China-Taiwan Conflict: Increased Risk in the Region and Its Implications

China-Taiwan Conflict: Increased Risk in the Region and Its Implications

The Hartford’s Global Insights Center’s “War on Land” score for China and Taiwan are at an 8.0 – indicating an elevated risk for war.
The risks for war with China and Taiwan have sharply increased in recent weeks – although the potential for violence in the region has been on an upward trajectory for several years. This exposure can be quantified by the Global Insights Center’s proprietary Country War risk models that provide peril-based scores for numerous countries. Specifically, the Global Insights Center’s “War on Land” scores for China and Taiwan are both 8.0 – indicating an elevated risk for war. The scores are on a scale of 1.0 to 10.0, with 10.0 being the highest risk.
The following white paper will support a quantitative output with a qualitative understanding of risk in the region, specifically analyzing the history and current state of affairs with respect to China-Taiwan. In addition, this article will discuss the rising risks with China forcing unification with Taiwan, how China would integrate, and also provide implications for risk and other China-related war, inter-state conflict and violence scenarios.
Overall, war risks are indeed elevated. This does not mean that war could occur in the very immediate future. However, events, policies and politics in the region all raise the potential for war. While a conflict could be averted, the risks of mistakes and missteps remain high. Put simply, a war between China and Taiwan is not a foregone conclusion or inevitable. However, if we think about where war and inter-state conflict could occur, the risks are significantly higher in and around China and Taiwan.

China-Taiwan: A History of Tensions

After formalizing ties with Mainland China, the U.S. maintains an ambiguous posture towards Taipei as Beijing seeks to reunify Taiwan with China.
The Chinese Civil War which started in 1927 was fought between the Kuomintang (KMT) government of the Republic of China and the Chinese Communist Party (CCP). At the conclusion of the war in 1949, the People’s Republic of China (PRC) was established under the leadership of the CCP, and the Nationalist Party (Kuomintang) fled to the island of Taiwan.
In the years after, even though mainland China considered Taiwan its own, the U.S. recognized Taiwan as the legitimate sole government of all of China. However, U.S. President Richard Nixon’s visit to Beijing in 1972 induced closer relations with (mainland) China – an approach continued under President Jimmy Carter, who formalized relations with (mainland) China alongside acceptance of the “One China Policy.”
The “One China Policy” recognized that the PRC (i.e., Beijing), is the official government of China and not the Republic of China (i.e., Taipei/Taiwan). At the same time, the U.S. approved the Taiwan Relations Act of 1979, which helped define U.S. ties with Taiwan, including provisions to provide Taipei with the means of defending itself. In other words, even though the U.S. established formal diplomatic relations with Beijing at the expense of Taipei, U.S. policy also sought to ensure that Taiwan would not be taken over by China.
These events gave rise to the concept of “strategic ambiguity,” which was the U.S. policy of not telling the world how it would react in the event of a China-Taiwan War. The Taiwan Relations Act was intentionally unclear as to whether the U.S. military would become involved in a conflict. The U.S. policy purposefully leaves the option open in whether the country would formally defend Taiwan. The goal was to prevent an invasion of Taiwan and overall hostilities in the Taiwan Strait, which is the body of water separating China from Taiwan.  
As China’s economy and military expands, its ability to force unification between Taiwan and the Mainland grows, too.
For several years, strategic ambiguity worked. Nixon’s opening to China eventually led to Beijing’s acceptance into the World Trade Organization (WTO) as well as the overall global financial architecture. As a result, China was the recipient of significant foreign direct investment, which boosted its manufacturing capabilities and integrated it into global trade. This helped China to grow and become the one of the largest economies in the world, only second to the U.S. Per the IMF, China’s GDP stands at nearly $20 trillion compared to America’s $25 trillion and Taiwan’s $841 billion. Furthermore, China accounts for almost 15% of all global trade.
Beijing also utilized much of this wealth to bolster its defense spending and domestic weapons development capabilities. For example, according to the Stockholm International Peace Research Institute (SIPRI), China spends about $250 billion on defense, the U.S. is around $780 billion and India spends almost $75 billion.
Some would argue that China’s strategy of economic growth was closely tied to its long-term strategic objectives. This would include an eventual military-led takeover of Taiwan and ultimately succeeding in becoming a global hegemon to challenge the U.S.-led economic and strategic order. And while China-Taiwan tensions would rise and fall, they were generally contained for several years as China grew. Yet, that may be set to change.

