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​​​​​​​China – Taiwan Conflict: Business Impact and Advisory

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by Farid Salimullah and Jason Kirubakaran , Senior Analysts, GBS Procurement & Finance
19 June 2023


Taiwan is an island located about 100 miles off the southeast coast of China. It is part of the so-called "first island chain," which comprises a series of U.S.-friendly territories crucial to American foreign policy.

Were China to take over Taiwan, some Western experts suggest that it might be better positioned to project power in the western Pacific region and could potentially threaten U.S. military bases as far away as Guam and Hawaii.

However, China maintains that its intentions are purely peaceful.

Historical sources indicate that Taiwan first came under full Chinese control in the 17th century when the Qing dynasty began administering the island. In 1895, China ceded Taiwan to Japan after losing the First Sino-Japanese War.

China regained control of Taiwan in 1945 following Japan's defeat in World War II. However, a civil war ensued in mainland China between the nationalist government forces led by Chiang Kai-shek and Mao Zedong's Communist Party.

The communists emerged victorious in 1949 and established control in Beijing. Chiang Kai-shek, along with the remnants of the nationalist party known as the Kuomintang, fled to Taiwan, where they governed for several decades.

China uses this history to claim that Taiwan was originally a Chinese province. Conversely, the Taiwanese use the same history to argue that they were never part of the modern Chinese state formed after the 1911 revolution or the People's Republic of China established under Mao in 1949.

Concluding his two-day visit to Beijing, U.S. Secretary of State Antony Blinken held a crucial meeting with Chinese President Xi Jinping on Monday, with the primary objective of alleviating the escalating tensions between the two nations.

Trade Impact on Taiwan

  • Supply chain disruptions have affected industries such as semiconductors, electronics, and information technology, resulting in delays and shortages. Concerns about intellectual property have made technology collaborations cautious.
  • Market access restrictions and manufacturing disruptions have posed challenges for export-dependent sectors.
  • Taiwan’s economy heavily relies on trade with China, which accounts for a significant portion of Taiwan's trade. Taiwan's total trade increased from 2018 to 2021 but experienced a slight decline in 2022 due to emerging tensions.

Risks for Businesses in Taiwan due to China-Taiwan Conflict

Economic Uncertainty and Instability

The conflict with China increases economic uncertainty and instability in Taiwan's business environment.

Trade Disruptions and Market Volatility

Disruptions in cross-strait trade may lead to market volatility, affecting supply chains, export-import dynamics, and pricing.

Reduced Investment and Business Opportunities

There is a decrease in foreign investment and limited business opportunities as investors grow cautious amid geopolitical tensions.

Tourism and Hospitality Sector Decline

The conflict results in a decline in the tourism and hospitality sectors due to safety concerns and travel restrictions.

Political and Regulatory Risks

Businesses operating in Taiwan face heightened political and regulatory risks, including potential changes in policies.

Trade Impact on China

China's imports from major partners declined in the first half of 2022, contributing to global supply chain disruptions.

Trade disruptions with China would affect its Asia-Pacific trading partners, leading to production slowdowns and revenue loss. China's exports also declined in 2022 compared to 2021.

Risks for Businesses in China due to China-Taiwan Conflict

Decline in Demand for Global Inputs

Weaker exchange rates, manufacturing disruptions, and reduced domestic consumption in China could lead to a decline in demand for global inputs.

Trade Disruptions and Production Slowdowns

Trade disruptions arising from the conflict could directly affect China's Asia-Pacific trading partners, causing shipment delays, production slowdowns, soaring inflation, and revenue loss.

Decline in Imports and Exports

China's imports and exports with major partners declined in 2022 due to the COVID-19 situation and global supply chain disruptions.

Impact on Global Economies


During the G7 summit, President Biden expressed a strong commitment to taking action if China were to initiate hostilities against Taiwan.

The U.S. relies significantly on Taiwan for semiconductor chips, which are essential to American tech giants like Apple. This reliance, coupled with ongoing TIFA negotiations, might enhance the U.S.'s resolve to support and protect Taiwan in any conflict with China, possibly solidifying the relationship between the U.S. and Taiwan.

