Taiwan: Mirabaud Group’s John Plassard asks whether the black swan is back?

The following analysis is from John Plassard, senior investment specialist at Mirabaud Group 

Taiwan fears that the Trump administration’s refocusing on China could weaken US support for its security. While increasing its defence spending and semiconductor links with the US, Taiwan is also facing trade tensions and regional instability. There are growing fears that Washington’s unpredictability could push allies such as Japan and South Korea closer to Beijing, weakening Taiwan’s position. Could this be the black swan of 2025?

• The facts

The US Department of Defense’s 2024 Annual Report on Military and Security Developments Involving the People’s Republic of China highlights the continued expansion of Chinese military capabilities, including an increased presence in the Pacific and Gulf of Aden. It highlights the rapid progress of the People’s Liberation Army (PLA), which is modernising its logistical capabilities and developing skills in urban warfare and long-range power projection.

China is also continuing to build up its nuclear arsenal, aiming for 1,000 warheads by 2030, and now has a functional nuclear triad comprising missiles, submarines and air forces. The report also highlights the PLA’s internal reforms, with efforts to improve military decision-making and joint coordination.

Finally, the recent anti-corruption measures affecting senior military officials could have repercussions for the organisation and governance of the Chinese armed forces.

• President Xi’s ambitions

A successful invasion of Taiwan would consolidate Xi Jinping’s legacy, achieving what even Mao Tse Tung could not. Beyond the symbolic victory, it would break the first island chain – a strategic barrier stretching from Japan to the Philippines – and give China unrestricted access to the Pacific.

The PLA could thus encircle Japan, put pressure on Australia and project its power into the Indo-Pacific. But the real shockwave would be political.

The fall of Taiwan would reveal the ineffectiveness of US military and economic deterrence and send a message to the whole of Asia: Washington’s security guarantees are meaningless.

Countries would pivot overnight, signing agreements with Beijing rather than risk the same fate. What would be the result? The United States, once the dominant power in the Pacific, would be sidelined, its credibility damaged and its influence called into question.

Remember that 3 years ago, during a face-to-face meeting between the US Defence Secretary and the Chinese Defence Minister, Wei Fenghe, the latter warned his American counterpart that Beijing ‘will not hesitate to start a war’ if Taiwan declares its independence.

Wei warned the American that ‘if anyone dares to split Taiwan from China, the Chinese army will definitely not hesitate to start a war no matter the cost’.

For almost 70 years, tensions between Taiwan, Beijing and the United States have been at an all-time high.

• Taiwan

The island of Taiwan – formerly Formosa – is a de facto independent state located off the coast of mainland China. However, the island is a ‘province of China’ over which the People’s Republic currently exercises no power.

The island of 35,980 km² is separated from the mainland by the Taiwan Strait and is surrounded to the north by the East China Sea, to the east by the Pacific Ocean and to the south by the South China Sea. In total, Taiwan has 88 islands and islets, the furthest of which are 150 km from the main island, Taiwan.

Taiwan is not a sovereign state from the UN’s point of view; the name ‘Republic of China’ or ROC that Taiwan has officially called itself since 1949 is not recognised everywhere on the international scene. In fact, since Taiwan was ousted from its seat on the UN Security Council in 1971, most countries in the world recognise only the People’s Republic of China. Only 18 states recognise Taiwan as a country. The country has a population of almost 24 million. The country is the world’s fourth largest producer of high-tech electronics and semiconductors.

• What is the relationship between Taiwan and China?

Relations with mainland China have deteriorated since Tsai Ing-wen’s Democratic Progressive Party (DPP) – overwhelmingly re-elected for a second term in January 2020 – came to power in 2016. The DPP has remained firm during its second term in its belief that it will not join the ‘1992 Consensus’ that governs cross-strait relations, in opposition to the ‘one China’ principle.

As a result, China has resorted to economic measures and stepped up military exercises to put pressure on Taiwan.

Taiwan, feeling increasingly threatened by China, ‘logically’ turned to the United States, provoking sharp tensions with Beijing.

