A Taiwan Invasion Would Cost China Dearly

Beijing has criticized Japan’s defense buildup as well as Taiwan’s decision to extend conscription. Never mind that Japan is reacting to Chinese belligerence (as well as North Korea’s) and Taiwan is reacting to Beijing’s outright threats of invasion or isolation. Some suggest that these moves by Japan and Taiwan might prompt China to move against Taiwan sooner, so as to strike before the potential opposition can build up its fighting abilities. From this side of the Pacific, it is all but impossible to assesses the probabilities. What goes on inside Beijing’s forbidden city is, as ever, inscrutable. But one thing China’s leadership knows or should know is this: the economics of a move against Taiwan is not good. An invasion or blockade would cost China’s already beleaguered economy dearly. Economics, of course, can never tell the whole story, and often takes a back seat to geopolitics and national pride. But to the extent that anyone in Beijing is listening, the economics makes a strong case for the moderation.

A first economic consideration is how much more important Taiwan has become to the Chinese economy. Taiwanese buying in China has increased some 87 percent during the past five years. That is an average of 13.3 percent a year, a faster rate than most measures of bilateral trade anywhere in the world. At the same time, China has become increasingly dependent on Taiwanese products. Chinese imports from Taiwan have increased some 71 percent over the past five years. That is an average of 11.3 percent a year.

More critical is the nature of China’s purchases from Taiwan. Some 64 percent of them are electrical machinery products, mostly semiconductors. This trade is vital to China, which at last measure could only produce some 10-15 percent of its silicon chip needs domestically. Taiwan, in fact, accounts for some 63 percent of the global contract manufacture of microchips, the lion’s share from a single company, TSMC. Taiwan accounts for some 92 percent of much sought-after miniature integrated circuits, those of less than 10 nanometers.

An invasion or blockade would bring the loss of all this. That is especially true of TSMC’s operation. Asked if China, after invasion, could simply take over the firm’s facilities, TSMC’s Chairman Mark Liu explained that because the company depends for parts, software, and diagnostics on real-time connections in Japan, Europe, and the United States, the place would become completely inoperable in the hands of the People’s Liberation Army. Nor is it clear that China in the event of an invasion would have use of Taiwan-based production operations in China, including the Apple supplier, Foxconn.

Aside from such direct Taiwanese-Chinese links, China’s relatively brief military exercises did a lot to point up the more general cost (to China and the world) of an invasion or a blockade. Those exercises interrupted all shipping in an area of ocean that averages some 240 ships a day. A Chinese blockade, much less an invasion, especially if contested by the United States, would stop all this shipping for an extended time and in so doing cripple China’s major ports of Shanghai, Delian, and Tianjin. The Taiwan Strait is a major conduit for all North Asia shipping to the rest of the world and the most direct route from South China to North America. It is estimated that just under half the world’s container ships passed through the strait during the last seven months, and 88 percent of the largest of these ships. Tankers carrying 1 million barrels of oil a day pass though that narrow body of water. World trade would suffer, China’s especially.

To be sure, nations go to war and take other military actions despite obvious economic drawbacks. Economists at the turn of the nineteenth century infamously dismissed the possibility of a European war because of the continent’s extreme economic integration would make war extremely costly. World War I showed the fault in that analysis. Especially when questions of sovereignty are involved and still more when they involve the hyper-sensitivities of China’s leadership, economic considerations may well be dismissed. But they are huge and should factor into Beijing’s calculations. For economic reasons alone, Beijing would do well to continue with past practices: claim sovereignty but resist forcing the matter and perhaps occasionally make dramatic demonstrations.