Relations between China and the West are off to a rocky start in 2021. Observers watching China and the U.S. trade accusations in Alaska, and Europe and China trade sanctions days later can be forgiven for a cold feeling in the pit of their stomach. Beijing’s tolerance for economic risk in the service of nationalism has rarely looked higher.
That could bode ill for many, not least Taiwan and the littoral states of the South China Sea. The trade conflict between the U.S. and China has metastasized into a broader geopolitical confrontation—while China’s armed forces are nearing parity with the U.S. in the former’s backyard. Chinese incursions into Taiwan’s air defense identification zone have at times become a near daily occurrence since late 2020, while the U.S. is busy rallying allies such as Japan to plan for contingencies.
A significant conflict between the U.S. and China in East Asia is still unlikely, but it can no longer be ruled out as an implausible tail risk. Companies need to start considering what that could mean. And governments need to find mutually acceptable ways to take the temperature down if they want regular business to remain possible.
The most likely scenario is still that the catastrophic potential downsides of any armed conflict keeps minds focused. Even “gray zone” tactics like a blockade of Taiwan would be hugely risky for Beijing—Taipei might respond, for example, by cutting off China from all semiconductor sales. U.S. and allied trade and financial sanctions would multiply the impact. Taiwan alone supplies around a third of China’s semiconductors, including some exclusively produced by Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker.
It is no longer completely clear economic deterrence alone is enough to prevent Beijing from attempting its long-treasured goal of absorbing Taiwan if it perceives distraction or weakness, even leaving aside the rising risk of accidental conflict.
