The early October visit to Washington, DC by Taiwan’s minister for economic affairs, Wang Mei-hua (王美花), occurred against the backdrop of the Ukraine War—now entering its eighth month—as well as rising tensions in the Taiwan Strait. Included amida packed itinerary that involved public and private meetings with government officials and experts, the minister spoke at a think tank event hosted by the Center for Strategic and International Studies (CSIS). In her public remarks, Minister Wang warned about the economic consequences of possible Chinese military aggression against Taiwan. In response to a question about how Taiwan—andspecifically, the Ministry of Economic Affairs (MOEA, 經濟部)—was preparing to respond in the event of an outbreak of military conflict, the minister warned that the economic ramifications would not only affect Taiwan, but also the United States, China, and the entire world. “You can see [that] Taiwan [is] in a very critical position. And […] we have a very critical industry in the world.” While Wang did not mention China by name, the intended target was clear. “So if you are [a] reasonable person, you [would] think twice […] [about] how huge [an] impact [it] will be for the individual country and for all of the world,” she concluded.
This warning dovetails with statements made previously by other foreign leaders who have called for enhancing deterrence against China in the wake of Russia’s invasion of Ukraine. The economic minister’s comments also underscore the growing salience of an understudied but increasingly discussed component of any effective response to Chinese coercion, as well as a potential—and some believe imminent—military conflict in the Taiwan Strait. The importance of the economic dimension was thrown into sharp relief after Western countries enacted a series of sanctions against Russia after its invasion of Ukraine. Embryonic discussions are now underway in various capitals about the possibility of adopting similar measures to potentially counter Chinese economic warfare, as well as to respond in the event of a Chinese invasion of Taiwan. Whether the international community, including Taiwan, will be in a better position to coordinate—and thus deter an invasion or other forms of coercion—will depend on what countries do now, both domestically and with one other.
While discussions are still at an early stage, policymakers in Washington are beginning to express increased concerns both privately and publicly about the need to more fully understand the economic implications of a conflict over Taiwan. These concerns are also driving the business community in multiple countries to think about their own contingency plans. Indeed, President Joseph Biden highlighted this concern when he stated “the idea that, that it [Taiwan] can be taken by force, just taken by force, is just not, is just not appropriate. It will dislocate the entire region and be another action similar to what happened in Ukraine and so it’s a burden that is even stronger.” As Gerard DiPippo, a senior fellow in the economics program at CSIS, has written: “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.”
Economic Dislocation from a Military Conflict in the Taiwan Strait
Whereas the human costs of a military conflict in the Taiwan Strait are better understood, less clear are the potential economic costs, especially in scenarios of those falling below the threshold of an all-out military conflict. The People’s Liberation Army’s (PLA) massive military exercises in early August simulating a blockade of Taiwan underscored how Taipei must also be prepared to respond to a spectrum of possible Chinese actions, as well as the potential economic costs of scenarios other than a full-scale amphibious invasion.
In highlighting the point about Taiwan’s critical position in the global economy, Minister Wang pointed out that “the waters surrounding Taiwan are home to the busiest shipping lane in the world. This area is densely filled with cargo ships and cruisers.” Indeed, according to DiPippo,“nearly half of the global container fleet and 88 percent of the largest ships transited through the Taiwan Strait [in 2022],” and nearly 50 percent of global shipping transits the strait. The minister also emphasized Taiwan’s colossal role in the industrial supply chain, with the island boasting some 80 percent share of the global market for laptops and motherboards, 60 percent of the world’s network devices are made in Taiwan, 70 percent of all functional textiles and apparel, as well as its global rank as the fifth largest exporter of machine tools. Furthermore, Taiwan holds a dominant position in the semiconductor supply chain, accounting for 62.9 percent of the global market—a number that climbs to a whopping 73 percent for advanced semiconductor chips (i.e., those smaller than 7 nanometers).
