The possibility of a geopolitical crisis in the Taiwan Strait is one of the uncertainties facing the world economy.
Trade & economy
The Trade and economic effects of a Chinese invasion of Taiwan could easily exceed those of Russia’s invasion of Ukraine.
The economies of China and Taiwan are much larger than those of Russia and Ukraine (China’s economy is about 10 times larger than Russia’s, and Taiwan’s is about 4 times larger than Ukraine’s), and the exposure of the US economy to China and Taiwan is far greater, not only in trade volumes but also in the share of value the two countries add in US final demand.
Taiwan also has an outsized role in the global advanced semiconductor chip industry, and disruptions to the supply of these chips or to US companies’ digital communications with Taiwanese partners would unsettle the US tech sector and nearly every industry that uses advanced computer chips.
China’s military, the People’s Liberation Army (PLA), appears to have planned extensively for invasion scenarios.
Our analysis of open-source data reveals China’s strategic points of interest: locations of economic importance, potential military locations, and key digital infrastructure such as submarine cable landing stations.
Ocean routes for the transport of goods in container ships are easy to find.
But the infrastructure for digital flows (the undersea cable network) is less conspicuous.
Nearly all digital and internet traffic relies on submarine cables.
The economic risks underscore the need for the United States to work with Taiwanese authorities and other Indo-Pacific allies and partners to improve the security of submarine cables and their landing stations, as well as the need for contingency planning for container shipping traffic and essential intermediate inputs to US production and value chains.
We view the scenarios discussed in this brief to be on the lower end of the spectrum in terms of intensity or severity.
Open-Source Data Illustrate Pressure Points
China has long been known to have ambitions for taking over Taiwan, and it has stated repeatedly that it would not rule out doing so by force.
PLA planning for invasion scenarios appears to be extensive and includes a wide range of detailed strategies.
This evidence may indicate the kind of documentation PLA is gathering, and it underscores the risks to US goods trade and digital trade with and through Taiwan in the event of a crisis in the strait.
According to information provided to us by Breadcrumb Cybersecurity acquired using open-source intelligence platforms, this IP address was associated with multiple malicious cybersecurity incidents between August 2019 and October 2021 targeting the United States.
In addition, 96 % of the locations are labeled by type.
These types vary widely and include restaurants, barber shops, schools, road intersections, government building, and military camp.
Some POIs, such as offices of companies in the software industry, are likely of interest to the Chinese entity as business intelligence; they could be relevant to Chinese companies doing business in Taiwan and, hence, competing with them. But other POIs, such as military facilities and public infrastructure, are more likely to be of military interest because those locations are strategically important and vulnerable in a kinetic conflict. We focus on the latter and visualize them on the map of Taiwan in figure 1.
First, there are 183 military POIs (see panel A), such as military bases, military schools, and military camps.
Examples include the Republic of China Navy’s Haifeng Brigade, an ammunition depot in Cishan (near Kaohsiung), the Republic of China Military Police Command headquarters, and the Army Logistics Training Center.
Second, there are 341 transportation POIs (see panel B), such as airports, train stations, and seaports.
Examples include the Taoyuan International Airport, the Taichung station of the Taiwan High-Speed Rail and the Port of Kaohsiung.
The POIs are comprehensive, and their locations are spread across Taiwan’s territory, including in areas that are sparsely populated.
The data suggest that at least one Chinese entity, possibly a government-affiliated entity, is paying close attention to a variety of economically and militarily critical locations on the island.
Submarine Cables in the Digital Economy
People’s day-to-day lives increasingly rely on wireless connectivity, but the bedrock of the internet is submarine cables lining the ocean floor.
The history of submarine cables goes back to the 1820s when the first cables were used to send an electric telegraph from the Russian embassy in Munich.
Today there are over 450 cables across the ocean floor and over 1,300 unique coastal landing stations (see figure 2).
The most obvious threats are physical, given that submarine cables can be damaged in many ways: bitten by sharks, hit by ship anchors, shaken by earthquakes, sabotaged by malicious actors, etc.
The 2011 Tōhoku earthquake and tsunami damaged about half of the cables running across the Pacific and disrupted internet connectivity in Japan and elsewhere in Asia.
Submarine cables come to shore at landing stations which are critical infrastructure for the network.
These stations are not always conspicuous, and a typical landing station often does not look that different from any other small building (see figure 3).
