Growing tensions between the US and China pose a significant threat to global supply chains with further disruption likely during the next decade, according to analysts.
Recent months have seen a deterioration in US-China relations over Taiwan, a major manufacturing hub and the world’s biggest supplier of semiconductor microchips. The speaker of the US House of Representatives, Nancy Pelosi, became the most senior American politician to visit the island in August. China, which claims sovereignty over Taiwan, has since ramped up military exercises in the waters around the island.
Tensions over Taiwan have resulted in growing concern over assets and people located in the region, according to Carl Johan Carlstedt, Asia intelligence analyst at geopolitical experts Dragonfly. However, he explained during a recent webinar that the long-term focus will be on how shifting geopolitical risk in southeast Asia will impact global supply chains.
“Supply chains are incredibly complex and interlinked, as we have seen with Ukraine. We have also seen how Covid restrictions in one part of the world can have massive implications for markets globally and politics domestically, across the world. This is particularly true for Asia,” said Carlstedt.
“Asia is the lynchpin for global supply chains. It has the busiest trans-shipment hubs in the world. Out of the top ten cargo ports, nine are in the Asia-Pacific region. It has some of the busiest airports in the world and Asia is the global manufacturing destination. So the consequences of any conflict, either limited or high intensity, would be widespread,” he warned.
The world is now highly dependent on China, according to Atul Vashistha, chairman and chief executive of Supply Wisdom and current US Department of Defense Reserve Forces Policy board member. China’s exports to the US are worth some $481bn, with $78bn going to Germany, $73bn to the Netherlands and $57bn to the UK. In Asia, China’s exports include $148bn to Japan, $110bn to Korea, $84bn to Vietnam, $50bn to Singapore and $49bn to Taiwan.
China accounts for as much as 50% of the global production of electronics and pharmaceuticals. Meanwhile, more than 50% of the global chip foundry manufacturing capacity is concentrated in one Taiwanese firm, the Taiwan Semi-Conductor Manufacturing Company (TSCM), according to Vashistha. Some 60% of all maritime trade and 22% of all global trade passes through the South China Sea, he said during a separate online briefing.
Multiple events are threatening China-linked supply chains, including China’s zero-Covid policy, the country’s anti-foreign sanctions law, the US Uyghur Forced Labour Prevention Act, and trade sanctions and military exercises in the Taiwan Strait, according to Vashistha. “You can see multiple disruptions potentially occurring, because of all the different factors coming in. Your aperture for risk identification needs to be much broader,” he said.
Although China’s response to Pelosi’s visits has so far been measured, further “flashpoints” are almost certain, according to Carlstedt.
“China has kept its powder dry for the future, especially in anticipation of further flashpoints. It will ramp activity up or down depending on US Taiwanese steps. Essentially, China can achieve its short-term objectives with this most recent show of force, whilst playing the long game for eventual Taiwanese reunification,” he said.
Future visits by senior US politicians could illicit a wide spectrum of responses from China, said Carlstedt. These include deploying the Chinese navy in Taiwanese waters and overflights by its air force. Selective bans on Taiwanese imports or exports could also disrupt supply chains operating through China, said Carlstedt.
According to Dragonfly, US-China relations have entered a “new normal” that will see China increasingly harass Taiwan shipping and airspace, while also implementing further import bans and launching cyberattacks. It believes all-out war is a “remote” possibility, while a full blockade of Taiwan is “highly unlikely”.
“However, scenarios like a full blockade or a Chinese invasion, although low likelihood, have a high impact. Especially due to the role China and Taiwan play in global supply chains, regionally and globally,” Carlstedt said.
A future blockade would cause major disruption to shipping between northeast Asia and the US and Europe, requiring costly rerouting, he warned. “A blockade would cause major disruption to manufacturing of technology, vehicles, machinery and electronics,” he said.
A conflict between the US and China would lead to major global supply chain disruption, continued Carlstedt. “A high intensity conflict would be long lasting and highly destructive, and essentially grim for everyone involved. It would impact severe damage on the world economy and potentially lead to a global economic depression. Globally, clients are beginning to realise that Asia is the lynchpin in global supply chains,” he said.
Increased geopolitical tensions over China and Taiwan will have particular implications for the semiconductor industry, which is an integral part of the modern economy and vital for the automotive, telecoms, electronics, healthcare, energy and defence sectors, according to Dragonfly Asia analyst Max Romer.
Taiwanese firms are leading manufacturers of semiconductors, while Chinese companies play a key role in chip manufacturing and the overall value chain, including testing and packaging, he noted. China also dominates the rare earth minerals industry, which is essential for producing semiconductors.
US President Joe Biden has signed an executive order to implement the $52.7bn semiconductor chips manufacturing subsidy and research law. The new legislation aims to reduce reliance on foreign chip manufacturing by subsidising US chip manufacturers and research funding.
But chip manufacturing continues to be concentrated in a small number of firms in southeast Asia and it will take decades for diversification efforts to have an effect, according to Romer.
“What we have been seeing these past few years is the start of the process, with a clear end goal, where both sides are less vulnerable to each other, and this has been accelerated by Russia-Ukraine,” said Barbara Kelmen, a security analyst at Dragonfly.
Romer added: “It is hard to get China completely out of the semiconductor value chain and, vice versa, to get the US out of the value chain. This is more complicated than just a few key countries and firms. Basically the US, Taiwan, Korea and Japan are very good at chip design and manufacturing, and China is important for rare earth minerals, testing and packaging, which are also key steps. You can see how intricately intwined the value chain is.”
Romer said the risk of semiconductor shortages remains high, with current shortfalls expected to last until at least mid-2023. Semiconductor prices have already risen by 10%-20% for some providers during the past year, while bringing the value chain closer to home could ultimately cost $45bn-$120bn each year in lost efficiency, he said.
“The risk of disruption is going up, while localisation and diversification means that costs will go up significantly as efficiency goes down. We are likely to see in this industry that shortages over the next five years are more likely than not to continue. It will take years to reroute and it is a process that will be incomplete, as some manufacturing locations in China are simply too competitive,” he said.
Romer said Taiwan’s semiconductor industry is an attractive target for China. “There is an economic incentive for China to invade Taiwan as it would fill the gaps in its semiconductor value chain. It’s the missing piece for China to reach autonomy in its domestic technology sector,” he said.
However, he noted that a full-scale invasion would be high risk. He believes it is more likely that China will look to drain Taiwan’s economic capabilities while trying to catch up with its own semiconductor manufacturing, Romer said.
He added that if China closes the semiconductor manufacturing gap by 2030 and continues to dominate the rare earth sector, it would have a powerful sanctions tool against western governments and firms.