International Cooperation Needed to Deter Chinese Aggression
The Taiwanese economic minister is not alone in warning about the economic consequences of a conflict in the Taiwan Strait. Russia’s invasion of Ukraine has sparked concerns in other capitals about the economic ramifications of a possible Chinese invasion of Taiwan. The then-foreign secretary (and current prime minister) of the United Kingdom, Liz Truss, commented back in April on the need to protect Taiwan. Specifically, she stated that “The G7 should act as an economic NATO, collectively defending our prosperity. If the economy of a partner is being targeted by an aggressive regime, we should act to support them. All for one and one for all.” In the same speech, Truss added: “We need to pre-empt threats in the Indo-Pacific, working with our allies like Japan and Australia to ensure the Pacific is protected. And we must ensure that democracies like Taiwan are able to defend themselves.”
The clearest articulation of the need to think strategically about the economic dimension of countering Chinese coercion of Taiwan was expressed by Japanese lawmaker Kono Taro during a visit to Washington, DC in May. Kono, who had previously served as the country’s foreign and defense minister under the late Abe Shinzo, made the following comments during a discussion hosted by the Brookings Institution:
“If we are to be ready for Chinese coercion vis-à-vis Taiwan we need to consolidate strategy among the like-minded countries. And where we’re going start and which timeframe, and what are the product[s] that we are to divest out of China or to on shore to each country? We need a coordinated strategy, otherwise if some country wanted to divest on shore, someone else might try to come in and cut the market share in China or try to steal the production capacity in China. So we’re going to be fighting among ourselves, [and] that would [defeat] the original objectives.
So we need a consolidated strategy vis-à-vis China. So that would sort of deny any selfish subsidy or selfish industrial policy using China as a pretext. So I think it’s time for us to sit down and come out with [a] consolidated strategy how we’re going to be ready […] [not only] for China’s […] invasion, but [also] coercion vis-à-vis Taiwan.”
Taiwanese officials are also reportedly appealing to the European Union (EU) and individual European governments to consider sanctions on China and to form a common position before, not after, the outbreak of conflict. According to CNBC, “Taiwan has not asked for anything specific, only for Europe to plan what actions it may take if China attacked […] and has asked Europe to warn China privately that it would face consequences.” It is worth noting that the EU’s new ambassador to China, Jorge Toledo Albiñana, stated: “In the event of a military invasion [of Taiwan] we have made it very clear that the EU, with the US and its allies, will impose similar or even greater measures than those we have now taken against Russia.” As an indicator of how such discussions have progressed, even the government of Switzerland, a neutral country, has also indicated that it would adopt EU sanctions against China.
Countries are Hedging against Risks of Overreliance on Taiwan
At the same time that countries are considering ways to economically deter China from invading Taiwan, they are also hedging against the risks of their own overexposure and reliance on Taiwan for its critical semiconductors. This concern was also explicitly conveyed by Kono, who noted during the same event that “we cannot continue relying on Taiwan’s capability to develop [the] latest technology on semiconductors. So we’ll probably need to create some kind of consortium among the like-minded countries to try to develop semiconductor technology among ourselves, so just in case something happened to TSMC or something happened to [the] Taiwan semiconductor industry we can replace them with our own capability.”
The current situation has created a dilemma for Taipei. On the one hand, Taiwan would welcome the increased attention to its importance in the global tech supply chain. On the other, however, it is obviously concerned that countries becoming less dependent on Taipei for such materiel might make it less likely that they would come to the defense of Taiwan in the event of a military conflict. It is therefore not surprising that part of Minister Wang’s central message in Washington was that: “If Taiwan is safe, the global supply chain will also be secure. This is in the world’s greatest interest for Taiwan to work with [the] US and other allies to maintain the most efficient production.”