The U.S. Strategic Competition Act of 2021 requires diversification of supply chains for Chinese companies that predominantly serve U.S. clients.


India has maintained robust informal ties with Taiwan since the mid-1990s.

Supporting Taiwan could be advantageous for India, especially in the semiconductor industry.

Collaborating with Taiwan might enable India to establish a semiconductor manufacturing plant.

However, India's ongoing border tensions with China might create challenges.

Such challenges could significantly affect India's Chemicals and Pharmaceuticals sector, given their high dependency on China.


China's potential annexation of Taiwan could negatively affect the Japanese islands (e.g., Yonaguni, Senkaku/Diaoyu, Okinawa), impacting Japan's tourism industry. Moreover, if China gains control over Taiwan, restrictions on shipping routes in the South China Sea could impede approximately 40% of Japan's maritime trade, affecting its economic growth. Proximity to Taiwan might escalate conflicts, affecting Japan's import-dependent economy. Supporting Taiwan could result in trade limitations imposed by China, while failure to support the U.S. might damage the U.S.-Japan alliance.


Australia is part of the "AUKUS" pact with the U.S. and the UK, which includes the provision of nuclear submarines, viewed by China as an escalation of an arms race. Australia's support for Taiwan has intensified tensions with China and increasing restrictions have hampered Australian trade growth.

China's potential retaliatory actions could affect Australian exports, notably in agriculture and mining, as well as industries such as retail, construction, and manufacturing.

Industries Impacted

Industry Impact

China accounts for approximately 78% of global metal and steel production. Sanctions on China could have a cascading effect on various industries worldwide.


The technology and electronics industry is heavily dependent on Taiwan for semiconductor manufacturing and supply. Taiwan is responsible for about 63% of global semiconductor production.

Supplies of neon gas and palladium, essential for semiconductors, are already being affected by tensions between Russia and Ukraine. The conflict between China and Taiwan could further aggravate the supply disruptions.

Medical Equipment

The conflict between Taiwan and China could disrupt supply chains, lead to shortages of critical components, and have a global impact on the medical equipment market. This situation could create market uncertainties, hindering investment and decision-making.

Automotive Industry

The automotive industry relies on Taiwan for the supply of critical electronic components and parts used in vehicles.

Disruptions in procurement and supply chains could result in production slowdowns, increased costs, and potential delays in launching new models.

Online Payments

Potential disruption of cross-border payment flows and alterations in payment infrastructure due to the conflict.

Payment providers should establish contingency plans, diversify their payment channels, and ensure compliance with changing regulations.


Taiwan's fresh fruit exports heavily depend on China, which purchases over 80% of these fruits.

In the event of a Chinese invasion, the damage to agricultural infrastructure and the disruption of shipping routes could have a detrimental impact on Taiwanese farmers and global fruit prices.


The pharmaceutical industry relies heavily on China for the supply of active pharmaceutical ingredients (APIs).

The conflict between China and Taiwan could lead to potential supply chain disruptions, and impact the global availability of certain medications.

Pharmaceutical companies should assess their supply chain vulnerabilities and consider diversifying their sources for APIs.

Global Supply Chain

The conflict could significantly affect global supply chains due to Taiwan's role as a key player in semiconductor manufacturing and China's dominance in manufacturing.

Companies with supply chains dependent on the region should explore alternatives and diversification to mitigate potential risks.

Logistical disruptions due to potential maritime conflicts in the South China Sea could also impact the availability and costs of goods worldwide.

Defence Industry

The escalating tensions between China and Taiwan have led to increased military activities in the region.

This escalation could stimulate demand in the defence industry, particularly for countries in the Indo-Pacific region as they may seek to bolster their military capabilities.

Mitigation Strategies - Procurement and Sourcing

Potential Impact on Supply-Demand: High

Aggression in the South China Sea could cripple global semiconductor production. Taiwan and South Korea, which account for 81% of production, could be severely affected. This may paralyze 80% of semiconductor production, exacerbating existing shortages and impacting the personal computer sector with order backlogs.

Potential Impact on Pricing: High

There could be a surge in electronics prices due to increased semiconductor demand following a military attack. This price impact is likely to continue until the transition to a secure supply chain is complete.