However, the tensions between the two territories are not new. In 1945, the island of Formosa was abandoned by the Japanese, who had just lost the war, and was recovered by the Republic of China, then led by General Chiang Kai-shek. But the Communists took power in Beijing and founded the People’s Republic of China in 1949, and the general’s troops took refuge in Taiwan.

China would like to apply the formula of ‘one country, two systems’ – status of ‘special administrative region’ – to Taiwan, following the example of Hong Kong and Macao. This is frowned upon by both Taiwan and the United States.

• What is the relationship between the United States and Taiwan?

Taiwan is a major foreign policy interest for the United States. Its values, technological prowess and geostrategic position are aligned with fundamental American values and priorities for the region, making it a crucial partner for the United States in the Asia Pacific.

Over the last 40 years, since the signing of the TRA, the United States has played an important role in ensuring Taiwan’s security, while maintaining constructive relations with the People’s Republic of China (PRC).

• The Taiwan Relation act (TRA) and TAIPEI

The United States officially recognised the People’s Republic of China in 1979. The same year, Congress passed the Taiwan Relations Act (TRA), a law that provides a framework for trade and cultural exchanges between Washington and Taipei.

It enables both partners to pursue a substantial relationship and to contribute to the maintenance of peace, stability and security in the Indo-Pacific region. The law does not recognise the term ‘Republic of China’ but refers to the ‘Taiwan governing authorities’.

Interestingly, the TRA does not guarantee US military intervention in Taiwan’s defence should it be invaded by China. The US has a deliberately ambiguous policy in this regard in order to prevent a unilateral declaration of independence by Taiwan as well as a unilateral annexation of Taiwan by China.

On 4 March 2020, the US House of Representatives unanimously passed the TAIPEI Act (‘Taiwan Allies International Protection and Enhancement Initiative’). The legislation, designed to support more international space for Taiwan in the world, urges the US administration to strengthen its relationship with Taiwan and supports Taiwan’s defence and security.

• China is angry with … the United States

The recent update of the US State Department’s fact sheet on Taiwan, which removed the explicit statement that the US ‘does not support Taiwanese independence’, has provoked strong condemnation from Beijing. By deleting this statement, the United States gives the impression of further blurring its position, which worries Beijing, which considers Taiwan to be a rebel province.

While the US downplayed the change as a routine update, China sees it as a ‘serious step backwards’ and an indication that Washington is changing its position on Taiwan. The Chinese Foreign Ministry urged the Trump administration to ‘immediately correct its mistakes’, warning of serious consequences for US-China relations.

Meanwhile, tensions in the Taiwan Strait are escalating, with an increase in People’s Liberation Army (PLA) military activity, including air and naval exercises near the island. The situation remains highly sensitive, with both sides continuing to manage long-standing geopolitical tensions.

• What are the consequences of armed intervention?

A rumour of a Chinese invasion in 2021, the centenary year of the Chinese Communist Party, spread for a time in 2019 and 2020. Nothing happened, fortunately.

While the consensus – and ‘common sense’ – is that Beijing will continue its efforts to control Taiwan through military threats, diplomatic isolation and economic incentives, we cannot totally rule out an armed Chinese intervention, which would have catastrophic human, geopolitical and economic consequences.

Indeed, President Xi Jinping’s desire to cement his legacy by recovering ‘lost’ territories could push China to ‘act’ at some point.

The Communist Party’s legitimacy rests partly on its promise to ‘unify’ China, and its hold over the country’s 1.4 billion inhabitants could be weakened if it allows Taiwan to become an independent country.

Be that as it may, we can imagine here that, in the event of intervention, Beijing would opt for rapid action, in which the Chinese army would submerge the main island before the United States could intervene.

On paper, the military balance is heavily in Beijing’s favour. China spends around 25 times more on its military than Taiwan, according to estimates by the Stockholm International Peace Research Institute, and has a clear conventional advantage in everything from missiles and fighter jets to warships and manpower, not to mention its nuclear arsenal.

