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Could China take Taiwan and still lose? A conflict could put Beijing’s own trade, investment and access to technology at risk and send the disruption far beyond Asia.
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00:00For years, China has been planning an invasion of Taiwan.
00:03What isn't clear is when or even if it will pull the trigger.
00:07China's wealth depends on the trade and technology that a war could wreck, for Taiwan at stake
00:12is its freedom to decide its future, its very survival as a nation.
00:17An invasion would impact the globe, disrupting the supply chains for cutting-edge AI chips
00:22plus potential sanctions on vital Chinese exports.
00:25So, what would an invasion really cost, and can Taiwan make that price high enough to
00:31prevent one?
00:32Welcome to The Dip, your podcast for money, power and consequences.
00:36I'm Daniel.
00:38Charlie Vest of Rhodium Group has co-authored a report on how a conflict over Taiwan could
00:43disrupt China's economy and the rest of the world's too.
00:46And Christy Hsu monitors Taiwan's trade ties and advises its government on trade policy.
00:51She's from the Chunghua Institution for Economic Research.
00:54Welcome, both of you, to The Dip.
00:56Christy, I'd like to start with you.
00:58Do you fear a Chinese invasion of Taiwan?
01:04I wouldn't say I'm not worried or not concerned at all.
01:09But for most of my time, me and my friends around me feel relatively safe because there will
01:16be preconditions for possible military invasion, which is Taiwan formally declares independence
01:25and then there will have the consequences.
01:27But at least until now, we don't find a kind of precondition exists.
01:32OK, and Charlie, let's just kind of get in at the ground floor here for those who aren't
01:38up to date on what's happening.
01:40You know, what is the state of the relationship between Beijing and Taipei at the moment?
01:45Because despite China claiming overship over Taiwan and the whole political diplomatic
01:51kind of conflict behind the scenes, they still have quite close trade ties.
01:55Isn't that right?
01:56Yeah, so of course, the China-Taiwan relationship is very complex, dating back to 1949, KMT fleeing
02:05the mainland when the Chinese Communist Party took power.
02:08And since then, Taiwan has been a self-governing island with a distinct political identity that
02:14Beijing continues to claim as part of its sovereign territory.
02:18And so the story of the last few decades has been a gradual reopening of that economic relationship
02:24at the same time that some of the fundamental political questions about how Taiwan should
02:29ultimately be governed, what sort of political relationship that Taiwan and China should have,
02:34still remain unresolved.
02:35OK, and we'll get into all of those throughout the interview today.
02:38And Christy, when people talk about a potential threat to Taiwan, what do they mean?
02:43What kind of scenarios do they have in mind?
02:48Potential threats, there are many forms, military threat, economic threat, all kinds of threats.
02:53So recently, people talked more about military threat as well as economic threat.
03:00So military threat, including all this expansion and also very frequent military exercise surrounding
03:08Taiwan, and we also lost the so-called median line since Pelosi's visit to Taiwan back in August 2022.
03:16That makes a military threat or exercise around Taiwan more immense to us.
03:23So that regards that is regarding the military threat.
03:28In terms of economic threat, I think we increasingly feel that kind of threat or coercion or whatever
03:36you call it, this weaponization of the market power and also the threats of disruption of supply chain
03:44and also the threats of Taiwanese investors in China.
03:48OK, just digging into this a bit more and the reasons behind it, Charlie,
03:52is it a purely ideological ambition or is there any sort of economic aspect to it as well?
04:00Why is China continually pushing at this?
04:04I think the the the primary driver is a political one that Xi Jinping and and Chinese leaders before
04:11him have have committed to the notion that Taiwan is a part of China and Xi Jinping himself has said
04:16that this is a question that cannot be continued to to be pushed onto the future generations.
04:22The economic aspect is important.
04:24So the reason is primarily a is a political one.
04:28But of course, you know, Taiwan sits at this very important node in semiconductor manufacturing.
04:34And China is, of course, quite aware of how important TSMC is for the build out of new
04:40AI data centers and sort of next generation IT infrastructure.
04:44And so making sure that, you know, it's it's using its political and military pressure to calibrate
04:53Taiwan's adherence to U.S. export controls is another important aspect of this picture.
