As a pivotal node in the global semiconductor supply chain, the Republic of China, Taiwan has become an indispensable part of the global economy, thus making a conflict around the island felt across the world.
The geopolitical rivalry between the People’s Republic of China and the United States has zeroed in on Taiwan, which Beijing claims as its own, even though it has never ruled it, and which Washington has broadly declared to defend.
Several democracies have begun reinforcing their economic security measures towards China, on particular key industries, their supply chains, and critical raw materials (CRM), while expanding trade links with Taiwan.
Implications for International Business
A military conflict or blockade in the Taiwan Strait would seriously disrupt shipbound trade between Asia and Europe; European car and auto part manufacturers in particular should have contingency plans in place.
As Taiwanese chips firms diversify production away from China, EU businesses stand to benefit from cooperation on relocating production and services to Japan, Singapore, and Vietnam as well as increased direct investments in Europe.
Given Taiwan’s ongoing energy security challenges, European firms’ technology such as offshore wind power offers substantial opportunities for expansion.
State of Play
Ten weeks into Russia’s war against Ukraine, The Economist called Taiwan the “most dangerous place on Earth” last May. That was a reference to the island’s increased geostrategic relevance, both as a major economic player and the object of China’s ambition for ‘unification’, if necessary, by force. Beijing’s pressure tactics, combined with military maneuvers in the Taiwan Strait, endanger stability in the Indo-Pacific where roughly half of the world’s container ships transit. Beyond that, fears abound that a conflict, military or otherwise, between China and Taiwan would lead to a wider US-China confrontation with global consequences. So far, however, efforts to isolate Taiwan have backfired: the international community, including the EU, is expanding cooperation, not reducing it. Accounting for over a quarter of Taiwan’s foreign direct investments (FDI), the EU saw both its exports to and imports from Taiwan rise in 2021, by 24.1 and 34.6 percent, respectively. Total trade valued €35.6bn, 94.9% of which is in manufactured goods such as electronic components, telecommunications equipment, machinery, transport equipment, and chemicals including pharmaceuticals. Also, political support to Taiwan participating in International Organizations where statehood is not required has increased, as have condemnations of Chinese coercion by the G7 and NATO as well as parliamentary delegations visiting Taiwan in a show of solidarity. While no major Western state is expected to recognize Taiwan as a sovereign country anytime soon out of fear of provoking an escalation with China, their aim is to reinforce deterrence against the People’s Republic by strengthening engagement with the island nation.
Key Issues The geopolitical stakes are high around the Strait
As a country of critical importance to the world economy facing territorial claims by a nuclear-armed global power, Taiwan represents the essence of a challenge that is both geopolitical and geo-economic in nature. The potential military confrontation with China that has increasingly kept strategists busy would have immediate consequences around the globe, from severe trade disruptions to a superpower confrontation not seen for decades. Crucially, Taiwan relies on imports for 98 percent of its energy needs. With most of its LNG imports passing through the South China Sea, Taiwan’s energy supply chain is fragile, its power grid lacks resilience, and its electricity consumption is rising, not least due to firms investing in new capacity at home. Given limited reserves, it is estimated that Taiwan could withstand a Chinese blockade only for a short while, ranging from a mere fortnight regarding natural gas to nearly six weeks for coal or over four months for oil.
More broadly, it is estimated that war in the Taiwan Strait would cause $2tn damage to the global economy resulting from severed global supply chains, involving anything from financial services to life sciences. A naval blockade alone would shut down trade through the Taiwan Strait, increasing shipping cost overall for certain raw materials. Moreover, Taiwan’s financial system is highly vulnerable to Chinese cyber and other asymmetric attacks. These would also damage economies exposed to semiconductor-related value chains, including global producers of cars and auto components such as China, the United States, Japan and Germany as well as economies where automotive production represents an important share of domestic production, namely Slovakia, Czechia, and Hungary.
In this global setting, Taiwan’s upcoming presidential election is expected to be highly competitive with an uncertain, but possibly decisive outcome. For one, the traditional duopoly of the independence-minded Democratic Progressive Party of incumbent President Tsai Ing-wen and the more mainland-friendly Kuomintang risks being upset by the newly founded Taiwan People’s Party. The latter offers a middle way on China relations by focusing on popular domestic issues such as energy and housing, but with conciliatory tones towards the PRC. For another, Beijing seeks to influence the political debate on the island in its favor through grey-zone activities like disinformation, cyberattacks, military incursions into its airspace, simulations of a naval blockade, and selective economic coercion.
In this global setting, Taiwan’s upcoming presidential election is expected to be highly competitive with an uncertain, but possibly decisive outcome. For one, the traditional duopoly of the independence-minded Democratic Progressive Party of incumbent President Tsai Ing-wen and the more mainland-friendly Kuomintang risks being upset by the newly founded Taiwan People’s Party. The latter offers a middle way on China relations by focusing on popular domestic issues such as energy and housing, but with conciliatory tones towards the PRC. For another, Beijing seeks to influence the political debate on the island in its favor through grey-zone activities like disinformation, cyberattacks, military incursions into its airspace, simulations of a naval blockade, and selective economic coercion. Therefore, even if escalation can be avoided through 2023, the cards will be shuffled anew at the beginning of next year.
Trading chips, threats, and other goods – or bads
Tensions around Taiwan have already reshaped regional relations. Taiwanese firms have begun to re-shore and nearshore away from China, mostly to East and Southeast Asia as well as back home in Taiwan itself. For example, TSMC invested $2.12bn in 2022 to establish a subsidiary in Japan, and Taiwan’s MediaTek Inc. provided a $1bn capital injection in Singapore, while investments in China decreased. Southeast Asian states, in turn, are re-assessing their dependencies with the PRC. Some, such as Vietnam, have increasingly integrated into diversified supply chains, offering alternate location for manufacturing. In fact, stronger regional links could help Taiwan garner support to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a free trade pact including most Pacific nations except China and the United States.
Meanwhile, the US and the EU have converged on the need to “de-risk” their China relations to protect key technologies, as opposed to the initial – and farther reaching – idea of a broader de-coupling. The EU now sees Taiwan as a like-minded partner in the Indo-Pacific, with substantial cooperation on information and communication technologies (ICT). Affected by pandemic-induced supply chain disruptions and overreliance on China in critical sectors, the EU has agreed to increase state support to help domestic semiconductor production capacity, and TSMC is considering opening a plant in Germany. Taiwan’s chips are vital to its green and digital transition, so the EU also started to link experts from the two sides in cluster-to-cluster, ecosystem-to-ecosystem cooperation on R&D and supply chain monitoring, connecting the European Commission, Taiwan governmental agencies, companies, and clusters. The closer EU-Taiwan relations get, the harder will be the impact of a conflict in the Strait.