2. Deterring war across the Taiwan Strait
Key Point Summary
China’s threats to annex Taiwan by military force poses a major strategic and economic risk. Conflict could expose more than US$2 trillion in global economic activity. A successful annexation of Taiwan would allow China to project its military power well into the South China Sea and the South Pacific.
Taiwan’s military deterrence and defence faces a number of challenges, not least a US$19 billion backlog in arms transfers from the US – its sole major weapons supplier. Taiwan’s other partners remain hesitant to arm Taiwan for fear of reprisals from Beijing.
Governments must make an unambiguous economic deterrent to annexation. Democratic countries should signal to the Chinese government that occupying Taiwan by force will be met with the same severe sanctions regime as imposed on Russia following the invasion of Ukraine.
Democratic countries can support Taiwan by building a broader concept of deterrence. Developing deeper trade, diplomatic and cultural ties with Taiwan would counteract China’s attempts to isolate Taiwan and weaken China’s disinformation campaign about Taiwan.
What would be the global ramifications of China annexing Taiwan?
The prospect of Chinese military action against Taiwan is not a remote possibility. President Xi Jinping has repeatedly reiterated the Chinese Communist Party’s desire to ‘reunify’ the island with the mainland and refuses to rule out the use of force to do so. Top US intelligence officials claim that Xi has ordered the Chinese military to have the capabilities ready to invade Taiwan by 2027.
Economic risks
It is difficult to understate the global economic fallout should China annex Taiwan by military force. The outbreak of conflict in the Taiwan Strait would lead to a slowdown in the regional economy and cause major disruption to global trade routes – almost half of the world’s container ships pass through the Taiwan Strait. It is estimated that the conflict could cause US $2.5 trillion in annual losses to the global economy, before including the impact of any ensuing military, political or economic response from Taiwan’s partners.
Disruption will be particularly acute in semiconductor supply chains, with Taiwan currently producing over 70% of the world’s total supply and 90% of the most advanced chips. A conflict or economic blockade around Taiwan would cause global shortages in agriculture and mining equipment, medical devices, automobiles, mobile communications and much more. The impact on other countries would range from employment losses to shortages of hospital equipment and inflation across consumer goods.
Strategic risks
Taiwan’s important placement in the South China Sea means that successful annexation of the islands would give the Chinese government a major strategic advantage. Control of Taiwan would allow China to break out of the first island chain, which Chinese military strategists see as acting as a barrier to projecting China’s power further into the Pacific. It would give China control over vital sea lanes and bring its military power closer to South Korea, Japan, Vietnam and the Philippines, most of whom it has ongoing territorial disputes with.
Needless to say, the greatest costs in any conflict would be borne by the Taiwanese people. A war over Taiwan would incur high human losses – as much as 10,000 people in the first weeks – and the destruction of Taiwanese infrastructure and cities. As one of Asia’s most successful democracies, the annexation of Taiwan would be a major loss to the cause of democracy and human rights in the region.
How can Taiwan deter Chinese military action?
Military deterrence
Successful deterrence relies on Taiwan’s military developing effective asymmetric capabilities for coastal defence. As demonstrated in the Ukraine War, equipment such as unmanned submersibles, sea mines and attack drones, as well as anti-ship, air-to-surface and land-attack missiles, are key to maximising defensive advantages against an aggressor. Asymmetric capabilities could prevent the PLA from establishing beachheads on Taiwan’s shore and exploit the vulnerabilities of an invading Chinese force, such as its military supply and logistics support.
Taiwan’s military transformation is likely to proceed at a slow pace without firm and sustained international support. The US has long been the major weapons supplier to Taiwan, with all of Taiwan's military procurement relied on it from 2016 to 2020. As of 2022, the combined total of arms sales under the current and previous US administrations total more than US $21 billion, while the recently passed Taiwan Policy Act promises approximately US $4.5 billion in security assistance over the next four years. However, undermining Washington’s pledges to enhance Taiwan’s defence is an almost 19 billion USD backlog of arms transfers, a situation exacerbated by diverted resources to Ukraine. Should US arms fulfilments continue to be delayed, Taiwan’s armed forces will face difficulties to maintain key defence requirements such as air defence and sea denial.
There is scope for other democratic countries to sell more arms to Taiwan, and doing so would give Taiwan access to a cheaper and broader range of weapons. However, the threat of political and economic repercussions from China means that such support is limited and is unlikely to replace Taiwan’s reliance on US supplies. Instead, other democratic countries can focus on building their military presence and defence partnerships in the region. Japan’s significantly revised National Security Strategy designated Taiwan as an “extremely important partner”, while Japan’s military and coast guard is also increasing its presence around Okinawa and the southwestern island chain that connects to northern Taiwan. A key lesson learned from the Ukraine war is that such partnerships should include effective intelligence sharing on China’s military plans.
Economic deterrence
Western powers were quick to place stringent economic sanctions on Russia following the invasion of Ukraine in 2022. Sanctions were designed to weaken Russia’s ability to finance the war and target the military, political and economic elites responsible for the invasion. Measures against Russia included freezing of Russia’s Central Bank’s foreign assets, import bans on oil and gas and the expulsion of banks from the SWIFT international payments system.
The international community should make clear to the Chinese government that military action against Taiwan would be met with a similarly robust and sustainable set of economic sanctions in response. Measures could include:
Freezing foreign currency reserves held by the People’s Bank of China, currently estimated at $3.2 trillion;
Freezing of assets belonging to state owned companies, and private firms linked to the People’s Liberation Army, such as Huawei;
Expulsion of Chinese banks from SWIFT, and CHIPS and other Western clearing houses;
Travel bans and asset freezes for senior Chinese Communist Party members and their families, including business elites;
Export restrictions on critical technologies and dual use goods, many of which could be preemptively applied to prevent China from developing key military capabilities.
