Will China Blockade Taiwan?

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. In today's conversation, we're going to talk about the state of China and Taiwan relations and what could happen next. 

Joining me today is Dr. Lori Esposito Murray, a senior fellow for national security and managing director of CEO programs at the Council on Foreign Relations. Lori is also the former president of the Committee for Economic Development, which is the public policy center of The Conference Board. And Lori, you've been here many times. Welcome back.  

Dr. Lori Esposito Murray: Thank you, Steve, and very happy to be invited back.  

Steve Odland:Sowe're going to talk about some delicate subjects today and try to understand what's going on in the minds of the leaders of China, as it relates to Taiwan. So talk about, first of all, the Chinese buildup of its military. It's really been exceptional over the past couple of decades, especially their naval and air forces. Give us some numbers and what their goals are.  

Dr. Lori Esposito Murray:So basically, to sum it up, China has been experiencing the most dramatic military buildup that the world has seen since World War II. And this has been a very serious commitment by President Xi since he came into power, and particularly since 2014, when he really explained his vision for the China Dream, which included national rejuvenation by 2049. And key to that was really establishing China as a military power to support its growth as a global economic and geopolitical power.  

And at least a decade ago, you were seeing double-digit increases in the defense budget. And while China hasn't sustained that, with its economic problems, it's still announced and has continued to provide increases. This year, it just announced an over 7% increase in the defense budget, which it has done for the past couple of years. So the military is continuing, even with the economic shifts, the impact of COVID on the economic budgets, continued to get very extensive resources from China.  

It's the second-largest military budget globally, second to the US, which is far above it, but nonetheless, it's number two globally. It has the largest navy in the world, has been one of the developments out of this large commitment. It has the largest active military force in the world. It has an air force as the most powerful and extensive air force in the region, and about to become the largest air force in the world. And while the US still maintains, obviously, very significant as Adm. Sam Paparo, who is head of the Indo-Pacific Command said, in terms of war-winning advantages, it's also a highly developed technological force, as well.  

And so you combine all this together, what you're seeing is China has really moved, not only with its navy but with its entire military force, from looking at its near abroad, in terms of what it was protecting, to actually projecting to a global presence. 

It's also important to point out, too, as a part of this military buildup, which doesn't get as much attention, is the fact that China is also expanding its nuclear forces, and more rapidly than we had anticipated. And which is really a critical component because Xi Jinping has moved beyond what has been a traditional Chinese approach of trying to have a minimum deterrence to actually model the US and Russia in terms of their strategic forces. 

And this will have particular impact in terms of any conflict that happens, because it will give, and it is what the Defense Department thinks China's seeking more escalation control. And as we've seen in Ukraine, how Putin has really played the nuclear issue in terms of both publicly stating and trying to control what the escalation levels are with his threats of nuclear weapons use, you could see that factoring into any conflict with China going forward, including, obviously, Taiwan.  

Steve Odland:So help us understand also just, the basis of the relationship between China and Taiwan. Because Taiwan was, in 1949, following World War II, it was a backwater. There was some native Taiwanese on there, but there wasn't much there until the revolution. So talk about then what happened and then how the relationship evolved. 

Dr. Lori Esposito Murray:So the history of the relationship of China to Taiwan is complicated and really stems from the revolution. But if I could even back up even further, Steve, what had happened in the late 1800s, 1895, the Qing Dynasty actually gave away Taiwan to the Japanese after the first Sino-Japanese War.  

During World War II, the Japanese control Taiwan. And we were working very closely with Chiang Kai-Shek, who was head of the Kuomintang Nationalist Republic of China and very much involved with fighting the Japanese, more so than Mao Zedong was at the time with the communist forces. And we had promised Chiang Kai-Shek, we had promised China during the negotiations leading up to the end of World War II, including at Potsdam and Cairo declarations, that China would receive back Taiwan as part of its territory. After the war, that's what happened. But the civil war broke out. In 1949, Mao Zedong becomes forces Chiang Kai-shek to go to Taiwan with his forces, the nationalist forces, and the issue of Taiwan then becomes a complicated, conflictual issue in terms of, does Mao Zedong's China have Taiwan as part of its China, where Chen Kai-Shek claimed that it was the home base of the Republic of China?  