Potential Impact on Duration: High

Geopolitical uncertainties, loss of production, and transportation delays in the South China Sea region could exacerbate the situation, making it difficult to predict the duration of the impact of potential military operations.

Procurement and Sourcing Strategies for Businesses in Taiwan/China Amid Trade Tensions

Diversify Supplier Base

  • Reduce reliance on a single market or country to mitigate risks of supply chain disruptions and trade tensions.
  • Explore Domestic Production
  • Utilize the skilled workforce and advanced technological capabilities in Taiwan to gain more control over the manufacturing process.
  • Foster Partnerships with Other Countries
  • Engage in joint ventures and collaborations.
  • Leverage the expertise of countries such as South Korea, Japan, and Vietnam.
  • Enhance Resilience of Procurement and Sourcing Strategies
  • Develop a more robust and flexible supply chain to adapt to changing market dynamics and mitigate impacts.

Mitigation Strategies - Legal

Incorporate Risk Mitigation Clauses

  • Multinational corporations should include specific clauses in commercial contracts to address risks arising from China-Taiwan tensions.
  • Clauses should cover conflicts in the Taiwan Strait and potential disruptions to business operations, with a focus on Force Majeure clauses.
  • Conduct Risk Assessment and Due Diligence
  • Pay close attention to sanctions regimes and blockades.
  • Consider increasing investments in anti-money laundering and sanctions screening procedures.
  • Protect Intellectual Property
  • Strengthen measures to protect intellectual property and proprietary technologies.
  • Develop Crisis Management Plans
  • Create comprehensive crisis management plans to effectively respond to challenges related to conflicts.

Types of War Clauses

Basic War Clauses

Extended War Clauses

Burden of Proof

  • Ensure fair treatment for foreign investors regarding compensation for losses.
  • Prove that the host state has implemented measures to address war or conflict losses.
  • Establish similar treatment for investors under comparable circumstances.
  • Provide additional protection and rights for investors, including compensation for the requisitioning or non-essential destruction of investments.
  • Ensure fair and equitable treatment, as well as full protection and security.
  • For extended war clauses, establish host state liability for damages.
  • Take into account the doctrine of necessity as a potential defense for the host state.

War clauses in international investment agreements offer protection for investors during times of war and armed conflict. Basic war clauses ensure fair treatment, while extended war clauses provide additional rights and protections. Investors invoking these clauses may need to demonstrate liability and the causation of damage by the host state.

Force Majeure Clauses that Businesses Should Consider

Natural Disasters

Include events such as earthquakes, floods, typhoons, or pandemics. Define these events comprehensively and establish obligations.

Political Unrest

Cover incidents arising from political instability, civil unrest, riots, terrorism, or war. Include clear definitions and provisions for notification and performance mitigation.

Supply Chain Disruption

Address disruptions caused by events like trade restrictions, embargoes, transportation delays, or interruptions in raw material availability.

Government Actions

Include events caused by governmental actions, such as legislative changes, regulatory restrictions, asset expropriation, or war.

Labor Disruptions

Cover events like labor disputes, strikes, lockouts, which significantly impact the ability to fulfill contractual obligations. Consider including contingency plans and alternative arrangements.

Technological Failures

Address events resulting from technological failures or cyberattacks, including system crashes, data breaches, or network disruptions. Include potential impacts and mitigation strategies.

Force Majeure Catch-All

Include a broad provision that encompasses unforeseen events beyond the control of the parties, not explicitly covered by other categories. This provides flexibility in addressing unique circumstances on a case-by-case basis.


The escalating conflict between China and Taiwan has far-reaching implications for various industries and economies globally. The situation demands careful monitoring and proactive strategies by stakeholders to mitigate potential risks and safeguard their interests. Diversifying supply chains, establishing contingency plans, and complying with international regulations are essential steps for businesses and governments. The geopolitical landscape is highly unpredictable, and it is imperative to remain vigilant and adaptable to evolving circumstances.

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Jonathan Cantrell

It would be much appreciated if you could include an 'executive-level' summary at the beginning of these articles.


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