Taipei recently suffered a power outage. Such is the uncertain nature of the world at the moment that our first thoughts were around the possibility of a Chinese cyber-attack on Taiwanese critical infrastructure. Was this the prelude to an invasion? No, it was simply an outage in power supply. However, it does underline how events in Ukraine can have a knock on effect elsewhere in the world. What exactly are the repercussions for Taiwan after the Russian invasion of Ukraine? Why are we nervous at this particular time? And what are the prospects for a Chinese invasion of Taiwan?
From a Chinese perspective, the Russian invasion of Ukraine offers a number of points to consider. They fall along two lines - the prosecution of the military campaign by Russia and the reaction of the US and other western allies, especially of NATO. The military campaign has appeared to have stalled in the first two weeks. This could be deliberate on the part of the Russian forces - they may be waiting for better ground over which to advance their motorised vehicles. It could possibly be the result of limited Russian war aims, although this seems unlikely. Or it could be the result of poor military planning and issues around logistics and re-supply. In the weeks to come, we shall find out which is which. For now, the war has assumed a character of the medieval - slow paced, siege operations, and a high degree of brutality inflicted upon the civilian population.
What have been effective in Ukraine are portable, hand held, anti-armoured vehicle and anti-aircraft missiles. This is not too surprising. These weapons were effective in Afghanistan against first Russian and then against NATO and American targets. The nature of potential Chinese operations in Taiwan - sea-borne and air-borne assault - does suggest what is known as a 'target rich environment'. It is true that China would be able to access overwhelming force, but the ability to deploy it is entirely a different matter. The lesson in Ukraine suggests, so far, that the balance has shifted to the defence and away from the attack. This increases the potential price of initial military action and the costs of occupation.
One factor that must weigh heavily in Beijing is the political cost of failure. If China were to attack Taiwan and fail to achieve the military aims, would the current regime survive? Would the present leadership be replaced by a different set of leaders? Or would this be a signal to replace the Communist Party of China altogether? These are very high stakes indeed. Reflecting this point onto the war in Ukraine, could we be seeing the endgame for President Putin?
The response of the US and European allies has been to detach Russia from the global economy. We have yet to see how successful that will be. Russia has not been abandoned by its Asian allies - China, Iran, and India - but the sanctions have started to have an impact. Since 2014, President Putin has focussed on building a siege economy that is disconnected from the global economy to a larger extent. We shall now see how successful that policy will be. The freezing and seizure of Russian assets in Europe and America has changed the game somewhat. It is inconceivable the China isn't taking note here.
For decades China has recycled its trade surpluses into US Treasury bonds. If these can be frozen and seized at short notice, that suggests that America is an unreliable partner to financial counter-parties. For the last five years, we have seen China re-cycling the US Treasury holdings into US Dollar loans to emerging nations. That process is likely to accelerate in order for China to diversify the overseas portfolio away from the US. It will lessen Chinese vulnerability to the US seizure of Chinese financial assets in the US. However, it has a knock on effect that might ultimately act to the detriment of America. If the US gains a reputation for being an unreliable banker - limiting convertibility, refusing repayment, seizing assets in custody - then the US will lose it's appeal as an international financial safe haven. This will hasten the decline of the US Dollar as the global reserve currency.
China has seen this and has acted in two ways. The first is a policy of increasing self-reliance. Whilst not a fully fledged siege economy in the style of Russia, China has followed a policy of dual circulation, which draws a distinction between the economy at home and the economy abroad. The former has been developed, whilst the latter has taken on a more strategic dimension in recent years. Allied to this is the second core policy, that of restricting the convertibility of the Renminbi. China's financial system is not sufficiently robust for the Renminbi to develop into a fully fledged reserve currency. Whether it ever will is an interesting question. For now, China is content to allow the US Dollar to retain that status.
America, by following a policy of containment and disengagement, is supporting the process of dual circulation. By distancing itself from China, the US is facilitating the process whereby China - and the inner core of nations over which it has influence - become largely self-sufficient and only has contact with the world outside of its sphere of influence for trade. That trade is normally on its own terms. This is where Russia has aspired to be prior to the war in Ukraine. The downstream effectiveness of this policy is now unfolding before us. I would imagine that Beijing is watching very closely.
Turning back to Taiwan, if we have a China that is largely disengaged from the process of globalisation, either as the result of Chinese policy or American diplomacy, then Taipei ought to be concerned by events in Ukraine. However, there are two factors working against this. First, the policy of dual circulation may not be effective. It may be impossible for China to completely disentangle itself from the global economy. To that extent, there will remain sensitive points where sanctions against China could have some impact. Second, a military campaign against Taiwan might not be successful. Indeed, the failure of that campaign might herald more radical changes on the mainland.
In the past, the Chinese leadership have been aware of the risks involved over Taiwan. This has led them to be cautious, even in the face of a perceived weak and ineffective US President. Even if Ukraine proves to be an absolute disaster for the US and NATO, that still may not encourage China to become adventurous in Taiwan. When given the choice, China prefer to stick rather than twist.
Stephen Aguilar-Millan
© The European Futures Observatory 2022
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