The European Union needs a China contingency. Government and corporate decision-makers may be preparing for a possible Chinese military attack on Taiwan, but they must also focus on how a Taiwan crisis will impact China and, consequently, the EU’s economic security.
Largely on account of Taiwan’s prominent position in the global semiconductor industry, a Chinese attack on the island will inflict trillions of dollars in costs on the global economy. But a Taiwan crisis also threatens to disrupt China-centered production and supply chains for green technologies, such as electric vehicles, solar panels and wind turbines, as well as create unprecedented geopolitical risk for European companies in China.
The economic costs of a limited conflict
Japanese observers of East Asian geopolitics have long warned that the security and economic consequences of any potential Chinese military action against Taiwan will not be isolated to the island alone. In 2021, Japanese Prime Minister Shinzo Abe even said that the Taiwan contingency was also a Japan contingency.
For the EU, the national security implications of a Chinese attack on Taiwan pale in comparison to those facing Japan. Yet, European policy researchers have stressed the urgency for the EU to iron-out policy ambiguities on the Taiwan issue, deter Beijing from engaging in such military adventurism and do more to prepare for the economic impact of a crisis.1
An all-out Chinese military attack on Taiwan is neither the only nor the most likely scenario. According to an expert survey by the Center for Strategic and International Studies, the likelihood remains low for a full-fledged amphibious invasion.2 Yet, a slim majority of respondents think that China will escalate the crisis through a military blockade or quarantine in the next ten years.
The costs of such military and coercive actions by China would still be devastating to the global economy. Even conservative estimates, such as those from the Rhodium Group, place the immediate loss to the global economy from a Chinese military blockade of Taiwan at above $2 trillion. In contrast, Bloomberg economists see the costs of a blockade causing some $5 trillion in economic damage in the first year.3 This estimate amounts to a 5 percent drop in the global economy (the global financial crisis in 2009 saw a 5.9 percent fall). Taiwan would suffer the most in this scenario, with a 12 percent loss to its economy, but China’s economy would experience a close to 9 percent loss.
Consequently, a Chinese blockade or another military or coercive attack would have serious consequences for China’s economy. Chinese leadership will not take any such military decision lightly. Nonetheless, European government and corporate decision-makers cannot rule out a changing political calculus in Beijing and Taipei, and a shifting military balance of power, that upends the status quo. The American reaction will in turn largely dictate the broader global response to a Taiwan crisis. The return of US President Donald Trump to the White House injects a more transactional approach to Washington’s relations with Taiwan (during the 2024 presidential campaign, Trump suggested that Taiwan should pay for US protection) and further unpredictability into the American position in the event of a crisis.
Supply chains and sanctions
The global economic decline from Chinese military action against Taiwan largely stems from the halt of Taiwanese semiconductor chip manufacturing. According to market research firm TrendForce, Taiwan currently maintains about half of the world’s chip production capacity, including close to 80 percent in the most advanced examples (7 nm and under).4 As a result, trillions of dollars in economic damage would come from supply chain disruptions in consumer electronics, automobiles, telecom, health and other industries dependent on the advanced technology.
Efforts by major powers to increase domestic chip supply with new, targeted industrial policies may lower present dependencies on Taiwan over time, but the island’s strong position in the global semiconductor industry will not be significantly diminished anytime soon. Alongside increases in chip manufacturing in the US and Japan, China’s massive growing investments in production is set to cut into Taiwan’s position in the short run. China may soon challenge Taiwan as the primary producer of legacy chips. Nonetheless, Taiwan will remain significant. It is estimated that its share of both mature and advanced chips will only drop by 4 and 6 percent respectively by 2027.
Furthermore, the supply chain disruptions from a Taiwan crisis may very well extend to China and the rest of East Asia. Just as Taiwan is a central node in global semiconductor chip supply chains, China makes up over one-third of total global manufacturing and is deeply entrenched as a source for everything from plastic toys to mobile phones. Bloomberg economists estimate that China’s home electronics and automobile industries would be hit hard by a military blockade of Taiwan.