Context for Current China-Taiwan Standoff

House Speaker Nancy Pelosi’s visit came after a long line of events and policies seen by Beijing as a change in U.S. posture.
While U.S. congressional delegations have visited Taiwan in the past, U.S. presidents and members of the cabinet have not, per recognition of the One China Policy. Pelosi’s recent visit meant she was the most senior visitor since then-House Speaker Newt Gingrich visited in 1997.
China most likely presumed that Pelosi’s visit was part of a broader strategy by the U.S. to end the One China Policy and nudge Taiwan to formally declare independence. This is a red line for Beijing. It’s possible that China has this mentality because of these seven events that happened before Pelosi’s visit:
  1. Pivot to the Indo-Pacific: This policy started under President Barack Obama and was carried forward by Presidents Donald Trump and Joe Biden. It is one of the largest foreign policy shifts in U.S. history and is based on Washington, D.C. deepening its ties with like-minded nations in Asia to augment the U.S.’ presence and ties in Europe. It’s no secret that this pivot is aimed at countering China.
  2. Critique of Belt Road Initiative (BRI): China is lending money to many emerging markets to help them build their infrastructure. However, the U.S. and other countries view it as a form of debt-entrapment. The International Monetary Fund (IMF), under the insistence of the U.S., is now barring countries that receive IMF funding from using the money to pay back Chinese loans. 
  3. Closer U.S.-India ties: Due to shared concerns, such as an ongoing border conflict between India and China and other issues, Washington, D.C. has ramped up its engagement with New Delhi. Beijing sees this as a direct threat. This also includes an increase in weapons sales to India and policies that support “interoperability,” or the ability of both armed forces and their weapon systems to work (and potentially enter conflict) together.
  4. Formation of the Quad: The U.S., Japan, Australia and India are members of the Quadrilateral Security Dialogue, known as the Quad. While the Quad was first envisioned in 2007, it failed to launch due to concerns by some participants that it would be seen as an anti-China grouping. However, over the past two years, the frequency of Quad meetings has increased, including multiple forums chaired by the presidents and prime ministers of each member nation. Although not a formal alliance, it is a security-based partnership, which many view as an entity aimed at rebuffing China’s strategic ambitions.
  5. Creation of AUKUS: AKUS was announced in 2021 as a security pact and alliance between the U.S., Australia and the United Kingdom. It includes sharing nuclear submarine technology between the members, among other things. This agreement is also seen by many, including Beijing, as a security alliance aimed at China, particularly given that China-Australia ties have deteriorated rapidly in recent years while the U.S. positions military forces in Australia.
  6. Economic Warfare: The imposition of U.S. tariffs on Chinese goods and the banning of Chinese technology in the U.S. started under Trump. However, Biden has maintained them, which raises the impression in Beijing that the U.S. wants to erode China’s economy.
  7. Unofficial End to Strategic Ambiguity: Biden has stated numerous times that the U.S. will defend Taiwan in the event of an invasion. To many, this ends strategic ambiguity since the U.S. is no longer staying silent on what it will do in the event of a war in the Taiwan Strait.
U.S.-China relations are likely now at an inflection point with limited avenues to reverse course.
As noted, Beijing likely believes that Pelosi’s visit was part of a broader strategy by the U.S. One of the greatest challenges in foreign policy is for one country to fully understand how decisions are made by another – both ally and nemesis. Governance structure, the political economy and culture all play a role in how countries arrive at these kinds of decisions. China likely presumes that the U.S. has fully shifted its position. Likewise, Pelosi’s visit and the seven events that happened before it were coordinated and strategically timed to showcase the shift in U.S. position. They also encouraged Taiwan to declare independence and fuel a potential conflict. At least that’s what China likely thinks.
The events followed by Pelosi’s visit are likely an inflection point in U.S.-China relations. Decisions by China going forward will likely assume that the U.S. is 100% focused on helping Taiwan declare independence. And if that’s the view in Beijing, then we can expect China to further ramp up their military advancement and take actions that accelerate the long-held goal of unifying Taiwan with China.

