy conversation in China. The ultimate result may be weaker commercial voices that have counseled restraint on all sides and have given China a belief that a “peaceful unification” strategy has some hope of eventual success.
Hence, all parties involved have an interest in improving the conditions of Taiwanese companies in Mainland China and Taiwan and stemming a potential exodus. It is critical for Beijing and Taipei to recognize the commercial, political, and security benefits that could come from taking clear steps to rebuild confidence in the business community, particularly among Taiwanese industry, in their respective markets.
U.S. Allies Remain Committed to Taiwan, but Fear Entrapment
Victor Cha, Senior Vice President, Korea Chair
Allies and partners of the United States in the Indo-Pacific welcome the Biden administration’s commitment to rebuild alliances and create like-minded coalitions in support of the liberal international order. However, the war in Europe and its impact on U.S.-China relations have also created a great deal of uncertainty. Debates among experts and officials in capitals across the region proliferate over the lessons China has learned from Russia’s invasion of Ukraine. There is general agreement that the war has not changed Beijing’s objective to absorb Taiwan, despite the difficulties faced by Putin in prosecuting the campaign. How China has adjusted its plans as a result of Russia’s difficulties, however, is hotly debated. While some believe that this has accelerated Chinese leader Xi Jinping’s timeline for acting, others believe Beijing’s recent belligerent rhetoric and actions are largely in response to the United States and Taiwan’s efforts to change the status quo across the straits in reaction to the Ukraine war.
The war undeniably has exacerbated and deepened U.S.-China strategic competition. The U.S. government and Congress are singularly focused on providing the capabilities to upgrade Taiwan’s defense. Moreover, Biden’s sequence of public statements about defending Taiwan, House Speaker Nancy Pelosi’s visit to Taipei, and pending legislation on Taiwan suggest that the United States is abandoning a policy of strategic ambiguity, which has rattled allies and partners. While many of these governments support U.S. defense of Taiwan, none of them want to see an inadvertent conflict that would entrap them in a great power war that would spin out of control. If allies had their druthers, they would probably like all sides to maintain the status quo rather than engage in a spiral where all parties think that time is running out in terms of accomplishing their objectives: the United States rushing to arm Taiwan, China seeing a closing window of opportunity, and Taiwan seeing the need to take advantage of a limited window of enthused U.S. defense assistance.
These uncertainties have led to a combination of internal balancing to build up national capabilities, as well as external balancing to form new alignments in the region. In the latter case, the creation of groupings like the Quadrilateral Security Dialogue (Quad), AUKUS, and the Indo-Pacific Economic Framework (IPEF) are examples that address the China challenge in everything from global health to supply chains to military security. The rejuvenation of trilateral coordination among the United States, Japan, and South Korea after a five-year hiatus is another example of external balancing. Internal balancing is evident in Japan’s rewriting of this year’s national security strategy, probable increase in its defense spending beyond the 2 percent of its GDP ceiling, and focus on building counterstrike capabilities. For the United States’ other main ally in East Asia, South Korea, the buildup is evidenced by the focus on offensive strike capabilities (the so-called Kill Chain), and enhanced missile defense efforts. Japan’s focus on Taiwan’s defense in the aftermath of the Ukraine war stands out given China’s ongoing pressures on both countries over disputed airspace and waters, almost eclipsing attention for the other extant threat to its national security—North Korea.
Allied uncertainties about the Taiwan straits are compounded by U.S. domestic politics. While all were relieved by the Biden presidency’s focus on rebuilding alliances, none were comforted that a future “America First” president could not return to power and reduce U.S. commitments to Asia in the face of a rising China. The United States needs to answer the call of its allies at this critical moment of uncertainty by bolstering defense and deterrence commitments and encouraging greater networking of its bilateral alliance partners in areas ranging from supply chain resilience to joint and combined contingency planning.
