The stepped-up planning by business leaders in the US, Europe, Japan and elsewhere is a signal that investors in China no longer view an invasion of Taiwan as just a low-probability “black swan” risk to the world’s second-largest economy. “There’s a lot of thinking about scripts. . . to the end: “What shall we do in the event of a war? Should we close our operations in China? How can we maintain our business and overcome potential foreclosures?” said Jörg Wuttke, head of the EU Chamber of Commerce in China. “This little island that is always simmering. . . suddenly it’s perceived in many headquarters as if it’s going to be the next Ukraine,” Wuttke said. Even before tensions flared in Taiwan this month, multinational companies operating in China faced growing reputational risks and pressure from Washington and its allies to diversify away from the mainland market. Business leaders said the lack of flight from foreign companies underscored the lack of alternatives in the world’s biggest consumer market and most important manufacturing base. But some US companies are among those considering moving parts of their operations out of China, threatening economic ties between the superpowers. Eric Zheng of the American Chamber of Commerce in Shanghai said that for many American manufacturers with global supply chains, the Taiwan crisis added to the “material” effects of deteriorating US-China relations, such as trade tariffs, and forced them to seriously consider the building factories in other countries. “The popular thinking is ‘China plus one’ or even ‘China plus two’ – meaning China will still be the main base for manufacturing, but you have an alternative Southeast Asian country, just in case,” he said. . Another US operations official, who asked not to be named, stressed that the contingency planning did not reflect an “anti-China” position but rather a prudent response to the reality and potentially devastating consequences of the increased risk of military conflict. President Xi Jinping’s decision to hold military exercises in response to US House Speaker Nancy Pelosi’s visit to Taipei this month dramatically changed the status quo in the Taiwan Strait. The episode also came against a backdrop of Western criticism of China’s refusal to condemn Russia’s invasion of Ukraine, as well as its crackdowns on Xinjiang and Hong Kong. President Joe Biden, who has said the US would defend Taiwan if China invaded, was already rallying allies to counter Beijing’s regional claim. But Zheng said many major US companies, including Disney and Elon Musk’s Tesla, had made long-term commitments to be “in China, for China” and remained largely dependent on reaching its 1.4 billion consumers her. The most serious standoff over Taiwan in nearly two decades has also increased political pressure on companies that rely on exports to China. David Mahon, a Western investment manager and consultant based in Beijing since 1985, said that for groups such as New Zealand dairy exporter Fonterra, diversifying from their most important market would not be easy. “They have been advised to diversify. The question is “where?” Do I stop making profits for the next five years? There is nowhere to go,” Mahon said. Fonterra said it was closely monitoring geopolitical developments and that “China continues to be a profitable market with excellent prospects”. Reiji Morooka, chief financial officer of Japanese trading house Sumitomo, told reporters at an earnings briefing that the company would “consider its next steps” as it monitors the fallout from Pelosi’s visit. “It is a big issue for us how we deal with the risk of global disconnection as geopolitical tensions rise,” Morooka said, adding that Sumitomo had not changed its business strategy in China. Noriaki Yamaga, chief executive at shipping company Kawasaki Kisen Kaisha, questioned the extent to which economic and trade ties between the US and China could weaken despite the temporary business interruption from events such as Pelosi’s visit. “Is it realistic for the global economy to have a US-China decoupling?” he said. James Zimmerman, a China lawyer at Perkins Coie, said the pace at which companies might shift operations out of the country may depend on the upcoming 20th Congress of the Chinese Communist Party, at which Xi is expected to be appointed new head of the party and the Central Party Military Committee. “If [there are] “absent policy changes on multiple fronts — and I don’t expect there to be — we may see an accelerated level of strategic renewal, outreach or overreach to friendlier countries,” Zimmerman said. Such changes could also be driven in part by Xi’s “zero Covid” policy, which has hurt China’s economy, as well as by “Beijing’s relationship with Russia, its treatment of Hong Kong and its overly belligerent reaction to Pelosi’s visit to Taiwan,” he said. The head of Asia execution at a Wall Street investment bank said investors were asking about hedging strategies against Taiwan’s risk of Russia invading Ukraine. “People are not at all sure that there will be an impact. It’s more about understanding what the tipping points are,” the person said, adding that two major areas of concern were how to hedge against currency moves and the impact of potential U.S. sanctions on China in the event of a conflict.

Analysts warned that Beijing and Washington see each other reacting to aggression and threats to the status quo, creating an “escalating dynamic”. Andrew Gilholm, head of China analysis at consultancy Control Risks, pointed out that previous crises in Taiwan were usually triggered by events in Taipei and carried less risk of igniting a conflict because the US previously had a much stronger military advantage. “China is watching [US policies challenging Beijing] and does not consider them reactionary, deterrent moves. It sees them as provocative moves that threaten the status quo, and it feels the need to respond to them with its own deterrent action,” Gilholm said. AmCham Shanghai’s Zeng said tensions could be eased only when Xi and Biden could meet in person, which he expected to happen after this year’s party congress. “You don’t want to see the disconnect happen. You don’t want to isolate China. And you don’t want to see those countries go completely separate ways,” he said. “The bottom line is that US-China leaders need to resolve their differences.” Video: Will China and the US go to war over Taiwan?