BY DR SOHA MAAD
A new threat is facing the global supply chain and digital economy. This threat is arising from the tension between United States (US) and China over Taiwan. The visit of speaker of the US House Of Representatives Nancy Pelosi to Taiwan outraged China who took action in response to the visit.
This article sheds light on the latest news related to Pelosi visit to Taiwan. Following a brief overview of the importance of Taiwan in the world, the article explores various future scenarios and presents an analysis of the impact of Pelosi visit to Taiwan on global supply chain, logistics and operational cost, global procurement, and various business and economic sectors (including semiconductors, agro commodities, data centres hosting services, personal computers and electronic devices, chemicals, and energy). The impact on Taiwan international relationships with various countries is also presented. The article concludes with recommendations and road ahead for Arab banks and government authorities to address the new threat facing the global digital economy and transformation as well as the global supply chain.
US House Speaker Pelosi Visit to Taiwan
Speaker of the United States (US) House Of Representatives Nancy Pelosi visited Taiwan on August 03, 2022 as part of a tour of Asia aimed at reassuring allies in the region.
The visit triggered opposition from Beijing and sparked concerns within the United States and around the Indo-Pacific about the impacts of the visit and the Chinese military response on regional security. Following the visit, Beijing launched large-scale military exercises, raising discussion of a possible Fourth Taiwan Strait Crisis.
China Response to Pelosi Visit
Live fire drills. Immediately on the confirmation of Ms Pelosi’s visit to Taiwan, China announced live fire drills in six areas surrounding Taiwan’s main island and effectively closed them to civilian airplanes and vessels for the four days period from 4-7 August 2022. This is breaching both territorial and internal waters from Taiwan’s perspective. China also took other military actions as well by imposing economic restrictions such as a ban on imports of citrus fruits and fish from Taiwan.
The White House is maintaining that this visit does not represent any shift to the United States ‘One China’ policy. However, Beijing perception is that the visit is part of US long-term strategy to hollow out the existing commitments that underpin the two countries’ bilateral relationship. There is also a strong incentive for Beijing to prevent future similar visits from the legislative leaders of other Group of seven (G7) countries.
Although China fire drills could turn out to be a one-off gesture, they could easily become a prolonged or regular occurrence, creating significant disruptions in Taiwan’s trade with the rest of the world.
Ban of food import. Chinese media reported that the China General Administration of Customs had banned the import of food from 107 Taiwanese companies. Many agricultural products have been affected by the ban, including aquatic products, such as live fish, fresh refrigerated fish, frozen fish, dried fish, prepared fish, and canned fish, as well as honey and tea leaves.
Reduction of semiconductors import. China is already seeking to become more self-sufficient in its semiconductor industry in order to reduce the reliance on imports. The main driver of this push has not been directly related to Taiwan, but rather a means of mitigating the impact of possible sanctions and trade tensions with the US. The ultimate effect will also be to become less reliant on Taiwanese-made chips and technology.
Labelling products from Taiwan. Several media outlets have reported that China’s customs will strictly implement labelling requirements for products imported from Taiwan. Goods labelled as being from “Taiwan”, “Republic of China”, or “Made in Taiwan” will now no longer be permitted to enter mainland China. This means companies that source components from Taiwan may find their imports confiscated or otherwise blocked at the ports of entry.
A report from Nikkei states that Apple has already requested all their suppliers from Taiwan to relabel goods with the source region of “Taiwan, China” or other similar phrases that conform with the One China Principle.
Bank Lombard Odier news, by Homin Lee, set out three scenarios for US-China tensions over Taiwan in the next 3 to 5 years.
First scenario: China will make further military drill around Taiwan, causing intermittent disruptions for trade flows through the Taiwan Strait and the waters and air spaces in the vicinity, without any major direct military confrontation between China and Taiwan or between China and the US. The costs for the global economy would be additional disruption in global supply chains.
Second scenario: China will quarantine or even blockade Taiwan, and China will decide who enters the area around Taiwan. In this scenario, the disruptions to global supply chains would be far more significant than the scenario of a prolonged one-off military drill.
Third scenario: China attempting full political control of Taiwan through military means. This scenario would send extremely large shockwaves through the entire global economy as it would likely lead to the complete bifurcation of global supply chains and the collapse of multilateral governance frameworks.
Different outcomes are possible due to the high level of uncertainty on the behaviours of both the US and China
Short-and near-term Implications for U.S.-China relations.
Beijing repeatedly stressed that Pelosi’s visit is escalatory in itself. Chinese foreign minister Wang Yi stated that the US side claimed that China is escalating the situation, but the basic facts are that the United States first provoked China on the Taiwan question and violated China’s sovereignty and territorial integrity. The Biden administration argued that sending short-range ballistic missiles over Taiwan, was a manufactured crisis and an overreaction by Beijing to a normal congressional delegation.
