I was at the TPM meeting back in early 2024. While everyone was mainly discussing the Houthi attacks on ships in the Suez Canal, Former U.S. Secretary of Defense Robert Gates was the main guest at the event and had a different threat in mind. When the moderator asked if there is any area that we should keep an eye on, he mentioned the possibility of an escalation in the Taiwan Strait.
So, what would the effects of a possible shutdown in the Taiwan Strait look like?
Just 12% of global trade was passing through the Suez Canal before the attacks started. By switching to the route around South Africa, container prices jumped by almost 300% and stayed at that level for a period of time. By contrast, the Taiwan Strait is a major shipping route, with 88% of world’s largest ships by tonnage and 40% of all container vessels passing through it.
Most of the world’s top 10 container ports in terms of volume are located right across the Taiwan Strait (such as Shanghai, Yantian, Ningbo, etc.) and there is a lot of feeder traffic happening as well. So, any disruption there will have major consequences in global trade. Apart from the delays in transit times, certain commodities do not have any alternative place to switch since certain commodities are considered high-tech where they can only be produced in certain countries.
One major example is semiconductors.
90% of the world’s most advanced semiconductors are manufactured in Taiwan and any escalation or blockage will have devastating effects on all electronics. According to Bloomberg, any war in that region will have a $10 trillion effect on the world economy, cutting the world’s GDP by 10%.
The Chinese economy is also having its own problems now with high debt levels and a high level of youth unemployment, so any conflict in that region might make foreign companies leave China altogether.
There was an interesting discussion regarding the world’s risk level as well.
S&P Global created an index considering political, economic, legal, security, tax and operational risks, as categories. Per their analysis for the last 15 years, the risk level went up from 2.0 levels into 2.4 – an increase of 20%. Key drivers of risk over the last 15 years were the global Financial crisis, the Arab Spring, the Covid-19 crisis, and the Russia-Ukraine war. With the conflicts in the Middle East and the possibility of military disruption in the Taiwan Strait, it’s likely the risk level will soon increase further.
As the world becoming more riskier and global trade is becoming less free with tariffs and quotas, it’s important for importers and exporters to evaluate their whole supply chain. It’s worth even checking where/how companies’ main factories are doing sourcing from and de-risking sourcing by switching (if possible) to areas where threat levels are much lower.