We can also imagine, with the advances in technology, that before an invasion, electronic and cyber warfare units would target Taiwan’s financial system and key infrastructures, as well as American satellites, in order to reduce the notification of imminent ballistic missiles.

However, the Taiwanese army has fortified its defences around the main landing points and regularly carries out exercises to repel Chinese forces arriving by sea and air.

The potential involvement of the United States is a key wild card in the assessment of an invasion scenario. American naval power has long deterred China from any attack, even though the US abrogated its mutual defence treaty with Taiwan in 1979 as a condition for establishing diplomatic ties with Beijing.

The TRA authorises US arms sales to ‘maintain sufficient self-defence capability’. Not intervening could damage US ‘prestige’. Arms control experts fear that any sign of China mobilising for intervention could trigger a pre-emptive strike by the US against China’s nuclear forces, which could lead to an uncontrollable conflict.

In short, the question of whether armed conflict will ever occur depends largely on the political leaders in Beijing and … Washington.

• Concrete economic consequences

According to Bloomberg Economics, a war in Taiwan would cost around $10 trillion, or around 10% of global GDP, dwarfing the consequences of the war in Ukraine, the avian flu pandemic and the global financial crisis.

1. Impact on markets

An (indirect) conflict between the world’s 2 leading powers would obviously have major consequences for the markets.

• Currencies: Sharp rise in the dollar and the Swiss franc – the Nikkei’s performance is more questionable.
• Treasuries yields: Bund falls, but Treasuries potentially rises – as China decides to sell its US bonds.
• Indices: Global indices fall sharply – SMI outperforms.
• Theme: Strong sector rotation in favour of defensive stocks.
• Impact on the semiconductor sector

Taiwan is the world’s epicentre for semiconductor chips, ubiquitous components used in products ranging from data centres to smartphones. A war in the region would have major consequences for the global economy.

Taiwan manufactures most of the world’s advanced logic semiconductors, as well as many state-of-the-art chips.

Worldwide, almost 6% of total value added comes from sectors using chips as direct inputs, i.e. over 6,000 billion dollars.

The total market capitalisation of the 20 largest customers of chip giant Taiwan Semiconductor Manufacturing Co. is over 8,000 billion dollars.

The Taiwan Strait is one of the busiest shipping lanes in the world.

Nvidia CEO Jensen Huang recently told Bloomberg TV that the global technology sector would continue to rely on Taiwanese manufacturing for ‘quite some time’. He added that it would be ‘very difficult’ for Nvidia to serve its customers without the island…

Last year, Bloomberg reported that two of the world’s largest chipmakers could remotely activate a ‘kill switch’ on their most advanced chipmaking machines in the event of a Chinese invasion of Taiwan.

ASML, Europe’s leading technology company by market value, supplies state-of-the-art machinery to chip manufacturers. These include Taiwanese company TSMC.

1. An ‘invasion’ not possible before …2027?

A Chinese invasion of Taiwan before 2027 is considered unlikely due to a combination of military, logistical and structural challenges within the PLA.

Despite rapid naval expansion, the People’s Liberation Army still suffers from major shortcomings, particularly in terms of officer proficiency, joint operations and the complex logistics required for large-scale warfare. The Pentagon report highlights the lack of demonstrated capabilities in urban warfare and long-distance military operations, both of which would be crucial in the event of an invasion of Taiwan.

In addition, Xi Jinping’s anti-corruption campaign has destabilised the military command, leading to increased risk aversion in the ranks. While China continues to modernise its nuclear and naval forces, these internal weaknesses significantly delay its ability to successfully conduct a large-scale military campaign against Taiwan in the near future.

• Conclusion

Taiwan is facing growing strategic uncertainty as the Trump administration appears to be recalibrating its priorities in favour of a direct confrontation with China, casting doubt on its commitment to the island. Between trade tensions, increased military pressure from Beijing and the vital importance of the semi-conductor sector, Taiwan’s future now rests on a fragile balance where American unpredictability could redraw the balance of power in the Asia-Pacific.