Multinational companies are drawing up contingency plans in the event of a military conflict between the US and China after Beijing launched an unprecedented series of exercises in Taiwan this month.
Intensification of planning by business leaders in the US, Europe, Japan and elsewhere is a sign that China investors no longer view an invasion of Taiwan as just a low-probability “black swan” risk for the second largest economy in the world.
“There are many scenarios in mind. . . to: ‘What will we do in the event of a war? Should we close our operations in China? How can we maintain our business and overcome possible blockades?'” said Jörg Wuttke, head of the Chamber of Commerce of the EU in China.
“This island that was always simmering . . . is suddenly perceived in many quarters as the next Ukraine,” Wuttke said.
Even before tensions flared in Taiwan this month, multinational companies active in China faced growing reputational risk and pressure from Washington and its allies to diversify away from the mainland market.
Business leaders said the lack of an exodus of foreign companies highlighted the lack of alternatives in the world’s largest consumer market and most important manufacturing base. But some US companies are among those considering moving some of their operations out of China, threatening economic ties between the superpowers.
Eric Zheng of the US Chamber of Commerce in Shanghai said that for many US manufacturers with global supply chains, the Taiwan crisis added to the “material” impacts of US-China relations, such as now trade tariffs, and forced them to seriously consider construction. factories in other countries.
“The popular thinking is ‘China plus one’ or even ‘China plus two,’ meaning China will continue to be the main base for manufacturing, but you have an alternative country in Southeast Asia, just in case case,” he said.
Another US business executive, who asked not to be named, stressed that the contingency planning did not reflect an “anti-China” stance, but a cautious response to the realities and potentially catastrophic ramifications of increased risk of military conflict.
President Xi Jinping’s decision to conduct military exercises in response to US House Speaker Nancy Pelosi’s visit to Taipei this month has dramatically altered the status quo in the Taiwan Strait.
The episode also took the backdrop of Western criticism of China’s refusal to condemn Russia’s invasion of Ukraine, as well as its crackdowns on Xinjiang and Hong Kong. President Joe Biden, who has said the US would defend Taiwan if China invaded, was already rallying allies to counter Beijing’s regional assertiveness.
Still, Zheng said many major US companies, including Disney and Elon Musk’s Tesla, had made a long-term commitment to being “in China, for China” and remained highly dependent on the access to its 1.4 billion consumers.
The most serious standoff over Taiwan in nearly two decades has also increased political pressure on companies that rely on exports to China.
David Mahon, a Western investment manager and adviser based in Beijing since 1985, said that for groups such as New Zealand dairy exporter Fonterra, diversifying away from its biggest market would not be easy.
“They have been advised to diversify. The question is ‘where?’ Stop making a profit for the next five years? There’s nowhere to go,” Mahon said.
Fonterra said it followed geopolitical developments closely and that “China remains a profitable market with excellent prospects”.
Reiji Morooka, chief financial officer of Japanese trading house Sumitomo, told reporters at an earnings briefing that the company would “think about its next steps” as it monitors the fallout from Pelosi’s visit.
“It’s a big issue for us in terms of how we address the risk of global decoupling as geopolitical tensions rise,” Morooka said, adding that Sumitomo had not changed its business strategy in China.
Noriaki Yamaga, chief executive of shipping company Kawasaki Kisen Kaisha, questioned the extent to which economic and trade ties between the United States and China could weaken despite the temporary disruption of business by events such as Pelosi’s visit.
“Is it realistically possible for the global economy to have a decoupling between the US and China?” he said
James Zimmerman, a China lawyer at Perkins Coie, said the pace at which companies could move operations out of the country could depend on the upcoming 20th Congress of the Chinese Communist Party, in which Xi is expected to be re-elected as head of the party and its headquarters. Military Commission.
“Yes [there are] Absent policy changes on multiple fronts, and I don’t expect there to be, we could be seeing an accelerated level of strategic relocation, offshoring or offshoring to friendlier countries,” Zimmerman said.
These changes could also be partly driven by Xi’s “zero-Covid” policy, which has hit China’s economy, as well as Beijing’s “relationship with Russia, its treatment of Hong Kong and overreaction of activists on Pelosi’s visit to Taiwan,” he said.
The Asia head of a Wall Street investment bank said investors had been asking about strategies to hedge against Taiwan risk since Russia’s invasion of Ukraine.
“People are not at all sure that there are dips. It’s more about understanding what the escalation points are,” the person said, adding that two major areas of concern were how to protect against currency moves and the impact of potential US sanctions on China in the event of a conflict.
Analysts warned that Beijing and Washington were seen as reacting to each other’s aggression and threats to the status quo, creating an “escalating dynamic”.
Andrew Gilholm, head of China analysis at consultancy Control Risks, noted that past crises in Taiwan were typically triggered by events in Taipei and carried less risk of sparking conflict because the US previously had a much stronger military advantage .
“China is watching [US policies challenging Beijing] and does not consider them reactive and deterrent moves. They see them as provocative moves that threaten the status quo and feel the need to respond to those with their own deterrent action,” Gilholm said.
AmCham Shanghai’s Zheng said tensions could only be eased once Xi and Biden could meet in person, which he hoped would take place after this year’s party congress.
“You don’t want to see a decoupling. You don’t want to isolate China. And you don’t want to see these countries go down completely separate paths,” he said. “The bottom line is that US and Chinese leaders need to resolve their differences.”
Video: Will China and the United States go to war over Taiwan?