With this conflict, with the civil war, with Mao Zedong declaring his China, communist China, as the one China, this issue became an international issue and particularly an issue with the United States. And was an issue of conflict with China during that time, including, particularly during the Eisenhower administration, where it actually almost triggered decisions as to whether to use nuclear weapons in these crises, the Taiwan crises that developed in 1954 and 1958, and led to a defense agreement with Taiwan and the US. And basically became a major issue that almost was resolved prior to the Korean War in 1950. And Kissinger actually said to Mao Zedong, had that Korean War never happened. Taiwan probably would've been returned to China at that time and wouldn't be an issue in US-China relations. 

Steve Odland: So why does China lay claim to the island?  

Dr. Lori Esposito Murray:So China lays claim to the island because of that history after World War II, or during World War II and after, where Taiwan was part of the post-World War II arrangement to be returned to China.  

Steve Odland: OK. That's like a nanosecond in history. And it's like a minute in Chinese history, which goes back as old as almost any, where there was no claim on Taiwan. So this is a relatively new event, and it has been operating independently, it was the original China recognized at the UN until we changed that. 

So this is all relatively new, and it's because of that post-war agreement. So unlike some territorial claims, it's not rooted in thousands of years of history.  

Dr. Lori Esposito Murray: Right, and it really became a central piece of the US opening, President Nixon's opening to China, a central piece in those negotiations, how to deal with it. A central and difficult piece on how to deal with it. And as you said, it was in 1971 during the Nixon presidency that the UN votes to seat the PRC as the official representative of China and expel the Republic of China, the Chiang Kai-shek government, the nationalist government, from the UN. And so sat the People's Republic of China as the China seat.  

Steve Odland: OK.  

Dr. Lori Esposito Murray:So President Nixon goes to China, and part of that visit included what was called the Shanghai Communiqué, which is one of the three communiqués that actually defined our relationship with China and Taiwan. And what it did was it acknowledged that all Chinese on either side of the Taiwan Strait maintained that there was one China. And that It acknowledged that Taiwan is part of China. What it did was this strategic ambiguity in terms of not explicitly stating who the US thought or whom the US thought would be the one China and what Taiwan's role was. It just acknowledged the situation and really, most importantly, left the settlement of the Taiwan question to the Chinese themselves, really between Taiwan and, mainland China, to decide how it was going to be resolved.  

And that was the first of three communiqués that followed. And just very quickly, the second one was President Carter's communiqué in 1979, where he was frustrated by the lack of progress. The Carter administration was frustrated by lack of progress, and they had a joint communiqué, which recognized the People's Republic of China, communist China, as the sole government of China, but didn't recognize China's sovereignty over Taiwan. 

And it also abrogated the 1950 Defense Treaty, which Congress responded with the Taiwan Relations Act, which actually set up the situation where the US would provide, for defensive purposes, arms to Taiwan. And then the third communiqué was Ronald Reagan in 1982 with the Chinese, where that communiqué basically said that we wouldn't have long-term arm sales with Taiwan or exceed the current levels unless the situation should change and warrant it. And we provided six assurances along those lines to Taiwan. And that is basically framed this policy we have, which is really leaving it to Taiwan and China to resolve the issue peacefully while carving out a US role to help Taiwan for defensive purposes with arm sales.  

Steve Odland: OK, so the current US position is that Taiwan and China should resolve it peacefully, and it should be between the two of them, but we are arming Taiwan. What is Europe's position or the rest of the West's position towards Taiwan?  

Dr. Lori Esposito Murray: As with the US, Europe has basically followed the same policy in terms of recognizing the PRC as the representative in the UN. But what's interesting is that the relationship with Taiwan is equally complicated because of the importance of Taiwan economically, globally, and what is the EU policy towards Taiwan evolving. Taiwan's not only an important economic partner for the EU and the US, 40% of the EU's external trade is with Taiwan, but it's also because of, we get to the chips question and the advanced technology, the major part of Taiwan's trade relations with the world. It's critical in terms of chip supply and in terms of advanced technology and electronics.  

And you have the EU steadily deepening its economic ties to Taiwan in trade and technology. And actually, in 2023, passed a non-binding resolution calling for strong economic ties with Taiwan, stressing the island's crucial role for Europe. The situation in Europe is a little bit more nuanced, as opposed to that resolution with each individual country actually havingvery important economic relations with China, as well, and stepping somewhat gingerly. But it still is an evolution in terms of how the EU has recognized, similar to the US, the significance and importance of Taiwan, particularly in this advanced economy and the fact that they are the hub for advanced chips. 