As of August 2022, Taiwan was connected to 15 submarine cables, which come to shore at landing stations in just three areas: the city of New Taipei, the town of Toucheng in the north, and the town of Fangshan in the south (see figure 4).
For instance, the Pacific Light Cable Network is owned by Google and Meta and became ready for service in January 2022.
The network, which is protected through advanced encryption, has landing points in Toucheng, Taiwan; Baler, Philippines; and El Segundo, California.
The lack of protection by international law exacerbates cable vulnerabilities.
According to James Kraska at the US Naval War College, the principal treaties governing submarine cables are the 1884 Convention for the Protection of Submarine Telegraph Cables, the 1958 Convention on the Continental Shelf, and the 1982 United Nations Convention on the Law of the Sea.
During open conflicts, however, the applicability of these rules is questionable, and Kraska notes that, in practice, cables connecting two points in the enemy territory may be cut.
The economic cost of disruption to digital communications is not clear.
One report estimates that the daily effect of a temporary shutdown of the internet and all of its services for a highly connected country is approximately $23.6 million per 10 million people.
Containerized Shipments in the Taiwan Strait
The South China Sea is one of the world’s busiest sea routes.
Estimates are that $3.4 trillion in trade passed through the South China Sea in 2016, or 21 % of the global trade in that year.
Figure 5 shows the vessel density in and around the South China Sea, the Taiwan Strait, and the East China Sea.
For instance, according to Bloomberg, in April 2022, a $50 million, five-year-old tanker hauling a standard one million barrels of Russian cargo would need to pay $5 million just in war-risk premium to sail in the Black Sea—about $1.5 million greater than the cost of hiring the carrier.
Yet before the invasion, such insurance cost practically nothing.
US production is more reliant on China and Taiwan for intermediate inputs than on Russia and Ukraine. Data from the Organisation for Economic Co-operation and Development on value added in US final demand indicate that China accounts for 2.2 % and Russia accounts for 0.2 % (see figure 6). For imported intermediate inputs, China accounts for 17.8 % of the US final demand and Russia accounts for 1.5 % (see figure 7). The heavy reliance on China is starker in manufacturing, and even more so in computers and electronic and electrical equipment.
In the event of a crisis, shipping routes that would normally go through the Taiwan Strait could be delayed, rerouted, or both, and this could affect US trade with at least China, Japan, the Philippines, South Korea, and Vietnam, let alone Taiwan.
Rerouting to avoid the war-risk premium would be possible but not costless.
Costs of rerouting all traffic around the Straits of Malacca have been estimated between $279 million per month (if rerouting through Indonesia) and $2.82 billion per month (if rerouting through Australia).
Actual costs would depend on the length of the disruption and whether energy shipments were affected.
The geographic reach of a crisis that starts in the Taiwan Strait may not be limited to the strait.
Economists often measure the costs of shipping delays in terms of an ad valorem tariff.
Each day of shipping delay is an estimated 1% to 2% ad valorem tariff equivalent.
Hence, for standard ex-ante analysis, the cost of a one-week delay would be equivalent to 7 % to 14% of the customs value of trade flows that go through the disrupted routes.
Disruptions to the supply of these chips or the ability to digitally communicate with Taiwanese chipmakers would be propagated throughout the entire value chain ecosystem for every US industry that uses advanced computer chips (e.g., electronics, computers, and smartphones).
Researchers interested in estimating economy-wide or sector-specific potential economic effects of container shipment delays may need to look beyond standard analytical approaches.
Loss of Container Ships
The loss of container ships in the Taiwan Strait and neighbouring routes in the South China Sea or the East China Sea is a more ominous scenario. Such a loss might occur if commercial ships are struck by the US or Chinese missiles or if such ships are sunk by PLA naval submarines enforcing a strict embargo on Taiwan. Additionally, even if missile targeting technology is advanced, recent events and existing studies indicate that misses do occur, making the likelihood of an unintentional hit a business concern.
The potential effects of a Chinese invasion of Taiwan on the US economy are far greater than those of the Russian invasion of Ukraine.
Container shipments to and from major ports in the region, as well as digital flows, would be at direct risk.
China and Taiwan are also major suppliers and consumers of US major trading partners around the globe from Japan and Germany to Saudi Arabia.
The effects of a crisis or blockade would be felt by every major economy, which, in turn, would produce additional negative effects on the US economy.
The bedrock of the internet is the submarine cables lining the ocean floor, and new evidence reveals the points of interest for China, which include economic centres, potential military locations, and submarine cable landing stations.
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Source: Mercatus Center