3 March 2022

Taiwan is next – and the West must be prepared

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Looking back, it is hard to believe that the invasion of Ukraine came as such a shock to the West. Not only were nearly two hundred thousand troops amassed on the border, but President Putin set the scene by dismissing his neighbour’s lack of a right to exist in the first place. ‘Ukraine has never had its own authentic statehood‘, he declared on 21 February, three days before he ordered the assault. 

After a hesitant start, the reaction by the West and its allies has been immense. In less than a week Russia has been diplomatically isolated, and economically blockaded. Democracies have shown they can work together to strike back at autocracy.

Unfortunately, the real test is yet to come. While the West has done well to sanction Moscow, its task has been made easier by the relative insignificance of the Russian economy, which was about the size of Spain’s before the war started (and is now shrinking fast). Taking action against an authoritarian regime that is not only an economic superpower, but which has vocalised equally hostile intentions towards its smaller neighbour, will be far harder. In short, we can’t allow ourselves to get caught out again. The West needs to plan its strategy for when China attempts to take Taiwan by force.

Just as with Putin, Beijing’s plans for the island nation are plain to see. Senior officials from the ruling Chinese Communist Party (CCP), including President Xi himself, have repeatedly pronounced that they intend to bring what they consider a renegade province back under control. ‘The historical task of the complete reunification of the motherland must be fulfilled and will certainly be fulfilled,’ said Xi in October 2021. Anyone standing in the way of Beijing’s ambitions would be ‘crushed’, he said in another speech a few months before, commemorating the centenary of the founding of the CCP. ‘No one should underestimate the Chinese people’s staunch determination, firm will, and strong ability to defend national sovereignty and territorial integrity.’

This cannot be dismissed as simple rhetoric. Bringing Taiwan to heel is now so entwined with the aims of the country’s leadership that to abandon reunification as a policy would be seen as undermining the very legitimacy of both Xi and the CCP. And it’s very unlikely to happen peacefully. Surveys over the last few years reveal that just 1% of Taiwanese want to see unification with China right now, and 73% would fight to keep their island free from Beijing’s control.

An influential academic who advises Beijing on foreign policy has recently stated that plans to capture the island will commence in earnest later this year, once the CCP’s autumn National Congress is out of the way. At which point, he said, ‘it is very likely that the leadership [in Beijing] will move toward armed unification by 2027, the 100th anniversary of the People’s Liberation Army’s founding‘.

When this invasion comes, the consequences for the UK and the West will be severe. At the heart of the worldwide economy lies the computer chip, powering everything from your mobile to your car to your office. At the heart of the computer chip industry lies Taiwan. Just one of the island’s companies, TSMC, has more than a 50% global market share of semiconductor manufacturing, and four of the top ten companies are based there. Of the world’s most advanced microchips, 92% are produced in Taiwan. 

We’ve already had a taste of a microchip shortage thanks to Covid. The lack of supply over the last year and a half caused by interruptions to the semiconductor supply chain have had a dramatic effect, costing the auto industry alone an estimated $210 billion in 2021. Car production in the UK fell to its lowest level in 65 years thanks to the shortages. A forced attempt at reunification will undoubtedly interrupt the supply of these chips at a scale considerably greater than anything caused by Covid, potentially including the destruction of the manufacturing sites. Western economies will suffer heavily as a result.

The problem for Washington, London, Brussels, and Tokyo is that China is so enmeshed in the global economy that any punitive action they take is likely to hurt them as much, or more, as their intended target. The People’s Republic accounts for about 28% of global manufacturing and 18% of the world trade in goods. Any action that cuts China off from worldwide supply chains would cause mutual economic damage on a monumental scale.

Companies with heavy exposure to China would suffer inordinately. They would either have to pull out of a market of 1.4 billion people – at least temporarily – or face the possibility of their business being split into two entities, one operating inside China, and one operating out. Brands such as VW, BMW, Nike, Adidas, GM, and Texas Instruments would be seriously affected, as would the British banks HSBC and Standard Chartered. 

It is not, however, too late to do something about this structural hold that China has over the West and its allies. If we are right about the timeline for a Chinese invasion of Taiwan, then there is still a chance for the democracies of the world to get their economic affairs in order and get ready to take action against Beijing when the conflict begins. It will be incredibly tough – building an alternative semiconductor industry alone will cost tens of billions of dollars – but there is no real option if the West wants to stand up for itself.

There can be no full decoupling between China and the West, at least not anytime soon. What governments and companies need to do instead is to urgently take stock of their exposure to China and work out how they will respond to the forthcoming conflict in a way that punishes dictators, not democracies.

Russia’s aggression against Ukraine has been a wake-up call for the West. With the threat of conflict looming between China and Taiwan, history will not be kind to those who said they didn’t see it coming.

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Sam Olsen is the author of the blog What China Wants and founder and CEO of Evenstar

Columns are the author's own opinion and do not necessarily reflect the views of CapX.