Decoding the Risks of a China-Taiwan War on the Global Supply Chain Economics

All is not well in the world’s busiest shipping zones.

As the Russia-Ukraine war rages on in Europe, tensions seem to be on the rise in the far east between China and Taiwan. China’s President Xi Jinping announced that a “reunification” with Taiwan, an island, only 100 miles from the coast of south-east China “must be fulfilled”. Though self-ruled Taiwan has its own constitution and democratically-elected leaders, China points to Taiwan as a breakaway province that will soon be under its control.

The burgeoning geopolitical crisis simmering in the background between China and Taiwan took an ugly turn after a visit to the island by the US House of Representatives Speaker, Nancy Pelosi. What followed was one of China’s biggest-ever shows of military force in the air and seas around Taiwan.

While any attack on Taiwan by China could have major implications for the future of the international world order, it could also lead to massive disruption and spell doom to the already-strained global supply chain.

The China-Taiwan conflict: A threat to the supply chain nerve centre

With tensions escalating between the two countries, there are growing concerns that a Chinese invasion of Taiwan would upend the global supply chains.

What’s at stake here is that nearly half of the world’s container ships pass through the narrow waterway that sits between China and Taiwan. According to Bloomberg, close to 88% of the largest container ships have passed through the Taiwan Strait in the first half of 2022.

With Taiwan’s critical position in the global supply chain that was recently battered by Russia’s invasion of Ukraine and previously by the COVID-19 pandemic, any disruption of the shipping lanes would wreak havoc on the global trade flows.

As much of the container fleet passes through this busy waterway—even if a single stretch gets blocked, the undercurrents would be felt across the system.

A disruption to vital electronics supply chains

The world relies on Taiwan, here’s why…

Taiwan dominates the global market for the production of the most advanced semiconductors. Going by the reports, the Taiwan Semiconductor Manufacturing Company (TSMC) is the largest manufacturer of microchips and holds over 65% of the global foundry market share.

These microchips manufactured by Taiwan power everyday electronic equipment from laptops and phones to cars and refrigerators.

The bigger concern here is that the supply of microchips globally is already strained. The semiconductor shortage is one of the main reasons why customers today are experiencing delays of nearly 12 months in getting a new car delivered.

This simply means that the slightest disruption to the manufacturing of these microchips could prove to be costly, having huge implications for industries worldwide.

China, on the other hand, is known to be a dominant player in the electrical vehicle (EV) supply chain. China drove nearly half of the growth in the EV industry in 2021. From graphite mining to battery cells, multiple facets of the EV supply chain are heavily reliant on China.

The rerouting of vessels would add more days to their voyage, resulting in not just severe trade delays, but a major shortage in these vital electricals which will further widen the supply-demand gap for electronic components.

Are we headed for a global economic catastrophe?

The recent tensions have led to discussions of a possible takeover of Taiwan by China. Keeping the political turmoil aside, given China’s significant positioning in the global economy, any disruption in the Taiwan Strait could result in serious economic consequences for countries worldwide, including India. An invasion could result in western sanctions on China similar to the ones placed on President Vladimir Putin and other Russian businesses.

What we need to understand here is that imposing any financial sanctions on China will adversely affect international financing causing a drop in the flow of the US dollar, which continues to remain key in global markets and trade.

While the Ukraine-Russia crisis has caused inflation to soar, a China-Taiwan war can be a massive blow, not just to the global supply chain and economies worldwide but in particular to the MSME sector.

A shortage in the supply of semiconductors is undoubtedly one of the many effects of a conflict between China and Taiwan and this would adversely affect many global industries such as manufacturing, industrial machinery, and automobile.

What does all this mean for India’s trade and economy?

From electrical machinery and organic chemicals to iron and steel, in the past decade, India’s imports from Taiwan have been on the rise. That is to say—tensions in the Taiwan strait are bound to have an adverse impact on India.

Given how Indian imports much of its manufacturing inputs and raw materials from China, such as electrical components, and fertilisers—if a full-scale war breaks out between China and Taiwan, India’s manufacturing sector would take a big hit. That’s not all, considering the current dependency, a war could even have a major impact on the pharma and chemicals industry in India too.

Closing Note

While the world waits and watches, we can only hope that considering China’s ongoing economic woes, they shy away from risking another major disruption.

That said, global economies that are likely to be impacted in the event of a China-Taiwan war, cannot let their guard down. As trade routes to Europe and the Middle East primarily run through the Taiwan Strait, governments worldwide need to start focusing on the diversification of the supply chain from China and Taiwan to reduce dependency and sustain economic growth.

Think Working Capital… Think CredAble!