Steve Odland:So China has described Taiwan as a breakaway province. How much of that is rhetoric and how much of that is their real view of it? But their intent, they've said that they're intent on reincorporating Taiwan into China. So how does all that work? Does it go the same way that Hong Kong went, and then Taiwan is just part of China? 

Dr. Lori Esposito Murray: Taiwan's role in China's vision of its rejuvenation, Xi Jinping's vision of China's rejuvenation by 2049, which he laid out as part of China's Dream and linked in 2014 to Taiwan being reincorporated into China. It is crucial. It is the core of core principles, as the Chinese have said, it is the crown jewel in terms of the rejuvenation, of the national rejuvenation of China and the China Dream. So it's really central. It's really core.  

Just in November of 2024, Xi Jinping in his last meeting with President Biden, set it out as one of the four red lines for China, and that was as much a messaging for the incoming President Trump as it was for the outgoing President Biden. It's serious. It's real. It's one of their top, if not their top, military objective. And in terms of being able by 2027, is the objective that our intelligence analysis analysts say that President Xi has laid out, that by 2027, that they will be militarily capable of, overtaking the island. Not that they would, but that they'd be military capable to overtake the island by 2020.  

Steve Odland: And assuming they did, what would change in Taiwan? And then also, what is Taiwan's view of that?  

Dr. Lori Esposito Murray:So I think that you could easily look at the Hong Kong situation in terms of seeing what would change in Taiwan. Now what is, I think, absolutely key in terms of how China is assessing how, not if, but when and how to actually reincorporate Taiwan into China. What's really key is the more advanced chips capacity, particularly with the Taiwan Semiconductor Manufacturing Company in Taiwan, is to not actually destroy that capability. 

And so that leads to a number of scenarios. And of course, calculating the US response is also critically important. But I think with the role that more advanced chips are playing, with the constraints that the Biden administration, now the Trump administration, are putting on China's ability to access those advanced chips, and actually denying that in terms of national security reasons, has made that capability and not destroying that capability really key, which opens up a number of areas.  

And a number of analysts are saying that, if you're looking at the type of exercises, training exercises, drills that China is doing even today or just yesterday, having a major training drill. That if you look at it, it seems to be considered more likely that they would be looking at doing a blockade of the island or quarantine, as opposed to an actual takeover, to eventually lead to the reincorporation of Taiwan into China.  

Steve Odland:Yeah.  

And sothey've been practicing blockades. They now have, I think yousaid the largest navy in the world to do that. That's been part of the purpose of this re-arming and this military buildup. So you think that basically they're going to try to encircle the island and blockade it in order to force the Taiwanese to come to some sort of settlement. Sowe've been arming Taiwan. They have advanced fighters, fighting planes. What would Taiwan's response be to that?  

Dr. Lori Esposito Murray:So Taiwan has been, which gets us to Taiwan's relationship with the new administration and with President Trump. Taiwan's response would be to, I believe, as many analysts do, is to obviously fight back, to defend the island. But the US relationship is absolutely critical, and there's a lot of concern in Taiwan as to how the president and the administration is actually looking at its relationship with Taiwan. So the administration started out with the president calling for Taiwan to actually pay more for its defense. And that got the Taiwanese nervous in terms of the president's commitment to Taiwan, as opposed to in the first administration, his first phone call with an overseas leader was with Taiwan's President Tsai. Taiwan's started out a little bit more nervous.  

There's recently been a leaked document in terms of the strategic direction of the Pentagon by Secretary of Defense Hegseth, which says that China is actually our top priority and we are pivoting to China. But nonetheless, Taiwan has been trying to bolster its relationship with the president. They've said that they were interested in, I believe it's a $15 billion military sale. Their president, Lai Ching-te, has said that he will be increasing defense spending to 3%. That falls far short from the testimony of President Trump's nominee Elbridge Colby, who called for 10% increase in Taiwan's military budget. But it'sactually in play now in terms of trying to assure that the US will continue to support Taiwan and as an important deterrent to whatever the Chinese might be considering doing.  

