The outlook for 2024 may prove challenging for companies operating in the Asia-Pacific region, and more widely.
Sino-American tensions are currently “on ice”, but elections in Taiwan in January, possible political instability in Japan, and US presidential elections in November will introduce new uncertainties, which may worsen systemic differences, and so lead to more overt confrontation.
Of course, it is perfectly possible that the uneasy equilibrium of recent years will continue throughout 2024. Even if it does, though, executives should still consider shaping operations to protect company interests, given how severely and rapidly geopolitical developments could damage the commercial climate.
SVA can advise on how best to respond.
The Taiwanese touchpaper
Of most concern are tensions in the Taiwan Straits.
Presidential elections on 13 January 2024 may result in the victory of Democratic Progressive Party (“DPP”) candidate, William Lai Ching-te, who supports Taiwanese sovereignty, and so is anathema to Beijing. He would not take office until 20 May 2024, though, meaning that tensions may not rise until the summer of 2024.
One consideration in that context is economic weakness in the PRC, with a property crisis under way. A partial bail-out of the ailing sector is possible, and a hoped-for recovery could follow towards the end of the year. Equally important will be political considerations; General Secretary Xi Jinping made clear in his New Year speech that Beijing continues to see Taiwan as an inalienable part of the mainland.
China has a number of options should it choose to demonstrate its claims of sovereignty, ranging from maintaining the status quo, through the carrying out of more “grey zone measures” that fall short of igniting conflict (such as aggressive deployments of military assets or the cutting of fibre optic cables), all the way up to an outright attack on Taiwan.
Perhaps the likeliest option, though, would be a blockade of Taiwan, as in August 2022 (although that was only for five days). Beijing may calculate that such action would not prompt a severe response from Washington, given the distractions of the upcoming presidential elections, and the divisive domestic political climate.
The economic impact of any lengthy blockade would be significant, possibly causing: disruption to shipping; diversion of trade in the region; the stoppage of high-end semi-conductor exports; deep financial uncertainty; and much subdued growth in China, Taiwan, and around the region.
The US and other states would have to respond to a blockade, in some way. At the least, Washington would impose economic sanctions on Chinese individuals and entities, which could damage the business climate.
More likely, though, is that Washington would back Taiwan, as it has Ukraine. A maritime blockade could then easily escalate into broader conflict, if US or Japanese vessels sought to push through Chinese lines – and were interdicted.
A separate concern relates to the situation in the South China Sea.
Of especial note here is the growing frequency of maritime near-misses near Philippines-controlled features in the sea, such as Second Thomas Shoal. The risk of an accident escalating into conflict is rising, particularly if the PRC calculates that the use of a maritime militia or the coast guard would not provoke a military response.
This issue is especially important because Manila is a treaty partner of the US, and has bolstered its military links to Washington in the context of Chinese pressure. American vessels are increasingly engaged in joint actions with the Philippines, but the US will want to strike a balance between protecting the Philippines but not provoking a conflict.
Separately, and in a reminder that the South China Sea, Taiwan (and East China Sea) issues are all closely interlinked, Washington is seeking access to sites in northern Luzon from which to operate in the event of a war in the Taiwan Straits, which will anger Beijing. Japan may also work for closer defence ties with Manila in 2024, too.
Other strategic considerations
Other variables add to the risks. One is the situation in Japan, which is a major regional power, a key ally of both the US and (in effect) Taiwan, and which sees Taiwanese autonomy as a national interest.
The Japanese authorities have started some planning for what-could-be a conflict, by liaising with southern prefectures about how to receive an influx of refugees from Okinawa, for instance, and by improving key port facilities and airports. Tokyo is also bolstering sea-based anti-missile defences.
However, Japan’s political stability is now somewhat in doubt. The Seiwa Seisaku Kenyukai faction within the ruling Liberal Democrat Party (“LDP”) is under pressure owing to a scandal related to illicit fund raising, which has already claimed four cabinet ministers.
Prime Minister Fumio Kishida thus faces serious distraction in the coming months – and could yet fall. A possible replacement for Kishida within the LDP is former defence minister Shigeru Ishiba, but Ichiro Ozawa, a nationalist politician, is seeking to put together an opposition alliance to challenge the LDP in the next election, which must take place by 2025.
As such, Japan seems liable to enter a period of political uncertainty, which could affect perceptions in Beijing and elsewhere of its ability to respond to a crisis. That said, Tokyo is well-aware of its national interests, and Japan’s bureaucracy should ensure a degree of policy continuity regardless of political developments.
Geopolitical risks in Asia are thus at their highest level in years, with significant implications for the business climate.
After all, much of Asia’s growth in recent years has rested on strategic stability. The integration of manufacturing processes across jurisdictions depended on cooperation between states and companies, and on stable and safe shipping and transport ties.
Now, tensions, blockades or even an overt conflict could not only undermine willingness to cooperate across borders, but also directly impede the free flow of goods, and add to the costs of shipping. The implications for business would be serious, affecting directly the prospects of not just China and Taiwan, but also South Korea, Vietnam, Thailand and other locales.
Moreover, that risk extends well beyond Asia. Western European states’ efforts to reduce carbon emissions, for instance, have rested in large part on the shifting of manufacturing capacity (and the associated carbon burden) to Asia. That sleight-of-hand increasingly seems unwise.
At a more “nitty gritty” level, even a limited rise in tensions would have significant implications for investors. Already attitudes towards Australian, British, Canadian, and US businesses in mainland China have worsened, resulting in some arrests and tougher regulatory treatment.
A strategic stand-off in the Taiwan Straits or South China Sea would only add to ill-will, which might manifest itself in harsher enforcement action, stricter enforcement of data or other rules, or in nationalist protests and boycotts. Suspicions of foreign executives travelling or working in the region would rise markedly.
Tensions could also result in a spike in the price of capital across the region, and add to insurance costs, putting corporates and banks under greater financial pressure. Insolvencies could follow, some investments may become untenable, and governments could respond by channelling finance to bolster champions, at the expense of outsiders.
It is perfectly possible that the uneasy geopolitical equilibrium that has existed for years in Asia will continue undisturbed throughout 2024. Equally, though, it may not. The strategic balance is much more precarious than it has been for years, and the risk of conflict is at a high.
Boards would thus be remiss not to take account of the growing geopolitical risks facing companies and investments in 2024. SVA has a great deal of experience in helping businesses adjust to geopolitical and other risks, and can advise on how best to respond.
SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.
We can be of any assistance to your organisation in dealing with these complicated issues. If you wish to protect your business from the negative consequences of geopolitical risks, please do not hesitate to contact us.