Scenario Planning for a Potential US-China Conflict

Tabletop exercises can help boards prepare for risks from a potential Taiwan conflict.

The world is entering a period of geopolitical uncertainty as relations between the United States and countries such as China continue to evolve. Corporate leaders are trying to predict the outcome of ever-changing policies, including those related to tariffs and export controls.

However, instead of focusing solely on near-term risks, boards should also consider how to plan for low-probability, high-impact risks through scenario planning. This can help directors and the companies they serve better understand and mitigate risks flowing from less probable US-China conflicts.

Rising Asia-Pacific Tensions

Whether there will be a conflict over Taiwan is unknown. China views the self-governing island as its own territory that will inevitably be “reunified” with the mainland and subject to Beijing’s control. The US government has traditionally maintained a policy of “strategic ambiguity,” not directly answering whether it would defend Taiwan if China were to use force to take over the island, while sending signals that it may do so.

The Trump administration has continued this policy. While delivering remarks at a security summit in Singapore in May, US Secretary of Defense Pete Hegseth warned of “devastating consequences” if China were to invade Taiwan, noting that the US military would act “if called upon by [the] commander in chief.”

Repeatedly over the last several years, the US government has conducted tabletop exercises to understand how a conflict over Taiwan might play out. Even though it remains a remote possibility, the United States has considered how it should plan for and mitigate risks stemming from a conflict in the South China Sea.

Companies should do the same. Boards can prompt this process by asking management whether their companies have considered the impact of a conflict on operations, including what steps have been taken to mitigate risk now—and whether the companies have developed a playbook for how to manage a conflict if one happens.

The macroeconomic fallout of a Taiwan conflict would be immense, disrupting potentially trillions of dollars in trade and investment. Taiwan produces 92 percent of the world’s advanced semiconductor chips, including high-performance chips that drive smartphones, computers, and cars. Despite investments in the United States to domesticate chip manufacturing, dependence on Taiwan will continue in the near term.

A Taiwan crisis could also unleash a cascade of government actions targeting China, including sanctions, export controls, asset freezes, and investment bans. The Group of Seven, which consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, would likely respond with sanctions that target major Chinese banks, state-owned companies, and key exports. China may react with countermeasures.

All of this would complicate the regulatory landscape not only for organizations with supply chains or operations in China but also for nearly every company that relies on exports from the region, which includes semiconductors, electronics, textiles, and plastics.

Planning for Disruption

By scenario planning for the impact of a conflict in the South China Sea, boards can better understand their companies’ risk exposure and begin to proactively develop a plan to mitigate such risks.

Directors and management teams should consider the following issues and questions when conducting related tabletop exercises:

Staff and operational safety. Does the company have personnel in Taiwan, China, or nearby countries? Do these employees have evacuation and safety plans should a conflict arise? Are there critical assets, including key personnel or operational resources such as data centers, in the region whose unavailability would materially disrupt operations?

Supply chain resilience. Has the company mapped supply chains to their original source? Are there alternative suppliers the company could use? If not, how long could the company continue to operate without these resources in the event of a conflict? Is stockpiling resources an option? Do contracts with the organization’s customers provide protections for the company if a conflict were to prevent the company from fulfilling its obligations? 

Sanctions. If significant sanctions were placed on Chinese companies and banks, what impact would they have on the company? Do the company’s operations depend on any firms in China, and if so, is it possible to mitigate those dependencies? How quickly could the organization respond to new sanctions? Given the likelihood of significant enforcement scrutiny, does it have the adequate structures in place to maintain compliance should the geopolitical landscape become more complicated?

Investments and joint ventures. What investments does the organization have in China? Does the company have Chinese investors? Are there legal structures in place for these operations that would allow the organization to divest or quickly withdraw from those investments in the event of a conflict?

Most importantly, boards should ask themselves and management what lessons they learned from how their companies handled the Russia–Ukraine war that they could incorporate into planning for new conflicts. For example, many boards discovered that they were unable to divest their investments at fair market value after the initial invasion or that their failure to move decisively led to reputational headaches. Learning from these mistakes—and the mistakes of others—can help companies avoid repeating the same issues.  

Preparing for geopolitical risk is an essential part of the board’s duties and long-term strategy. By planning for the worst-case scenarios, boards can stay ahead of evolving risks and future-proof the company for years to come. 

The views expressed in this article are the author's own and do not represent the perspective of NACD.

For more resources to help your board navigate the effects of the Trump administration’s policies on business, visit Navigating Changing US Policy: Key Board Implications.

Freshfields is a NACD partner, providing directors with critical and timely information, and perspectives. Freshfields is a financial supporter of the NACD.