Steve Odland: OK. So it sounds like that Chinese are committed to this being in place by 2027. They're already running drills to blockade the island. If they blockade the island, they cut off all imports to Taiwan, which includes food. So does this just create another situation, first of all, like the Berlin Airlift, and would that be allowed? Or would this just lead to a kinetic war, with Taiwan fighting back and then the US having to help defend Taiwan militarily? 

Dr. Lori Esposito Murray:Alsowhat's happening in Taiwan from a Chinese perspective, looking at in terms of what the Chinese may be thinking or how they're approaching it, it also serves as a bargaining chip for the Chinese with President Trump. There's discussion out there, is President Trump trying to cut a grand bargain with China or even a smaller bargain with China? And what would that involve? Obviously, concerns about tariffs are leading those efforts. As far as the need for bargaining, discussing, basically President Trump has taken a chessboard and has added multiple plays to this. And how it will come out may actually be part of a much larger picture in terms of what role Taiwan plays in this.  

But in terms of China, it could be a bargaining chip that China has as leverage, if and when they actually start considering or moving towards really physically imposing a blockade or, probably even more feasibly, even though this sounds like angels on a pinhead, a quarantine. So a quarantine would be led by their coast guard, not by their navy. It would be not as much seen as a military action as opposed to a commercial action where they can actually put in regulations in terms of what type of trade, what type of ships can pass or pass through. They could even consider taking it a step further and boarding ships. So it becomes a bargaining chip in terms of how a larger agreement with the US might play out.  

Steve Odland: Would the United States involve itself in a shooting war with Taiwan against China?  

Dr. Lori Esposito Murray:That's the million-dollar question here, and one that Taiwan is very concerned about. And obviously one that China has to factor in, what role the US might play. That has always been a big question. How would the US get involved? And President Trump is confusing in terms of the messages he's been sending so far, as he is clearly committed to not, committing US troops overseas. On the other hand, he's also been committed, and you could see this with the visitations of US Navy ships in the Strait of Taiwan, committed to making sure that those waterways stay open and stay open to trade and commerce. And it's, there's a lot of mixed messaging going on here and concern about what role the US could play.  

This leaked document from the Pentagon, that in terms of the strategic view coming from the secretary of defense, actually pivots the US away from Europe and accepts more risk in Europe and calls on the allies to step up. And pivots US assets towards the Indo-Pacific and the South and East China Sea, as well as the Taiwan Straits. 

Steve Odland: And hence, you have a situation where Russia is in Ukraine. They're trying to solve that before the China-Taiwan situation heats up even further. And the US is trying to get Europe to take over the European side of it so that the US can focus on the Asian side of it. 

This sounds a lot like what the world faced with Japan and Germany in those two neighborhoods back in the late '30s, which devolved into, of course, World War II. Do you see the similarities? I suspect you do. And do you see the devolution into a similar kind of war?  

Dr. Lori Esposito Murray: OK. Obviously, given the type of military training drills, the extensive military training drills, with live fire and missiles being shot across the Taiwan Strait, and the joint exercises—army, navy, air force, coast guard—that the extent of the military drill is taking place, they seem to be political responses, messaging responses to political statements. Whether it's Hegseth's visit to Asia, or whether, most importantly, the president of Taiwan's positions and statements, which have been very concerning to the Chinese. And they've been very responsive with these type of intimidating, but also live fire, joint exercises on a very large scale. 

And they can easily flip the switch and go from being an exercise to actually being an actual military operation.And so given that, this is a really dangerous situation, what's happening with Taiwan and in the Taiwan Straits. You add to that how important the Taiwan Straits are to commerce, not only for the US but for the world and for China, as well, and for Taiwan. So you have a very volatile situation. Miscalculation and the potential for miscalculation is very high. And so the potential for conflict is very high.  

And here's where I think diplomacyhas to play a very important role. And the US needs to be directly involved with the Chinese in terms of dialogue. And I think the sooner that President Xi and President Trump can meet to discuss a whole broad range of issues in US-China relations. I think the better off we will be globally in terms of being able to address what I think is one of the most serious and dangerous, potentially kinetic conflicts regarding Taiwan. 

Steve Odland:Yeah. And then you have the Russians and the Chinese up in the Arctic, which is about a stone's throw from North America. And hence the issues over Greenland and Northern Canada and the US trying to force Canada to step up. And hence the 51st state thing, if you're not going to defend your own country, then why should there be two? All of that is all interrelated to the China-Russia situation.  

