The global shipping industry should brace for a widespread crisis that would result in a surge in operational costs, loss of ships, and delays if China actualizes its rhetoric and goes ahead to invade Taiwan, a new report suggests. At the same time, the report prepared by the Mercatus Center think tank at George Mason University, hypostatizes that China would cut undersea Internet cables vital to the semiconductor industry and providing a key link for data between Asia and North America.
As tension between China and Taiwan escalated in recent weeks, the report draws on Chinese data to illustrate the potential scenarios and impact on the global economy. The authors report that China’s People’s Liberation Army has prepared hundreds of scenarios as part of the country’s long-held ambitions of reunification.
If actualized, the invasion they conclude is bound to have significant trade and economic effects that could easily exceed those of Russia’s invasion of Ukraine. Pointing to the potential for the likely impact on container shipping, the report says that the U.S. economy would likely bear the biggest brunt due to its huge exposure to the economies of the two Asian countries not only in trade volumes but also in the share of value the two countries add in U.S. final demand.
The report contends that an outright invasion of Taiwan by China, a Taiwanese declaration of independence, or an accidental clash at sea between China and Taiwan or the U.S could lead to a crisis in the Taiwan Strait. The result they conclude would pose two immediate risks to the U.S. economy, first in the form of delays or disruption of container shipments in the Taiwan Strait, the South China Sea, and the East China Sea, as well as the potential disruptions to digital flows from vulnerable submarine cables with landing stations in Taiwan.
“The potential effects of a Chinese invasion of Taiwan on the U.S. economy are far greater than those of the Russian invasion of Ukraine. Container shipments to and from major ports in the region, as well as digital flows, would be at direct risk,” writes senior research fellows Christine McDaniel and Weifeng Zhong at the Mercatus Center
According to the report, a Chinese invasion would significantly disrupt container shipping operations through the Taiwan Strait, one of the world’s busiest sea routes. They cite estimates showing that $3.4 trillion in trade passed through the South China Sea, or 21 percent of the global trade, using the Taiwan Strait as a vital route. The disruption could affect containerized shipments to or from major ports in China, Japan, the Philippines, South Korea, Taiwan, and Vietnam. The report shows that one of the busiest shipping routes is in the Straits of Malacca, given that it is the shortest sea route between the Indian and Pacific oceans.
An invasion would lead to shipping routes that normally go through the Taiwan Strait being delayed, or force vessels to reroute. As was seen with bulkers and other shipping in the Black Sea, any form of hostilities would ignite a surge in insurance premiums. While rerouting to avoid the war-risk premium is possible, the authors note that it would result in additional costs and also lengthens shipping times. Costs of rerouting all traffic around the Straits of Malacca are estimated between $279 million per month (if rerouting through Indonesia) and $2.8 billion per month (if rerouting through Australia).
“Any geographic expansion of a crisis that begins in the Taiwan Strait would easily make rerouting harder, if not impossible,” notes the report.
Another impact would be substantial delays in supply chains, a development that would have ripple effects across various industries. In the U.S., for instance, most technology firms rely on Taiwanese manufacturers to produce up to 90 percent of semiconductor chips. Disruptions to the supply of the chips would disrupt entire value chain ecosystems for every industry that uses advanced computer chips.
Apart from disrupting the container shipping industry, China’s invasion of Taiwan has the potential to disrupt digital flows from vulnerable submarine cables with landing stations in Taiwan. As of August 2022, Taiwan was connected to 15 submarine cables that come to shore at landing stations in the city of New Taipei, the town of Toucheng in the north, and the town of Fangshan in the south. The landing stations connect high-capacity cables in which U.S technology companies have made significant investments.
The report concludes that economic risks underscore the need for the U.S to work with Taiwanese authorities and other Indo-Pacific allies and partners to improve the security of submarine cables and their landing stations. They also cite the need for contingency planning for container shipping traffic and essential intermediate inputs to U.S. production and value chains.