The EU is increasingly dependent on China in the supply chains of green technologies. 80 percent of the EU’s solar panels come from China. 90 percent of its permanent magnets, essential in the production of electric vehicles and wind turbines, are sourced from China-based suppliers. If no serious policy action is taken to strategically support European industry to diversify overseas sources and develop new production in Europe, analysts predict that EU’s current dependency on EV batteries from China will rise from 30 percent last year to 50 percent by 2027.
Altogether, with the possibility of Chinese military or coercive action across the Taiwan Strait blocking major trade arteries, the hyper-concentration of the production in green technologies in one or several East Asia countries makes little strategic sense from an economic security perspective. The EU’s pathbreaking Critical Raw Materials Act and Net-Zero Industry Act aim to reduce these dependencies, but they nonetheless lack sizeable strategic investments to meet their ambitious targets. A Chinese military blockade of Taiwan may not necessarily cut off shipments of green technologies and other Chinese-made products to the EU and other major markets, but the serious stakes demand prepartion for such a scenario.
Then come the possible sanctions response led by the United States (and Beijing’s counterreaction) to a blockade or other limited conflict scenario. While it is neither guaranteed Washington will use heavy sanctions against China, nor whether the EU and other G7 allies will join, one study finds that such a confrontation could add $3 trillion more in costs to the crisis if China’s banking system and trade and financial flows are all targeted in a maximalist approach.5 Even narrower sanction action by the United States would threaten tens of billions of dollars as industries such as aerospace, and select political and military entities, become targets in geoeconomic warfare.
Managing geopolitical risk
Most corporate executives may not see the prospect of a Chinese invasion of Taiwan as a very likely possibility anytime soon. Yet, even in a military blockade, quarantine or coercive action, the geopolitical risks of operating in China will enter unprecedented territory.
Although some European multinationals have doubled down on investing in the Chinese market, many others have become increasingly cautious in deepening their engagement. Slowing growth, a difficult business environment and rising geopolitical risk are some of the main reasons. A report commissioned by the European Union Chamber of Commerce in China found that risk assessments and scenario planning on the impact of a Taiwan crisis has become a more regular practice. Some companies are already taking concrete steps to mitigate possible risk.6
European multinationals face compounding geopolitical risks to their personnel, data and assets in Taiwan and China. First, a late 2022 Nikkei survey found that some European, American and Japanese companies in Taiwan have plans in place for how to evacuate expatriate staff and their families in the case of an emergency.7 In China, foreign companies are learning to manage the fact that an increasing number of their foreign and Chinese employees have been expelled and detained by Chinese authorities.
Second, factories and retail outlets in Taiwan could be left idle or physically destroyed in a Chinese military blockade or grey zone attack. As a result, major global insurers have recently raised their rates and tightened their risk coverage when Taiwan is involved. Yet, in the event of a crisis, there are also risks of major losses in China. The Atlantic Council and the Rhodium Group estimate that $460 billion in investment assets from G7 countries could face appropriation by Beijing in a crisis.
Third, just as foreign companies in Taiwan are transferring proprietary data out of servers on the island, the European Chamber of Commerce in China has found that a growing number of its members have already begun the process of “siloing” supply chains, IT systems, data storage and business relationships in China from the rest of the world.
Some European and other foreign companies may envision that they can find enough manoeuvrability to ride out a Taiwan crisis and remain invested in the mainland. Indeed, despite a long line of western companies announcing their withdrawal from Russia following its invasion of Ukraine in early 2021, research from St. Gallen University and IMD Business School finds that only 8.5 percent of G7-headquartered companies divested from one subsidiary or more.8
Since, for many industries, China’s importance in revenues, assets and technology is higher than that of Russia, pressures would be even stronger to remain and face an unfolding Taiwan crisis. The Russia experience underlines the urgency for European policymakers and corporations to plan out scenarios, consider risk assessments and manage expectations for a potential Taiwan crisis and its impact on China.
Only the future will tell whether taking assertive moves to derisk dependencies from China today will pay-off, but if catastrophe does strike East Asia, then those prepared for the worst will be best positioned to forge ahead.