Iran shut the Strait of Hormuz without a navy. A handful of missile and drone strikes convinced the insurance markets that transit came with too steep a risk, and commercial shipping immediately shut down. The chokepoint closed on its own, without Iran ever having to declare a formal blockade. The lesson for Beijing is obvious. Chinese military planners, who have long studied how to use economic pressure against Taiwan, have a proof of concept.
You don’t need to sink ships to shut down a global trade route and force the United States to the negotiating table. You just need to create enough uncertainty that the private sector falls in line. The Trump Administration does not have the stomach for prolonged economic pain, and it has no plan to make that pain tolerable. America’s adversaries have us over a barrel. Washington needs to deal with this problem, or we are setting ourselves up to be blackmailed and extorted in every region of the world.
For years, the debate over Taiwan in Washington has revolved around a single question: Could Beijing successfully invade the island? When the U.S. intelligence community recently concluded that China has no fixed timeline for doing so, many found the assessment reassuring. They were wrong to. The more accurate interpretation is that Beijing no longer believes invasion is necessary.
China has a better option—one that Iran, in a cruder form—is demonstrating before our eyes now. Consider the following scenario. Beijing declares legal jurisdiction over the waters surrounding Taiwan. It fires missiles into designated exclusion zones. It starts harassing commercial vessels that refuse to submit to inspections and screening. None of this would amount to a blockade or an act of war. But the insurance markets would respond precisely as they have in the Strait of Hormuz.
The Five Powers Clause in standard maritime war-risk policies voids coverage for losses arising from conflict involving the U.S., the United Kingdom, France, Russia, or China. Carriers that won’t sail past Iranian drones are certainly not going to run the gauntlet of the People’s Liberation Army. Taiwan’s trade would shut down, including the manufacturing facilities known as fabs, that produce over 90% of the world’s most advanced semiconductors. Washington would then have to decide whether to accept the new reality or push back and risk a far larger confrontation.
Perhaps Washington decides to let Taiwan go without a fight. But if it chooses to resist China’s tactics, the economic fallout would be worse than anything seen at Hormuz, in almost every dimension. Oil has substitutes, strategic reserves, and secondary markets. You can stockpile oil and it does not depreciate. Semiconductors are different.
Taiwan Semiconductor Manufacturing Company’s fab in Arizona produces four-nanometer chips; the cutting edge two-nanometer process exists only in Taiwan. The most advanced chips typically leave Taiwan by air, not by sea, but Beijing could restrict air traffic much as it restricts maritime traffic, by claiming legal authority to screen who comes and goes from the island and threatening “law enforcement” action against aircraft that refuse to comply.
A disruption to chip supply would hit manufacturing, automobiles, telecommunications, and financial markets across every advanced economy simultaneously. There is no equivalent of the International Energy Agency capable of releasing an emergency stockpile, because no such stockpile exists. Semiconductors are expensive, and they age faster than canned tuna.
There is also the question of duration. Beijing has spent years building reserves of oil, grain, rare earths, and other essential goods as part of what analysts call China’s “fortress economy.” As of 2022, China held 69% of global corn reserves, 60% of global rice reserves, and 51% of global wheat reserves. Xi Jinping has made strategic stockpiling a personal priority and directed state oil companies to expand crude reserves and accelerate the development of alternative supply chains. This fortress economy was deliberately constructed to outlast an economic standoff longer than the allied democracies can sustain. Iran is running a version of this strategy at Hormuz right now. So far, that bet appears to be paying off.
What do the democracies have working in their favor? At the moment, not much in the way of coordinated preparation. No joint allied framework exists to deliver critical supplies to allies in need across the Pacific. The U.S., Japan, Australia, Canada, the U.K., and the European Union all maintain bilateral defense relationships, but none of them have worked out what it would actually do in the first week of a Taiwan supply chain crisis. Nor do they have a plan to prevent such a situation from cascading into a global financial crisis.
Hormuz has made painfully visible what happens when governments are left to improvise. The Trump Administration scrambled to set up a government-backed insurance program through the U.S. International Development Finance Corporation, or the DFC, that has so far failed to restore transit through the Strait. European and Asian allies, cut out of decision-making before the war began, have been left competing with one another for scarce energy deliveries, with some turning to America's adversaries for supplies.
A Taiwan crisis would move faster and cut deeper than anything we have recently experienced, and the cost of incompetent improvisation would be far higher. The work that matters now is not designing punishments for China. Everyone understands that a genuine geopolitical crisis with China would be economically devastating to both sides.
The harder, and more necessary, task is building the kind of economic resilience that makes coercion a losing proposition in the first place. That means allied stockpiling of semiconductors and other critical inputs that cannot be quickly substituted. It means pre-negotiated crisis logistics agreements, so that allied militaries and merchant fleets can resupply one another without weeks of bureaucratic delay. And it means rigorous supply chain coordination—joint planning so that allied governments know which factories, shipping routes, and financial systems are most vulnerable, and have fallback arrangements in place before the crisis hits. That work must begin now, before we are tested again.
