DAILY MACRO VIEW

Taiwan and China split in 1949 after a civil war that ended with a communist victory on the mainland.The two governments say they are one country but disagree over which is entitled to national leadership. They have no official relations but are linked by billions of dollars in trade and investment.

Washington follows a "one-China policy" that recognizes Beijing, not Taipei, diplomatically. But it is obliged by U.S. law to provide the democratically governed Taiwan with the means to defend itself, and pressure has mounted in Congress for more explicit support.

It continues to sell military gear to Taiwan for self-defence, even though Beijing has repeatedly warned US not to do so. US Navy warships also regularly sail through the Taiwan Strait to project American military power in the region.  In recent years, the US deepened military ties with Taiwan and increased arms deliveries.

China has been furious about Pelosi’s potential visit to Taiwan.China’s Maritime Safety Administration announced yet another series of military exercises in the South China Sea from 2 Aug to 6 Aug.

Threats of retaliation  have driven concerns of a new crisis in the Taiwan Strait, which separates the two sides, that could roil global markets and supply chains.

China says Taiwan has no right to conduct foreign relations. It sees visits by US officials as encouragement for the island to make its decades-old de facto independence official.

Beijing`s threat to take action if Pelosi makes what he called a "provocative" visit to Taiwan, reiterating that the "one China principle" is a "red line" and "we allow no one to cross this red line."`

On the one hand, the US needs to signal its support for Taiwan, particularly since China often portrays the US as a paper tiger who does not have the resolve to come to Taiwan’s aid.On the other hand, US needs to reassure China that it still abides by the one China principle.

Pelosi’s expected visit illustrates how difficult it is to strike a good strategic balance.

Will she go to Taiwan today : Most probably yes .

Implications : No one  could predict in any detail what China would do militarily as a response to the visit. But Beijing will launch some kind of military measures but they will be less than those which have substantial risk to lead to military conflict.

If  China doesn`t do anything in response to this visit, it is obvious that  US and other countries to continue sending high-ranking officials on visits to Taiwan.

When economies are in distress,  it has been the time tested principle to whip up  nationalism and patriotism which come to the rescue of politicians .Both China and US need this  distraction of Pelosi`s visit   at this moment to divert the narrative from Economics. So it`s but obvious that the stand off would be no more than a war of words .