As if the Sino-US trade war weren’t enough, tensions between the two nations continue to mount. The specter of the Sino-US conflict over Taiwan looms more than ever. This does not mean that military engagement will end in war, but there are signs that the risks are escalating. Businesses cannot afford to ignore them.
What are the signs of increased risk? In a speech marking the 100th anniversary of the Chinese Communist Party, Xi Jinping declared that China has an “unwavering commitment” to reunification with Taiwan and that it “would never allow anyone to intimidate, oppress or subjugate China.” Xi went on to say, “Anyone who dares to try to do this will have a bloody head against the Great Steel Wall forged by more than 1.4 billion Chinese people.
This rhetoric can have teeth. China has carried out live-fire military exercises which it has called “combat exercises“around Taiwan in April and has intensified the theft of warplanes in the Taiwan Air Defense Identification Zone in recent months. Japanese defense official warned the United States of a possible Chinese attack on Hawaii based on evidence of joint Russian and Chinese military exercises in the region. Meanwhile, the United States and Japan were drive joint military exercises to counter a Chinese takeover of Taiwan.
As the Sino-U.S. Trade war continues and U.S. businesses continue to incur higher costs due to the prevailing tariffs, they may also need to consider the impact of a physical conflict on their home bases. Chinese production and distribution. It is safe to assume that in an attempt to take over Taiwan by China, the sea surrounding Taiwan will be occupied by warships or amphibious construction zones. This will create a major challenge for sustaining the international sea freight trade, which can be blocked or even attacked. The main economic zones in which foreign companies operate, such as Xiamen and Fuzhou, are likely to be involved in the conflict.
Moreover, while the conflict is not confined to the Taiwan Strait and includes the engagement of Taiwan’s missile systems and / or US bombers, the entire coast and interior of China are equally vulnerable. The eastern coastal region of China, including Guangzhou via Shanghai and even Qingdao, would be threatened by the conflict. This encompasses the main production areas of the Pearl River Delta and the Yangtze River Delta as well as many local production areas. Inland areas such as Nanjing and Wuhan are also said to be threatened with attack.
This means for American companies producing in China that due to a military conflict between the United States and China, most likely over Taiwan, production and / or logistics are likely to slow down considerably and face major bottlenecks. This disruption of normal economic activity will force foreign companies to move quickly to other countries as production bases. The impact on Chinese production would be greater than COVID-19, and the effects of a military confrontation are expected to be long-lasting.
As US companies discovered during the China-US trade war and the COVID-19 pandemic, it is difficult to find another production base comparable to China. Indeed, China is well integrated in Asian supply chains, has a well-developed infrastructure and a large and growing market. Alternative production sites, like Vietnam and Thailand, do not represent the production power that China has.
A military engagement between the United States and China would be very unfortunate, given the decades the two countries have spent in forging economic and diplomatic ties. Many years have been spent by American companies relocating and setting up manufacturing and distribution centers in the Asian country, sourcing inputs from countries such as Japan and Indonesia, and identifying shipping routes. the most effective. Perhaps the most difficult to replace, American companies have hired talented foreign and domestic employees to keep operations running smoothly.
However, heavy American investments in China do not negate the real threats resulting from possible Chinese military maneuvers in Taiwan. This means that American companies must reorient their strategy towards diversifying production away from China. Many companies have already committed to this strategy as part of the “China Plus One” trend, in which companies maintain a production base in China but also transfer part of their production to another country, such as Vietnam or Mexico. Considering the growing risks, companies should consider this as a basic requirement for doing business in China.
At the bare minimum, US and foreign companies operating in China should pay close attention to the ongoing conflict between the two countries and have a well-thought out Plan B if Chinese production is cut short. Hopefully nations will be able to resolve any conflict without a military confrontation, but as long as this remains a mere hope, a strategy to preserve business operations as usual is essential.