Deterring War in the Taiwan Strait
Seth Jones, Senior Vice President and Director, International Security Program
Washington and Beijing are—and likely will continue to be—at odds over Taiwan. Chinese leaders insist that the United States recognize Chinese sovereignty over Taiwan. U.S. leaders have generally argued that both sides of the Taiwan Strait should mutually and peacefully agree to a resolution of this unsettled issue. While these differences suggest that Washington and Beijing will likely remain at odds over Taiwan for the foreseeable future, the two sides are not on an inevitable collision course toward war.
The United States should focus on deterring conflict and buying time for a long-term mutual and peaceful resolution over Taiwan’s status. There are two main types of deterrence: Deterrence by denial involves preventing an action by making it infeasible or unlikely to succeed, thus denying a potential aggressor confidence in attaining its objectives. Deterrence by punishment includes preventing an action by imposing severe costs if an attack occurs.
There has been considerable attention recently on developing a strategy of denial regarding Taiwan. Most of the focus has been on building and deploying sufficient U.S. and partner conventional military capabilities to the Indo-Pacific—such as submarines, aircraft carriers, fifth-generation fighter aircraft, strategic bombers, air defense systems, and precision-guided munitions—and constructing hardened bases so that China cannot successfully conquer and hold Taiwan. There has also been an interest in increasing arms sales to Taiwan—including Harpoon anti-ship missiles, radar, and Sidewinder air-to-air missiles—to strengthen Taiwan’s conventional military capabilities.
While these steps are necessary to deter China—and to fight if deterrence fails—they are not sufficient. Successful deterrence will require a much broader mix of irregular, economic, diplomatic, and other steps that raise the costs and risks of a Chinese invasion of Taiwan. The war in Ukraine has illustrated the importance of several of these steps.
The first is helping Taiwan build local resistance capabilities in case of a Chinese invasion. Much like the strategies of Switzerland, Finland, and the Baltic States to deter foreign—primarily Russian—invasion, the goal should be to create unacceptably high costs for Beijing if it were to invade. U.S. special operations forces and Marines have already begun to train Taiwan units in irregular warfare. But these efforts need to continue and increase.
Examples include helping Taiwan train and equip independently operating local defense units (supported by regular forces in accordance with a national strategy), prepare transportation infrastructure for demolition in the event of an invasion, and instruct members of the military and the general public in how to effectively participate in decentralized, ubiquitous, and aggressive resistance activities.
Ukraine offers an interesting recent example. Ukrainian civilians have risen against Russian invaders, with grandparents stockpiling Molotov cocktails and civilians forming local militias. Much to Moscow’s detriment, the conflict evolved into what Mao Zedong, the former Chinese leader, referred to as a “people’s war.” The goal would be to raise the prospect of a people’s war in Taiwan, in which significant portions of the population rise and fight invading forces.
The second step is to raise the economic costs of a war. China’s economy is already suffering from a sharp slowdown, thanks in part to Beijing’s zero tolerance for Covid-19, the state’s proclivity to interfere in corporate affairs, recent efforts to rein in real estate speculation, and China’s aging population. A Chinese military invasion of Taiwan would likely trigger major U.S. and allied sanctions that further weaken China’s economy, though a war would also have significant economic costs for the United States. The United States needs to prepare for effective multilateral sanctions in case of an invasion, as well as to blunt the impact on the U.S. economy.
As Thomas Schelling wrote in his book, Arms and Influence, “It is the threat of damage, or of more damage to come, that can make someone yield or comply. It is latent violence that can influence someone’s choice.” Schelling’s logic has direct relevance for Taiwan. The best hope for preventing war over Taiwan is to affect Beijing’s cost-benefit calculations by raising the prospect of a wide range of military, economic, and other damage.
What CSIS Wargames Tell Us about Deterring China
Mark F. Cancian, Senior Adviser, International Security Program
Emerging insights from a CSIS wargame on a U.S.-China conflict over Taiwan provide several ways to enhance deterrence. And deterrence is needed. Although most game iterations showed that the United States and Taiwan could maintain an autonomous Taiwanese government and prevent Chinese occupation of the island, this came at a high cost. The United States and its allies lost dozens of ships, hundreds of aircraft, and tens of thousands of servicemembers in addition to Taiwan seeing its economy devastated. Further, the high losses would damage the U.S. global position for many years.
