China-Taiwan Conflict: A Global Economic Catastrophe

The United States of America did it again. After leaving Afghanistan in chaos, the visit of Nancy Pelosi, Speaker of the US House of Representatives to Taiwan, has created a stir in Asia and economic concerns across the globe. 

On 02 August 2022, Pelosi said that the United States delegation’s visit to Taiwan honours America’s unwavering commitment to supporting Taiwan’s vibrant democracy. 

Expectedly, the Chinese foreign ministry condemned Pelosi's visit and said it seriously damages peace and stability in the Taiwan Strait.

The US should abandon any attempt to play the Taiwan card and faithfully abide by the one-China principle. If the US insists on its way, all the serious consequences will be the US' responsibility, the ministry said. 

China and US through different channels have maintained close communication. We've repeatedly expressed our strong opposition to the potential visit of Speaker Nancy Pelosi to Taiwan and that it's a sensitive issue and how dangerous it could be, it added

As a result, China initiated military operations around Taiwan, extending the schedule of war games launched in retaliation to the visit by Pelosi. 

However, before tensions could die down, a five-member US congressional delegation led by Senator Ed Markey of Massachusetts arrived in Taiwan on Sunday on an unannounced trip. This again sparked unprecedented air and sea drills that raised the concerns of possible conflict.

The recent tensions have led to the murmur of a possible takeover of Taiwan by China. The majority of experts said that there are very few chances of this conflict escalating into a full-blown military war. However, President Xi Jinping led the Chinese government has repeatedly said to take control of the self-governing nation, by force if necessary. 

Keeping the security and political turmoil aside, the possible war can affect the entire world considering Chinese integration in the global economy. 

In this article, BW Businessworld analysed the economic consequence for the globe along with India, if a war breaks out between China and Taiwan. 

Global Impact

Experts have predicted that any escalation in the Taiwan Strait will have an impact on trade and security throughout the entire Indo-Pacific region. The possible assault could lead to western sanctions on China just like President Vladimir Putin and other Russian businesses. 

Also, the sanctions could have a severe impact on the global economy. Experts said that any step to destabilise the Chinese economy may have serious implications for the entire world. 

"China has a very significant position in the world economy, driven by both imports and exports and any step to disrupt that balance could cause disruptions across the world. It is tough to say if China could potentially be faced with western sanctions," said Arun Malhotra, founding partner and portfolio manager, CapGrow Capital Advisors. 

Notably, imposing financial sanctions on China would constrain international financing and severely reduce the flow of the US dollar, which still remains key to international markets and trade for China. 

"The Taiwan-China conflict has alarmed the global economy. While the world is still reeling from the aftermath of the Ukraine-Russia crisis, which has resulted in soaring inflation and commodity prices, another crisis-like situation is threatening the MSMEs sector," said Pradeep Multani, President PHD Chamber of Commerce and Industry.

Malhotra also added that China has been a crucial value-add to the global supply chain. It would be very difficult for the US to replicate Russia’s sanctioning of the aggressor and resupplying the resistor strategy on China-Taiwan. 

India And Taiwan

Taiwan being a small nation has placed itself as one of the biggest manufacturers of essential semiconductors and electronic components. It holds 10 per cent of the global shipping container capacity, both of which play crucial roles in the global supply chain. 

"A blockade or slowdown of semiconductor chip shipments could be one of the many effects of a conflict between China and Taiwan, which would have an impact on many global industries, including manufacturing, internet communications technology (ICT), research and development," said Multani. 

In 2021, bilateral trade between Taiwan and India increased to over USD 7 billion. Also, over 120 Taiwanese businesses are present in India with total investments of over USD 2.3 billion. 

Experts noted that the impact of possible conflict is likely to be very negligible as India’s trade with Taiwan is minuscule and contributes less than a per cent of India's total trade. 

Meanwhile, R P Gupta, Economist and Author said, "General conflict has no impact. But a full-scale war has an impact on all nations including India. If the supply chain of energy and food is affected, its impact is across the globe. However, India is not dependent on these two nations for energy and food."

