January 25, 2024
Expect Chinese economic retaliation against Taiwan after the DPP’s presidential victory
The electoral victory of the Democratic Progressive Party (DPP), which secured Taiwan’s presidency for an unprecedented third term, has put China in a difficult spot. Failure to make concrete at least some of its threats prior to Taiwan’s elections—portraying the election as a choice between “peace and war, prosperity and decline”—would risk undermining the credibility of future threats to Taiwan. Therefore, it is likely that China will step up its coercive campaign to make Taiwan more amenable to the idea of one China. However, the United States has warned China against intimidation tactics targeting Taiwan after the elections—something China has to consider as it wants to avoid raising tension with the United States at least in the period immediately ahead, in order to focus on boosting its economic growth.
As a consequence, it seems likely that China will not significantly intensify its military exercises and excursions around Taiwan, which could escalate risks of direct confrontation with the United States. Instead, China will step up various forms of economic sanctions against the island. The economic coercion approach would allow China to put increasing pressure on Taiwan, without being directly confrontational to the United States and would leave it with a lot of leeway to calibrate trade measures depending on the circumstances—ratcheting all the way up to a maritime blockade against Taiwan. These measures would have increasing impact on Taiwan’s economy and beyond—and should be taken into consideration while assessing the economic outlook for the foreseeable future.
China’s economic sanctions against Taiwan
China has often used economic sanctions against Taiwan. For example, China banned the import of several agricultural products and fish from Taiwan as part of its reaction against former US Speaker of the House Nancy Pelosi in August 2022. A month before Taiwan’s elections on January 13, 2024, China suspended twelve of Taiwan’s petrochemical products from the zero tariff treatment provided in the Economic Cooperation Framework Agreement (ECFA) signed in 2010 between the two sides—ostensibly to counter Taiwan’s discriminatory policies against Chinese products but widely seen as China’s attempt to influence the elections.
More seriously, China’s Ministry of Commerce announced in early November 2023 that “it is looking to terminate the ECFA in full or rescind some of the preferential tax rates for Taiwanese products.” The ECFA offers zero tariff for 806 of Taiwan’s agricultural, aquatic, and petrochemical products; its termination will affect a small portion of total China-Taiwan trade of $244 billion in 2022 (with China running a deficit of $156 billion)—but will heighten uncertainty and weaken Taiwanese business confidence. At the same time, offering carrots to complement its sticks, China has proposed to cooperate directly with Taiwanese farmers to help them sell more in the mainland. This way, China hopes to be able to persuade them to temper the DPP’s pro-independence policies. Taiwan’s election has weakened the DPP Presidency because the party lost control of the Legislature. Any obstacles and delays in cooperation among the three parties to pass needed legislations on a timely basis to tackle various serious problems would darken Taiwan’s economic outlook, reflecting poorly on President-elect Lai—and could play into China’s hands.
Maritime blockade
How far will these economic coercion measures go? A possible maritime blockade of Taiwan has increasingly been viewed by Western analysts as a less risky, more flexibly implementable option for China, compared to an outright invasion, in pursuit of its national goal of unifying with Taiwan. As a recent Atlantic Council report put it, “a nonkinetic blockade, [being] the lowest level of coercive action that could remain below the threshold of open hostilities…[has become] the PRC’s most strategically viable option.” As an island, Taiwan is extremely vulnerable to such a blockade.
While imposing a blockade against an independent country is considered to be an act of war under international law, China can find excuses to camouflage its blockade measures as enforcing laws and regulations within areas it claims to be under its sovereignty, using Coast Guard and maritime militia vessels instead of People’s Liberation Army Navy (PLAN) warships—which can provide strategic backup and support. Furthermore, China can calibrate blockade measures according to circumstances: ranging from harassing merchant ships to and from Taiwan; to efforts to board and inspect cargos; to diverting ships to Chinese ports; to fully blocking ships from going to and from Taiwan’s ports. In other words, a blockade strategy would be scalable and reversible at China’s initiative, depending on how things pan out. Basically, it does not take a full blockade to disrupt and raise the costs of trading with Taiwan—especially shipping insurance premiums.