04:59Yeah. So TSMC, which makes some of the world's most advanced chips, which are used, for example,
05:05in cutting edge AI, a very important company for Taiwan. But I just wanted to get when we were planning
05:12this
05:13episode. We were thinking, how do we phrase this? Is it accurate to say that China has planned
05:20various invasion scenarios, has carried out exercises on its own territory, kind of practicing
05:26what may happen in an invasion? Is it fair to say that it has planned an invasion, whether it actually
05:33goes ahead and schedules it or changes its plans in some way or adds or develops it to its plans
05:37or
05:37another matter? But is that accurate to say? Absolutely. This is something that China has, you know,
05:46very detailed joint operations plans that they are practicing for now in military exercises around
05:55Taiwan with increasing frequency. Okay. Christy, we'll mostly focus on the invasion scenario in this
06:02episode, but you mentioned the case of a blockade as well. That could cut Taiwan off even without any
06:11troops landing on its beaches. How would that change the economic stakes, would you say?
06:17Yes. I would like to go back to your formal question about China's plan for a military invasion.
06:24I think China certainly has plans for all kinds of scenarios, including military invasion,
06:31including impossible unification, peaceful unification, so all kinds of scenarios. I wouldn't say that
06:40they target or specifically prioritize the military invasion because peaceful unification
06:48eventually will be their final goal. But there's no way for doing that and they have different choices,
06:54including blockade, including everything, including military invasion. So that's the answer
06:59from Taiwan's perspective to that. And as your question about all kinds of foreign, including
07:07blockade, quarantine, I think that happened pretty much, pretty much part of daily life now.
07:15I mean, we'll focus in this episode, of course, more on the invasion scenario because of its global
07:20impact if a very sudden invasion scenario were to take place. But I want to stop on just what you
07:26were
07:26saying there about the peaceful unification scenario, just to cover that aspect as well.
07:34And also inside Taiwan, there are various opinions, aren't there? Could you maybe kind of lay out what
07:38that is just just briefly so that we've we've covered that aspect as well? It's very important.
07:44Of course, I mean, I always think that it's still possible for peaceful unification, but
07:52a lot of people may not agree with me, especially the younger people or those people that are they have
07:58different stance towards China. So for this, it's pretty much divided. So people, some people believe
08:06that China will take Taiwan by force sooner or later, but others believe that with communication
08:15or negotiation to find a solution, there's still opportunity for both sides to come to a consensus
08:26or come to agreement as to Taiwan's future.
08:29Okay. I think there's a whole broad range of scenarios. And Charlie, you say in your report,
08:37when you look at some of the more extreme scenarios, that even a limited military engagement would have
08:44a devastating economic impact on China with costs in the trillions of dollars. Can you break that down for us?
08:52Sure. Yeah. So in this paper, which we we wrote some time ago, we examined the question of suppose that
08:59there was an indefinite blockade of of Taiwan in a pretty high escalation scenario, but one that falls
09:05short of a full scale military conflict. So United States isn't getting involved, but nothing is coming
09:11in and out of Taiwan. And there's there's a huge amount of a global financial system upheaval
09:17as a result of of this very escalatory action. And in this in the study, what we did was add
09:23up
09:24all the different channels that we could think of of economic flows that would be disrupted from from
09:28this kind of scenario. And our very conservative estimate was that, you know, about 2 trillion of
09:33annualized economic flows, this includes trade, this includes foreign direct investment,
09:38would be this is company revenues for those who are dependent on ships coming from Taiwan,
09:42would be would be disrupted from this kind of scenario. And exactly as you say, one of the
09:47the countries that gets impacted most heavily from this scenario is China itself. And we can talk
09:52about exactly what that looks like. Well, it's partly down also to its its current economic structure
09:58as well. It's highly reliant on on exports, and it's tried to generate more domestic spending,
10:05but it's it's struggled with that. How does that impact its kind of assessment over what it does
10:11with Taiwan? Yeah. And so that's there's there's two things there. One is that a lot of the things
10:18that China is exporting, you know, cars in particular do depend on ships that come from Taiwan. Some of
10:24these are the most advanced node ships that are coming from TSMC, and some of them are, you know, lower,
10:31not as sophisticated, but still critical chips, they're difficult to replace and in the short term.
10:36And indeed, you know, China's trade surplus hits yet another record this year. And we're seeing
10:41continued dependence on exports as the household sector has really been unable to be a key driver
10:47of growth. So disruptions to chips coming in from Taiwan is going to be a huge disruptor for exports going
10:53out of China. The second force here is that in the kind of scenarios where we're talking about,
10:58where there's on the on the higher escalation side, maybe a full scale blockade scenario.
