What does the Chinese ban on Taiwan mean for international trade?

Here are some questions and answers about the tensions surrounding the Taiwan Strait and the fallout for international trade if China tries to block the island.

How will the embargo affect international trade?

Because of the island of about 23 million people’s prominent role in global trade, China’s ban on Taiwan would weaken global supply chains and raise freight costs in Asia and beyond.

Taiwan accounts for 70% of the world’s microchip supply. It serves as an important part of the production chain for goods such as smartphones, computers and cars. And it sits next to the Pacific shipping lanes through which trillions of dollars worth of trade flows in and out of East Asia.

“Taiwan is much more important to the global economy than its 1% share of the global economy,” Gareth Lesser, an economist at research firm Capital Economics, wrote last week. He said cutting off Taiwan’s exports would lead to chip shortages for cars and electronics and increase inflation.

How important is Taiwan to the chip industry?

so true. Taiwan is home to Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker. Co.

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which manufactures semiconductors for companies including Apple Inc.

and Qualcomm Inc.

Globally, TSMC TSM -0.37%

It accounted for more than half of the $100 billion semiconductor manufacturing market last year, according to research firm Gartner.

By 2021, a one-year disruption to Taiwan’s chip supply chain could cost global electronics companies $490 billion, according to reports by Boston Consulting Group and the Semiconductor Industry Association. If Taiwan’s chip production is permanently disrupted, it will take at least three years and $350 billion to build manufacturing capacity elsewhere, the report said.

TSMC Chairman Mark Liu said in an interview with CNN in late July that the use of military force or an invasion of Taiwan would put TSMC factories out of business. His production facilities are “based on real-time communication with the outside world, Europe, Japan, America,” he said. TSMC did not respond to a request for further comment.

Where can the world get chips?

Western powers have been trying to hedge their reliance on Taiwan’s semiconductors after global chip shortages and supply chain disruptions during the pandemic exposed the island’s industrial dominance. The United States and the European Union have finally pledged tens of billions of dollars to boost domestic chip production and competitiveness with Asia.

TSMC, which benefited from funding from the US chip-industry bill signed by President Biden last week, is currently building a $12 billion factory in Arizona. A $7 billion factory is under construction in Japan.

What other big industries will the Taiwan ban affect?

Danish shipping giant A.P. Moller-Maersk A/S CEO Soren Scu said the closure of the Taiwan Strait, one of the world’s busiest waterways, would have a significant impact on shipping capacity. “Everyone should reroute around Taiwan and increase the length of the trip,” he said earlier this month.

Analysts say shipping companies are likely to spend more on fuel and labor because of longer transit times — costs that can be passed on to businesses and consumers.

Insurers have said they are reluctant to sell insurance to cover potential losses from Taiwan-related conflicts and will cover them until tensions calm down. Peter Sand, chief analyst at Zenata, said short-haul cargo on sea voyages between Taiwan and China has increased 11 percent since early July following Ms. Pelosi’s trip to Taipei in early August. , which analyzes ocean and air freight rates.

What does China’s ban on Taiwan look like?

An embargo, an act of war under international law, can range from an all-out effort to prevent all people and goods from entering and leaving Taiwan, to less ambitious actions to block certain types of traffic and goods. China’s military could employ air and naval patrols to drop sea mines and even destroy airports and ports, analysts say. Even announcing a ban could prompt airlines and shipping companies to carefully divert traffic.

In the year In a 2021 report, Taiwan’s Ministry of Defense said the Chinese military had cut off the island’s air and sea links, affecting the flow of our military supplies and logistics resources. Taiwan may suffer from shortages of commodities, including liquefied natural gas, from which the island imports most of its energy.

Still, it’s unclear whether China’s military has the assets to maintain the blockade, and any attempt to destroy Taiwan would prompt the US, Japan and other countries to intervene, said Drew Thompson, a visiting senior researcher at Lee Kuan. Yew School of Public Policy in Singapore.

What’s stopping Beijing from trying a ban?

In addition to the military and geopolitical costs of Beijing’s experiment, analysts say there is one major obstacle for Beijing: China itself relies on Taiwan for trade and jobs.

China depends on TSMC for chips needed for cutting-edge computing and industrial applications. Taiwanese companies such as Foxconn Technology Group, the largest assembler of the iPhone, are major private sector job providers in China. And Taiwan serves as a strategic shipping gateway to China’s Pacific Ocean.

“A military conflict would destabilize the entire supply chain and China’s ambitious strategies,” said Jui-Lin Yang, director of consulting at the Taiwan Industrial Technology Research Institute, a public research firm.

In other words, Beijing could not disrupt Taiwan’s economy without throwing its own.

Write Chun Han Wong at chunhan.wong@wsj.com and Yang Ji at jie.yang@wsj.com