4th Taiwan Straits Crisis
China's military exercises around Taiwan are raising concerns of an escalation, either in terms of the U.S. Navy sailing into the Taiwan Straits like 1995-96 or Chinese military action to intermittently interfere with exports and travel out of Taiwan.
Bottom line: While an invasion of Taiwan is unlikely in the next few years, an escalation of tensions is likely between China and the U.S. President Joe Biden will be reluctant to sail a full U.S. carrier strike group into the Taiwan straits, although a single ship is feasible as occurred July-December 1995, and China will stop short of the military threshold that could provoke the U.S. Even so, diplomatic tensions will likely grow and China is unlikely to reverse its new normal more flexible interpretation of the Taiwan straits. Financial markets should not be complacent on this issue. Any move to send the U.S. Navy into the Taiwan straits would cause great concern in markets over the potential hit to global trade and the economy.
Figure 1: Taiwan Straits Exercises nearer than 1995-96
Source: CSIS
Temporary Military Flexing or Prelude to Invasion, Blockade or Tensions?
China's military exercises in the Taiwan straits are not at the same intensity but are being extended, as China shifts to a new normal on Taiwan. China wants to get several points across. Firstly, that it has the ability to undertake large-scale military exercises around the island and can fire missiles over Taiwan. Secondly, that it is outraged by U.S. House Speaker Nancy Pelosi's visit to Taiwan, though prior military buildup suggests that the Pelosi visit was used as an excuse. Thirdly, that it alters the status quo that existed in the Taiwan straits, in terms of both the median line and future military exercises that could cause disruption around Taiwan. Additionally, Chinese media support for the military exercises can help President Xi Jinping in his preparation for a third term being confirmed at the October party congress. However, could this be a precursor to a full-scale blockade or invasion of Taiwan? A number of key points are worth considering:
- The coming years or reunification by 2049: One concern about China's incremental military activity is that it could lead to a major escalation in the coming months or years that could end in a full-scale blockade to force Taiwan's people to unify with China or alternatively a full-scale invasion to force that outcome. However, China's timescales are much longer than the political cycles that Western politicians are driven by. An alternative view is that China has set 2049 as the timeline for its reunification policy with Taiwan, which could include a peaceful outcome. President Xi has made reference to this date, as part of the wider geopolitical strategy for China.
- Invasion military/logistic problems and political constraints: Military think tank views on China's ability to invade Taiwan differ. Some feel that China is getting close, given that its missile and aircraft capability would be the crucial element in attacking Taiwan and potentially U.S. air/sea forces. However, the majority still appears to feel that China needs more vessels with amphibious capabilities to mount an invasion of 1m-2m troops, including more aircraft carriers. The U.S. Department of Defense report on China shows commitment to a significant scale by 2027 (here), though some note (here) that China's fourth aircraft carrier is not due until 2027. Politically, external observers contrast China's goal of unification with its wanting to ensure that the odds are stacked toward military victory before launching an invasion. This argues against early action. Russia's difficulties with a land-based invasion of Ukraine on balance will likely delay the option of invasion.
- Full blockade: An alternative short of invasion is a full blockade of Taiwan to pressure Taiwan's people to accept unification with China. This is possible and would cause disruption to the world economy, given the dependence on Taiwan for advanced semiconductors. However, this option could force an escalation of military tension with the U.S. depending on who is the U.S. president. If a Republican president is elected in 2024, then China could face renewed strategic competition and trade pressures, but a re-elected Donald Trump (who gyrated between hot and cold toward Taiwan in 2016-17) could be less willing than President Biden to react to a severe escalation. From a Chinese viewpoint, intermittent exercises in the coming years and ignoring the median line appear to be the first step to try to weaken resolve in Taiwan.
- U.S. Navy into the Taiwan straits: President Biden could follow President Bill Clinton's 1995-96 strategy of sailing a full U.S. aircraft carrier group through the Taiwan straits as occurred in December 1995 and March 1996 after Chinese missile tests. This helped to restore the status quo in the area and the China and U.S. acknowledgement of the deliberately ambiguous one China policy. However, Clinton's approval ratings were higher than Biden's now, while Biden is more cautious in actions than words, e.g. the Ukraine war. Sending a full U.S. aircraft group into the Taiwan straits is possible, but could require further major escalation from China. Global risk assets would be hurt by such a move, as it could prompt fears of escalation with China now stronger than in 1954/58 or 1996 and the possibility of U.S. sanctions on China (China had military offensives against small Taiwan islands in 1954 and 1958 that were rebuffed by the U.S. Navy). This could hurt expectations on the global economy. An alternative is to send a single ship or a series of ships through the Taiwan straits, as occurred July-December 1995, and this would have less impact on markets.
On balance, we see intermittent exercises from China in the coming months and years and ignoring the median line as being the current step to try to weaken resolve in Taiwan and shift momentum toward support of unification. This is a shift to a new normal and a change from the previous status quo. However, it may not be enough for the U.S. to seriously escalate, and President Biden will likely wait but moderately increase diplomatic pressure on China and send a single ship through the Taiwan Straits.