The $5 trillion risk
Taiwan inaugurated a new president on May 20. His name is Lai Ching-te, and he quickly got a taste of how challenging his next four years will be.
While Lai, 64, who served as vice president in the previous administration, called on Beijing to drop its threat of war to force unification with mainland China, the Communist Party's People's Liberation Army on Thursday launched military drills that encircled the entire island. In the face of Lai's statement that neither side of the strait was subordinate to the other, the PLA's operations conveyed something quite different.
There wasn't a whiff of concern in financial markets over Beijing's latest chest-thumping, however. Taiwan's benchmark stock index notched its fifth straight weekly advance. And its champion tech giant, Taiwan Semiconductor Manufacturing Co., hit a record high even amid Beijing's "punishment" of Taiwan.
But any view of China's display of military aggression as business as usual carries grave peril. Instead, it may very well be a dress rehearsal.
"This is almost certainly an intentional blockade simulation," says Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics. "A real blockade that cut Taiwan off from the world would choke off a significant portion of global semiconductor supplies—costing the world economy about $5 trillion," she and her colleague Gerard DiPippo estimate.
Lai Ching-te during his swearing-in ceremony at the presidential palace in Taipei on May 20. Photographer: Chi Chih-Hsiang/Taipei News Photographer Association
Bloomberg Economics calculates about a one-in-four chance of a "major crisis" in the Taiwan Strait over the next five years. The growing concern in Taipei is the idea of a blockade, which would be much less militarily hazardous to mainland forces than attempting a tricky amphibious invasion. And perhaps less likely to trigger war with America.
It could take several forms, from a "customs-inspection regime" where Taiwan-bound shipping is selectively interdicted, to a quarantine that features more aggressive screening. "The most intense option is a traditional military blockade," where China potentially cuts off all air and seaborne traffic, Welch and DiPippo write.
While many foreign-affairs experts discount warnings by US military officials who see outright invasion as a danger in the near-term, scenario-modelling is still warranted, given the steady rhetoric from China's President Xi Jinping and his lieutenants about the need to bring democratic Taiwan to heel.
Xi's incentive isn't just predicated on Qing Empire maps from the 19th century, either.
Taiwan poses a direct threat to the Communist Party's entire narrative that only it can secure prosperity and success for the mainland, something it hasn't been doing so well of late. Little more than 100 miles (160 kilometers) off its coast is an ethnic Chinese population with high living standards and, in stark contrast with the mainland, a vibrant democracy.
That vibrancy was on display Friday as tens of thousands of Taiwanese exercised their right to free expression, protesting moves by the opposition-controlled legislature to curb Lai's authority.
If China did impose a blockade, a major part of the global economic impact would be the disruption of semiconductor supplies from TSMC, the world's largest contract chipmaker by market share and the go-to supplier for companies such as Apple Inc. and Nvidia Corp. When it comes to advanced chips, Taiwan's world market share is some 46%.
The world has already had several examples of the impact of supply-chain disruptions over the past decade and a half—most prominently with the Covid shutdowns of 2020 that both curtailed the array of things consumers could buy and sent prices for what was available soaring.
Autos and home electronics would again be hugely disrupted by a Taiwan blockade. Economies and regions that have greater reliance on those sectors would suffer disproportionately. That includes South Korea, Mexico, Southeast Asia, Japan and the European Union, Bloomberg Economics says.
A total Taiwan cutoff, along with the imposition of Western sanctions on China, would reduce global GDP by about $5 trillion, or 5%, in the first year, the team's modelling shows. US GDP goes down 3.3% in the first year. China's hit is 8.9%.
And that assumes that Taiwan, the US and its other allies don't raise the stakes militarily in retaliation to any such naval aggression.
Even without a military response, it became clear this week that Beijing would see disruptions beyond just tariffs or trade bans. The world's only maker of machines needed to produce the most advanced chips, Dutch firm ASML Holding NV, has ways to disable its sophisticated chipmaking machines remotely, Bloomberg reported.
And Taiwan's new technology minister, Wu Cheng-wen, confirmed Bloomberg's reporting that TSMC also has that capacity. Smart machines connected to the internet, including chip tools, can be remotely shut off in the event of a conflict on the island, Wu said.
That this is the news coming out of press conferences these days is a testament to how tense things have become. As Singapore Deputy Prime Minister Gan Kim Yong said on Friday, "Any clash in the Taiwan Strait will have dire consequences not just for the parties involved, but the entire world." One other thing is sure—at least as far as Taiwan's Lai is concerned: it's going to be a bumpy four years. —Chris Anstey
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The Big Take Asia podcast: Each week, Bloomberg's Oanh Ha reports on critical stories at the heart of the world's most dynamic economies, delivering insight into the markets, tycoons and businesses driving growth across the region and around the world. Listen in.
