China has announced that in the vicinity of the island of Taiwan in the coming days, news that fuels tension between China and the US and increases the risk of an escalation in this conflict that could have global economic consequences. China is the world’s second largest economy, while Taiwan is the world’s leading producer of advanced semiconductor chips, so a continued blockade of the island or a major conflict could be fatal to the global economy.
Although the base scenario used by the experts does not foresee that the crisis will lead to a military conflict, the truth is that “the tension generated after the visit to Taiwan of the president of the US Legislative Assembly, Nancy Pelosi, with the start of military maneuvers in China with live fire in the Taiwan Strait could have serious economic effects globally,” according to Natixis.
Alicia García Herrero, Natixis chief economist for Asia Pacific, and Gary NG, senior economist at the same firm, believe that these tensions are much more dangerous today than in other similar crises that occurred in the past, such as the one in 1996.
One of the lessons that can be drawn from the war in Ukraine is precisely that in a globalized world, a conflict in one part of the world can end up damaging the economy in the other part. The great chain that makes up international trade needs all its links to continue working efficiently. In the case of Taiwan and China, it is more pressing, since they are not just any two links.
Differences with 1996
The risk is much more important today than in the past, say the Natixis economists: “On the one hand, the world is much more globalized. On the other, China’s economy is now much more decisive than in the last crisis of the Strait of Taiwan in 1996, while Taiwan plays a fundamental role in the global value chain, especially as far as semiconductor production is concerned,” these experts argue.
“Any disruption to Taiwan’s semiconductor exports will hurt inflationary pressures, due to the key role of semiconductors. This may put additional pressure on central banks globally. The good news is that more inventories have built up after of the pandemic”, say these experts.
What if there is a blockage?
“There are two important sectoral implications. First, a potential lockdown would affect sectors with a greater reliance on semiconductors, such as high-performance computing, the Internet of Things, data centers, electric vehicles. Consumer electronics will also suffer, but the downturn of demand and the higher level of inventories would be the damper,” say the Natixis economists.
Second, Asian economies may experience delays in receiving shipments of key energy products such as gasoline, diesel, or gas. In this case, the threat not only looms over Taiwan, but could also end up affecting Japan and South Korea that share waters.
Finally, China itself could also be affected. “A larger blockade in size and duration will also be costly for mainland China due to As of today, Beijing already faces obstacles set by the US such as the chip law, equipment export bans and pressure on other manufacturers (Taiwan, Korea and the Netherlands, etc.) so they don’t export their technology to China.”
However, perhaps one of the most important repercussions, but less visible today, is the impact of this conflict on globalization itself. As has happened with the covid crisis or the war in Ukraine, in the medium term, “this will accelerate the already existing trends so that different economies and companies diversify their supply chains, that is, they will rely more and more on nearby and local operations”, say Natixis experts.
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