Is this the biggest threat facing the global economy?
China has long claimed the island of Taiwan as part of its own country. US intelligence
believes it may be soon ready to invade. The leadership of Xi Jinping, the current key
leader of China, is really based on the idea of making China great again. And that means getting
back what it regards as its historic territory. A Chinese invasion or blockade would devastate
Taiwan and would shock the world. Assessing the economic damage is a frightening prospect.
One major study found that in a blockade scenario - which would be short of a full
invasion - well over 2 trillion dollars’ worth of economic activity would be disrupted instantly.
From a business perspective, it's terrifying. And it's terrifying
because if we were to lose the fabs in Taiwan, which I think is the worst case
scenario. We basically enter a technological dark age which would take us years to recover.
Taiwan matters to the global economy as much as almost anywhere on earth because of these:
semiconductors. The building blocks of the modern world.
If China invades or blockades Taiwan, the results would be catastrophic for the world
economy. It'd be the largest disruption to global manufacturing since World War II,
perhaps even since the Great Depression. In this episode, we will reveal an
economic timebomb – and ask if anything can be done to defuse it.
Does it make sense to trigger a crisis over Taiwan that could lead to immense
global economic damage? A lot of that damage would be concentrated on China in particular.
I think that if they view an invasion to be a politically necessary task,
I'm not sure that economic damage would be something that would prevent them from invading.
Find out what’s at stake on Business Beyond. The story of modern Taiwan began in 1949,
when the Chinese Communist Party won the Chinese Civil War. In the aftermath of that defeat,
the leadership of the defeated Republic of China government fled to Taiwan.
Ever since, Taiwan and China have been governed by distinct political systems.
Over the last few decades, Taiwan has evolved into a vibrant and modern democracy – and many argue
that is now the key difference between it and the People’s Republic of China.
I think the hostility really stems from the belief in Taiwan,
the belief in democracy, to be quite honest. And democracy is really important to us.
We've had the ability to choose our own leaders, to vote, to express our own thoughts,
to have referendums on social issues that are important to us.
I think there is a political difference in how we value our societies and the democracy
that we really do value and we really do hold dear. And a lot of people fought for
it in Taiwan. And so, this is something that I think is fundamentally different.
Taiwan however is not widely recognized as a sovereign state.
Only 13 countries recognise its independence and many of them are among the smallest in the world.
But the USA is by far Taiwan’s most important strategic partner.
While Washington does not support Taiwanese independence, its official position towards the
island states that it opposes “any unilateral changes to the status quo from either side.
It also commits to the defence of the island, saying it maintains its “capacity
to resist any resort to force or other forms of coercion that would jeopardize the security,
or the social or economic system, of Taiwan. It adds up to an incredibly delicate
balancing act between Taiwan and the world’s two most powerful countries.
The issue is that in the island, Taiwan, there is a desire to remain independent,
to have autonomy, to be a democracy, which they've been since 1996. I mean, there are huge
differences. There's also a pragmatic acceptance that Beijing has the force to do things that could
radically and catastrophically impact on them and the region. So, there's a constant sort
of tense balance. It's very, very difficult. And as of today, it seems to me unresolvable.
It just has to be left the way it is.” But Chinese President Xi Jinping has
repeatedly made it clear that is not something he is especially keen on.
The resolution of the Taiwan issue is a matter for the Chinese ourselves to decide.
We insist on striving for the prospect of peaceful reunification with the greatest sincerity and with
the greatest effort. However, we are not committed to abandoning the use of force and we reserve the
option of taking all necessary measures. Cross-strait military tensions are now in
their worst state in decades. Over the past year, China has carried out several military
drills simulating an attack and has fired missiles close to the island. US intelligence officials say
President Xi wants his country’s military to be ready to attack the island by 2027.
As we will see throughout this episode, economics makes the relationship between the two even more
complicated. Despite the long-term tensions between China and Taiwan, their economies have
become extremely intertwined in recent decades. Since 2005, China has been Taiwan’s biggest trade
partner. When we include Hong Kong, two fifths of Taiwan’s exports went
to China in 2021 - well ahead of the USA, Singapore, Japan and South Korea.
It’s a similar picture for imports. China, together with Hong Kong,
accounts for 22% of the goods coming into Taiwan, well ahead of the next four countries.
That has created some concern in Taiwan that the island is too economically dependent on China.
That has always been a concern whether or not too much economic reliance will cause detriment to
Taiwan. And that has always been something that the Taiwanese government is very much aware of.
But because of the lack of language barriers and the cheap labor that the Chinese market
offers and a lot of times the incentives by the Chinese government to the Taiwanese investors,
the movement of capital and sometimes the investments to China seems to be something that
the government is not able to actually control. But the Taiwanese economy has a not-so-secret
weapon. Semiconductors. Taiwan is so dominant in semiconductors that it makes it one of the most
commercially important places in the world. It is sometimes referred to as its Silicon Shield.
I've heard a lot of people say that data is the new oil. People will depend on data
but you need semiconductors to have data. I think of it more as semiconductors are the driving force
behind everything that we have today. Chips are in everything from the Led light bulbs that are in
your house to the computers that we're talking on right now to automobiles and smartphones.