Calls from Within for a “Finance Han Kuang Exercise”
Growing international concerns about the economic consequences of a military conflict are being complemented by increased calls from within Taiwan for the central government to conduct military-like exercises referred to as the “Finance Han Kuang Exercise” (金融漢光演習). While most of the attention have been exclusively focused on the high-tech industry, these exercises could involve financial sector industries and other monetary institutions in practicing responding to the potential fallout from Chinese economic warfare and military operations. The proposed drills take their name from the military’s Han Kuang exercise (漢光演習), an annual large-scale exercise conducted by the Republic of China (ROC) Armed Forces to maintain combat readiness.
According to a researcher at Academia Sinica (中央研究院)—a government-sponsored national research institute directly under the Presidential Office—while protecting the semiconductor supply chain would naturally be an important aspect of contingency planning, the financial industry could also face considerable impacts from a cross-Strait conflict. In a range of conflict scenarios, domestic and international funds would likely flow in and out of Taiwan, and financial institutions might not be able to operate properly. Accordingly, there would need to be a coordinated mechanism for early detection and response.
This sentiment has been echoed by members of the financial industry, including the Taiwan Academy of Banking and Finance (台灣金融研訓院), which has similarly called on the government to organize such an exercise. These calls have found political support from the main opposition parties in Taiwan. The largest opposition party, the Kuomintang (KMT, 國民黨), has criticized the Tsai Ing-wen (蔡英文) Administration for failing to respond to the threat posed to the financial industry. The Taiwan People’s Party (TPP, 台灣民眾黨) has also pushed the government to conduct similar exercises for the purpose of strengthening cyber security monitoring and financial stability mechanisms.
According to William Tseng (曾銘宗), a current KMT legislator serving as the caucus whip—and who served previously as the chair of the Financial Supervisory Commission (FSC, 金融監督管理委員會)—such an exercise must address three components: first, cyber-attacks; second, the stock market response; and third, the foreign exchange response. Tseng also argued that the current government is relying too much on the national security fund (國安基金) to protect the financial industry, even though the fund only has around NTD $500 billion (USD $15.6 billion)—an amount insufficient to adequately cover the transaction volume of the stock exchange, which averages around NTD $335 billion in daily trading volume.
However, in response to questions about measures that the government is taking to respond to the threat, an official from the FSC stated that the body’s daily supervision of financial institutions already includes various drills and stress tests, and does not require an additional exercise as some have suggested.
Credible Signaling Requires More Concrete Planning
The warning by Taiwan’s economic minister, taken along with statements made by other foreign leaders calling for enhancing deterrence against China amid Russia’s invasion of Ukraine, underscores the growing urgency of the economic dimension to rising tensions in the Taiwan Strait. This is particularly true for scenarios falling below the threshold of an all-out military conflict (even if that is the worst-case scenario), as human and economic costs must both be factors of consideration for intervention on either side.
As the PLA’s August exercises demonstrated, China could inflict significant harm—not only on Taiwan, but on the entire global economy. As DiPippo concluded: “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.”
To be sure, imposing sanctions and economic measures on China would be far more complicated and costly than sanctioning Russia. Even if one believes that the likelihood of an all-out military conflict breaking out in the Taiwan Strait is unlikely (at least in the near-term), Chinese economic and hybrid warfare—especially activities falling below the threshold of a kinetic military attack—could become a more common coercive tool that China may leverage in the years ahead as it intensifies its pressure campaign against Taiwan. With proper coordination and cooperation among like-minded countries, however, there could be ways to mitigate the economic fallout from, for instance, a coordinated cyber-attack on Taiwan’s financial industry. The economic minister’s warning in Washington is a necessary first step, but more needs to be done—and with a greater sense of urgency.
The main point: As Taiwan’s Economic Minister Wang Mei-hua noted during a recent visit to Washington, the economic impacts of a Chinese invasion of Taiwan have received insufficient attention. Amid rising tension, for Taiwan and like-minded countries around the world, more coordination is necessary to ensure that Taiwan is better protected from attacks on its financial industry.
The author would like to thank GTI Fall 2022 Intern Katherine Wagner for her research assistance.