Speaker Pelosi’s Taiwan Visit: Implications for the Indo-Pacific

U.S. House of Representatives Speaker Nancy Pelosi’s visit to Taiwan beginning August 2 triggered stark opposition from Beijing and sparked concerns within the United States and around the Indo-Pacific about the impacts of the visit and the Chinese military response on regional security. Following the visit, Beijing launched large-scale military exercises, raising discussion of a possible Fourth Taiwan Strait Crisis. In this analysis, CSIS experts explore the regional implications of Pelosi’s visit to Taiwan and provide insight into the trajectory of this crisis and signs to watch for going forward.

Q1: What are the short- and near-term implications for U.S.-China relations?

A1: In the wake of Pelosi’s trip, both Beijing and Washington jostled for control of the narrative about which country instigated the crisis. Beijing repeatedly stressed Pelosi’s high rank in the U.S. political hierarchy in an attempt to frame her visit as escalatory in itself. Chinese foreign minister Wang Yi stated, “The U.S. side claimed that China is escalating the situation, but the basic facts are that the United States first provoked China on the Taiwan question and blatantly violated China's sovereignty and territorial integrity.” The Biden administration argued that the People’s Liberation Army’s (PLA) military exercises, including sending short-range ballistic missiles over Taiwan, was a “manufactured” crisis and an overreaction by Beijing to a normal congressional delegation. Under Secretary of Defense for Policy Colin Kahl remarked on Pelosi’s trip during a press conference: “Nothing about the visit changed one iota of the U.S. government’s policy toward Taiwan.”

While both sides argue that their actions were measured and proportionate, it is clear that last week’s events—as well as Putin’s invasion of Ukraine—have placed managing tensions over the Taiwan Straits at the very center of U.S.-China relationship. This will increasingly, and worryingly, be a conversation dominated by military dynamics, be it through questions of potential blockades, invasions, or how to increase Taiwan’s defensive capabilities. The spillover impacts on other areas of the bilateral relationship are already becoming evident—China has announced it is halting dialogue with the United States on a number of issues, ranging from anti-narcotics to military relations to climate change, while news reports indicate that the Biden administration may decide to keep its long-running tariffs on Chinese imports in place.

The political calendar over the next few years does little to help these dynamics. Beijing is acutely concerned with the possible passage of the Taiwan Policy Act, which may come up for a vote after Congress returns from its August recess. In late October, the 20th Party Congress will be held in Beijing, with Xi Jinping destined to assume a third term as the party’s general secretary. In November, both the United States and Taiwan will hold midterm elections, and while Beijing will not be on the ballot, the outcome of those elections will have an important effect on future cross-strait relations. Perhaps most consequentially, Taiwan will hold its next presidential election in January 2024, and owing to term limits, President Tsai Ing-wen will relinquish power after eight years in office. If her party, the Democratic Progressive Party, wins an unprecedented third straight election, Beijing may well conclude that the path to “peaceful reunification” has further narrowed.

Q2: How was Taiwan’s economy affected by the Pelosi visit?

A2: There was barely a ripple. There was certainly some anxiety in Taiwan during the days immediately preceding and following the visit and the occurrence of China’s extensive military exercises. However, the economy came into the crisis stable and exited it with few signs of distress. Taiwan has a well-developed economy. Although it is known for its manufacturing, services comprise 62 percent of its economy, compared to 37 percent for industry and 1 percent for agriculture. (In the United States, services account for 77 percent of the economy.) And per capita income is $28,400 in nominal terms, or $55,700 when measured by purchasing power parity (PPP). Taiwan’s gross domestic product (GDP) grew 3.08 percent in Q2 on the basis of strong private investment and continued personal consumption. Taiwan’s stock market saw a slight downturn around Pelosi’s visit but has had as many positive days as negative ones since. Tech stocks such as TSMC, United Microelectronics, and Hon Hai (Foxconn) have followed the same trajectory. The New Taiwan Dollar (NT) has weakened somewhat over the course of the year (from NT$28 to NT$30 to the U.S. dollar), but that is a sign of the U.S. dollar’s overall strength against many currencies. Taiwan’s foreign exchange reserves were nearly $550 billion at the end of July, sixth-largest in the world and more than sufficient to cover imports or overseas debt obligations. Some flights in and out of Taiwan were canceled or rerouted because of the tensions, but commercial air traffic has returned to normal.

