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Taiwan Needs Business Help to Harden Its Economy Against China

China is making no secret of its desire to harm Taiwan by putting the screws to its economy. Beijing could cause enormous harm for relatively little direct cost and without dispatching a single soldier to the island: Companies always worry about disruption and reduce their operations or leave altogether if chaos seems likely. But that doesn’t mean the Taiwanese economy is doomed. Western companies can partner with Taiwanese ones and agree take on key parts of their operations in case of a crisis. Even just striking such deals would signal to Beijing that Taiwan is resilient—and that it has many friends.

When Taiwanese President Tsai Ing-wen met with U.S. House Speaker Kevin McCarthy in California in April, Beijing responded with a military exercise featuring a simulated attack on the island—and, for good measure, dispatched an “inspection flotilla” to the Taiwan Strait, where its inspections would have wreaked havoc on the crucial but narrow shipping lane, through which 240 cargo ships sail on an average day. The message to global shipping companies was clear: Sailing near Taiwan is risky, and Beijing can cause chaos in the strait whenever it chooses.

A little saber-rattling is enough to unsettle many companies. Britain’s iconic Brompton Bicycle firm is, for example, reducing its use of Taiwanese suppliers out of fear of a Chinese invasion. Other companies with operations in Taiwan are adding conflict clauses to contracts. “Companies are increasingly concerned that in the event of a takeover of the island by force, the U.S. government could sanction assets in Taiwan if Washington deems them to be under China’s control,” Nikkei Asia reports.

In the weeks before Russia’s invasion of Ukraine in February 2022, the presence of Russian soldiers at the border so spooked Western investors that many left the country. Ukraine’s currency lost value, its sovereign dollar bonds plummeted, and insurance against a Ukrainian default became more expensive. Yet, with the soldiers remaining on the Russian side, the Kremlin was not yet violating any international laws or rules.

Taiwan’s economy is far sturdier and larger than Ukraine’s, and it doesn’t suffer from the pervasive corruption that made Ukraine a risky bet for businesses in the first place. But its economy is indisputably vulnerable to Chinese gray-zone aggression and invasion threats. That doesn’t mean, though, that companies on the island are doomed. Rather than panicking, many are beefing up their resilience. A survey released in February by the American Chamber of Commerce in Taiwan showed that 47 percent of its member companies said the new geopolitical climate had forced them to revise business continuity plans. An October 2022 survey by Nikkei Asia, in turn, showed that 46 percent of foreign multinationals with operations in Taiwan had made plans to evacuate staff in case of a serious crisis. But the American Chamber of Commerce survey also showed that 88 percent of companies planned to maintain or expand investments in Taiwan in 2023.

Industry accounts for nearly 38 percent of Taiwan’s economy, while services account for nearly 61 percent. Agriculture makes up a mere 1.4 percent of the Taiwanese economy, compared with nearly 11 percent of Ukraine’s economy. That distribution is worrisome from a self-sufficiency perspective in case of war. It is, however, excellent news when it comes to Taiwan’s economic resilience because a heavy focus on industry and services means that companies can more easily rely on international partners in a crisis.

If, for example, Beijing were to dispatch its “inspection flotilla” again, thwarting deliveries to Taiwanese manufacturers, such disruption could cause Taiwanese manufacturers’ international customers, to look for alternative suppliers. Chinese use of military force against Taiwan would naturally scare Taiwanese companies’ customers away. While Taiwan has a new All-Out Defense Mobilization Agency, it only includes mobilization of defense-related industries, and its responsibilities don’t include the continuity of the economy.

But if Taiwanese businesses had international crisis partners, those partners could take over production and services in case Taiwanese firms became incapacitated. Should Taiwan proper become disconnected from the internet (and thus from most modern functions), as Taiwan’s Matsu Islands were this February after their cables were severed by two Chinese vessels, international corporate partners could similarly cover Taiwanese companies’ core obligations to customers.

While Taiwan faces more devastating risks than most countries, there are models that it can build on to secure the continuity of its economy during a severe crisis. Sweden and Finland, for example, have continuity-of-the-economy plans that date back to the Cold War, though the plans are largely nationally based.

