Hormuz blockade offers hard lessons for trade-reliant China

SEOUL, South Korea — War, for all its death and destruction, imparts instruction for those willing to learn. The ongoing conflict in the Middle East shows how easily a regional economy dependent on seaborne shipping can be taken hostage — a lesson with worldwide applications but particularly sobering for China, the world’s biggest exporter.

The war between the U.S. and Iran underscores the massive economic risks for trade-dependent China of undertaking an invasion of Taiwan.

In addition to the extreme peril inherent in any assault across the Taiwan Strait, as narrow as 100 miles wide, Chinese officers planning such an operation must confront a dilemma strikingly similar to that in the Persian Gulf.

On the one hand, Beijing must consider the likely closure of the Malacca Strait, which connects the Indian and Pacific oceans and is the world’s second-busiest shipping lane after the English Channel.

About 80% of China’s energy imports and almost 60% of its seaborne commerce pass through the strait.

On the other hand, China must consider the same stark fact confronting the Americans in the Middle East. A powerful navy does not ensure that shipping lanes remain open, nor does it guarantee that the maritime insurance sector is willing to gamble with massive ships loaded with millions of dollars in cargo.

Maritime insurers dictate whether and at what premiums commercial vessels move through conflict zones, and China’s trade-reliant economy needs a constant flow of container ships, energy carriers and bulk carriers.

“For PLA planners gaming a Taiwan contingency, the lesson is immediate,” U.S. Navy Cmdr. Ander S. Heiles wrote in an April guest article for the Center for International Maritime Security. “Any conflict that triggers a disruption at the Malacca Strait could strangle China’s economy before a single shot is fired.”

Closing Malacca

The 550-mile-long Malacca Strait lies between Malaysia and Indonesia. Singapore is a key hub at its southeastern entrance. Because of East Asia’s primacy in modern manufacturing, the strait accounts for almost one-third of the world’s trade in goods and more than a third of seaborne oil shipments.

Beijing recognizes the importance of the strait. In 2003, Chinese President Hu Jintao coined the term the “Malacca dilemma,” and the military has sought to hedge its risks.

The People’s Liberation Army Navy has effectively seized control of the sea lines of communication leading to the southeastern, or “bottom,” end of the strait. It has terraformed a series of reefs and islets in the South China Sea into air-sea-land bases, backstopped by powerful assets on the mainland.

However, that maritime terrain grants Chinese shipping secure access only to a funnel that is highly vulnerable to blockade.

“Just a couple of guided-missile destroyers at the top of the strait could close it to China,” said Lance Gatling, Tokyo-based principal of Nexial Research and a former officer with U.S. Forces Japan.

“At its closest choke point, it is just a couple of kilometers wide,” said Alex Neill, a Singapore-based fellow of the Pacific Forum think tank, referring to the strait’s southern waterway, off Singapore. “It is a crazy bottleneck, so it is relatively easy to blockade.”

The strait’s northwestern geography does not favor China. The “top” end is under the control of the India-administered Andaman and Nicobar Islands.

New Delhi is engaged in a tense strategic confrontation with Beijing in the high Himalayas and is highly sensitive to Chinese power projection into the Bay of Bengal. India’s navy fields aircraft carriers and nuclear submarines and is engaged in its biggest-ever expansion.

China has other shipping routes from points west of the Malacca Strait to reach home ports, including the Lombok and Makassar straits through the Indonesian archipelago.

Still, those routes add cost and would likely become high-risk in the event of hostilities. They provide ideal ambush locations for American submarines and, potentially, Australian and Japanese submarines.

In April, the U.S. and Indonesia signed a major defense cooperation partnership agreement in Washington, signaling closer military relations. However, the agreement does not offer the same kind of relationship the U.S. has with the Philippines, where troops rotate through a series of bases equipped with weapons, including land-to-sea missiles.

That indicates that China and the U.S. have much to gain from Indonesia’s vast archipelago.

“Maybe there is some discussion about bases and places, and facilitating enhanced U.S. interactions,” Mr. Neill said of the agreement. “At the same time, China has got such a big footprint and influence over Jakarta, there is pressure they could apply.”

Geopolitical chess

Given its geographically disadvantaged naval position, China is extending its influence in other domains.

It has doubled down on overseas land transport corridors — road, rail and pipeline — with partners across Eurasia, from Pakistan to Russia.

China’s Belt and Road Initiative is gaining influence regionwide through major infrastructure projects, including a $7.3 billion Indonesian high-speed rail system that opened in 2023. Chinese technology is also deeply embedded in Indonesia’s digital infrastructure.

Another potential workaround for China in the Malacca Strait is a Panama Canal-style project. The 63-mile-long “Kra Canal” was foreseen as early as the 17th century as a shipping shortcut carved across the Thai Isthmus.

The likelihood of realization, however, is low.

“The idea has surfaced again, but it would be far more vulnerable to closure than the Malacca Strait,” Mr. Neill said. “It is pooh-poohed a lot by Southeast Asian specialists. … It is almost a subject of mirth.”

London calling

Beyond geopolitical vulnerabilities, Beijing must contend with financial weaknesses.

Although the U.S. and China field the world’s largest navies, neither is a total maritime power. Maritime powers combine powerful navies, capable shipyards and maritime finance sectors.

Underwriting maritime commerce is maritime insurance. London is the global industry leader, and the remaining cities are European and Asian capitals. China, despite strengths in trade and shipbuilding, underwrites less than 15% of global cargo shipping.

Cmdr. Heiles said in his Center for International Maritime Security article that the key lesson Beijing is learning from the Iran conflict is likely not kinetic, but commercial.

The Strait of Hormuz was closed, he wrote, “not by minefields or naval blockade, but by the withdrawal of maritime insurance and the cascading commercial decisions that followed.”

If war erupted over Taiwan, then China would likely face an “insurance blockade.”

Within three days of the start of the joint U.S.-Israeli Operation Epic Fury campaign, the International Group of Protection and Indemnity Clubs, which insures 90% of oceangoing tonnage, issued cancellations of war risk coverage for the Strait of Hormuz.

“The choke point was not closed by missiles,” the officer wrote. “It was closed by spreadsheets.”

Although warships may compel ships to heave to on the high seas, they cannot compel insurers to write policies.

Washington is widely expected to fight for Taipei in the event of a contingency. Tokyo is increasingly invested in its defense, and Australia and the Philippines could join the fight.

That means naval combat would almost certainly not be confined to the Taiwan Strait, but would ripple outward. That suggests a scale of risk to shipping far greater than the Middle East crisis, with far graver economic implications.

“China’s maritime insurance ecosystem does not yet have enough depth or international credibility to underwrite the scale of coverage that a Taiwan-related disruption would demand,” Cmdr. Heiles wrote. “Even if China can insure its own flag vessels, it cannot compel foreign-flagged ships to continue sailing into a war zone.”