If there was a world cup for producing semiconductors, Taiwan would win it every year.
Taiwan completely dominates the global production of semiconductor chips. In 2021,
the island accounted for almost two-thirds of all those made on the planet.
And when it comes to the most advanced semiconductors - So-called logic chips measuring
10 nanometres or less - Taiwan's supremacy is almost total. The country makes a massive 92% of
these, with the remaining 8% made in South Korea. And it’s all down to this one company – the
Taiwan Semiconductor Manufacturing Company, widely known as TSMC.
90% of the world's most advanced processor chips, the type of chips that go in your phone, your PC,
or in data center or telecom infrastructure, 90% of those chips are produced by one company
in Taiwan, the Taiwan Semiconductor Manufacturing Company, which is the world's largest chip maker
and also the most advanced chipmaker. Put simply, the world's entire computing infrastructure,
from phones to PCs to data centers, can't function without chips from this one company.
TSMC does not design chips and therefore does not have to compete with companies that do. It
focuses exclusively on contract manufacturing and has become the undisputed world leader in
a process that has become intimidatingly complex for those wishing to do likewise.
And so each of the transistors themselves is absolutely tiny, not just microscopic,
but far, far smaller than anyone can see. And so today, in a new smartphone,
each of the 15 billion or so transistors will be the size of a coronavirus,
which means that manufacturing them is the hardest, most complex, most precise manufacturing
processes that humans have ever undertaken. Both China and the USA have been dramatically
trying to scale up their own production of semiconductors to reduce dependence on
Taiwan.But as chips become smaller, more powerful and more complex, Taiwan is retaining its edge.
And that, above all else, is why Taiwan matters so much economically.
We have this incredible technology that all of us use every day in terms of semiconductors that's in
almost everything we touch all the time that comes from this little island in the Pacific that China
claims is theirs and the west is terrified of having fall to China. So we're dependent
from a business perspective on the semiconductor supply chain continuing to run and these little
pieces of silicon getting etched and produced and manufactured and fabricated in Taiwan.
Talk of invasions or blockades remains highly speculative at this point.
But multiple scenarios have already been gamed out by policymakers around the world.
So let’s take a closer look at how the worst could unfold.
Taiwan is located around 130km from the People's Republic of China,
across the Taiwan Strait. The capital, Taipei, is located in the North of the island.
Most of Taiwan's ports, population and industry are located on the west coast,
closest to China. Taiwan's geography makes it vulnerable to an invasion
but even more vulnerable to a blockade. A blockade scenario could see Chinese ships
and submarines block off Taiwanese ports – a move that would cause global economic chaos.
Many experts believe a blockade is much more likely than a full-scale invasion.
In December 2022, the economic research group Rhodium released a study analysing
the global economic effects of a blockade. We drew the line at a blockade scenario.
And so, think about trade flows, investment flows being paralyzed to and from Taiwan
and showing what a conservative estimate would be in disruption to global economic activity. And
the figure that emerged there was that well over 2 trillion in global economic activity
would be at risk and that's before you consider sanctions responses at that stage of crisis second
order effects along different value chains and actual military conflict escalation from there.”
A blockade would immediately threaten the most basic necessities of life in Taiwan.
So, a blockade first would not necessarily be a precursor to an invasion. In fact,
that might be the more obvious play that Beijing could use, which is that Taiwan is heavily reliant
on imports for pretty much all of its fuel and a good chunk of its food. They have something like
ten days of fuel reserves without trade. Taiwan is definitely not going to be self-sufficient.
But a full blockade on Taiwanese exports would very quickly plunge the world economy
into a crisis of historic proportions. A huge chunk of global semiconductor
production would suddenly go dark. If we were to lose Taiwan and there
are various amounts of it we could lose. It would be catastrophic for the global economy
and it would be catastrophic because we'd start to lose the products that we need.
If there were a crisis that caused us to lose access to chips made in Taiwan, we'd face Great
Depression levels of manufacturing disruption. And it wouldn't only be smartphones, although
we'd struggle to make a smartphone almost anywhere in the world without access to Taiwan's chips,
but everything else that relies on chips too, from dishwashers to microwaves to cars, which today
have 1000 chips inside the typical new car. All of this would be at risk of severe disruption in case
of a loss of access to Taiwan's chip making. And many experts believe that if Beijing
thinks it could simply take over TSMC and restore its production capacity
after an invasion, it is grossly mistaken. There's only a very narrow set of scenarios
where there is forceful reunification with Taiwan and TSMC remains both intact,
fully staffed and able to produce. My operating assumption is if there's a conflict, and unless
it's very quick, with minimal or no Taiwanese resistance, I think TSMC is basically cooked.
The Covid-19 pandemic led to huge disruption in semiconductor production. But much of
that was temporary. Conflict in Taiwan would change the industry permanently.
While China and the USA have been trying to drastically ramp up their own semiconductor
production, experts say they are nowhere near ready to replace TSMC in global supply chains –
especially at a time when chips are in greater demand than ever before in multiple sectors.