Due to the significantly higher volume of trade between China and the rest of the world, the impact of such sanctions on global trade and capital flows would be much greater than the fallout from Russia’s invasion of Ukraine. It is also notable that China’s network of state owned companies and proxy asset holders is much more extensive than Russia’s. If deterrence of China fails, the global market would bear great costs regardless of the outcome and timeframe of the conflict. As highlighted elsewhere in this publication, governments must advise banks and businesses on the dangers of overreliance on access to Chinese markets to mitigate against these geopolitical risks.
Moving towards a broader concept of deterrence
Beijing’s efforts to ‘reunify’ Taiwan with mainland China do not rely on military means alone. The Chinese government aims to block Taiwan from forming diplomatic, economic and cultural ties with other countries to minimise resistance to any future action taken against Taiwan. China’s trade sanctions against Lithuania following the opening of a Taiwan Representative Office in Vilnius, or its blocking of Taiwan from taking part in the World Health Assembly, are all demonstrative of this strategy.
By pushing back against China’s attempts to exclude Taiwan from the international community, democratic countries can help strengthen Taiwan’s position and signify to Beijing that taking action against Taiwan would not go unnoticed or unchallenged. This broader concept of deterrence allows all democratic countries to play a part in supporting Taiwan, not just those that are able to offer military support.
Deepening diplomatic exchange
The COVID-19 pandemic exposed the cost of excluding Taiwan from key multilateral institutions. While Taiwan was a prime model in stopping the spread of the virus, China continued to block its participation in the World Health Organization and World Health Assembly. Similarly, despite being a manufacturer of green technologies, Taiwan was excluded from COP27 and other U.N. Framework Convention on Climate Change forums.
Democratic countries must continue to push for Taiwan’s meaningful participation in multilateral institutions, as called for in the 2021 G7 communique. However, as such success may be unlikely in the short term, governments must pursue alternatives. Democratic countries should seek to follow the US, Australia and Japan in joining Taiwan’s Global Cooperation and Training Framework (GCTF). The GCTF allows Taiwan and its partners to share expertise on issues such as the digital economy and good energy governance.
Taiwan as a key trade partner
Taiwan is the world’s 18th largest economy and consistently ranks among the world’s best destinations for investment.30 Governments can make the most of these trade opportunities by working towards bilateral trade agreements with Taiwan. For instance, concluding the EU-Taiwan bilateral investment agreement would lower barriers and increase transparency for Taiwanese investment in the EU market and vice versa. Greater funding for regional trade outreach offices, as seen in the Canadian Trade Gateway in Southeast Asia initiative, can also support businesses in making further connections into Taiwan.
While Taiwan’s inclusion in the CPTPP and RCEP trade regimes will remain politically contentious due to China’s objections, those CPTPP and RCEP members could work towards ensuring Taiwan’s market will not be disadvantaged. This is because Taiwan – unlike China – already meets many of the high standard rules and market access commitments.
People to people ties
Taiwan has a developed university sector and a thriving civil society sphere.31 This presents numerous opportunities for academic partnerships and cultural exchange which demonstrate to a broader audience that Taiwan is a distinct democratic polity from mainland China. Governments can support track 1.5 dialogues with Taiwan, with successful examples including an Australia-Taiwan dialogue on the low-emissions technologies trade and a US-Japan-Taiwan dialogue focused on improved communication between respective coast guards.
A key focus of these discussions can be showcasing Taiwan’s experience of building democratic resilience. Taiwan’s civic sphere has been at the forefront of the Chinese state sponsored cyber-attacks, disinformation campaigns and espionage. Through initiatives such as the New Southbound Policy (NSP), Taiwan hopes to partner with civil society groups, think tanks and local governments to build democratic resilience across Asia and Oceania. Similarly, as countries around the world seek to reduce the role of Chinese state-backed Confucius Institutes in Chinese language teaching, partnerships with Taiwanese educational institutions represent a vital resource for countries looking to boost their China-related competencies without deepening links with the Chinese state.
Conclusion
A broader concept of deterrence recognises that Taiwan’s ability to avert China’s military aggression depends not only on its defence capabilities but also enlarging Taiwan’s role in the international community. By pushing for Taiwan’s greater participation in multilateral institutions and by deepening political, economic and cultural links, democratic countries can raise the costs to China of military action while strengthening Taiwan’s position.
Recommendations
Democratic countries must build a robust economic deterrence against China’s invasion of Taiwan. Senior officials should signal that prospective economic sanctions would include freezing the foreign assets of key Chinese state banks, companies and party officials, while placing restrictions on China’s ability to access international finance.
Governments should deepen diplomatic exchanges with Taiwan. Governments should voice support for Taiwan’s inclusion in multilateral institutions such as the World Health Organisation (WHO), International Civil Aviation Organization (ICAO), the International Labor Organisation (ILO) and the U.N. Framework Convention on Climate Change, while also participating in alternative forums with Taiwan – such as the Global Cooperation and Training Framework (GCTF).
Policymakers should work to increase trade with Taiwan. This can take place through exploring bilateral trade and investment agreements and funding regional trade offices to support businesses looking to increase trading activity in the region.
Democratic countries should boost people-to-people ties with Taiwan. Governments should work to explore new opportunities to deepen academic partnerships and cultural exchange with Taiwan, including through Taiwan’s New Southbound Policy and track 1.5 dialogues on the environment, public health and other areas. Taiwanese educational institutions can offer alternatives to China’s state backed Confucius Institutes.