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This assessment was issued to clients of Dragonfly's Security Intelligence & Analysis Service (SIAS) on 4 August 2022.
Nancy Pelosi’s visit this week has triggered the most acute crisis in the Taiwan Strait in decades: China has fired 11 missiles as well as MLRS rockets over the island this afternoon, exceeding the daily record set in the last major Taiwan Strait crisis in 1995-1996. And Beijing has announced military exercises around the island until 7 August. While we anticipate that the coming days will be characterised by further missile firings, provocative naval manoeuvres and fly-bys, this will probably be aimed at maximising pressure on Taiwan, rather than starting a conflict.
Still, we have raised our crisis risk rating for Taiwan from moderate to high. This is to reflect the rising likelihood of the ongoing tensions forcing organisations to consider or trigger crisis or evacuation plans. The heightened risk of miscalculations and accidents amid so much military activity (in a relatively condensed area) means that security managers may need to make business-critical crisis decisions at little to no notice.
The chart above shows our top line forecasts for the immediate term. Critically, even in the event of a military accident, we still assess that both China and the US would be highly likely to move to de-escalate.
While tensions around Taiwan are clearly acute, the military drills and political rhetoric so far has had only a limited impact on business operations, and by extension, evacuation options from the island. Our monitoring indicates that maritime traffic in the Taiwan and Luzon straits are continuing but navigating around exercise areas. And our analysis of flight radars covering the region suggest that flights into and out of Taiwanese airports are largely continuing as normal (that said, several airlines including South Korean, Asiana and Thai have suspended their Taiwan operations).
The operational situation around the island will probably remain volatile in the coming days. Notably, Chinese state media has been at pains to present the exercises as giving it the ability to enforce a blockade around the island with little warning. But we are sceptical that Beijing will do this, and for now shipping appears to be continuing through the Strait.
Domestic political considerations are probably, at least in part, driving China’s – and specifically President Xi Jinping’s – assertiveness over Taiwan. Pelosi’s visit took place only a few months before the Chinese Communist Party Congress. And given President Xi’s strident stance on Taiwan, this has probably put him in a position in which not responding forcefully could be seen as weakness. China had also repeatedly issued warnings of ‘powerful measures’ if the visit took place. Not acting on these in any form would have undermined its declared ‘red lines’.
With the US and Taiwan explicitly calling for calm, China’s actions are the primary driver of the risk that this crisis escalates into conflict. We still assess that this outcome is highly unlikely in the coming days or weeks. In its recent statements, the Chinese government signalled it is not in a hurry to take control of the island, saying time is ‘firmly in [its] hands’. Our broader assessment also rests on the assumption that China will not risk the economic fallout of a military invasion of the island. This is particularly when gradually eroding Taiwanese independence remains a feasible, albeit longer term, prospect.
While the circumstances were wholly different, it was economic risk analysis of this kind that led European countries among others to wrongly forecast that Russia would not invade Ukraine in February. So we continue to monitor other indicators of President Xi’s intent. The first among these remains the still relatively composed posture of Taiwan’s regional supporters, such as Japan, who seem confident that this crisis will blow over. It is also not clear that Chinese military planners are confident they could swiftly and surgically take Taiwan, particularly amid uncertainty of whether the US would intervene on behalf of Taiwan.
Although a direct Chinese military attack on the island is highly unlikely, there is a reasonable possibility that President Xi will see the current crisis as an opportunity to demonstrate the capability of the mainland to choke off Taiwan. As with an invasion, this would have global ramifications. Supply chains in the region are already strained, and disruption of even a few days in Taiwan would carry highly disruptive and potentially business-threatening implications across the board. This is particularly for global technology and computing, given Taiwan’s role as a semiconductor hub.
Any attempt by China to demonstrate its ability to truly blockade Taiwan would most likely include widespread military and naval drills with amphibious landing craft and the deployment of anti-access area denial weapons. This approach carries a lower risk of escalation, compared with actually attacking or invading the island. Importantly, it would also be a way for China to test America’s resolve towards Taiwan without directly attacking it. The US has been deliberately ambiguous on what its redlines for Taiwan are, and we doubt a blockade would meet the threshold for a US intervention.
Amid the current military exercises, there is a reasonable risk of miscalculations. This includes an incident involving maritime traffic such as Chinese forces seizing or harassing a foreign commercial vessel or disarming an isolated Taiwanese navy patrol in the Strait. And with live-fire exercises of ICBMs and MLRS across the island, there is also a chance of misfires or missiles going off their intended course and landing in Taiwan (five of the missiles fired this afternoon landed in the Japanese EEZ).
In the event of a military accident or miscalculation, it is highly likely that China, Taiwan and the US would try to swiftly prevent an escalation. But in such a scenario, there would still be a chance that events spiral and there is an unintended escalation. Amid US-China tensions in recent years, the avenues through which such an escalation could be controlled have narrowed. There are now far fewer channels of military and diplomatic communication than there was during the last Taiwan Strait crisis. These are how past tensions have been navigated.
Dragonfly is pleased to invite you to a briefing looking at the security crisis unfolding in the straits around Taiwan. This will take place online on Monday 8 August at 0930hrs London / 1630hrs Hong Kong. You can register to attend here.
Image: A woman uses her mobile phone as she walks in front of a large screen showing a news broadcast about China's military exercises encircling Taiwan, in Beijing on August 4, 2022; Photo by NOEL CELIS/AFP via Getty Images.
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