China military exercises around Taiwan threatens global trade

By Paloma Almoguera

Singapore, Aug 8 (EFE) – China’s military exercises in the Taiwan Strait – one of the busiest shipping lanes on the planet – held in response to last week’s controversial visit to the island by US House Speaker Nancy Pelosi were slated to end on Sunday but were still ongoing on Monday, raising the risk of renewed disruptions to global supply chains.

The People’s Liberation Army reported Monday that it was still conducting joint practical exercises around the island, focusing on anti-submarine operations and targeted air strikes.

The extension of the maneuvers by China, which considers Taiwan a breakaway province and has not ruled out an invasion of the self-governed island, increases the uncertainty surrounding Beijing’s goals and threatens the stability of one of the world’s most important shipping lanes.

Nearly half of the global container fleet and 88% of the largest ships by tonnage passed through the Taiwan Strait this year, according to Bloomberg data.

It is a key route for the supply of semiconductors from Taiwan – home of TSCM, the world’s largest manufacturer of a key component in modern technology products – and electronic equipment produced in East Asia, as well as an essential artery in the transport of natural gas.

Experts are therefore warning that the slightest disruption in those trade routes will be felt in the global supply chain, which has already been weighed down by the pandemic and the lockdowns decreed in “zero Covid” China, as well as Russia’s invasion of Ukraine.

“Semiconductors and energy face the biggest supply disruptions if the situation continues relatively intense or if there is a major escalation (in Taiwan), such as a blockade on exports. Then the world will suffer,” said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis.

While the impact on air and shipping so far has been moderate, Garcia-Herrero told a press conference on Friday that the exercises could continue intermittently, hampering shippers’ decisions.

“Perhaps not so much because of a total blockade of the island, but because of a potential one, companies could make decisions to protect or increase the resilience of their supply, such as rerouting routes or seeking other destinations,” she said.

The Chinese maritime administration last week ordered ships to avoid the six areas where the exercises were taking place, but on Monday did not specify the location of the additional maneuvers, raising doubts over the viability of trade routes and increasing the likelihood of delays and cancellations.

But there is one key factor that restores optimism among experts: China has a lot to lose if the crisis lingers, as more than 42% of Taiwan’s exports go to China.

The largest share of China’s imports from Taiwan is made up of electronic products, with semiconductors – a key industry that Beijing is trying to develop without great success – being the main component, according to a Capital Economics note by Julian Evans-Pritchard.

In any of the possible scenarios in which China decides to impose itself on Taiwan, from a trade blockade to a forceful invasion, “there would be a significant economic cost to China, which would see access to semiconductors disrupted and its ties with the West undermined,” Evans-Pritchard says.

China, the world’s largest exporter, is still heavily dependent on foreign demand, which accounts for 15% of its GDP; Capital Economics stresses that it is the developed economies – those that could turn their backs on it in the event of an escalation with Taiwan – that fundamentally underpin demand.

“By our calculations, two-thirds of Chinese exports go to countries that are aligned with the United States,” Evans-Pritchard adds.

Whatever happens – the last such exercises, which took place in 1995-96 in response to the visit of the then president of Taiwan to the United States, lasted for months – experts agree that this latest crisis is part of the dynamics of competition between the two major world economies.

According to García-Herrero, “it is all part of the strategic competition between China and the United States,” Taiwan’s main arms supplier and which maintains an ambiguous stance on whether it would defend the island in the event of an attack by Beijing.

“(The crisis in Taiwan) accelerates the creation of blocs, a scenario for which companies have to prepare,” she warns. EFE

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