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Home / Opinion / Views /  Mint Explainer: How Chinese invasion of Taiwan will hit world economy

War clouds seem to be gathering over the Taiwan strait. Since at least October 2021, the island nation of 23 million people has been at the centre of protracted military tension with the People’s Republic of China determined to press its claim to Taiwan. However, these doldrums risk spiralling into conflict and threatening the island’s crucial $700 billion economy. The Mint looks into how a Chinese invasion of Taiwan would threaten the global economy.

Why is Taiwan’s economy important?

The global economy relies on Taiwan’s highly innovative industry for a few key products. The first, and perhaps the most well known, is semiconductors. Taiwanese semiconductor fabrication firms like TSMC rule the $85 billion market for manufacturing semiconductors with a 63% market share. This means that without the island’s firms, industries ranging from electronics to automobiles will find it difficult, if not impossible, to function. Any country with hopes of mastering cutting-edge technologies needs Taiwan: TSMC is one of only two firms that can manufacture highly advanced 5 nano-metre chips and possesses a huge 90% market share for these advanced chips. By contrast, China can only produce around 6% of the chips the country needs to keep its massive electronics industry going.

What could China do to attack Taiwan?

Beijing has a range of options open to it. The first would be a full-scale direct invasion of the island. This would come at enormous costs both in terms of lives lost and the economic consequences. For instance, an invasion with troops on the ground would risk damaging key infrastructure in Taiwan, including the enormously valuable semiconductor fabrication facilities owned by companies like TSMC. The second would be a blockade of Taiwan where the People’s Liberation Army Navy (PLAN) would attempt to close the island off from outside trade and compel its submission. This could also be accompanied by a devastating volley of cyberattacks that would be designed to immobilise the leadership in Taipei.

What would be the consequences of a Chinese invasion?

In a word: disaster. The war in Ukraine sent food and energy prices spiralling and triggered a major inflation crisis globally. Growth forecasts have also taken a major hit. The consequences of Chinese military action might be far worse given how economically central the Chinese and Taiwanese economies are to the world economy. The combined GDP of Ukraine and Russia totals around $2 trillion while both China and Taiwan together account for more than nine times that figure at around $18.5 trillion.

Any disruption in the flow of semiconductors would prove enormously costly. The COVID-19 pandemic caused industries like electronics and automotives to slow down substantially due to the shortage of suitable semiconductors. Electronics titan Apple alone suffered $6 billion in losses due to these shortages. Should Taiwan’s semiconductor fabrication plants be damaged in a Chinese invasion, these supplies would not resume in the short term and would heavily damage global growth.

What is the worst-case scenario?

This is not to mention what may happen if the United States and Japan, the world’s first and third largest economies respectively, were to get involved in the conflict. Unrestricted sanctions warfare could send the global economy into a tailspin. A direct military conflict between the United States and China, estimates the RAND Corporation, would shave 5% off US GDP. By contrast, the financial crisis of 2008 wiped out only 2.6% of GDP. RAND estimates that China’s economic output could decline by 25% in the event of a direct shooting war with Washington. Like Ukraine, Taiwan would likely suffer the brunt of the invasion.

How would it impact India?

Apart from the obvious geopolitical ramifications, the Indian economy would likely suffer heavily in case an invasion leads to disruption in the supply of semiconductors. Pandemic-induced shortages brought the automobile industry in particular to a screeching halt given India's overwhelming dependence on imports for semiconductors. While the 76,000 crore Production-Linked Incentive scheme intends to bring semiconductor manufacturing to India, it will likely be years before a single semiconductor is manufactured domestically. Until then, India remains critically dependent on a stable supply of semiconductors.

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