Q3: Is Taiwan’s economy vulnerable in the event of an actual war or embargo?

A3: Yes, but Taiwan’s economy has thrived in a highly globalized world of international supply chains and transnational innovation ecosystems. Although it has tried to diversify trade and investment through its New Southbound Policy, 42 percent of Taiwan’s exports still go to China, led by electronic components (particularly semiconductors), followed by optical equipment. Similarly, 22 percent of Taiwan’s imports are from China. (The comparable figures for the United States are 15 percent and 10 percent, respectively.) Although some have moved back to the island during the pandemic, 158,000 Taiwanese still reside in mainland China. In short, Taiwan’s economy is heavily dependent on China, and a war or blockade would likely be devastating. However, despite Taiwan’s small size, China’s own dependence on stable cross-strait trade and investment ties should not be underestimated. Although China has been developing its own chip producers, such as the Semiconductor Manufacturing International Corporation (SMIC), China is still absolutely reliant on TSMC and other Taiwanese firms, which are in turn dependent on fabrication equipment and tool suppliers from the United States, Europe and Japan. Obviously, politics and nationalism could override such considerations, but the cost to China’s own economy would be monumental.

Q4: How did U.S. allies and partners respond to Speaker Pelosi’s trip and the People’s Republic of China (PRC) military exercises around Taiwan that followed?

A4: Among U.S. allies in the region, Japan was most forward leaning in condemning the PRC military exercises. Although Japanese officials avoided commenting publicly on the merits of Speaker Pelosi’s visit to Taiwan itself, they were sharply critical of Beijing after reports on August 4 that five Chinese ballistic missiles had landed within Japan’s exclusive economic zone (EEZ). During a breakfast he hosted for Speaker Pelosi on August 5, Prime Minister Kishida condemned the missile launches, emphasizing that China’s actions represent a “serious issue concerning the security of Japan and the safety of its people.” The PRC’s response to the Speaker’s visit will reinforce a growing public recognition in Japan that Taiwan’s security is closely connected with its own, and that a cross-strait conflict would inevitably implicate Japanese interests; China’s military exercises will strengthen support for increased investments in defense and cooperation with the United States on Taiwan-related contingency planning. More than 80 percent of respondents to an NHK poll released on August 8 said that China’s actions will affect Japan’s security environment.

Australia's thinking about Taiwan is undergoing a shift. For years, the conversation about Taiwan had been dominated by legal and political discussions over the extent of Australian alliance obligations to the United States. But, Beijing's prolonged military build-up, the increasingly aggressive use of the PLA (including against Australian forces), a ramped-up Chinese campaign of economic coercion against Australia, and the expansion of the PRC's power projection capabilities have prompted a nascent debate in Canberra over the strategic importance of Taiwan to regional stability, the credibility of the alliance system, and Australia's own security interests. Moreover, the disproportionate and menacing response from China towards Taiwan following Pelosi's visit is likely to have an impact on both the internal debate in Australia about its Taiwan policy and the new government's desire to speed up its acquisition of deterrent capabilities.

South Korea was very cautious about Speaker Pelosi’s high-profile visit to Taiwan. Although Pelosi’s expressed support of democratic Taiwan falls in line with the Yoon government’s foreign policy focus on freedom and democracy, Seoul had reservations out of concern that the Taiwan Strait issue could directly spill over to the Korean peninsula and undercut China’s cooperation with the denuclearization of North Korea. Moreover, Seoul did not want to face China’s wrath amid Beijing’s growing warnings over “Chip 4” and THAAD issues.