Based on extensive operations research, a team at CSIS developed an unclassified wargame to assess a conventional Chinese invasion of Taiwan in 2026. So far, the project has conducted 21 of a planned 24 iterations in a wide variety of scenarios. Game participants have been a mix of retired senior military officers, think tank experts, and former government officials. The project will finish in December 2022 with a final report and a rollout event.
Emerging Results and Measures to Enhance Deterrence
Although the project is still analyzing the data, some emerging results are becoming clear. Here are the five most important for deterrence, along with recommendations for action.
- Supply Taiwan with weapons now.
Once the conflict begins, it is virtually impossible for the United States to get any forces or logistics onto Taiwan. The Chinese defensive zone is so thick that few cargo ships or airlift aircraft can get through. This means that the kind of resupply effort that the United States and NATO have conducted with Ukraine would not be possible. Taiwan will fight with what it has when the war begins.
Recommendation: Taiwan has ordered billions of dollars of weapons, but deliveries have been slow. The United States should speed up the Foreign Military Sales program on its side and urge the Taiwanese to speed up their side.
- Arm all bombers with standoff anti-ship missiles.
U.S. bombers proved to be the most important U.S. weapon, particularly when armed with long-range anti-ship missiles. Bomber range, missile standoff distance, and the high carrying capacity presented the People’s Liberation Army (PLA) with daunting challenges that were difficult, if not impossible, to overcome.
Recommendation: The Air Force should fully embrace the anti-surface warfare mission and train for it vigorously. The bomber inventory should be maintained rather than cut as part of the Air Force’s “divest to invest” strategy.
- Harden bases.
In every iteration, 10 U.S. aircraft were destroyed on the ground for one lost in air combat. These high losses occurred because U.S. fighter/attack aircraft must deploy forward to strike at the Chinese fleet, particularly the amphibious forces, before establishing air and maritime dominance. However, existing mechanisms for protection are insufficient to adequately reduce losses.
Recommendation: The United States needs to harden bases with aircraft shelters and air defense. Access to dual-use facilities in Japan (such as international airports) would greatly reduce attrition on the ground by dispersing forces. Camouflage, concealment, and deception should be pursued at scale to complicate Chinese targeting. The Air Force should restructure organizations to cope with wartime losses to aircraft, maintenance facilities, and support personnel.
- Build larger munitions stockpiles.
In four weeks of conflict, the United States generally expended more than 5,000 long-range missiles, mostly against Chinese naval targets. Some preferred munitions became exhausted after the first few days of conflict. Without long-range munitions, U.S. aircraft must approach Chinese forces more closely. Attrition then greatly increases.
Recommendation: Increase production of long-range anti-ship missiles whether launched from air, sea, or ground.
- Ensure deterrent forces do not undermine deterrence.
U.S. warfighting doctrine includes a pre-hostility phase designed to strengthen deterrence and enhance U.S. warfighting capabilities should conflict occur. However, as Thomas Schelling noted regarding the attack on Pearl Harbor in 1941, “a fine deterrent can make a superb target.” Loading up Japan and Guam with aircraft and moving carrier battle groups into the region might signal U.S. resolve, but these deployments could also tempt China to attack preemptively.
Recommendation: The United States needs to build deterrence that is not also a tempting target. Deploying defensive systems like antiair and antimissile units is one approach. Bombers might deploy outside of Chinese missile ranges, for example, to Hawaii or Australia, to increase offensive capability without increasing vulnerability.
