China’s missile launches into Taiwan’s coastal waters this week have highlighted the risks to global supply chains from any continued escalation of tensions between rival nations.
The military exercises, in response to US House Speaker Nancy Pelosi’s visit to Taiwan, were like an experiment in the blockade of the export-reliant island, with some cargo ships forced to reroute and airlines canceling flights.
Three of the six areas prohibited for the exercises are in or near the Taiwan Strait – the body of water between the island and the Chinese mainland that is only 130 kilometers wide at its narrowest point. The strait is the main shipping route between China and Japan, the world’s second and third largest economies, respectively, and Europe. It also serves as a trade route for South Korea’s technology powerhouse, bringing manufactured goods from Asia’s factories to the world’s many consumers.
In an environment where China is trying to play a more assertive role and trying to block the strait. . . “It would be very devastating,” said Anoop Singh, principal analyst at ship broker Braemar. “Everything will be affected.”
Chinese military exercises in the straits and the East China Sea this week – much broader in scope than the war games staged during the last such crisis in 1995 and 1996 – were scheduled to last only a few days. But analysts said the maneuvers could lead to a sustained period of heightened tensions across the strait.
Beijing claims that Pelosi’s visit, the first by a president to Taiwan in 25 years, is part of Washington’s “one China” policy “emptying”, according to which America recognizes Beijing as the sole government of China and recognizes, but does not accept, its claim to the island.
“Prolonged or regular exercises in the Taiwan Strait could lead to significant disruptions in Taiwan’s trade with the rest of the world, and in global supply chains,” Homin Lee, Lombard Odier Macro Asia Analyst, wrote in a note.
Half of the global container fleet and 88 percent of the world’s largest ships by tonnage passed through the strait this year, according to data reported by Bloomberg.
While live-fire exercises are a “very common event at sea,” they are usually restricted to areas less prone to trafficking, Primar Singh said. He added that one million barrels of crude oil and petroleum products usually pass through the strait daily. “This water is usually very crowded.”
Singh said he knows at least two major shipowners who have asked ships to avoid the strait after reports of live fire in the area.
Most of the others are likely to follow [their] lead,” he added.
Elsewhere in the Asia-Pacific region, Japanese shipping group NYK Line issued a warning to avoid the strait, while South Korean Airlines canceled all flights between Seoul and Taipei on Thursday and Friday. Korean media also reported that Asiana Airlines had canceled flights between Seoul and Taipei, while Cathay Pacific in Hong Kong said it was “closely monitoring developments.”
Any prolonged attempt to disrupt international trade from Taiwan, with several major military exercises conducted near the island’s two major ports, would harm world trade.
Taiwan is an important link in global technology supply chains. Taiwan Semiconductor Manufacturing Co. accounts for 90 percent of the world’s high-end chip capacity, while electronic contract manufacturers such as Apple supplier Foxconn produce components and assemble products from smartphones to servers for some of the world’s largest companies.
More spillover across the strait could be devastating to Taiwan’s economy, with 40 percent of its exports going to China and Hong Kong, according to figures from Capital Economics. China has already announced the suspension of thousands of agricultural imports from the island.
“In the event of a catastrophe that virtually shuts down Taiwan for a while, I really don’t know how the tech industry’s global supply chain could survive,” said Dan Nested, vice president at TriOrient Investments.
“You have at least $3 trillion to $4 trillion worth of work that will probably not be done.”
Paul Tsui, managing director of Hong Kong-based logistics company Janelle Group, which serves companies such as General Electric, said some customers have raised concerns about business disruption from Pelosi’s visit to Taiwan.
If tensions escalate in the Taiwan Strait, the cost and transit times will rise dramatically [and] “It could be worse than the Covid disruptions,” Tsui said.
Additional reporting by Catherine Hill in Taipei, Song Joong-A in Seoul, Eri Sugiura in Tokyo, and Miki Ding in Beijing.