11:05What we can expect is, you know, a real substantial hit to the renminbi lots of,
11:11you know, in this sort of scenario, every investor in the world is going to be concerned
11:16about sanctions being put on Chinese banks, and they're going to be working to get their money out
11:20of China as fast as possible. This looks like a very substantial depreciation of the renminbi
11:26that, you know, affects its ability to buy products worldwide, it's going to affect the
11:32willingness of banks to finance trade between China and the rest of the world. And this is also looks
11:38like what will ultimately be a shutdown of Taiwan, excuse me, of Hong Kong as, as the sort of financial
11:45intermediary between China and the rest of the world. So all of this adds up to a very, very difficult
11:50situation for China in one of these higher escalation scenarios where investors feel a real fear that
11:56that Chinese banks could come under sanction. And so all of this could be slowly at first and then
12:02come all at once in a kind of a cliff edge scenario. The acute harm, I think, is quite clear.
12:10And we'll
12:11talk through some of the various potential sanctions scenarios in a moment. But what would Beijing be
12:17sacrificing in terms of its long term economic future, if it were to carry out any of these
12:23significant intervention scenarios? Yeah, in our view, China is already facing a sort of low degree
12:33economic crisis that, you know, the headline numbers is that China is on track to hit around 4.5%
12:39growth
12:40this year. We think that that number is much lower if you look at where growth is actually coming from,
12:45pretty much the only engine of growth in China right now is exports. So if you take that away,
12:50you're talking about mortgaging the future of the Chinese people for possibly decades,
12:59with inability to really hit the sort of development milestones that that China's leadership has set out
13:06for it. You know, China really does need the rest of the world right now as an open market to
13:11to
13:11continue to grow and meet its goals. And the sort of scenarios we're talking about here,
13:18where there's huge disruption to supply chains, difficulty conducting trade with China because
13:23of the financial implications of a high escalation scenario. This is just a really bleak future for
13:30the Chinese economy. Do you feel that if there were a significant escalation that the US really would
13:40step up in that scenario, especially under President Trump, people have been very uncertain about how he
13:48will behave in this scenario? And also when China does really have significant economic influence in this
13:58case, do you think that they would actually step up and protect Taiwan, whether that is militarily,
14:05whether that is in terms of sanctions? I think Taiwan and also other US think tanks, I mean,
14:13constantly have that kind of polls or survey, you know, trying to know how Taiwan feel about
14:18the guarantee of the guarantee of US support. I think so far that those believe that US will step in,
14:30as you mentioned, militarily, I think it's still not a surprising majority. But it is true that we
14:39believe that we have to protect ourselves. So US government agreed to have more arms sales to Taiwan,
14:48and also right now they are helping Taiwan in terms of training, in terms of providing more
14:58military equipment, and also involving Taiwan, you have heard this, the whole of society resilience
15:06program, meaning preparing Taiwan in every different aspect. So for possible conflicts, I think that
15:16is how US shows this support to Taiwan. But as to whether they are going to some soldiers coming to
15:25this part
15:25of the world, so far is still being discussed, and we have to wait, and we have to wait.
15:34Okay. And Christy, you've researched how Taiwanese businesses have been moving investment and production
15:39away from mainland China, particularly towards Southeast Asia and the United States. How has that changed
15:46Taiwan's vulnerability to Chinese economic coercion?
15:51Yes, I think that is one very significant phenomenon where Taiwan, together with the US, trying to work
16:00together to lower or reduce Taiwan's dependence. First, Chinese market, and second, a production base in China.
16:13So back in 2010, I mean, 85% of our total outbound investment went to China. And that share has
16:23continuously declined. And last year, it was less than 5%. That means that last new investment going to China,
16:32instead, they were pretty much diversified into Vietnam, Philippines, Malaysia, India, and the US.
16:40And also, in the meantime, that our exports also are going to China also declined. China used to be
16:47the largest export market accounting, including Hong Kong accounting for around 42%. And right now,
16:54it's less than 30%. So how do you think that Taiwan should weigh the cost of preparing for war and
17:02the
17:02physical defenses that it's been building and all of this, these aspects of, for example, TSMC,
17:09building a big facility in the United States, because perhaps it's worried it needs that additional
17:15space to even move to in the future? Who knows? How should it weigh up that cost against the other
17:20things that people need, that a government would spend on on a day-to-day basis for the everyday economy?
