Taipei: Taiwanese businessman Oscar Chang believes that despite its extensive supply chain and cheap labor, there is no point in doing business in mainland China as warplanes and missiles fly through the skies nearby.

Recent events, which have led to extensive aerial and naval joint exercises around the island, have meant that although his one-year-old company, Heyde, has always produced fitness equipment in Taiwan, he will not change his mind anytime soon. I would say it's a lot of trouble because of politics and everything like Covid," he said, adding that if the cost was reasonable and he "can control the consequences," he would consider building fitness equipment on the mainland.

Taiwanese businesses, from Chang to multinational corporations, are closely monitoring China's live-fire military exercise, which began on Thursday after a controversial visit by US House Speaker Nancy Pelosi earlier this week. Additionally, Beijing has imposed a flurry of trade sanctions on the island, including export and import restrictions as well as sanctions against a number of organizations and businesses, to advocate for "Taiwan independence".

Beijing's retaliatory measures will result in new impetus for many Taiwanese businesses to distance themselves from the mainland. Analysts claim that the cost of never using China's huge production capacity or leaving investments there could be high. Beijing attaches importance to Taiwan's imports and investments at the same time. According to William Chong, Senior Fellow at the ISEAS-Yusoff Ishak Institute in Singapore, reducing dependence on its larger neighbor has been a priority since long before Pelosi's visit. However, he added, "Taiwan's businesses are devoted to mainland China.

In response to the visit of Pelosi, a longtime China hawk, who arrived in Taipei on Tuesday for a quick visit, the People's Liberation Army is conducting military exercises throughout the weekend in six maritime areas around Taiwan.  Some in Taiwan worry that the Chinese government will continue military operations in the Taiwan Strait until next week, making export shipping risky and increasing logistics costs.

Liang Kuo-yuan, the retired founder of Taipei think tank Yuanta-Polaris Research Institute, said if the communist army continues its action, it will be a problem for everyone and investors may consider delaying their investment.  

However, according to Ker Gibbs, a former leader of the US Chamber of Commerce, breaking ties with China would cut investors off from a vital source of cheap labor and some of the world's best factory-related infrastructure, including ports and roads.

Wages on the mainland averaged 56% in Taiwan this year, according to a database maintained by CountryEconomy. According to He Weiwen, senior fellow at the Chongyang Institute for Financial Studies at Renmin University in Beijing, mainland Taiwan provides investors with access to an "extensive" East Asia-Pacific supply chain, with "China serving as the axis of the network.

Leaving the mainland would risk a backlash on capital outflows, according to Alicia García Herrero, chief Asia-Pacific economist at French investment bank Natixis. He said neighborhood officials could retaliate by requesting an unexpected site inspection and awarding a failing grade.

According to Gibbs, simply shutting down operations on the mainland could lead to retaliation from Chinese authorities, who may demand some sort of "mitigation" or be harassed for so long as to prevent investors from coming back.

Since the 1980s, Taiwanese have invested in the mainland, where they now own 4,200 companies. According to Taiwan's official figures, the approved investment from 1991 to mid-2021 totaled US$193.51 billion.

Taiwan's $765 billion GDP, based primarily on exports of semiconductors, consumer electronics, machinery and petrochemicals, is supported by trade with the mainland, which is its main trading partner.

Although Taipei regulations prohibit many mainland companies from operating in Taiwan, product designers often outsource production to factories on the mainland. Demand for Taiwan's computer chips helped the island's exports to mainland China and Hong Kong reach an all-time high of US$188.9 billion last year. However, in the first 11 months of 2021, its outbound investment in the mainland decreased by 14.5%.

Chinese officials announced this week that they would halt imports of natural sand, citrus fruits, some types of seafood and breads from Taiwan. These actions are portrayed as symbolic, and it is not anticipated that the mainland will restrict the high-value industries that support its economy.

Since the 1990s, Taiwanese officials have urged investors to consider spending on the independent island and Southeast Asia to reduce dependence on the Chinese mainland. Following her election in 2016, Taiwan President Tsai Ing-wen established this goal with the New Southbound Policy, which called for the expansion of trade, investment, and tourism with 18 target countries. Washington, which is at odds with Beijing over global influence in an increasingly bitter tech war, has set its sights on the close economic ties between Taiwan and the mainland.

Through the US-Taiwan Initiative on 21st-Century Trade, which could move the island closer to the US Indo-Pacific strategy by reducing its economic reliance on mainland China, the Biden administration has recently sought to deepen relations with Taipei. The US-led Chip 4 alliance, which also consists of South Korea and Japan, is seen as yet another attempt to wrest Taiwan away from Beijing and cut it out of the semiconductor value chain.

According to He from Renmin University, Taiwanese businesses, including the world's largest contract chip manufacturer, Taiwan Semiconductor Manufacturing Co (TSMC), will probably experience increased pressure in the future. "America's interests are about the global supply chain that is based on friendship," he said.

According to analysts, when considering expansions, many Taiwanese investors in mainland China have looked to Southeast Asia, particularly Vietnam. According to Yuan Ho-ling, director of the Taishang Research Centre at National Chung Hsing University in Taiwan, they have bypassed China to avoid paying higher tariffs because of the four-year-old trade war and mobility restrictions as a result of Covid-19 outbreaks in 2020 and 2022. Investors with assets on the mainland view the military drills as a "sudden" shock that should pass quickly, according to Yuan. He added that they are likely to keep their opinions about the drills "quiet" and hold onto their assets.

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