China-Taiwan: What is Next?

In our report “The U.S. – China Tech War Expands to Taiwan” we reviewed the escalating tensions between the U.S. and China while examining the critical role Taiwan plays in this war for geo-political, economic, and technology dominance. In this report, we will look into the strategic importance of China and Taiwan and the implications of potential conflict between the two countries.

China’s plans for Taiwan have been deeply concerning to the U.S. and the world as Taiwan is a major semiconductor hub for the world and China’s occupation of the island will create a major power imbalance in the East Asian region. 

China has been aiming to reunify with Taiwan for some time but tensions between China and Taiwan have been growing since 2016 when Tsai Ing-wen became president of Taiwan. She has taken a tougher stance on China’s ambitions in cross-strait relations, emphasizing Taiwan’s determination to maintain its democracy. 

China on the other hand has escalated its maneuvers toward occupying Taiwan. They recently outlined the importance of reunification with Taiwan to their country in a recent White Paper, stating their intentions are for peaceful reunification of the two countries but refused to rule out the use of military forces to annex the island nation. 

The relationship between the two countries is one of interdependency, in 2020, goods and services worth $166 billion were exchanged between the two countries. In summary, China is Taiwan's most important trading partner, followed by the United States. More than 42% of Taiwan's exports go to China, from where Taiwan gets around 22% of its imports. Taiwan is also among the top investors in China. In 2021 Taiwanese companies invested around $194 billion in a total of 44,577 Chinese projects including Foxconn. 

Many people in the microchip industry believe Taiwan will have a hard time walking away from China. The bulk of the electronics supply chain continues to run through China. For years, the value of China’s imports of semiconductors has exceeded those of oil. In 2021, it bought more than $430 billion in semiconductors, 36 percent of which came from Taiwan, according to Chinese state media.

Geopolitical importance of China and Taiwan to the World

China has been the largest exporter of goods in the world since 2009. Consumer electronics, data processing technologies, clothing, other textiles, optical gear, and medical equipment are among its many exports. Most notably, China is the leader in refining rare earth minerals. It refines 68% of nickel, 40% of copper, 59% of lithium, and 73% of cobalt globally. China also holds 78% of the world’s cell manufacturing capacity for EV batteries and over 80% for all manufacturing stages of solar panels. 

China has additionally, been investing in many developing countries by building roads and injecting cash into their economy making China an important strategic partner to many nations.

Taiwan is also critical to the global economy due to the world’s reliance on its production of semiconductors. Taiwan manufactures about 65% of the world’s semiconductors and almost 90% of the advanced chips. The importance of semiconductors to the world’s economy and nation's national security makes the world reliant on Taiwan. The conflict between China and Taiwan could lead to disruption or halt of semiconductor export and production in Taiwan which will have catastrophic effects on the world including China. 

Europe and the United States have been increasingly concerned about China’s invasion of Taiwan and have been looking at increasing their local and domestic semiconductor productions. The U.S. Chips and Science Act as well as the EU Chip Act mobilize billions of dollars into local semiconductor manufacturing. Meanwhile there these efforts take time and are dependent on raw material that is largely controlled by China.

Historically, China has utilized its market monopoly on rare earth elements to manipulate global supply and achieve its diplomatic goals which can be devastating to the global economy. 

What is Next

According to Barron’s, few strategists see a Chinese takeover of Taiwan as imminent, in part because of the catastrophic impact on the global economy, including China. But geopolitical strategists see a new status quo around Taiwan that opens the door to ongoing mini-crises and potentially military activity between the two countries with U.S. involvement. 

More and more businesses are looking at the situation seriously and looking for strategies on how to diversify and build resilience in their supply chains according to Dale Buckner, head of Global Guardian, a security consultancy that has helped companies with conflicts, including the war in Ukraine. 

Companies are steering their investment and looking at whether they should renew partnerships with the two countries due to the risk of conflict as well as policy-related changes and the slowing down of growth in China.

“You have to be mindful of your China exposure—and quite often it isn’t in China. A Chinese exporter locked out of the U.S. market could prompt a Chinese import from buying American,” says Harry Melandri, an advisor at independent macroeconomic research firm MI2 Partners.

In summary, there is increased volatility and disruptions risks related to China, and advisable for businesses to look at strategies to de-risk and diversify their supply chain. 

We recommend you analyze your supply chain risks and build contingency plans to prepare for supply chain disruptions.

Add sourcing and location redundancies to your supply chain by multi-sourcing. This will help reduce your country and supplier dependencies and have alternative suppliers in case of conflict and disruptions. 

Look at increasing your inventory for the components that are especially vulnerable and location-dependent. 

Build protocols for quick mitigation responses and a business continuity plan as part of your supply chain risk management plan. 

Learn more about how to manage your supply chain risk beyond crisis mode.