While both sides argue that their actions were measured and proportionate, it is clear that this event as well as Putin’s invasion of Ukraine have placed considerable tensions over the Taiwan Straits at the very centre of US-China relationship.
TAIWAN IMPORTANCE IN THE WORLD
TAIWAN FACTS AND FIGURE
According to Taiwan government data (https://www.taiwan.gov.tw/), important facts about Taiwan are:
- Taiwan was the world’s 15th largest exporter of merchandise in 2020.
- Under the New Southbound Policy, Taiwan is deepening ties with 10 Association of Southeast Asian Nations member states, six South Asian countries, Australia and New Zealand.
- Taiwan holds an important position in the global economy. It is a top player in the world’s information and communication technology industry as well as a major supplier of goods across the industrial spectrum.
- According to the World Trade Organization, Taiwan was the 15th largest exporter and 18th largest importer of merchandise in 2020. It was also one of the largest holders of foreign exchange reserves as of December 2020.
- Annual surveys of the world’s economies, including those conducted by the World Economic Forum and Business Environment Risk Intelligence have ranked Taiwan among the top nations year after year with respect to long-term growth and technological development.
- Taiwan signed an economic cooperation agreement with New Zealand and an economic partnership accord with Singapore.
- Taiwan and the US launched the Taiwan-US Economic Prosperity Partnership Dialogue in November 2020 and resumed talks on the Trade and Investment Framework Agreement in June 2021.
- Taiwan adopted the New Model for Economic Development. This seeks to boost growth by promoting innovation, increasing employment and ensuring the equitable distribution of economic benefits. Under the model, Taiwan is striving to strengthen global and regional connections through initiatives such as the New Southbound Policy, which aims to diversify the nation’s international markets by expanding links with ASEAN member states, as well as South Asia, Australia and New Zealand.
- Taiwan will continue promoting its participation in regional and global economic integration processes.
- Taiwan is promoting six core strategic industries. These comprise information and digital technology; cybersecurity; biotech and medical technology; national defence; green and renewable energy; and strategic stockpile industries.
- Taiwan government is also promoting the Forward-looking Infrastructure Development Program to meet national infrastructure needs over the next 30 years.
- As it works to advance innovative industries, Taiwan government is also committed to protecting the environment.
Taiwan’s democracy is relatively young. Despite Chinese threats, the Economist’s Democracy Index in 2020 labeled Taiwan a “full democracy” for the first time. In 2021, Taiwan was ranked the world’s eighth-most-democratic country.
An increasing number of Taiwanese people feel more closely tied to Taiwan than to China.
TAIWAN ECONOMIC DEPENDENCE
Taiwan’s economy remains reliant on trade with China, which is the island’s largest trading partner. However, their economic relationship has experienced disruptions in recent years, partly due to Beijing’s pressure on the island and Taiwanese officials’ growing concern about its overreliance on trade with China.
Impact on global Procurement
According to Chartered Institute of Procurement and Supply (CIPS), the threat of war between China and Taiwan extends to reach procurement in supply chain.
Procurement professionals are alerted as tension rise up between China and Taiwan as a result of the biggest-ever military drills around the island.
The procurement industry should look into alternative sources of supply as there will be a real impact on supply chains. Western politicians and western manufacturers should take into account impact on their supply chains. More disruptions in supply chains may be expected.
CIPS is warning the global semiconductor industry, alerting that any sector that relies on chips, is vulnerable to disruptions.
With the automotive and tech industry already impacted by global shortages of the chips following increased demand during the Covid-19 lockdowns, any disruption to Taiwanese supply chains would further place pressures on an already stretched industry.
Taiwan is fundamental in the semiconductor industry, and has the potential for a massive impact on semiconductor supply chains and other high tech supply chains as well. The tensions between the west and China are growing and this threaten global supply chain.
Research by Gartner revealed that supply chain teams are already looking to diversify away from China as political tensions rise. It has also found that 75% of supply chain leaders are evaluating or executing changes to their sourcing and manufacturing strategy with China, and 55% of them had already acted on their plans.
Impact on LOGISTICS AND OPERATIONAL COSTS
According to the Diplomat, there is a potential logistics and operational costs of China-Taiwan Conflict. Half of the global container fleet (ships and aircrafts) passed through the Taiwan Strait in 2022, making it a critical waterway for global supply chains.
An increased conflict between China and Taiwan would result in a massive disruption to global supply chains.
During Pelosi’s visit, the Chinese Ministry of Defence warned ships and aircraft to remain out of six different areas as China ran drills. Three areas in or near the Taiwan Strait were blocked off, causing ships and planes to cancel or reroute transportation.
Importantly, most ships end up using the Taiwan Strait on the way from China and Japan to Europe, and even from the United States to Oceania and Asian nations. Taiwan itself is dependent on the strait for trade with China, which, along with Hong Kong, accounts for 40 percent of its exports.
