China-Taiwan tensions: Impacts on global supply chains and semiconductor availability

China claims sovereignty over Taiwan and aims for reunification, while Taiwan sees itself as separate from mainland China. This has caused ongoing tensions, with China increasing military activity around Taiwan, especially following significant political events. Notably, on 23 May 2024, China conducted large-scale military exercises near Taiwan, raising fears of potential conflict. 

So, what will this mean for supply chains around the world?

The Taiwan Strait and the South China Sea: Potential supply chain disruptions worldwide

• The Taiwan Strait, a primary shipping route between China, Japan, South Korea, and Europe, facilitates the transportation of manufactured goods worldwide. It plays a crucial role in global supply chains, carrying half of the global container fleet, including 88% of the world’s largest ships by tonnage in 2022. A China-Taiwan conflict could create significant global supply chain disruptions. 
• A military conflict could also lead to maritime disputes and blockades in the South China Sea, which accounts for £3.9 trillion in annual trade.
• A full-scale Chinese invasion of Taiwan could reduce global economic output by up to 2.8%, according to an Institute for Economics and Peace report. Recovering supply chains and rebuilding business confidence would likely extend over several years post-conflict, so it is vital businesses assess and protect themselves against risks ahead of time to mitigate disruptions to their operations.

Brace for semiconductor shortages

Taiwan plays a vital role in the global semiconductor value chain: chip design, semiconductor material production, assembly, packaging, and testing.

Semiconductors are essential components in nearly all industrial activities, driving advancements in telecommunications, healthcare, military systems, transportation, clean energy, and more. Taiwan’s chipmakers are responsible for over 60% of the world’s contract chipmaking capacity and over 90% of the advanced ones, dominating cutting-edge semiconductor production for major tech companies, including Apple and Google. 

Any disruption to Taiwan’s semiconductor supply chain is expected to cause shortages and increased costs worldwide, affecting markets for everything from refrigerators to cell phones to electric vehicles. This would result in an estimated loss of $500 billion for electronics manufacturers reliant on this supply.

There is precedent for such disruptions, particularly the pandemic-induced semiconductor shortage, which caused economic turmoil extending beyond consumer electronics, such as communication infrastructures. Geopolitical tensions between China and Taiwan could cause more severe shortages, ultimately leading to price increases for consumers and job losses for manufacturers. 

Most semiconductors are produced by a single company, Taiwan Semiconductor Manufacturing Corporation (TSMC). TSMC’s fabrication plants, known for their efficiency and highly skilled, intensive labour, can manufacture chips more quickly and accurately than any of its competitors. Experts agree that replicating this intricate supply chain in another location would be inefficient and challenging. Nonetheless, US and European governments are taking action to bolster their semiconductor supply chains and competitiveness.  

Semiconductors: Governmental actions in the US and Europe

Sources: The Financial Times, The New York Times, Reuters, NBC News, Vision of Humanity