What a Chinese blockade of Taiwan would mean for global business

What a Chinese blockade of Taiwan would mean for global business

Beijing considers Taiwan, a democratically governed island off mainland China, to be part of its territory. When US House Speaker Nancy Pelosi visited Taiwan this month to support his government, Beijing condemned the trip and conducted military exercises using fighter planes, ships and missiles to demonstrate its ability to blockade the island.

Here are some questions and answers about tensions in the Taiwan Strait and the potential impact on global business should China attempt to blockade the island.

How would a blockade affect global business?

A Chinese blockade of Taiwan would cripple global supply chains and raise freight prices in Asia and potentially beyond, as the island of around 23 million people plays an outsized role in global business.

Taiwan accounts for about 70% of the world’s microchip supply. It serves as an important part of the production chain for goods such as smartphones, computers, and cars. And it sits alongside Pacific shipping lanes that channel trillions of dollars worth of trade flows in and out of East Asia.

What a Chinese blockade of Taiwan would mean for global

China was conducting military exercises, including fighter and bomber sorties, as Beijing condemned House Speaker Nancy Pelosis’ visit to Taiwan.

Photo: Ng Han Guan/Associated Press

“Taiwan is far more important to the global economy than its 1% share of global GDP suggests,” wrote Gareth Leather, economist at research firm Capital Economics, last week. Cutting off Taiwan’s exports would lead to chip shortages for cars and electronics and increase inflationary pressures, he said.

How important is Taiwan for the chip industry?

Very. Taiwan is home to the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co. TSM -0.09% , which makes semiconductors for the likes of Apple Inc. and Qualcomm Inc. Globally, TSMC TSM -0.09% held more than half the shares in the $100 billion semiconductor manufacturing market last year, research firm Gartner said.

According to a 2021 report by the Boston Consulting Group and the Semiconductor Industry Association, a year-long disruption in the chip supply chain could cost Taiwan’s global electronics companies around $490 billion in losses. Should Taiwan’s chip production be permanently disrupted, it would take at least three years and $350 billion to build manufacturing capacity elsewhere to offset, the report said.

In an undated interview aired by CNN in late July, TSMC chairman Mark Liu said that the use of military force or an invasion of Taiwan would render TSMC factories inoperable. Its production facilities “depend on real-time connectivity with the outside world, with Europe, with Japan, with the US,” he said. TSMC did not respond to a request for further comment.

Where else could the world get its chips?

Western powers had already sought to hedge their reliance on Taiwan’s semiconductors after global chip shortages and supply chain disruption during the pandemic highlighted the island’s dominance in the industry. Both the US and the European Union have pledged tens of billions of dollars to eventually increase domestic chip manufacturing and competitiveness with Asia.

TSMC, a beneficiary of funding from a US chip industry bill signed into law by President Biden last week, is currently building a $12 billion plant in Arizona. It is also building a $7 billion plant in Japan.

What other major industries would be affected by a Taiwan blockade?

Closing the Taiwan Strait, one of the busiest routes in the world, would have a serious impact on shipping capacity, said Soren Skou, managing director of Danish shipping giant AP Moller-Maersk A/S. “Everyone would have to drive around Taiwan and increase the travel time,” he told analysts earlier this month.

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Analysts say longer transit times mean shipping companies may spend more on fuel and crew — costs that would likely be passed on to businesses and consumers.

Insurers have recently said they are reluctant to sell insurance to cover the possibility of losses arising from a Taiwan-related conflict until tensions there calm down. Short-term freight rates for shipping cargo on sea routes between Taiwan and mainland China rose 11% from July in early August following Ms Pelosi’s trip to Taipei as risks to shipping in the region increased, Peter Sand said. Chief Analyst at Xeneta, analyzing ocean and air freight rates.

What would a Chinese blockade of Taiwan look like?

A blockade, which is an act of war under international law, could range from an all-out attempt to prevent all people and materials from entering and exiting Taiwan, to less ambitious operations attempting to block specific types of traffic or goods To block. China’s military could deploy air and sea patrols, lay sea mines or even destroy airports and ports, analysts say. Even declaring a blockade could prompt airlines and shipping companies to divert traffic out of caution.

In a 2021 report, Taiwan’s defense ministry said China’s military had been able to “sever the island’s air and sea communications routes and impede the flow of our military supplies and logistical resources.” Taiwan could face shortages of raw materials, including liquefied natural gas, which the island imports for much of its energy.

Even so, it’s unclear whether China’s military has the resources to maintain a blockade, and any attempt to cut off Taiwan would likely prompt the U.S., Japan and other countries to intervene, said Drew Thompson, a senior research fellow at the Lee Kuan Yew School of Public Policy in Singapore.

Videos from Chinese state media and a map of live fire drills across Taiwan have revealed Beijing’s strategy of imposing an air and sea blockade on the island. In the event of a military conflict, China could threaten both Taiwan and world trade. Illustration: CCTV What’s stopping Beijing from attempting a blockade?

Aside from the military and geopolitical costs of an attempted blockade, there is a major deterrent for Beijing, analysts say: China itself relies on Taiwan for trade and jobs.

China relies on TSMC for chips needed for advanced computing and industrial applications. Taiwanese companies like Foxconn Technology Group, the largest maker of iPhones, are major providers of private sector jobs in mainland China. And Taiwan serves as China’s strategic shipping gateway to the Pacific Ocean.

“Should there ever be a military conflict, it would disrupt the entire supply chain and even China’s own ambitious policies,” said Jui-Lin Yang, advisory director at Taiwan’s Industrial Technology Research Institute, a public research organization.

In other words, Beijing could not disrupt Taiwan’s economy without choking off its own.

write to Chun Han Wong at [email protected] and Yang Jie at [email protected]

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