17:28I think that our president already committed that in some years from now, the defense budget will
17:36increase to around 10% of our GDP. So that is a commitment for Taiwan's willing to defend itself
17:43with the support from the US and also support probably from Japan and other like-minded countries. For
17:50example, all this joint exercise between Japan and Philippines and other countries in our neighborhood
17:58who shows that this country will not walk away and walk away when something happens. And recently,
18:05we also find that it's more than this like-minded country. It's more than US, Japan or Philippines.
18:12For example, I'll give you an example. For example, South Korea right now, the world's largest
18:20producer producer for memory chips and also for HBM for AI data center. And SK Highness actually
18:29needs TSMC as a sole customer in Taiwan for testing and packaging its HBM. So if something happens to
18:39Taiwan, some disruption, that means South Korea's economy will also be hugely impacted. So that kind of
18:49implication will be much wider than we originally expected. So with this, I believe there are more
18:56than just US, Japan or Philippines. There are actually a lot more countries that need to make sure
19:04that cross-strait a peace across Taiwan Strait. And in various forms, we believe they will try to support
19:13to make sure that there will be peace across Taiwan in their own efforts.
19:19Yeah, 10 percent GDP assigned to defense spending is massive when you compare it to the European
19:25countries that are still debating and figuring out how they'll get to 3 percent. So Charlie, the economic
19:30fallout could be global as we heard Christy talking about the various countries that could get involved
19:35and which would be affected by this. When we look at the most extreme possibilities,
19:42the worst case scenarios here, can you give us a sense of the scale of the impact globally?
19:47Yeah, Christy's right. I mean, the impact from this really is global. And I think there is a growing
19:52awareness in capitals around the world that this isn't just a US-China question. This isn't just a
19:59China-Taiwan question is really a global challenge. If we think about Europe and how important the auto
20:05sector is to growth there and dependence on chips sourced from Taiwan, it gives you an illustration
20:10about how exposed Europe is. You think about Southeast Asia, where these countries, Vietnam, Malaysia,
20:18that are so dependent on electronics manufacturing for jobs and for growth, how disrupted they would be
20:24if a Taiwanese chip suddenly are disrupted. This hits global commodity exporters. If you think about
20:30Australia and Brazil, the DRC, that export copper and lithium and iron to China in a situation where
20:40China is buying less because the economy is in crisis, how devastating that is for them. And then
20:45this hits the least developed countries as well. If we think about Pakistan and other countries that have
20:52taken out debt from China and rely on China to continue rolling over those loans to prevent a
20:59debt crisis in these economies, it gives you a sense for the fact that everybody has a stake here.
21:05And another thing that Christy pointed out, which I want your take on, Charlie, is
21:10there are so many various different scenarios of what could happen in so many areas where
21:15there are gray zones and various points of escalation. And it's not necessarily clear
21:22whether the United States would intervene and to what extent it would intervene because there are so
21:28many varying scenarios and constellations of how this could come about. How does that factor into how
21:35you analyze the situation when it comes to U.S. involvement?
21:38Yeah. And I think a sort of a full-scale invasion or even a full-scale blockade scenario is one
21:44thing when we think about whether the United States is going to get involved and come to Taiwan's aid.
21:49I think it becomes a whole other question if we think about these slightly lower escalation scenarios
21:54that can also be hugely disruptive to the global economy. We think about scenarios like these
22:00quarantines or partial blockades where China sends ships, some of them Coast Guard, some of them,
22:07you know, maybe even just merchant ships around to disrupt trade going in and out of Taiwan
22:12without explicitly declaring a blockade. These are scenarios that China has been practicing for,
22:19and it creates this sense of uncertainty about what China is going to do next. They may be saying,
22:26oh, well, you know, we want to search ships for incoming contraband coming from the United States,
22:30searching for weapons or other things, searching for chips that shouldn't be going to the United States.
