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How rising tensions across the Taiwan Strait could threaten global trade

China’s missile launches in coastal waters off Taiwan this week have highlighted the risks to global supply chains from an ongoing escalation in tensions between the warring nations.

The military exercises following a visit by US House Speaker Nancy Pelosi to Taiwan resembled a rehearsal for a blockade of the export-dependent island, with some cargo ships having to change course and airlines canceling flights.

Three of the six areas closed to the exercises are located in or near the Taiwan Strait – the body of water between the island and mainland China that is only 130 km wide at its narrowest point. The Strait is the main shipping route between China and Japan, the world’s second and third largest economies respectively, and Europe. It also serves as a trade route for technology powerhouse South Korea, which transports manufactured goods from Asia’s factories to many of the world’s consumers.

“In an environment where China is trying to play a more assertive role and block the Straits. . . it will be hugely disruptive,” said Anoop Singh, chief analyst at shipbroker Braemar. “Everything will be affected.”

China’s military exercises in the Straits and East China Sea this week — significantly broader in scope than war games staged during the last such crisis in 1995 and 1996 — would last just a few days. But analysts said the maneuvers could spark an ongoing period of heightened tensions across the Strait.

Pelosi claims Pelosi’s visit, the first speaker’s visit to Taiwan in 25 years, is part of an “erosion” of Washington’s “one China” policy, which sees America recognize Beijing as China’s sole government and acknowledges, but does not accept, his claim to the island.

“Prolonged or regular exercises in the Taiwan Strait could create significant disruptions in Taiwan’s trade with the rest of the world and in global supply chains,” Homin Lee, Asia macro strategist at Lombard Odier, wrote in a note.

Half of the global container fleet and 88 percent of the world’s largest ships per tonnage passed through the Straits this year, according to data reported by Bloomberg.

Map of Taiwan showing China's military fire drills in March 1996 and August 2022

While live fire drills are “an extremely common occurrence at sea,” they’re usually limited to less-crowded areas, Braemar’s Singh said. He added that 1 million barrels of crude oil and oil products pass through the Strait every day. “This water is usually very, very congested.”

Singh said he was aware of at least two major ship owners who had asked ships to avoid the Strait after reports of live fire in the area.

“Most others will probably follow [their] lead,” he added.

Elsewhere in Asia-Pacific, Japanese shipping company NYK Line warned to avoid the Strait, while South Korean carrier Korean Airlines canceled all flights between Seoul and Taipei on Thursday and Friday. Korean media also reported that Asiana Airlines canceled its flights between Seoul and Taipei, while Hong Kong’s Cathay Pacific said it was “monitoring developments very closely”.

Any prolonged attempt to hinder international trade from Taiwan, with some of the major military exercises near two of the island’s main ports, would hurt world trade.

Taiwan is a vital link in global technology supply chains. Taiwan Semiconductor Manufacturing Co accounts for 90 percent of the world’s advanced chip capacity, while downstream electronic contract manufacturers, such as Apple supplier Foxconn, manufacture components and assemble products from smartphones into servers for some of the world’s largest companies.

Further outages in the Taiwan Strait could be devastating to Taiwan’s economy, as 40 percent of exports go to China and Hong Kong, according to figures from Capital Economics. China has already announced the suspension of thousands of agricultural imports from the island.

“In the event of a disaster that shuts down Taiwan for some time, I really don’t know how the global supply chain for the tech industry could survive,” said Dan Nystedt, vice president at TriOrient Investments.

“You have at least $3 to $4 trillion worth of work that may not get done.”

Paul Tsui, director of Hong Kong-based logistics provider Janel Group, which serves companies such as General Electric, said some customers had expressed concerns about business disruptions caused by Pelosi’s visit to Taiwan.

“If tensions escalate in the Taiwan Strait, costs and transit times would increase significantly [and] could even be worse than Covid disruptions,” Tsui said.

Additional coverage by Kathrin Hille in Taipei, Song Jung-a in Seoul, Eri Sugiura in Tokyo and Maiqi Ding in Beijing

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