But back to your statement about Trump's declarations. He's been very clear that we don't want us soldiers around the world. He doesn't want to fight these wars. He wants to end the killing that suggests that, as long as Russia and China continue to rattle sabres, that there would be a settlement of some point of some kind, including capitulation on their demands for land in Ukraine and land in China. After all, why would the world, I'm just saying quote-unquote, why would the world go to war over a small island in the South Pacific? You see what I'm saying?  

And hence, that brings into focus the 90% of the world's advanced chips, which power all the military electronics, communications, the grids, and so forth. So it really looks like China has the upper hand here, and particularly in their partnership with Russia, can do almost whatever they want together. 

Dr. Lori Esposito Murray:So I would really caution that, because of the incredible power that the US actually has and brings both economically and militarily, it's not an open free reign for China and Russia. They have to move carefully, and they have to move strategically, and we have to move carefully and strategically and make sure that we deter actions that we don't want to have happen that could destabilize the world. 

Also, the other piece of this, as you mentioned, is the importance of Taiwan in terms of the advanced technology economy and its role in that in terms of controlling, as you've mentioned, 92% of the world's advanced semiconductors and how important that trade is to not only the US but to our allies across the globe. 

Taiwan is more than it was in the 1950s to us and more even then in the '60s, '70s, and '80s. It has really developed as a key pivotal point in terms of the global economy. And that requires a level of attention and commitment and deterrence on the part of the US and working with our allies in Asia and in the Indo-Pacific as far as making sure that the stakes are really clear if China and Russia are going to take certain actions.  

Steve Odland: So given all of these possibilities on the horizon, and hoping, of course, for diplomacy to settle all of it, but hope is not a plan. What steps should businesses be taking to prepare for possible gray swan outcomes here? 

Dr. Lori Esposito Murray: Yeah, and I would say it's diplomacy plus deterrence, which is absolutely key. But which completely raises the stakes terms of the business stakes and the stakes for private enterprises and businesses and business leadership in terms of this issue. And I would really recommend starting with business entity and business leadership and C-Suites looking at what's actually at stake for them. They have to look at the situation as one, as you said, Steve, can easily become a kinetic situation. War can easily break out. Violence, disruption can easily break out, where you're either talking about disrupted trade because of quarantines or blockades, or you are looking at actually the beginnings in terms of what could become a world war, World War III.  

Steve Odland: And these supply chains, then you can't assume that the supply chains between the West and Taiwan will continue. And so they need to be secured in other ways.  

Dr. Lori Esposito Murray:I think C-suites and boards really need to look at what the particular enterprise's vulnerabilities are if something should happen in Taiwan. So that's a starting point. Look at how it would actually affect your business.And obviously, some would be very directly affected if you're in the shipping industry and actually involved in trade, either through air or sea. Or how would disruption in the trade in terms of the areas that Taiwan is absolutely key in terms of its trade relations, obviously starting with chips and advanced electronics, but also looking at the other areas where they supply imports. 

So look at the vulnerabilities, also, in terms of how Taiwan is involved in what you sell. So looking at your own vulnerabilities in terms of a company, but it has to go larger than that. And looking to see where are the alternative supply chains. Figuring out, even if you're not directly affected, there is clearly going to be shortages and price increases, just how that affects you. But going even further, looking at, I think, the lessons of COVID and how we responded to crises. We did find alternative ways to deal with the chip shortages. Look at those lessons of COVID, of how the economy kept going and what were the workarounds as solutions. 

But I think it actually goes to even a higher level here. I think it just begs the issue of business leaders being involved, directly involved in terms of policy and engaged in policy, and playing an important role in discussing the importance of Taiwan, the need for deterrence, how the US government needs to help or support alternative supply chains. And then, business leaders also have traditionally and historically played a very important role in terms of diplomacy. Where actual diplomacy between governments has ended, business leaders have played a role in terms of talking to the leadership in the countries that they're involved in. And you look at Russia and Armand Hammer, and there are many other examples of the importance of business leadership in terms of keeping a dialogue and making the Chinese leadership understand the negative ramifications of their policies and what they may lead to, and the importance of how to resolve those crises. 

Steve Odland: Dr. Lori Esposito Murray, thanks for being with us today and helping us to understand this crucial relationship between China and Taiwan.  

Dr. Lori Esposito Murray: Thanks, Steve. Appreciate being here.  

Steve Odland: Thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.