Impact on Global Supply Chain
According to Australian news, China and Taiwan tensions threaten to impact global supply. This reveals how much the world relies on Taiwan and the narrow stretch of water between it and China. One of the world’s busiest shipping lanes sits right between Taiwan and China, and the escalating tensions involving the island are causing concern for the already strained global supply chain. Almost half the world’s container ships and 88 per cent of the world’s largest ships by tonnage have passed through the narrow Taiwan Strait in 2022, according to data from Bloomberg.
Container xChange, a technology marketplace and operating platform for container logistics companies, said it was difficult to forecast the degree of impact to global trade but it expects trade disruptions across Taiwan, China, South Korea and Japan if military action persists.
The global supply chain is interconnected and all the major stretches like Taiwan Strait are nerve centres of these value chains, if any one stretch is blocked, the undercurrents are felt across the system.
CHINA AND TAIWAN ROLE IN GLOBAL SUPPLY CHAIN
According to the Diplomat and Gartner research, China accounts for 12 percent of global trade, with many of its exports representing key links in global supply chains.
In terms of China’s role in global supply chains, its processing of materials into finished goods accounted for 32 percent of its exports in 2018. That means that other countries continue to rely on China to assemble inputs into final products. In addition, China produces inputs for production, including raw materials and intermediate goods, which comprised 18 percent of its exports in 2019. This means that about half of China’s exports represent important parts of global supply chains.
China-Taiwan conflict could bring chaos to the semiconductor industry. Taiwan Semiconductor Manufacturing Co. produced 63 percent of global semiconductors in 2020, and almost all of the world’s advanced chips in 2019. The auto industry suffered greatly due to shortages of the chips in the past couple of years, and disruption in the industry would have major effects on sales of advanced electronic products. In addition, half of Taiwan’s exports are comprised of electrical machinery and equipment, which would bring more pain to this industry.
The costs to global supply chains would be quite large from the tension between Taiwan and China. The biggest concern for the global supply chain is disruption to the manufacturing of integrated circuit (microchips), which would have huge consequences to many, if not all, industries.
Taiwan Semiconductor Manufacturing Co is the world’s largest contract manufacturer of the chips, which are used to power everyday items including phones, laptops, cars, watches and refrigerators across the world.
There is a supply problem worldwide with microchips already, with delays of 12 months for ordering a new car mainly because of microchips.
If things escalate between China and Taiwan or between China and the US over Taiwan, any disruption to the world’s supply of microchips would have huge implications. If the supply of microchips was interrupted, this will have a massive impact on the world.
Impact on Various Businesses and Economic Sectors
Based on Beroe Inc analysis, the tension between US and China over Taiwan will have an impact on various businesses and economic sectors including semiconductors, agro-commodities, data centres hosting services, personal computers, energy, chemicals, and metals, as detailed below:
- Taiwan is the largest producer of electronic chips, which are supplied to almost all the industries, from phones to laptops, watches to game consoles, industrial equipment to automotive, and aircraft and fighter jets.
- TSMC (Taiwan Semiconductor Manufacturing Company) is the largest foundry in the world and holds around 65 percent of the global production of chips.
- Any potential conflict with China would completely disrupt the entire supply chain of TSMC and labor availability, and could cause major shortage of electronic chips.
- Additionally, China controls five percent of the global production of chips, which could also be affected.
- This could further impact the already existing supply-demand gap for electronic components.
- At present, China can meet only 15-20 percent of the global semiconductor demand, and relies on Taiwan and South Korea for most of its semiconductor chip imports and electronics manufacturing.
- Since early 2021, Taiwanese companies started shifting from China, reportedly due to rising costs of doing business and trade tensions.
- As part of the U.S. Strategic Competition Act of 2021, companies located in China—with a majority of U.S. clients—will need to diversify their supply chain.
- In the long term, a decline in investments and investment-led trade between Taiwan and China is expected, which would assist Taiwan to secure a stronger supply chain position.
- Fresh fruits form the largest export category for Taiwan within the agro space. China buys over 80 percent of all the fruits exported, followed by Japan and Hong Kong.
- In case of a war, Taiwan will not be able to export its fruits to China or any other country. There will be an over-supply of these fruits within Taiwan, which might result in wastage due to lagging infrastructural support to store these fruits.
Data Center Hosting Services
Taiwan accounts for around 63 percent of semiconductor production in the world. With the Russia-Ukraine conflict already impacting the semiconductor supply chain, as it hinders neon gas and palladium supply for semiconductors, any aggression over Taiwan would further affect the supply of semiconductors for data centers.
