Growing potential for global disruption as US-China tensions rise

The potential for conflict in Asia is a source of anxiety for policy makers and corporate leaders in North America, Europe and elsewhere, given the region’s importance to flows of finance and trade. Much of the worry stems from China acting more assertively on its longstanding claims of sovereignty over areas of the South China Sea and carrying out military exercises close to Taiwan.

It is important, therefore, to understand that Chinese nationalism remains a potent political force that the Chinese Communist Party is seeking to both mobilize and harness. Under certain circumstances, Beijing would risk confrontation, even with the United States – most notably, over steps that break Taiwan out of its current box and move it toward de jure independence or greater officiality in its diplomatic interactions with foreign countries.

These geopolitical tensions could lead to disruptive economic sanctions and political coercion that may affect international supply chains and capital markets. If Beijing acts, it will probably use non-kinetic tools like cyber attacks directed at Taiwan while pressuring global companies that operate in both Taiwan and mainland China.

There could also be a limited military dimension, including more aggressive Chinese operations around the island of Taiwan. Given Taiwan’s status as a manufacturing hub for semiconductors this would rattle markets and have immediate repercussions for global supply chains far beyond Asia.

Beijing also aims to develop its economy, including by securing a stable supply of resources and achieving technological independence by indigenizing some of the supply chains on which its industrial growth depends. It is simultaneously exploring ways to internationalise its payment platforms and is building prospective alternatives to SWIFT and other US-dominated instruments. But these are long-term propositions and China remains vulnerable.

China is, nevertheless, now armed with an economic clout that makes any sanctions imposed from Beijing harmful to global and US players. Beijing is therefore capable of imposing considerable financial and commercial pain on international companies and various national economies through the use of license withdrawals, ‘unreliable entity’ lists, bans on imports or exports, and financial restrictions.