Why China Could Seek To Change the Status Quo With Taiwan

The evolving geopolitical landscape could result in Beijing forcing Taiwan back to the mainland, which would upend the status quo.
The One China Policy and U.S. Strategic Ambiguity can be referred to as the status quo. In other words:
  • Taiwan maintains its own government
  • Mainland China is the official capital and sees itself as the de facto leader of Taiwan
  • The U.S. maintains diplomatic ties with Beijing and not Taipei
Per the status quo, an invasion is not needed as the interests of all parties are largely met. However, this also implies a high level of opaqueness as Taiwan is not technically independent or recognized and doesn’t view itself as being part of China.
China could seek to alter the status quo by forcing unification and officially making Taiwan part of China. This could be driven by three factors:
  1. U.S.-China ties and perception of U.S. Policy: Beijing likely believes that Washington, D.C. has fully pivoted and is actively supporting the declaration of Taiwanese independence.  The potential end of Strategic Ambiguity by Biden could also be playing a role in this. In addition to Pelosi’s visit and the seven events that happened beforehand, China may seek to change the status quo to preempt the U.S.
  2. China President Xi Jinping’s legacy: Reunification is likely a leading goal for the Chinese Communist Party (CCP), and especially for Xi who has frequently discussed the subject. Reunification is a long-standing ambition for the country – one that is intrinsically tied with the identity and goals of the CCP and what it seeks for China’s future. Furthermore, Xi has effectively declared himself leader for life and will likely seek to consolidate his power over the CCP. However, China’s economy is slowing, some of which has been exacerbated by China’s COVID Zero policy. The economic outlook could deteriorate further due to ongoing droughts, which have shuttered some manufacturing plants. Plus, the real estate sector is facing significant headwinds with an increased risk of insolvency in the sector. In light of the slowing economy, Xi may look to unify Taiwan with the mainland and deliver on a key aspiration of the CCP and potentially citizens of China. This would substantiate his title of leader for life and solidify his legacy.
  3. Taiwanese politics: The Democratic Progressive Party (DPP), under the leadership of President Tsai Ing-wen, is traditionally seen as anti-China and aims to maintain Taiwanese quasi-independence. The opposition party, Kuomintang (KMT), is seen as more sympathetic to Mainland China and some members favor reintegration with China. The DPP, however, is increasing its popularity, while the KMT’s support base amongst younger votes has fallen sharply. As Taiwan gears up for the 2024 presidential election, political commentary may sharpen with the DPP advocating for increased autonomy to tap into voter sentiment. Accordingly, the elections and potential DPP win could prompt a reaction from Beijing if China worries that Taiwanese politics are drifting the island further away from the mainland. 

Why China May Hold Back

Economics could prevent China from attacking Taiwan, but that calculus may be under reconsideration.
Economics may be the reason why China may not be in a rush to reintegrate Taiwan. The Russian invasion of Ukraine in 2022 may have caused Beijing to rethink its approach. In particular, the potential for economic blowback. In addition, many analysts often note that as an export-oriented economy, China will not want to attract sanctions that could hurt their export potential. If Xi is worried about the political fallout from a slowing economy, he may not want to risk further economic headwinds by starting a war. Accordingly, China’s economic strength is concurrently a mitigating factor for any attempts by Beijing to change the status quo with Taiwan.
With that said, based on data from the IMF, the Taiwan Bureau of Trade Statistics and our own calculations, net trade to GDP is only 2.0% in China. As a comparison, the figure is 7.1% for Taiwan. In other words, as a percentage of its economy, exports matter a great deal more for Taiwan than for China. Furthermore, the Chinese leadership is trying to evolve the country’s economy away from trade and exports, and instead move towards services. So, they may be thinking about the impact of war on trade flows differently.
At the same time, the leadership likely also knows that even though net exports make up 2.0% of GDP in nominal dollar terms, it’s a big number for the global economy and some countries that are dependent on Chinese goods. In an era of supply chain constraints and inflationary pressures, countries may not want to enact trade sanctions on China as retribution for a war over Taiwan.  
The impact of potential sanctions on the Chinese economy, coupled with the limited willingness of countries to enact severe sanctions, may be affecting how policy makers in China calculate the cost of war.