While Lai, 64, who served as vice president in the previous administration, called on Beijing to drop its threat of war to force unification with mainland China, the Communist Party's People's Liberation Army on Thursday launched military drills that encircled the entire island. In the face of Lai's statement that neither side of the strait was subordinate to the other, the PLA's operations conveyed something quite different.
There wasn't a whiff of concern in financial markets over Beijing's latest chest-thumping, however. Taiwan's benchmark stock index notched its fifth straight weekly advance. And its champion tech giant, Taiwan Semiconductor Manufacturing Co., hit a record high even amid Beijing's "punishment" of Taiwan.
But any view of China's display of military aggression as business as usual carries grave peril. Instead, it may very well be a dress rehearsal.
"This is almost certainly an intentional blockade simulation," says Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics. "A real blockade that cut Taiwan off from the world would choke off a significant portion of global semiconductor supplies—costing the world economy about $5 trillion," she and her colleague Gerard DiPippo estimate.
Bloomberg Economics calculates about a one-in-four chance of a "major crisis" in the Taiwan Strait over the next five years. The growing concern in Taipei is the idea of a blockade, which would be much less militarily hazardous to mainland forces than attempting a tricky amphibious invasion. And perhaps less likely to trigger war with America.
It could take several forms, from a "customs-inspection regime" where Taiwan-bound shipping is selectively interdicted, to a quarantine that features more aggressive screening. "The most intense option is a traditional military blockade," where China potentially cuts off all air and seaborne traffic, Welch and DiPippo write.
While many foreign-affairs experts discount warnings by US military officials who see outright invasion as a danger in the near-term, scenario-modelling is still warranted, given the steady rhetoric from China's President Xi Jinping and his lieutenants about the need to bring democratic Taiwan to heel.
Xi's incentive isn't just predicated on Qing Empire maps from the 19th century, either.
Taiwan poses a direct threat to the Communist Party's entire narrative that only it can secure prosperity and success for the mainland, something it hasn't been doing so well of late. Little more than 100 miles (160 kilometers) off its coast is an ethnic Chinese population with high living standards and, in stark contrast with the mainland, a vibrant democracy.
That vibrancy was on display Friday as tens of thousands of Taiwanese exercised their right to free expression, protesting moves by the opposition-controlled legislature to curb Lai's authority.
If China did impose a blockade, a major part of the global economic impact would be the disruption of semiconductor supplies from TSMC, the world's largest contract chipmaker by market share and the go-to supplier for companies such as Apple Inc. and Nvidia Corp. When it comes to advanced chips, Taiwan's world market share is some 46%.
The world has already had several examples of the impact of supply-chain disruptions over the past decade and a half—most prominently with the Covid shutdowns of 2020 that both curtailed the array of things consumers could buy and sent prices for what was available soaring.
Autos and home electronics would again be hugely disrupted by a Taiwan blockade. Economies and regions that have greater reliance on those sectors would suffer disproportionately. That includes South Korea, Mexico, Southeast Asia, Japan and the European Union, Bloomberg Economics says.
A total Taiwan cutoff, along with the imposition of Western sanctions on China, would reduce global GDP by about $5 trillion, or 5%, in the first year, the team's modelling shows. US GDP goes down 3.3% in the first year. China's hit is 8.9%.
And that assumes that Taiwan, the US and its other allies don't raise the stakes militarily in retaliation to any such naval aggression.
An outdoor screen in Beijing showing state media coverage of China's military drills around Taiwan earlier this week. Photographer: Jade Gao/AFP
Even without a military response, it became clear this week that Beijing would see disruptions beyond just tariffs or trade bans. The world's only maker of machines needed to produce the most advanced chips, Dutch firm ASML Holding NV, has ways to disable its sophisticated chipmaking machines remotely, Bloomberg reported.
And Taiwan's new technology minister, Wu Cheng-wen, confirmed Bloomberg's reporting that TSMC also has that capacity. Smart machines connected to the internet, including chip tools, can be remotely shut off in the event of a conflict on the island, Wu said.
That this is the news coming out of press conferences these days is a testament to how tense things have become. As Singapore Deputy Prime Minister Gan Kim Yong said on Friday, "Any clash in the Taiwan Strait will have dire consequences not just for the parties involved, but the entire world." One other thing is sure—at least as far as Taiwan's Lai is concerned: it's going to be a bumpy four years. —Chris Anstey
Get the Bloomberg Evening Briefing: Sign up here to receive Bloomberg's flagship briefing in your mailbox daily—along with our Weekend Reading edition on Saturdays.
The Big Take Asia podcast: Each week, Bloomberg's Oanh Ha reports on critical stories at the heart of the world's most dynamic economies, delivering insight into the markets, tycoons and businesses driving growth across the region and around the world. Listen in.
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