The impact of this risk is massive. And even if we were to lose half of
the semiconductor production or a third or 10% of the semiconductor capacity that's in
Taiwan. We don't really have a backup for that. And as we're shifting technologies, things like
electric vehicles, EVs use four to ten times as many semiconductors as traditional automobiles.
So, we're looking at more advanced, more chip hungry production than we've had in the past, with
the risk of less chips available in the future.” As you can see, assessing the scale of economic
damage from an invasion or blockade of Taiwan is a gargantuan task. There are
few areas of global economic life where the knock-on effects would not be instantly felt.
The hit to global trade would be felt in every port in the world.
The two economies most instantly and severely hit by an invasion would be China’s and Taiwan’s.
And both are absolutely pivotal when it comes to global trade. China is the world’s biggest
exporter. It accounts for almost 15% of all the goods sent around the world. But even
though Taiwan is much, much smaller it has a hugely important role in global trade and is
actually the 15th largest exporter in the world. If China were to invade or blockade Taiwan, its
own economy would be facing an existential crisis. For starters, it would face a range of severe
sanctions from some of its main economic partners. So think about blocking sanctions on banks,
on state owned enterprises, banning swift access to designated entities. These are the
things that would really freeze up trade with China. And remember, the Chinese economy is
highly dependent on dollar financing. That was made readily apparent in the wake of Russia's
invasion of Ukraine, where there was a question of whether China would comply with US and G Seven led
sanctions. And there's a reason why China had to be very cautious. Not only is it extremely
dependent on US origin technology, but it cannot easily escape that dollar dependency either.
Then there’s an even bigger problem. As well as being the world’s biggest exporter,
China is the world’s biggest manufacturer. It accounts for around a fifth of global GDP. And
suddenly it would have – of its own volition – knocked out the main supplier of one of the
most important manufacturing components. If there was a full blockade or if there
was an economic embargo against China, we wouldn't have toys to buy our kids
at Christmas. All The Paper goods, all the Less expensive Products that We Rely on right
now…availability Of TVs, availability of just general products wouldn't be there.
There's so much that we take for granted that comes out of China. If you look at clothing,
if you look at what's printed, there is so much that we buy today that is made
in China. China is the world's factory, and losing it would be absolutely catastrophic.
That brings us to a pivotal question. From Beijing’s perspective,
could the prospect of catastrophic economic damage prevent the Chinese Communist Party
from pressing the red button on Taiwan? To get an answer to that, it’s important
to consider just how important the Taiwan question is to Xi Jinping and the party.
For the Communists, the mission is to create a unified, strong China,
and Taiwan is at the heart of that. And as they have become stronger economically, militarily,
there's more of an expectation by Chinese people that there will be
something that will make Taiwan part of the great unified Chinese nation again.
So for Xi Jinping and his colleagues, this is not something that they can ignore. I mean,
they've always got to have it on their minds. In major speeches and policy documents and
all sorts of forums, they talk about this issue as something that must be resolved.
Does that mean that the political importance of Taiwan will always outweigh its economic
importance as far as Beijing is concerned? “Definitely economic damage to Taiwan would
have consequences to the China economy and to the well being of China. But I think
in truth, the Chinese political aspirations and their political thinkings have always been more
important, I think rather than their economic considerations. So, I think that if they view an
invasion to be a politically necessary task, I'm not sure that economic damage would be something
that would actually prevent them from invading.” Well, I hope that the Chinese leadership realizes
the cost of a blockade or attack would be immense and therefore is deterred from attacking. But I'm
not sure how confident we should be. The reality is that all of the disastrous wars in history were
started by people who underestimated the amount of disaster that would be caused.
In some respects, to view the Taiwan issue only from an economic perspective is to miss the point.
This may well become THE defining political, military AND economic issue
the world has dealt with for many years. And is there a solution to avert economic
catastrophe, and a potential military showdown of the world’s two most powerful countries?
I'd hope that, yeah, I mean, biding time, just letting this issue sleep is to me the only
viable option. I mean, there's no resolution at the moment. There hasn't been for the last
70 years. So, I think that that's all that can happen. Whether this can continue forever,
well, that's the problem. But I mean, at the moment, I think Beijing's tactic is, yeah,
just wait, wait, let them get bigger and stronger. Maybe one day then the resolution will come.
But at the moment, there isn't a resolution that I see on the horizon.
And for the last word, we go to Taiwan itself. Because while we can all speculate about the
economic impact of the crisis from thousands of miles away, millions of people in Taiwan
live with a very different reality. Are we afraid? I would not say that
I'm not afraid. I am afraid, but it's a fact of life but there's not
a lot of things on a personal level that you can do to make it not happen or happen. And so,
learning to know how to live with uncertainty is something that
I think we tried to do. That’s all from this episode
of Business Beyond. If you’re interested, check out some of our recent episodes in our playlist
and don’t forget to subscribe. And I’d like to also alert you to an upcoming episode
which delves deeper into something we discussed here – the global semiconductor industry.
Thanks for watching and until the next time, take care!