US vs China: Taiwan Edition

Taiwan’s population is 23 million. It is 80 miles from the coast of China.

Taiwan is a democratic state, but China considers it, its own territory and looking to acquire it back.

While in May Joe Biden warned China that it will help Taiwan militarily if China will invade Taiwan.

Experts suggest this is a contrasting statement because the US was strategically ambiguous on the issue until now. Meaning there was no clarity on where the US stood on the Taiwan issue. But the recent statement by Joe Biden made it pretty clear that the US will help Taiwan.

Now Nancy Pelosi is US house representative, one of the senior most person in US government.

Her going in Taiwan after the opposition of China signifies one thing. It’s that US doesn’t accept China’s proposition of Taiwan belonging to it.

That is the main point of tension between the US and China on the Taiwan front.

In response to Pelosi’s visit, China has put banned sand export. While the import of fish and fruits is also banned.

Ban on natural sand is important because it is used in the production of semi-conductor. Taiwan is one of the biggest semiconductor producers in the world. Shortage of natural sand can impact the production of semi-conductor. This means more delay in cars production, laptops and other electronic items in which semiconductor is used. So waiting time for cars in India can increase. And we can face a severe shortage of electronic items.

However, it was reported on Taiwan news.com that China’s ban won’t have much impact. Bureau of Mines stated that imported sand accounted for less than 1% of domestic demand in last 2 years, 0.64% (450,000 tonnes) and 0.71% (540,000 tonnes). Out of that only 70,000 and 170,000 tonnes were imported from China. It was also reported that Taiwan will not be impacted. As the country has resilience and alternative sources for sand. Hence we can say, that on this front China’s ban wont have a significant impact.

Now let’s talk about trade

Any escalation between US and China can impact Taiwan Strait. Its importance can be understood from the fact that it is a primary route for ships going from Asian countries like China, Japan, South Korea and Taiwan towards Europe and US.

Asia has become a manufacturing and assembly hub. In this globalized world, European and US companies create designs of products in their headquarters. Then they send this design and all the raw materials from across the world to assembly units in Asian countries.

After products are assembled they are again sent to Europe and US for distribution and marketing. Assembling of a product comes right in the middle of the supply chain. Hence disturbance in the Taiwan strait will impact the delivery of final goods in Europe and US markets.

It will create shortage products in Europe and US. This supply-side issue will lead to lower sales of companies and higher inflation. Keep in mind central bank can’t control supply-side inflation.

Bloomberg reported that half of the global container fleet and 88% of the largest container ships by tonnage passed through this route.

So if trade through Taiwan Strait is impacted then it will further lead to higher inflation, lower economic growth (Read Stagflation)

Well, we talked about disruptions in trade routes, however, Xi is a rational player who looks at the game from a long-term perspective. Therefore China will be very careful in spooking the US. The Chinese economy is not doing great, its people are unhappy. So before taking any action against the US, China will consider the domino effect of its action. Hence the potential impact of US-China tension in Taiwan is massive but the event is not very probable.