It is understood that the President of the Peoples’ Republic of China (“China”), Xi Jinping, has instructed the Chinese military leadership to be ready to invade Taiwan by 2027. Other reports suggest that China will simply implement a naval blockade/embargo against Taiwan. While neither is a certainty, Dominic Burgess provides a litigator’s perspective on how UK businesses may act now to reduce their exposure to possible  risks and legal liabilities arising from a hypothetical conflict.

 

*Author’s note: This article does not provide an exhaustive list of issues that would arise in the above scenario. Furthermore, the issues highlighted below will also be subject to: government policy; who is in government at the time; the result of the Russia/Ukraine war; and other geo-political factors.

The UK’s position

Currently, the UK government does not recognize Taiwan as a sovereign state. On the face of it, it would not appear that the UK would support Taiwan militarily. However, the UK forms part of the AUKUS Pact (a military alliance with the USA and Australia). Australia and the USA have vowed to aid Taiwan in the event of an invasion, so the UK may be forced into the conflict.

China is the UK’s largest importing partner (as of 1 June 2022) as 13.3% of all imports come from China. China is also our sixth largest exporting partner, accounting for 5.8% of all UK goods exported. The UK government currently (at the date of publication) has positive relations with China, and aims to “…promote UK interests through a strong, effective relationship with China. We work to promote international security, increase mutual prosperity, and support China’s process of modernisation and reform. We also aim to provide high quality consular services for British nationals in China.”

Notwithstanding the above paragraph, there has been a spate of espionage scandals between both the UK and China against each other, one scandal potentially involving a member of Parliament.

If the UK were to be drawn into the potential conflict, it would not be for very long, as the British Army does not have sufficient stockpiles, or recruits to maintain more than two months of total war.

Technology

Taiwan produces 60% of all semi-conductors/chips and 90% of the most advanced semi-conductors/chips in the global supply chain. The UK (and more broadly, the technology sector globally) has a dependence on imports of semi-conductor technology from Taiwan, and is at the mercy of China when it comes to importing rare earth metals, particularly as the current administration (at the time of writing) wants to become a “technology superpower.”

Modern technology and manufacturing are also dependent on rare earth metals, of which China controls a substantial share of the market. In 2010, China reduced the export of rare earth metals by 40%. This quadrupled prices internationally. An invasion would dramatically affect the UK economy if China restricted exports further, in an effort to supply their own war effort.

The UK government is aware of the demand for rare earth metals, as well as the risk China poses to the supply chain. It has also acknowledged the need for energy security, and for the need of UK based production of semi-conductors and microchip technology, but has not yet implemented any policy, or strategy, to mitigate the risks posed.

If the UK government does not implement any policies on UK based chip/semi-conductor production, or secure any trade deals for rare earth metal imports, then tech companies, and those who use tech services, will likely see an increase in prices, and more critically, a halt in technology development for the duration and immediate aftermath of the conflict.

In such circumstances, there is a real likelihood that trade partners will not be able to perform contractual obligations. In the event of a breach of contract, a litigation solicitor will  be required to advise you on the merits of your claim, and strategy for any recovery (including specific performance). Griffin Law has experience in cross-border disputes should you require assistance with a dispute against a client or trade partner.

Tech companies will also need to review their employment contracts. There will be a significant disruption to the tech sector, and the most common response to such circumstances is to make certain employees redundant. This can be expensive, particularly if the employees have worked at the company for several years. To reduce headcount as and when required it is more economically efficient to employ workers on fixed-term contracts. Our employment team at HRx can assist with employment disputes, as well as advising on contract management and any HR queries your business may have.

Sanctions and supply chain management:

In the event of such an invasion, there is a high probability that it would be a global conflict, rather than contained to China and Taiwan.

China began implementing the ‘Belt and Road Initiative’ (“the BRI”) in September 2013. This involves providing loans to developing countries to support their infrastructure. The debt itself is not necessarily repayable, as the security the developing countries provide for the loans, is the control/proprietorship of said infrastructure to China. This has led to China having a stranglehold on many commodity-rich African and South American countries’ ports, railways, and mines, thus making China resilient to sanctions.

Furthermore, China is a founding member of BRICS, which is a trading alliance of major developing countries, rivalling the G7. Members include the Federation of Russia (“Russia”), Saudi Arabia (“KSA”), Iran, UAE, Brazil and more. BRICS members collectively produce more than 44% of the world’s crude oil, and have suggested replacing the US Dollar as an international currency (more likely since KSA has not renewed the 1974 Petrodollar agreement).