How China Could Force Unification

While integration by force is one possibility, other scenarios could happen without actual fighting.
To reiterate, we see the current moment as an inflection point. China has displayed its military capabilities, U.S.-China relations are likely permanently hindered, and more importantly, Beijing is now firmly convinced that the U.S. is and will support Taiwanese independence. There is no going back from this, and Chinese policy makers will adjust their policies accordingly.  
For more context, after Pelosi’s visit, Beijing organized a series of military drills near Taiwan, which helped provide a test case for what could occur in the future. China launched a series of missiles over Taiwan, drones were deployed and flight incursions that crossed the centerline of the Taiwan Strait increased sharply.
There are three potential scenarios of how China could reunify with Taiwan:
  1. Outright invasion: The military drills and overall advancement of military capabilities could usher in a full-fledged attack on Taiwan. In this scenario, ground troops could land in Taiwan, resulting in a removal of the government. If the U.S. and others move to defend Taiwan, the fighting could be protracted and lead to collateral damage. Theoretically, China would seek to maintain Taiwan’s core economy and semiconductor producing capabilities. However, if China manages to fortify its own semiconductor industry on the mainland, Beijing may be less willing to avoid Taiwanese manufacturing assets.
  2. Naval blockade: The drills after Pelosi’s visit highlighted the potential for China to encircle Taiwan and inhibit trade. This would not require a ground invasion or significant deployment of military assets. Instead, the Chinese Navy could encircle Taiwan with relative ease. This could also affect other cargo traffic traversing the Taiwan Strait. Concerns about a blockade likely led the U.S. to recently deploy its own naval ships into the Strait.  
  3. Altering Taiwanese politics: China was able to accelerate the integration of Hong Kong into mainland China beyond the original 50-year window that was agreed to with the United Kingdom. This was in part done by enacting new laws in China that affected Hong Kong and helping induce political change in Hong Kong that was more tolerant of Chinese meddling in local affairs. China could also deploy this playbook in Taiwan by encouraging political change on the island that is more supportive of integration. This method would also give China some plausible deniability and help mitigate potential sanctions from the U.S. and others.

Implications for Risk and Damage

Beyond destruction of assets from violence, business interruption and adverse credit conditions, a worsening economic environment could occur if China seeks to change the status quo.
Naturally, an armed invasion could cause physical destruction of property and assets in and around Taiwan. If the fighting expands and the U.S. or others join, the potential for damage would rise.
This also raises the risk of fighting expanding in terms of geography due to collateral damage. If an armed attack leads to projectiles hitting Japan’s elusive economic zone, Tokyo may counter. There are also other countries in the region that have adverse relations with China. If they are encroached upon, then they may choose to join the potential fighting.
It could also lead to an increased risk of insolvency for Taiwanese companies as they lose access to transactions and funding. Some of this could also affect Chinese businesses and give rise to business interruption, altering the economic trajectory of both countries.
Even slightly less aggressive actions, like a blockade, could adversely affect the country’s:
  • Crédito
  • Negocios
  • Economy