What made Pelosi’s visit to South Korea controversial both within and outside the country was the confusion involved in her meeting with President Yoon. At first, the U.S. delegation had no scheduled meeting with Yoon because their visit coincided with his summer vacation (he planned to be out of Seoul to visit local provinces). But after his local trip plan got canceled and Yoon stayed in Seoul, he did not meet, instead having a phone call with the delegation, which triggered speculations that Yoon avoided the meeting to not antagonize China.

Despite bad optics of Pelosi’s visit to South Korea, Seoul’s stance on the Taiwan issue is consistent with Washington’s official policy. At the East Asia Summit and ASEAN Regional Forum (ARF) in Phnom Penh, Cambodia, Foreign Minister Park Jin stated that while South Korea supports the “One China” policy, he also made clear that South Korea is opposed to the growing instability in the Taiwan Strait and any attempts to change “the status quo by force.” In less than a week after China began its military drills around Taiwan, Park held a meeting with Foreign Minister Wang Yi and reiterated South Korea’s stance on “One China” policy and stressed the importance of peace and stability in the Taiwan Strait.

The tensions across the Taiwan Strait reportedly dominated much of the annual ASEAN Foreign Ministers Meeting and ASEAN Regional Forum in Cambodia, at which Secretary of State Antony Blinken and Foreign Minister Wang Yi were both in attendance. Unsurprisingly, the ASEAN ministers released a tortured joint statement expressing concern and urging dialogue without mentioning China or Taiwan by name. That does not mean, however, that individual countries in Southeast Asia are not concerned by China’s aggressive response. The consensus among elites and much of the public across Southeast Asia is that while the trip may have been ill-timed or unnecessary, Beijing’s reaction has been beyond the pale and it was imperative that the United States stand firm.

This is especially true in the Philippines, where government and thought leaders increasingly recognize that they will likely be party to any conflict over Taiwan, whether they seek to be or not. The Philippines’ northernmost islands are within sight of Taiwan and some of the military exercise areas declared by China crossed into the Philippine exclusive economic zone. Nearly 200,000 Philippine citizens live and work in Taiwan. And for the first time, the U.S. and Philippine governments are beginning to have honest conversations about their expectations of each other in a Taiwan contingency. That is part of a process of alliance modernization kicked off at last year’s Bilateral Strategic Dialogue, which includes ongoing negotiations on new defense guidelines, a General Security of Military Information Agreement, a new maritime security dialogue, and the long-delayed start of U.S.-funded upgrades of and access to Philippine bases under the 2014 Enhanced Defense Cooperation Agreement. Newly installed president Ferdinand Marcos Jr. met with Blinken in Manila over the weekend and was asked by the press about the tensions around Taiwan. His response underscored the shift seemingly underway in the alliance: “This just points to the fact of the importance of the relationship between the United States and the Philippines.”

Jude Blanchette holds the Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Charles Edel is the Australia Chair and senior adviser at CSIS. Christopher B. Johnstone is senior adviser and Japan Chair at CSIS. Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at CSIS. Victor Cha is senior vice president and Korea Chair at CSIS. Ellen Kim is deputy director and senior fellow with the Korea Chair at CSIS. Gregory B. Poling is a senior fellow and director for the Southeast Asia Program and the Asia Maritime Transparency Initiative at CSIS.

Critical Questions 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).

© 2022 by the Center for Strategic and International Studies. All rights reserved.

Scott Kennedy
Senior Adviser and Trustee Chair in Chinese Business and Economics
Victor Cha
Senior Vice President for Asia and Korea Chair
Ellen Kim
Deputy Director and Senior Fellow, Korea Chair
Gregory B. Poling
Senior Fellow and Director, Southeast Asia Program and Asia Maritime Transparency Initiative