When Russia invaded Ukraine, the UK government, with other western governments/allies, imposed a range of economic sanctions on Russia. This includes prohibiting UK based companies from trading with Russian owned/domiciled/controlled businesses. The effects of which can be devastating for the targeted party. The most recent US sanctions imposed on Russia has even caused the Russian capital markets to halt trading. This did, however, also cause hardship to UK consumers/citizens, as the sanctions led to a contraction in the supply of natural gas and led to a spike in all crude oil.

In the event of similar sanctions being imposed on China, the economic effects on the UK will be more severe, given the volume of goods the UK imports from China. Furthermore, China has the fourth largest shipping fleet globally. Given how dependent the UK is on Chinese trade, there is a chance that UK-based companies have longstanding legal contracts in place that will not be fulfilled in the event sanctions are imposed. There is also a high risk of having an inability to litigate the matter fairly. I wrote an article on an insurance dispute currently in the Commercial Court, concerning the enforceability of “exclusive jurisdiction clauses” in contracts affected by sanctions. My article can be viewed here.

Companies based in countries which are beneficiaries of the BRI may also be subject to the sanctions, particularly if those companies are controlled by Chinese officials. This will be particularly difficult to avoid, as China has effective control of critical infrastructure, particularly shipping ports and rare earth metal mines in sub-Saharan Africa. Ultimately, Western sanctions may do more damage to those imposing the sanctions, than China. If your business is reliant on imports from China and/or the relevant BRI beneficiaries, it may be beneficial to review your contracts and confirm the ‘jurisdiction’ and ‘choice of law’ clauses within your contracts, and any supplementary contracts (such as insurance/re-insurance).

Even if your business is not reliant on Chinese imports directly, your suppliers/customers/trade partners may be. On that basis, it would be prudent to research other suppliers and carry out due diligence on how they are supplied, and be prepared to litigate any breaches of contract which negatively impact your business. Griffin Law has experience acting for claimants and defendants in the Commercial Court, for high-value claims (some exceeding £ 20 million).

Cyber-security

China is aligned with Russia both economically and politically. UK/Russian diplomatic relations are at an all-time low. The UK government has supplied Ukraine with significant weaponry, and Russia has launched a campaign of cyber-attacks on critical infrastructure, including the NHS, as a consequence. If the UK government were to impose sanctions (similar to those currently imposed on Russia) on China in retaliation to an invasion, then both China and Russia would likely escalate the volume and intensity of cyber-attacks on critical infrastructure within the UK. This may extend to businesses in the UK.

If this were to be the case, then it is crucial to have protective measures in place, specifically, cyber-insurance. This usually requires maintaining a minimum level of protection on your computer systems, to prevent any breaches to your company’s data/cyber security.

In the event that your company’s systems are breached, there is a high probability that the hackers will either commit fraud or hold your company’s data to ransom. In these circumstances, you may need a lawyer to assist with crisis management.State sponsored hackers will also be attacking critical industries’ systems with a view to stealing various companies’ intellectual property. This may involve bribing employees to assist with the hack/fraud, by sabotaging the computer system’s security. This is also known as corporate espionage.Griffin Law has experience in corporate espionage and crisis management, with extensive experience in cross-border cyber disputes and asset recovery.

Debt

If any of the issues discussed above become a reality, there is a chance that suppliers and/or customers and consumers would be affected by the conflict. Furthermore, as seen with the Russia/Ukraine war, prices will likely rise, but even more dramatically than we have seen in recent years, as anytime a superpower is at war, oil (and other natural energy commodities’) prices increase dramatically.

If the UK experienced inflation greater than that which has occurred in the past couple of years, the Bank of England may raise the base rate of interest as a controlling measure, and debt would become more expensive as a consequence. It is therefore suggested that businesses have reserve capital to cushion any shock of business interruption. As discussed above, it may also be worth reviewing your company’s insurance policies to confirm what is covered in the event of a war. For example, if your company rents commercial property, you will likely have taken out insurance on the premises, or pay ‘insurance rent’. Are you certain that in the event of a war, you would be able to make a claim to cover unpaid rent if your business is affected? Furthermore, if China implements a naval embargo, rather than a full-scale invasion, would it even count as a war, when making a claim on your insurance?

If your business has a debtor who will not repay, Griffin Law can assist with debt recovery as well as insurance disputes, should your insurer refuse to accept your claim.

Prepare

Whilst war, or a naval embargo, are not certainties, international relations are increasingly hostile, particularly with the threat of a paradigm shift in geopolitical power (from Western hegemonic control, to Eastern). SMEs have less power and fewer resources to mitigate their risk, than say, a multinational conglomerate. Griffin Law can review contracts and advise on litigation avoidance. Furthermore, we can advise on all legal disputes raised above.

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