Avoiding the Costs of War
Given the high casualties that the Chinese might suffer in an invasion and the potentially destabilizing effects that such a defeat would bring, many argue that China would never undertake an invasion. However, countries sometimes launch risky military actions because they misestimate the military balance, are driven by internal politics, or believe that prospects for success will be even worse in the future. Thus, Japan attacked the United States in 1941 even though both the Japanese and the Americans recognized how risky it was for Japan. Even now, Russia invaded Ukraine and is now facing defeat. The bottom line: deterrence is worth enhancing because others may not see the world as we do.
The U.S.-Philippine Alliance Is Looking at Taiwan, Too
Gregory B. Poling, Senior Fellow and Director, Southeast Asia Program and Asia Maritime Transparency Initiative
The Philippines would find it difficult to remain neutral in any conflict over Taiwan. Up to 150,000 Philippine citizens live on the island and would be endangered by any conflict. In the case of an invasion, both Filipino and Taiwanese citizens would cross the narrow Bashi Channel seeking refuge. That same proximity and the long-standing alliance with the United States makes Philippine territory an attractive staging point for U.S. intervention and a possible target for Chinese retaliation. The U.S. and Philippine governments now seem to be holding sophisticated discussions about the role of the alliance in a Taiwan crisis for the first time in recent memory. These have been accelerated by House Speaker Nancy Pelosi’s visit to Taiwan and China’s resulting threats and missile tests. But they were underway before then, the necessary result of a push under the current and former Philippine governments for a more “equal” alliance with the United States.
The Biden administration has proven eager to meet those calls and modernize the alliance. But that means looking beyond the territory and maritime claims of the Philippines. A more equal alliance entails greater reciprocity. If the Philippine government wants the United States to increase security assistance and stay committed to defending Filipino lives in the contested South China Sea, as both the Trump and Biden administrations have pledged, then it has matching obligations to meet. U.S. forces will require greater access to the country to credibly project power over the South China Sea. And the Philippine government will be expected to assist U.S. forces facing threats in the wider “Pacific Area” mentioned in Article V of the U.S.-Philippines Mutual Defense Treaty, including around Taiwan. The Philippine defense establishment understands this. Based on recent comments, so does its political leadership. And as a result, the two sides are having honest, fruitful discussions about their mutual obligations.
At last year’s Bilateral Strategic Dialogue, the two sides formalized a roadmap for modernizing the alliance. They agreed to negotiate their first set of joint defense guidelines and a military information sharing agreement, launch a new maritime security dialogue, increase U.S. capacity building support to the Armed Forces of the Philippines, and implement the long-delayed 2014 Enhanced Defense Cooperation Agreement. That pact allows the United States to gain access to five predetermined Philippine military sites to fund upgrades, preposition equipment, and engage in joint training and operations. In addition to implementing the agreement at those five sites, the allies are seeking to expand the agreement to additional locations, which has fueled speculation that new sites would include facilities in northern Luzon, less than 200 miles from Taiwan.
Soon after Pelosi’s visit, Secretary of State Antony Blinken met with President Ferdinand Marcos, Jr., in Manila. Afterward, when asked about China’s military threats against the island, Marcos told the press that the crisis reinforced the need for close U.S.-Philippines ties. In September, Ambassador to the United States Manuel Jose (Babe) Romualdez said the Philippines might give U.S. forces access to military sites in case of a Taiwan crisis. At this month’s annual Bilateral Defense Board-Mutual Security Board meeting, the allies agreed to hold their largest-ever joint military exercise in 2023—the annual Balikatan drills—to include “a full battle test for operating together, including in Northern Luzon.” And when Defense Secretary Lloyd Austin and his Philippine counterpart Jose Faustino met after the board meeting, Taiwan was a major topic of discussion.
The alliance is going through a necessary process of soul-searching, the likes of which it has not seen since at least the late 1970s. If it comes through the other side, it will be more capable and resilient. And both sides will have a clearer understanding of their obligations to each other in a Taiwan crisis.
What Are the Economic Stakes of a Taiwan Conflict?
