The Chinese government's initial response to US House Speaker Nancy Pelosi's Taiwan visit should ease concerns about a worst-case scenario of military confrontation or trade blockades. Even short of such scenarios, however, Beijing's responses could last for months, unsettling financial markets and raising risks for multinational companies. US multinationals in China face heightened risk of informal regulatory harassment and nationalist boycotts from Chinese consumers.
China's Early Responses
After weeks of speculation, Pelosi followed through on her visit to Taiwan, which her office officially confirmed only hours before her arrival. We previously forecast that the Chinese government would calibrate a response that appears strong relative to previous shows of force, but not strong enough to provoke a cycle of escalation. So far at least, Beijing appears to be following a carefully choreographed script. Within minutes of Pelosi's plane landing in Taipei, several Chinese government agencies released lengthy public statements that must have been prepared in advance.
The People's Liberation Army (PLA) has already made a show of military force, and further exercises are scheduled, particularly in the South China Sea, Yellow Sea, and the Bohai Sea. Earlier, the PLA deployed mobile missile launchers, artillery, and armored vehicles to the city of Xiamen in southwest China's Fujian province, which borders the Taiwan Strait. On 4 August the PLA fired 11 missiles to Taiwan's north, south, and east. Further missile tests could occur in the Strait itself, as during the 1995-96 Straits Crisis, however, for now China has suspended the remainder of the missile tests that were supposed to take place during the joint air-naval live fire exercises surrounding Taiwan on 4-7 August. Likewise, the US has postponed a previously scheduled intercontinental ballistic missile test (ICBM), while keeping the US naval aircraft carrier strike group in the South China Sea longer than originally planned. During the 4-7 August exercises, multiple Chinese fighter jets and naval ships crossed the median line of the Taiwan Strait, as Taiwan continued to monitor and deny the Chinese the ability to cross when possible with both sides demonstrating restraint in a high-seas game of ‘cat and mouse.’ Following the end of these scheduled military exercises, on 8 August China also conducted joint drills focusing on anti-submarine and sea assault operations around Taiwan. Taiwan’s military also announced it will hold two large-scale, live-fire artillery drills in southern Taiwan on Tuesday and Thursday this week. Military exercises that are incrementally more aggressive than during the 1995-96 Straits Crisis has enabled Beijing to signal a high degree of concern while continuing to contain escalation risk.
Chinese authorities are also imposing trade sanctions on Taiwan. Beijing has blocked imports of fruit, fish, and other food products from Taiwan, as well as a ban on natural sand, which is used in the production of concrete. Notably, however, the semiconductor industry is unaffected, reflecting the strategic importance that Beijing attaches to maintaining access to advanced Taiwanese technology.
So far, the Chinese government does not appear to be engaging in cyberattacks. The websites of several Taiwanese government agencies suffered distributed denial of service (DDoS) attacks, but the resulting disruptions were short-lived, and the attacks' low sophistication suggests they were the work of "hacktivists" rather than state actors.
What is the Chinese Government's Objective?
Beijing aims to halt what it views as a slippery slope of increasingly robust official contacts between the US and Taiwan. Chinese leaders view these contacts as emboldening pro-independence forces within Taiwan ahead of the island's 2024 presidential election. Though Washington insists that its One China Policy (OCP) has not changed, Beijing sees a steady ramp-up in Washington's support for Taipei in recent years as a form of incremental "salami slicing" that amounts to a hollowing out of the OCP. At a meeting last month with US Secretary of State Anthony Blinken, Chinese Foreign Minister Wang Yi referenced the Three Joint Communiqués, which define the political commitments on Taiwan that have formed the basis of normalized relations since 1979. This reference signaled Beijing's concern that Washington's commitment to the OCP is eroding.
Though the situation remains fluid, the initial developments should ease concerns about a worst-case scenario of military confrontation or trade blockades. To a large extent, both Pelosi and Chinese leaders are performing for domestic audiences, not seeking confrontation. Moreover, the emphasis that US President Joe Biden and Chinese President Xi Jinping placed on maintaining communication during their recent phone call suggests that both sides are prepared to engage in robust crisis management.
Impact on Foreign Business
On the other hand, as previously noted, the cycle of responses and counter-responses could continue unsettling markets and affecting multinational companies' operations in Taiwan and the mainland for many months.
The risk to US-based companies is especially acute. US businesses have privately expressed concern that the Chinese government may unofficially halt investment approvals or impose other informal regulatory obstacles as a form of retaliation. Chinese outbound investments could also be affected. According to media reports, Chinese battery producer CATL may delay – though not abandon – an official announcement of its plan to build a new US factory.
Another risk is a backlash by Chinese consumers against prominent US brands. Chinese state media may encourage this sentiment, but grassroots nationalism in China is strong, and top-down encouragement is not necessarily required for a boycott to materialize.
While most global companies will naturally seek to avoid commenting on sensitive political issues, situations may arise where staying silent is not possible. Companies should therefore prepare communications and government relations strategies to address the above mentioned risks. In both public-facing statements and private communications with government officials, companies can emphasize their commitment to one-China policies.
Maintaining a neutral stance on Taiwan should be easier than on other contentious issues such as alleged repression in Xinjiang, where Washington and Beijing's respective positions are fully irreconcilable. On Taiwan, Washington's continued commitment to the OCP, at least notionally, creates a space in which companies can avoid directly offending either side.
Still, companies should be cautious on specific wording. For example, Beijing typically prefers the phrase "One China Principle," but hardline anti-China politicians and commentators in Washington view this phrase as an endorsement of Beijing's view of the issue. Washington's preferred phrase, "One China Policy," though not ideal from Beijing's perspective, is still acceptable.