22:35These other things that create a real sense of uncertainty in the market
22:40that could disrupt shippers who may suddenly become unwilling to transit the Taiwan Strait or go in and
22:46out of Taiwan ports because the Chinese military is telling them not to. And then that sort of
22:53situation becomes really, really difficult. You know, how do you, what does the United States do to
22:58come to Taiwan's aid without escalating the scenario further? Can you, are there, you know, how do you
23:04organize a sort of a sanctions, uh, coalition in a scenario where China might reverse the, this sort
23:11of, um, block, uh, this temporary blockade or, or quarantine tomorrow, particularly given how costly,
23:17right? The, these, these, these sanctions would be on the United States, on Europe that do continue to
23:22do a lot of business with China. Um, and to suddenly put in these sanctions in place would be a,
23:27would be a very costly move. And that makes it very,
23:29very difficult to, to organize a, an international response to deter China from some of these gray
23:35zone actions, which is, which is a core finding of our research that, that these, that threatening
23:39sanctions in these gray zone scenarios really may not be enough to deter China from taking what could
23:45be very, very, um, impactful steps on, on Taiwan and the rest of the world from these, these more
23:50subtle gray zone actions. Uh, it's something that we're familiar with, uh, in, in Europe with, um,
23:56Vladimir Putin, for example, and how there's been constant arguments, um, about how what he's doing
24:01is bad for his economy. The sanctions, um, uh, have stepped up the pressure and yet it continues
24:06because it seems that the, uh, the ideological aspect and the domestic political aspect is more
24:13important than even the success of the economy. Um, Christy, how do you see that? Do you think that
24:19there is anything reasonable that can be done to deter China from, uh, taking such actions or is it
24:26just a case of it will follow what is politically convenient, uh, what is, uh, um, ideologically
24:34kind of fit to, to how they want to run things and that there's little to be done when it
24:38comes to
24:39the economic argument? How, how do you feel about that? Uh, I think we have to agree that, um,
24:45um, China is not what China was 20 years ago. So, uh, today they have to take care of their,
24:52uh,
24:52population, their citizens, and also, uh, be responsible to their people. For example,
24:58they have to, um, they have to economic, uh, uh, a growth so that, um, people there will have jobs
25:04and their business will have market, will have orders. So in that sense, I believe, um, China will
25:11go consider the costs, uh, for it taking Taiwan by, uh, by, by force, or as you mentioned,
25:18a quarantine. So, uh, uh, if we put everything together, I don't think China is going to do this,
25:25um, immediately because they have so many things to handle domestically, economic issues,
25:30and all this they have to handle. Okay. You've both been very generous with your time,
25:34but I just have, um, a question for you each. Um, I think Charlie, one kind of underrated, uh,
25:40aspect of this under discussed, uh, aspect is a failed invasion. Um, what do you,
25:46how do you think that kind of impacts the assessment of it? Yeah, I, I think fear of,
25:52um, a military failure is one of the driving reasons that we've seen, um, restraint from,
25:59from Beijing on, on, uh, trying to, to execute the most extreme, um, options with regard to unifying,
26:05um, uh, with, with, with Taiwan by force. You know, this would be politically catastrophic for
26:11the leadership of China. Um, uh, they are already a very risk averse, um, set of, set of leaders.
26:18Um, uh, and so to, to when, when, if they did want to carry out, uh, an exercise like this
26:24and,
26:24and, and really move forward with a full, full scale invasion, they would have to be sure that,
26:29um, they would succeed. Um, it would be, it would be catastrophic for leadership otherwise.
26:33Okay. And Christy, just looking forward to the near future, what do you think can be
26:39done to make the greatest difference when trying to keep the peace, um, between Taiwan and China?
26:48Um, this is really a great question because, uh, we always ask this question, uh, to ourselves.
26:54And so, and also discuss this with other country. I think, uh, of course, most Taiwan people want to
27:01remain a status quo, uh, meaning that, uh, uh, we, meaning that, uh, no declaration of independence.
27:09However, um, unification so far is not an, is not an option to Taiwan people either. And that means,
27:16and, uh, how do we, um, um, um, how do we handle this cross-regulation, uh, to remain the, uh,
27:26the situation? It is, I think it takes a lot of, um, wisdom from, and also constraint from both,
27:32from both leaders. And also, um, the American, uh, play a very important role because if US, um,
27:40shows to China that US will not allow unilateral change of status quo, I don't think China is going
27:47to, uh, especially right now, they want to have, uh, the bilateral, they want to improve the bilateral
27:52relation with US. And as long as US make its position very, very clear, uh, I don't think
27:59China is going to do anything, uh, against, against that, uh, at least in the near future.
28:05Okay. Well then let's hope for, for peace and stability in the near future. I mean,
28:10that's the best that we can hope for. Absolutely. Charlie and Christy,
28:13thank you very much for taking the time to talk to us today on The Dip.
28:18That's it for this week on The Dip. Thank you very much for listening. Don't forget to leave a
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