“Even short of an attack of Taiwan, COVID and the war in Ukraine have demonstrated that that the world’s long supply chains are incredibly vulnerable,” said retired Maj. Gen. Pekka Toveri, a former chief of military intelligence in the Finnish defense forces and newly elected member of the Finnish Parliament. “That includes ammunition for Ukraine. The world is discovering that the ammunition we want to send the Ukrainians includes parts from authoritarian countries that are not exactly our friends.” That makes it even more important for Western companies—and countries—to help companies in an indisputably friendly country such as Taiwan.

To be sure, there are logistical challenges in taking over a modicum of another company’s operations, especially in manufacturing. The parts have to be available, and the logistics of getting the product to the customer have to be arranged. And, yes, companies in other countries often have full order books. Inherently local operations, like supermarkets and pharmacies, can’t be conducted from afar. But like most of today’s corporate giants, most Taiwan-based companies—led by TSMC, Foxconn, MediaTek, Chunghwa Telecom, Formosa Petrochemical, and Delta Electronics—already have operations in other countries. (TSMC has invested $40 billion in building two chip factories in Arizona, the first of which will become operational next year.)

These satellite operations, aided by local partners, would be well-placed to increase their operations if China were to start tightening the clamps on Taiwan. The home bases of foreign companies active in Taiwan could naturally take over some of the Taiwanese branches’ operations in case of a crisis. The rise of remote work, and the fact that Taiwan is a fully integrated member of the modern global economy, is to Taiwan’s advantage. What’s more, the Czech Republic already runs pioneering national security exercises for the private sector led by its defense ministry. Prague could lend this expertise to Taiwan.

So is the fact that Taiwan has a rapidly growing number of friends. It may enjoy diplomatic recognition from only 13 countries, but many more—including Lithuania and the Czech Republic—have demonstrated great fondness toward the island in recent months. In a poll conducted by the Pew Research Center in March, 66 percent of Americans viewed Taiwan favorably.

By contrast, a Pew poll in September 2022 found that 82 percent of Americans had a negative view of China, up from 35 percent in 2002. So did 83 percent of Swedes, up from 40 percent; 74 percent of Germans, up from 37 percent; 75 percent of Dutch citizens, up from 34 percent; 63 percent of Spaniards, up from 21 percent; 74 percent of Canadians, up from 27 percent; and 69 percent of U.K. citizens, up from 16 percent; 87 percent of Japanese citizens, up from 42 percent; and 80 percent of South Koreans, up from 31 percent. In Germany, an astonishing 87 percent of respondents said in a poll last November that the government should make the country less dependent on nondemocratic countries. Only 22 percent were in favor of stronger relations with China at the expense of human rights.

Such popular support for Taiwan across the Western world opens massive opportunities for Western companies, even ones fearful of Chinese retaliation. Since they face risks in China anyway—not least because of China’s newly amended, and now even broader, espionage legislation—and are often trying to leave as a result, why not make lemonade out of geopolitical lemons and volunteer to become Taiwanese companies’ crisis partners? By supporting Taiwan and communicating this to the world (under the hashtag #FreedomFirm, perhaps?), they would engender a great deal of affection among Western consumers.

“From a reputational perspective, there would be upsides, especially for consumer-product companies, since so many companies are already caught between Western consumers and Chinese ones,” said Alison Taylor, a clinical associate professor at New York University’s Stern School of Business who focuses on business ethics. “But if you make pharmaceuticals, for example, you might want to stay under the radar. It would depend a lot on the sector.” Western governments could offset potential reluctance by offering tax breaks and other support to companies that team up with Taiwanese counterparts. That would send a strong signal of allied support for Taiwan—and be an entirely peaceful measure.

Beyond the potential reputational win, companies would help Taiwan demonstrate that Chinese attacks on its economy won’t have the desired effect. That’s the point: By demonstrating resilience in case of aggression by China, Taiwan and its friends can make such aggression less likely. A Taiwan economic defense alliance formed by Western corporations assisted by their governments would be as symbolically important as a military one.

Source : FP