Other Non-Taiwan Triggers for China War Risk That Should Be Considered

When thinking about risks in the region, there are additional scenarios that could lead to violence and war outside of Taiwan.
In addition to Taiwan and a deterioration in U.S.-China ties, there are other China-related risks that drive the Global Insights Center’s China War on Land risk score of 8.0.
  • India: This is perhaps one of the most overlooked war and violence risks in the region. China and India fought a war in 1962 and have had numerous, often unreported, border skirmishes since. China claims the entirety of Arunachal Pradesh, which is a northeastern Indian state on the border of Tibet. China also holds one-third of Kashmir and has built a series of military roads through Pakistan, linking Western China through Pakistan’s portion of Kashmir and into the Port of Gwadar at the South of Pakistan. China also has access to a port in Sri Lanka. This implies that China could organize a three-front war with India to retake Arunachal Pradesh and weaken India’s economic growth and strategic interests overall. In the past five years, there have been three material border skirmishes that nearly turned into a full-fledged war. In 2017, China started to build roads in Bhutan near the Indian border – that road could have allowed the Chinese army to attack the Siliguri Corridor in India from where they could cut off the northeastern Indian states and thereby annex Arunachal Pradesh. The Indian army moved into Bhutan and there was a two-month long standoff between the Indian and Chinese armies. There were also two mini battles in Ladakh, Kashmir over the past 24 months, one of which led to a few dozen deaths of soldiers on both sides.
  • Australia: Relations have really soured in recent years, despite previous attempts by Australia to forge close economic ties with China. This stems from allegations of Chinese intelligence paying politicians and institutions in Australia. In recent weeks, China has signed a military pact with the Salomon Islands, and Australia has noted that the arrangement could lead to a China-Australia war – their strongest comments ever. Since then, China has embarked on a full-fledged foreign policy tour of the other Pacific Islands with the goal of forming a quasi-alliance.
  • Japan: China claims full control of the Senkaku Islands of Japan. The islands could be used by the Chinese army and navy if it were to get into a war with Japan. On top of this, China still maintains animosity towards Japan for its invasion and treatment of China during World War II.
  • Philippines: Although relations are generally sound, China has recently extended its claims over the South China Sea all the way to the Philippines border. China essentially requires ships anywhere in the sea to inform China, which could be a point of contention with the Philippines.
  • Vietnam: Ties have worsened due to economic tensions. China is making claims over oil and gas reserves found off the Vietnam coast as Beijing claims the reserves are in Chinese waters. The Chinese Navy has also gone in at times to scare off Vietnamese oil ships. For now, it’s a lower-level risk, but this is forging closer India-Vietnam ties and could also be a trigger for broader issues.
Essentially, while conflict between China and Taiwan is often viewed as the main risk in the region, there are other potential triggers for violence, too.
China has complex relations with many of these nations. Independent of Taiwan, there is the threat of inter-state conflict with these countries, particularly India. But when the topic of Taiwan is added, then the risks increase further as some of these nations could inadvertently be drawn into a conflict over Taiwan, especially U.S. allies like Australia and Japan. The trigger for violence is vast, which directly increases the risk potential for a war, inter-state conflict or violence to occur.
This article provides general information, and every effort has been made to ensure accuracy of the information contained herein. In no event will The Hartford be liable for direct, special, incidental, or consequential damages (including, without limitation, damages for loss of business profits, business interruption, loss of business information or other pecuniary loss) arising directly or indirectly from the use of (or failure to use) or reliance on the information contained herein, even if The Hartford has been advised of the possibility that such damages may arise.  
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries, including the underwriting company Hartford Fire insurance Company, under the brand name, The Hartford®, and is headquartered in Hartford, CT.  For additional details, please read The Hartford’s legal notice at  © 2022 The Hartford  
Personal del centro de perspectivas globales
Personal del centro de perspectivas globales
The Hartford’s Global Insights Center team provides analysis on macroeconomics, geopolitics and sectoral risks. The team consists of:
Shailesh Kumar, Head of The Hartford's Global Insights Center
Puneet Bhasin, Senior Economist
Ben Wright, Principal U.S. Economist
Jeffrey Woodruff, Country and Credit Analyst