Malhotra said that economically, while China has become a super economic power, Taiwan has also gained progress and is the leading supplier of semiconductor chips, having the majority share. China wants to strategically control this critical industry. 

India And China

Amidst the border tensions and continuous ban on Chinese applications by the Indian government, the trade between both nations grew to USD 67.08 billion in the first half of this year due to a big surge in Chinese exports. 

The war if it breaks out, will directly impact the Indian manufacturing sector as India imports a larger amount of manufacturing inputs and raw materials from China including organic chemicals, fertilisers, electrical components, and machinery among others.  

"India is highly dependent upon China for importing raw material for medicine, coking coal and electronic chips. Hence, the consuming industry might suffer till the alternative sources are channelized. However, a total stoppage of trade with China is not envisaged despite rising conflicts, said Gupta. 

As per China's General Administration of Customs (GAC) data, its exports to India have gone up by 34.5 per cent to USD 57.51 billion in the last year. However, Indian exports to China declined by 35.3 per cent to USD 9.57 billion as compared to last year. Talking about the trade deficit at the half-year mark, it stood at USD 47.94 billion.

"The conflict will definitely impact global trade, including India. Industries like Auto, electronics and commodities could be severely impacted and we have already witnessed the severe impact of global supply disruptions in the last two years on major industries," said Malhotra. 

In 2021, Indo-China bilateral trade hit a record high of over USD 125 billion. In exports, China witnessed a growth of 46.2 per cent to USD 97.52 billion while India's exports to China grew by 34.2 per cent to USD 28.14 billion. Also, the trade deficit for India increased by USD 69.38 billion in 2021.

"India-China bilateral total trade crossed the USD 100 billion mark last year and also seems to be making progress on the investment front. Therefore, supply chain disruption due to the China-Taiwan conflict would have a significant impact on Indian Industries," added Multani.

Multani further said that China- Taiwan conflicts are likely to have an influence on the Indian manufacturing supply chain, resulting in higher costs for automobiles, smartphones and medical devices, refrigerators, washing machines etc.

Atmanirbhar Bharat

During the initial days of the Covid-19 outbreak which started in Wuhan, China caused a global slowdown. A report by United Nations Conference on Trade and Development in 2020 stated that the Coronavirus outbreak has cost global value chains USD 50 billion in exports. 

In that report, India was among the 15 most-affected economies due to the coronavirus epidemic and a slow down in production in China with a trade impact of 348 million dollars. After Covid-19, India upgraded its domestic economic activities to avoid dependence on other countries. 

Talking about Atmanirbhar Bharat (self-reliant India), Prime Minister Narendra Modi in his Independence Day speech said, Self-reliant India is not a government agenda or a government program. This is a mass movement of society, which we have to take forward." 

Along with PM Modi, several experts have said that this is the high time for India to become more self-reliant as the global supply chain can disturb at any time amid the Ukraine-Russia and China-Taiwan conflict. 

"India has hidden potential to become self-reliant to a large extent; that must be unlocked, particularly on the energy front. In the modern world, the conflicts should be resolved and the world should fight with common enemies like poverty, unemployment, epidemic etc. for the overall prosperity and happiness," said Gupta.

Currently, there is a need for India to become self-reliant in many sectors such as energy, minerals, raw material for medicine, manufacturing etc. 

Multani added that as geopolitical tensions emerged due to the Russia-Ukraine war and China-Taiwan conflicts, India can take advantage of diversifying exports to other countries.  

"At this crucial juncture, India should strengthen the global value chains to capture emerging opportunities in the global arena. India’s export performance will depend upon diversification across destinations, products, and services to scale up the export volume," Multani said. 

Malhotra also believes that the Make in India and other initiatives that ensure less dependence on the outside world will ensure the least obstacles to Indian economic growth. 

"India has already been at the forefront of such moves- Make in India and focus on local manufacturing, bringing tax rates in parity to international rates, facilitating businesses with the conducive economic environment and reducing red tape, all have been implemented to give a thumbs up to Indian businesses," said Malhotra.  

Even critical industries like defence, semiconductor chips etc. have been initiated to bring India on the world map and get the least impacted by these international conflicts.