Geopolitical tensions in the Taiwan Strait have risen after US Home Speaker Nancy Pelosi visited Taiwan.
It is no real surprise that Beijing announced economic retaliations plus military drills. The Taiwan Strait, among the world’s most important lane for marine shipping and air cargoes, is now a riskier place because of the continuous live military workouts. These are bound to make bottlenecks and supply-chain disruptions, feeding inflationary pressures.
Primary of Beijing’s financial sanctions is upon food, but that will only affects 0. 2% of Taiwan’s exports. So the transfer ban is very narrowly targeted, without touching the semiconductors that mainland China clearly needs. But the live military drills surrounding Taiwan are more worrisome, especially if they become regular. That could push ships and aeroplanes to reroute, detour, or even cancel their trips.
With the troubling developments in the Taiwan Strait and the low degree of trust between The far east and the US, a mild global marketplace reaction seems incomprehensive. The reality is that global investors are carefully watching the growth prospects for the US and mainland Cina, and the focus is relatively limited to Taiwan.
Capital outflows have stepped up from Taiwan’s equities, but the scale is just not comparable to April when the US Federal Reserve raised interest rates. In other words, the market is barely pricing in a turmoil in the Taiwan Strait, certainly nothing like the particular Ukraine-Russia war.
Even if the world manages to avoid another military conflict, there are still essential risks related to Tiongkok continuing military drills, which are larger than during the 1996 Taiwan Strait crisis.
First, the economic size of landmass China and its industry flows with the world are much greater these days. Second, Taiwan has become a critical producer associated with semiconductors and ICT (information and marketing communications technology) products, especially advanced chips.
There are 2 sectoral implications to the above.
A de facto blockade simply by China’s regular army exercises would produce bottlenecks in fast-growing sectors dependent on semiconductors, such as high-performance processing, the Internet of Issues, data centers plus electric vehicles. Electronics will also suffer, though falling demand and higher inventory amounts should buffer the shock.
As well, the Taiwan Strait is an important route for energy imports by Japan plus South Korea.
Therefore , a potential Taiwan Strait crisis is usually part of the bigger picture from the US-China strategic competitors. Any further escalation could have very negative implications for Taiwan, Asia, and the world. Which includes supply-chain disruptions and renewed inflationary pressures.
One more consequence is that the continuing supply-chain reshuffling is set to accelerate. China is bound to face a lot more headwinds to upgrading the tech step ladder in key sectors, especially semiconductors.
The US will certainly put more stress on key providers to ban exports to China and develop production in the own market with industrial policy equipment, such as the CHIPS (Creating Helpful Incentives to Produce Semiconductors for America) Act, and a push for friend-shoring – that is, reworking essential supply chains plus sourcing essential materials, goods and services among trusted partners and allies.
Alicia Garcia Herrero is chief economist for Asia-Pacific from Natixis and mature fellow at Bruegel; follow her upon Twitter @Aligarciaherrer. Gary Ng is a senior economist for Asia-Pacific who covered thematic research at Natixis.