Economic Responses to a Chinese Invasion of Taiwan

The People’s Republic of China (PRC) has claimed the island of Taiwan as a piece of its sovereign territory ever since the end of the communist revolution. Despite that, the Republic of China, also known as Taiwan, has had significant autonomy and has developed both a thriving economy and democracy. Many PRC leaders following Deng Xiaoping have let Taiwan enjoy this autonomy while still maintaining their nominal claim on the island. Instead, they decided to focus on improving the economy of the mainland and increasing their power through multilateral institutions such as the United Nations. This strategy culminated in the One-China Principle that had other nations such as the United States recognize the People’s Republic of China as the sole legitimate Chinese government. The U.S. did this through the One-China Policy adopted in 1972. President Xi Jinping has changed the Chinese Communist Party’s stance on Taiwan and has vowed that "The historical task of the complete reunification of the motherland must be fulfilled, and will definitely be fulfilled."

The Republic of China and the United States were close allies before the OneChina Policy forced the United States to sever official political ties. In place of an alliance, the United States passed the Taiwan Relations Act (TRA) which has established strategic ambiguity over the ownership of Taiwan and any potential U.S. involvement. The TRA lays out that the United States will only recognize a peaceful resolution to Taiwanese reunification with the mainland. Any use of force, embargo, or coercion will not be recognized as a legitimate claim to Taiwan.

Strategic Ambiguity has left many wondering if the United States would take an active role in the defense of Taiwan or if their assistance will end in supplying weapons and military technology. However, at a conference in Japan during his visit to ASEAN to establish the Info-Pacific Economic Framework President Biden claimed that the United States military will defend Taiwan. His administration has since walked those statements back claiming that U.S. policy towards Taiwan has not changed. However, they are still militarily supportive of Taiwan.

Former Speaker of the House Nancy Pelosi’s visit to the island has also significantly contributed to the tensions between the United States and China. In response to her visit, China held live-fire drills in 5 zones around the island ending on August 10th . Afterward, the CCP released a whitepaper once again vowing to use force to reunify Taiwan if necessary despite international accords barring such actions.