Gerard DiPippo, Senior Fellow, Economics Program
China’s military maneuvers in response to House Speaker Nancy Pelosi’s August trip to Taipei have sparked concerns about Beijing’s plans and intentions, including among multinational firms. It is perfectly clear that Chinese leaders consider eventual “reunification” with Taiwan as a precondition for national rejuvenation. It is far less clear whether Beijing has a firm internal deadline for unification or a coherent strategy to achieve it without using force. But perhaps the most uncertain risk is how much any conflict over Taiwan would harm the global economy. Reasonable damage estimates range from bad to catastrophic.
The potential for military conflict between the world’s two largest economies is frightening enough on its own. But China is also the world’s top manufacturing hub, Taiwan is the leading producer of advanced semiconductors, and the United States has the largest capital markets and the preeminent currency. In addition, global shipping would be severely disrupted. Chinese ports accounted for roughly 40 percent of shipping volume among the world’s 100 largest ports in 2020. So far this year, nearly half of the global container fleet and 88 percent of the largest ships transited through the Taiwan Strait. Taiwan is also a critical node connecting submarine cables from China with the rest of the world.
Few studies have examined the economic implications of a conflict over Taiwan. This is probably in part because such estimates are difficult and speculative, as economic models and data are not calibrated for such scenarios and there are few, if any, relevant historical examples to serve as comparisons. It may also be because most economists are wary of touching such a bleak scenario that is the opposite of “positive sum” thinking and economic efficiency.
The scenarios are complex and require many assumptions, including about the type of military operation China attempts, the number of countries involved in response, the conflict’s duration, and the level of escalation. A 2016 study by RAND estimated that a yearlong war would reduce China’s GDP by 25 to 35 percent and U.S. GDP by 5 to 10 percent, but the study did not examine the implications for global supply chains or estimate effects from sanctions, infrastructure damage, or cyberattacks. A complete disruption of China’s trade would reduce global trade in value added by $2.6 trillion, or 3 percent of world GDP, but this only captures the first-order effect on trade based on peacetime valuations of global supply chains. In reality, the disruptions could be significantly worse.
U.S. or allied financial sanctions on China could be devastating on all sides. China continues to rely on the U.S. dollar for most international finance despite efforts to internationalize the renminbi. But the damage to foreign banks could also be severe, as some Chinese banks are global systemically important. Sanctions on the People’s Bank of China could effectively trigger a heart attack in global trade finance.
The United States would be at risk of suffering a severe shortage of consumer goods, especially electronics and appliances. Washington is fixated on building supply-chain resiliency, particularly for high-tech inputs like semiconductors. But even if such efforts were successful, North American factories still would not manufacture many of the final goods those high-tech components go into. OECD data suggest that only 2 percent of final demand in the United States comes from China, but China accounts for nearly 20 percent of value added in U.S. final demand for electronics. That portion would seem even larger if there were no substitutes, which would likely be in short supply during a major conflict when firms would face extreme uncertainty and resource constraints. The Covid-19 pandemic demonstrated that often times only the firms in the higher-value-added portions can afford to maintain large excess capacity while lower-value-added supply chains are tighter.
Substantial “decoupling” of the Chinese and U.S. economies is not feasible in the medium term. Beijing is prioritizing self-sufficiency and technological indigenization efforts, including along entire supply chains. U.S. efforts are more targeted and modest in scale, even after factoring in recent U.S. legislation. Nonetheless, China will struggle to reduce its macro-level dependence on external markets and the dollar. Meanwhile, the United States probably lacks the institutional capacity and political will to enact industrial policies large enough to substantially mitigate supply-chain exposures to China, at least for civilian goods.
More research is needed to understand global economic interdependencies. At a minimum, any conflict over Taiwan would entail sanctions and physical disruptions far more disruptive than those in recent years from the Covid-19 pandemic and Russia-Ukraine war.
The best economic policy would be to prevent a conflict. The ideal approach would be to maintain peace through deliberate caution, empathy, and forbearance on both sides of the Pacific; but if not, economic and military deterrence might have to suffice as a second-best option. The third option would be far worse.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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