Western sanctions in response to a Chinese blockade would be more difficult for the United States to organize and sustain for a sufficiently long period, compared to sanctions against an outright invasion—as in the case of Russia against Ukraine. More importantly, US and Western efforts to sustain Taiwan throughout the blockade would be costly with clear risks of escalation—for example, by maintaining sufficient supplies to Taiwan via airlifts or using Navy vessels to escort merchant ships running through China’s blockade. At the end of the day, it becomes a question of staying power and it is not clear which side is willing and able to persist longer.
The damages of China’s full blockade of Taiwan would be significant—costing the global economy an estimated $5 trillion, according to Bloomberg Economics, and would push the world economy into a deep and destabilizing recession.
How reliable is Taiwan’s “silicon shield”?
Many analysts have argued that China’s dependence on semiconductor shipments from Taiwan for its own manufacturing activities would limit the extent of China’s punitive actions. As noted in a recent Atlantic Council report, semiconductors “are simply too important for Beijing to punish—short of a decision to cut off its nose to spite its face”. This can serve as a “silicon shield” protecting Taiwan from China’s extreme economic attacks, putting the island’s economy in jeopardy. However, China can address this dependency by exempting shipments of semiconductors from Taiwan from economic sanctions or even a blockade. Moreover, geopolitical tension and de-risking policies by many countries, such as Taiwan’s own New Southbound Strategy, has reduced the share of China (plus Hong Kong) in Taiwan’s exports from 44 percent in 2020 to 35 percent last year—still significant as Taiwan’s exports account for 60 percent of its economy. In particular, the portion of electrical machinery including semiconductors has fallen from 37 percent to 19 percent of exports. This means non-semiconductor export to China is substantial enough to leave plenty of room for China to squeeze Taiwan.
In the longer run, China’s dependence on Taiwan for semiconductors is likely to diminish, weakening the value of the silicon shield. In mature semiconductor chips (nodes of 25-nm and above) not subject to US sanctions, China has made substantial investment in recent years, boosting its share in global production to 31 percent in 2023, which is expected to rise to 39 percent in 2027. In advanced chips (14-nm and below), subject to US sanctions, China’s share has fallen from 8 percent to 6 percent last year. In particular, Taiwan has claimed to have stopped selling advanced chips to China, complying with US controls. (Despite US sanctions, Chinese entities including the military have been able to buy advanced chips, due to loopholes in the US control regime.) Consequently, any Chinese actions curtailing Taiwan’s shipments of chips, especially the advanced ones, would hurt China, but probably less than expected, and could be devastating to Western economies totally relying on TSMC advanced chips.
Conclusions
Going forward, it is likely that China will roll out more coercive economic measures to put pressure on Taiwan—hoping that businesses, big and small, on the island will push the government to be more accommodative to China—especially through the two opposition parties which form a majority in the Legislature. Concretely, one can envision a scenario according to which Taiwan refrains from entertaining visits from high-ranking US officials from the Administration or Congress. In return, China could scale back its military excursions around Taiwan. However, beyond these largely symbolic steps, it is highly unlikely that the main bone of contention between China and Taiwan can be resolved. China has refused to talk to the DPP government unless it accepts the 1992 Consensus recognizing the principle of one China—something which the DPP cannot agree to without negating its own raison d’être. It is also unlikely that either side will change its position. Eventually, the longer this stalemate remains unsolvable, the more likely the prospect of a maritime blockade against Taiwan. Governments and businesses around the world should seriously incorporate this scenario in their strategic planning.
Hung Tran is a nonresident senior at the Atlantic Council’s Geoeconomics Center; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund
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Image: Taiwan President-elect Lai Ching-te, of Democratic Progressive Party's (DPP) and his running mate Hsiao Bi-khim hold a press conference, following the victory in the presidential elections, in Taipei, Taiwan January 13, 2024. REUTERS/Ann Wang