Economy · August 5, 2022

How escalating tensions across the Taiwan Strait could threaten global trade

Chinese missile launches in Taiwan’s coastal waters this week underscored the risks to global supply chains stemming from a prolonged escalation of tensions between conflicting countries.

Military exercises in response to a visit by US House Speaker Nancy Pelosi to Taiwan resembled evidence for the export-dependent island blockade, with some merchant ships forced to adjust their route and airlines canceling flights .

Three of the six exercise-locked areas are located in or near the Taiwan Strait, the stretch of water between the island and mainland China that is only 130km wide at its narrowest point. The Strait is the main shipping route between China and Japan, the second and third largest economies in the world, respectively, and Europe. It also serves as a trade route for South Korea’s technological powerhouse, transporting products from Asian factories to many of the world’s consumers.

“In an environment where China tries to take a more assertive role and tries to block the Strait. . . it will be extremely disruptive, “said Anoop Singh, principal analyst at the shipping agency Braemar.” Everything will be affected. “

Chinese military exercises in the Strait and East China Sea this week – which are significantly broader in scope than the war games organized during the last such crisis in 1995 and 1996 – were scheduled to last only a few days. But analysts said the maneuvers could initiate a prolonged period of heightened tensions across the Strait.

Beijing says Pelosi’s visit, the first by a president to Taiwan in 25 years, is part of a “flare” of Washington’s “one China” policy, whereby America recognizes Beijing as China’s only government and recognizes, but does not accept, his claim on the island.

“Prolonged or regular exercises in the Taiwan Strait could create significant disruptions in Taiwan’s trade with the rest of the world and in global supply chains,” Homin Lee, macro strategist for Asia at Lombard Odier wrote in a statement.

According to data reported by Bloomberg, half of the global container fleet and 88% of the world’s largest ships by tonnage have crossed the Strait this year.

Taiwan map showing Chinese military exercises in March 1996 and August 2022

Although live-fire drills are “an extremely common occurrence at sea,” they are usually limited to less trafficked areas, Singh of Braemar said. He added that 1 million barrels of crude oil and petroleum products normally pass through the Strait per day. “This water is usually very, very congested.”

Singh said he was aware of at least two large shipowners who had asked ships to avoid the strait following reports of fires in the area.

“Most of the others are likely to follow him [their] drive, “he added.

Elsewhere in Asia Pacific, Japanese shipping group NYK Line has issued a warning to avoid the Strait, while South Korean carrier Korean Airlines canceled all flights between Seoul and Taipei on Thursday and Friday. Korean media also reported that Asiana Airlines canceled its flights between Seoul and Taipei, while Hong Kong’s Cathay Pacific said it “is monitoring developments closely”.

Any sustained attempt to obstruct international trade from Taiwan, with many of the major military exercises taking place near two of the island’s main ports, would harm global trade.

Taiwan is a crucial link in global technology supply chains. Taiwan Semiconductor Manufacturing Co accounts for 90% of the world’s state-of-the-art chip capacity, while downstream electronics contract manufacturers like Apple supplier Foxconn manufacture components and assemble products from smartphones to servers for some of the world’s largest companies.

Further spillovers across the Strait could be devastating to Taiwan’s economy, with 40% of its exports going to China and Hong Kong, according to data from Capital Economics. China has already announced the suspension of thousands of agricultural imports from the island.

“In the event of a disaster that actually shuts down Taiwan for a period of time, I really don’t know how the global supply chain for the technology industry could survive,” said Dan Nystedt, vice president of TriOrient Investments.

“You have at least $ 3 trillion to $ 4 trillion of work that won’t be done, potentially.”

Paul Tsui, chief executive of Hong Kong-based logistics services firm Janel Group, which serves companies such as General Electric, said some customers have expressed concerns about business disruptions due to Pelosi’s visit to Taiwan.

“If tensions in the Taiwan Strait were to escalate, costs and transit times would increase significantly [and] it could be even worse than Covid disruptions, “Tsui said.

Additional reports by Kathrin Hille in Taipei, Song Jung-a in Seoul, Eri Sugiura in Tokyo and Maiqi Ding in Beijing