The Chinese People’s Liberation Army last week launched a series of military drills around the island of Taiwan. Beijing’s escalation was presumably undertaken to overlap with the inauguration of Lai Ching-te as president earlier this month: Taiwanese voters struck a blow to Beijing at the start of this year, by electing a candidate who campaigned on what many viewed as a “China sceptic” platform.
In his victory speech, Lai appeared to strike a moreconciliatorytone, saying: “As president I have an important responsibility to maintain peace and stability in the Taiwan Strait. I will act in accordance with the Republic of China’s constitutional order in a manner that is balanced and maintains the cross-strait status quo.”
Lai also stated that he was committed to safeguarding “intimidation and threats” from mainland China.
Lai clearly makes Beijing nervous – hence the military exercises. On Monday, American lawmakers vowed to bolster Taiwanese deterrence against an incursion by China. At a news conference in Taipei US Representative Michael McCaul, chairman of the House Foreign Affairs Committee, stated that the military exercises were an attempt to “punish democracy”. Beijing has described them as “strong punishment” for Taiwan’s “separatist acts”.
McCaul used the opportunity to urge Congress to speed up shipments of defensive weapons to the island, but the fear must nowbe that the current strategy is becoming out-of-date. For most of 2022 and 2023, the underlying assumption was that a Chinese attack on Taiwan, were it to occur, would involve a full-scale invasion – not unlike the D-Day landings.
But recent work has suggested that this might not be the strategy at all. A paper released by The Atlantic Council last year made a strong case that the likely Chinese strategy would be to simply blockade the island. The paper argued that “a maritime blockade is the most strategically viable action for the PRC, that Taiwan is uniquely vulnerable to a blockade, and that a blockade is both a present and enduring challenge”.
A naval blockade of Taiwan could be modelled on the actions by the Houthis in the Red Sea. That is, it would not be undertaken by Chinese destroyers firing cannon at inbound merchant ships. Rather, it seems likely that the PLA would deploy their extensive rocket forces, threatening any merchant ships that ran the blockade with being targeted.
Indeed, the Chinese have been closely monitoring the situation in the Red Sea, presumably to get a sense of how Western air defence fares against Houthi missile and drone attacks.
Taiwan would be extremely vulnerable to such a blockade. Despite having the world’s 21st-largest GDP, Taiwan receives the sixth-largest number of container ship arrivals. This highlights just how reliant the island is on trade. Nearly 98pc of Taiwan’s energy is imported, and the Atlantic Council paper argues that in a blockade scenario the island would only have 146 days’ worth of oil, 39 days of coal, and 11 days of natural gas.
In such a scenario, the US and its allies would face a grim choice: either allow the Chinese to starve the Taiwanese into submission or send in the Western navies to break up the blockade. This would be no easy task considering that the Western navies have been unable to reopen the Red Sea against a far inferior force, but there is every reason to think that they would feel the need to act.
Such action could spark a direct military confrontation with China, which would be economically catastrophic. Presumably it would lead to the sorts of sanctions and counter sanctions that we saw placed on Russia after they invaded Ukraine. One recent study puts the cost at up to 10pc of global GDP, but even this likely understates the true damage.
Western economic supply chains are reliant on China in ways that no one person truly understands. China makes important intermediary and capital goods that are fundamental for Western manufacturers to function. Without access to these inputs, the Western economies would grind to a halt. The result would be severe shortages and uncontrollable inflation, unlike anything that we have seen in living memory. This would potentially be compounded by the Chinese dumping their Western bond and currency reserves.
To give some sense of this, consider that Chinese holdings of American bonds and reserves are large enough to represent a 40pc increase in the number of US dollars circulating in the daily foreign exchange market. These markets are used to very incremental changes in dollar liquidity, a shock dump of dollars making up 40pc of the market would send the currency into a tailspin. Hyperinflation would be a very real possibility as a result.
When Russia invaded Ukraine in February 2022, the economic effects were enormous – most notably through the rise in energy costs and the blowout in budget deficits in Western countries. But the economic threat from that war was never truly existential. The economic threat of a war between the US and its allies and the Chinese would be. Such a war could truly throw Western economies into severe turmoil.
These economies, already stagnant and overloaded with debt, could easily crumble in the face of such a threat. Social tensions in many Western economies are already riding high – especially around the issue of migration – and history gives us ample evidence that fractious societies can fall into chaos if hit with a large enough economic shock.
Western leaders might therefore want to consider diplomatic management of the situation in the South China Sea very carefully. It is in everyone’s interest to ensure that the situation does not spiral further out of control.
