Since Covid, we have all learned the domino effect that any crisis along the global supply chain can have worldwide.
The recent tensions between China and Taiwan can have such an effect. The air and seas around the self-ruled island of Taiwan are crucial for smooth economic trade. Still, tensions are rife as Chinese aircraft and vessels crossed the Taiwan Strait median early August.
Why is Taiwan important?
Analysts have said that Chinese military exercises around Taiwan (the Republic of China) could disrupt the already stretched global supply chain. Why? Because Taiwan sits in one of the world’s busiest shipping zones. Even a minor supply chain disruption could be costly to international trade already pummeled by the COVID pandemic and Russia’s invasion of Ukraine.
Geographically, since Taiwan is on one of the world’s most active shipping routes, it has a critical position in an already stretched global supply chain. The zone supplies many of the world’s semiconductors, computer chips, and electronic equipment – from laptops to phones and games consoles – produced in the East Asian factories to global markets. According to TrendForce market researchers, the Taiwan Semiconductor Manufacturing Company (TSMC) alone has over half of the world’s market. In addition, the routes are also a significant artery for natural gas.
Major supply routes
According to Bloomberg, almost half of the world’s container ships passed through the narrow Taiwan Strait in the first seven months of 2022. The Strait is 180 kilometers wide and separates Taiwan from continental Asia, particularly the Chinese mainland. The waterway is subject to a political dispute over its legal status. China’s exercises are happening in this bustling shipping canal. Shutting it down even briefly will also impact the flow of goods to South Korea and Japan.
One Singapore researcher commented that since most container fleets pass through the strait, it will undoubtedly disrupt global supply chains if they must reroute.
The uncertainty has dragged Taiwan’s Taiex Shipping and Transportation Index, which follows significant airline and shipping stocks, down 4.6 percent since the beginning of the first week of August.
Meanwhile, Taiwan’s Maritime and Port Bureau warned ships in southern, northern, and eastern areas to avoid the areas China uses for drills. However, AFP reported that several shipping companies said they would wait to see the effect of the exercises before choosing to reroute. Furthermore, given that it is typhoon season, rerouting ships around the eastern coast of Taiwan through the Philippine Sea is risky.
China’s actions have also impacted air routes, with more than 400 flight cancellations at major airports in Fujian, the Chinese province nearest to Taiwan. This move could imply that China might use it for the military. Taiwan’s cabinet responded that the drill would interrupt 18 global routes passing through the airspace in its Flight Information Region (FIR).
Taiwan and PH
Taiwan and the Philippines are not only geographically close but, more importantly, share the common values of democracy, civil society, freedom, the rule of law, and more. The Philippines is ready for sustained and high growth. Its market is among the most prosperous in the Association of Southeast Asian Nations (ASEAN) union. As such, Taiwan has prioritized PH as the gateway to ASEAN countries and among the goals of its New Southbound Policy (NSP) introduced in 2016 is to reinforce cooperation with the Philippines in numerous fields from trade and investment to green technology, small and medium enterprises, climate change, education, and beyond. The NSP aims to strengthen Taipei’s relationships with the ten countries of the ASEAN union, six states in South Asia, New Zealand, and Australia.
In 2021, the Philippines and Taiwan two-way trade reached $6.63 billion. In addition, Taiwan established nine banks in the Philippines to further strengthen business ties. Also, the countries maintain close cooperation beyond trade, economics, investment, and technology. According to the new Policy, both countries will benefit from sustained mutual growth by enhancing and expanding their multifaceted partnership and collaboration.
The bottom line, Taiwan is not prepared to jeopardize its efforts to expand its presence across the Indo-Pacific. The country’s defense ministry sees China’s military activities as highly provocative. Accordingly, it has dispatched ships and aircraft and positioned land-based missile systems to monitor these large-scale military drills in its surrounds.
Politically, Taiwan sits in the hypothetical “first island chain,” which comprises US-friendly territories vital to US foreign policy. The military drills – China’s largest around Taiwan, were kicked off after US House Speaker Nancy Pelosi visited the island, angering Beijing. While China insists its intentions are peaceful, its President Xi Jinping has stated that reunification with Taiwan “must be fulfilled.” However, he has also not ruled out the possibility of using force to attain this. China views Taiwan as a breakaway province that must eventually be under Beijing’s control once again. Still, the island sees itself as separate from China with its democratically elected leaders and constitution.
China’s Global Times newspaper said that the military drills intend to show that China’s military can block Taiwan. However, given China’s continuing economic problems, such a disruption to trade would also hurt the country. It is a matter of how much economic and political risk the Communist Party leadership is willing to take.