The price of data center hosting services would escalate exponentially, possibly drawing parallel to the price rise during the 2011 floods in Taiwan. In case of any military aggression, the demand for data center infrastructure would increase significantly, especially in the U.S., Europe, and the Asia Pacific as vendors would look forward to higher levels of inventory at their disposal.
Taiwan and South Korea account for around 63 percent and 18 percent of semiconductor production in the entire world, respectively. Any military aggression in the South China sea will cripple around 80 percent of the production capacity, severely impacting personal computers that are facing order backlogs due to the existing semiconductor shortage.
It is possible that prices of personal computing devices, such as laptops and smartphones, would grow rapidly.
Aside from geopolitical uncertainty, the loss of production capacity, coupled with transportation delays in the South China sea region, might exacerbate the situation.
A global shortage in Renewable Energy RE technologies in the short and medium term could be triggered. Price and supply risk of energy commodities is already very high. Suppliers from different geographies should partner with new emerging suppliers for Renewable Energy (RE).
Chemicals and Metals
The price and supply risk for chemicals will be very high and periodic monitoring is needed.
China accounts for over 60% of global supply for all known metals, and minerals. Hence the price and supply risk of metals may be high.
Impact on world relationships
Under President Donald Trump, the United States deepened ties with Taiwan over Chinese objections, by selling more than $18 billion worth of arms to the military and unveiling a $250 million complex for its de facto embassy in Taipei.
The Biden administration has taken a similar approach, continuing arms sales and affirming the Trump administration’s decision to allow US officials to meet more freely with Taiwanese officials. Biden was the first US president to invite Taiwanese representatives to attend the presidential inauguration. The United States participates in military training and dialogues with Taiwan, regularly sails ships through the Taiwan Strait to demonstrate its military presence in the region, and has encouraged Taiwan to increase its defense spending.
Also, Taiwan has received bipartisan support in Congress over the years. The latest proposed legislation, the Taiwan Policy Act of 2022, designates Taiwan as a major non–North Atlantic Treaty Organization (NATO) ally.
According to the office of the United States Trade Representative, US-Taiwan Trade Facts are:
- US goods and services trade with Taiwan totalled an estimated $105.9 billion in 2020. Exports were $39.1 billion; imports were $66.7 billion.
- Taiwan is currently the USA 9th largest goods trading partner with $90.6 billion in total (two way) goods trade during 2020.
- Trade in services with Taiwan (exports and imports) totalled an estimated $15.2 billion in 2020.
- According to the Department of Commerce, U.S. exports of goods and services to Taiwan supported an estimated 188,000 jobs in 2019.
- US foreign direct investment (FDI) in Taiwan (stock) was $31.5 billion in 2020.
- Taiwan’s Foreign Direct Investment FDI in the United States was $13.7 billion in 2020.
- Sales of services in Taiwan by majority U.S.-owned affiliates were $7.8 billion in 2018, while sales of services in the United States by majority Taiwan-owned firms were $9.5 billion.
The US approach is governed by its One-China policy. The United States acknowledges the Chinese position that there is but one China and Taiwan is part of China.
The United States has for decades attempted to maintain a delicate balance between supporting Taiwan and preventing a war with China. But President Joe Biden has seemingly rejected the policy, stating several times that the United States would come to Taiwan’s defense if China attacked.
Taiwan International Relationships
Relationship with Japan.
If Japan fails to assist the US in supporting Taiwan, it could harm the US–Japan alliance.
Relationship with Australia
- Australia has signed a defence and trade pact with the United States and the United Kingdom (UK) and has vowed to support Taiwan.
- Australia has been facing increasing restrictions and friction with China over the past few years, which has impacted trade growth prospects.
Relationship with India
- India does not hold formal diplomatic ties with Taiwan. However, informal ties have been strong since the mid-1990s. India’s support to Taiwan mean a potential tie that would help India establish semiconductor plants.
Road ahead for arab countries
The impact of the tension between US and China over Taiwan may become similar the impact of Russia-Ukraine war, if this tension escalates.
The impact on high tech semiconductor supply to the world has already disrupted the global supply chain, and further disruption is expected.
Arab banks and government authorities in the Arab world should take precautionary measures in order to protect their trade supply chain, high tech industries relying on semiconductors, and their road to digital transformation.
Below, we offer some recommendations to Arab banks and government authorities to address the new threat to digital economy and global supply chain:
Support the diversification of trade and supply chain.
Businesses in Arab countries are advised to look for alternate suppliers, like South Korea, for semiconductor chips and intermediate electronic goods to deal with any supply chain issues.
Procurement leaders in the Arab world must put in place diversified strategy for sourcing that balance global, regional and local suppliers in an ecosystem that establishes a balance between cost and resilience.
Arab banks and businesses should expand investments into new developed markets.
Arab banks and authorities should support the reconfiguration of supply chain to make it more diversified and resilient.
Arab countries should adopt a unified diversification strategy for supply and production.