THE POST-GLOBALIZATION WITHOUT TAIWAN

SUMMARY

Whether it’s an embargo or an invasion, any action by China on Taiwan could lead to further inflationary pressures, shortages, redistribution of supply chains leadership, and, at certain points, even paralysis in a de-globalized economy. For now, there are two unknowns: Western sanctions and the rapid relocation of technological production, both of which would be very costly.

An American story – almost an urban legend because of its difficulty in attribution – tells of a large manufacturing company, probably a paper mill in Chicago, that comes to a halt due to a malfunction.

An experienced, now-retired former employee is called in. He arrives, takes a look at the machinery, tightens a screw, and the company is back up and running. But when presented with a bill for $10,000, the owner asks why such a high fee for simply turning a screw.

And here is the answer that makes the story: one dollar is for turning the screw, 9,999 are for knowing which screw to turn.

To imagine the post-global economy without Taiwan, we should think of it without that single screw that makes almost the entire intricate mechanism of global value chains function.

Taiwan's golden screw

Supply chain experts call them golden screws. These are parts, components, or products crucial to the functioning of a production process, an industry, or a market.

They are indispensable, strategic, often invisible. They are things we cannot do without, and in this case, we need to think of them embedded in the country that is now at the center of Chinese geopolitical interest.

The reason we can consider Taiwan the golden screw of technological globalization is the exceptional concentration of production, located on its territory, of critical components for technological production chains.

We're talking about semiconductors and microchips – the hardware of the digital universe: microchips are complex electronic devices built from semiconductor materials, primarily silicon, in the form of wafers.

And the country is a global leader, particularly in advanced semiconductors, with the Taiwan Semiconductor Manufacturing Company (TSMC) at the forefront, a supplier and partner to companies such as NVIDIA, Apple, and Qualcomm.

Scenarios of embargo or conflict

So, what would happen if China embraced all the reasons it has to move toward Taiwan and translated them into concrete action?

Let's look at these reasons:

1. Technological reasons: to control the production leadership in semiconductors and technological components;
2. Geo-economic reasons: to control one of the most important straits for global product flows;
3. Political reasons: to unify the country with Taiwan for identity and symbolic reasons, completing the "One China" principle;
4. Military reasons: to project its military power more effectively in the South China Sea and its presence in the Western Pacific;
5. Historical reasons: to rebuild familial and cultural ties with a territory considered part of the country.

Since there are at least five reasons, to understand which of them is the most important, we can turn to an old Chinese proverb, which says that it is better to lose a thousand soldiers than a palm of territory.

Or to the economist Adam Smith, who, in defiance of his liberalism, argued that defense is far more important than wealth (1778). But what would then be the most likely action with which China could seize this island, so important to them from a territorial point of view?

1. The first is an embargo, i.e., the blocking of flows of goods, people, or even money through bureaucratic, regulatory, or sanctioning measures;
2. The second is a physical invasion, with the predictable deployment of men and resources, preceded and accompanied by multiple levels of attack on military or strategic positions for transportation and communications links to the outside.

The 5 economic and geopolitical consequences

In both cases, the direct and indirect economic consequences on the regional or global economy would be measurable in several trillion dollars (Bloomberg even estimates up to 10 trillion).

But overall, considering the experiences of COVID, the war in Ukraine, and inflation, we can imagine at least five consequences unfolding in this order of appearance:

1. Paralysis and production halts in plants located in Taiwan (semiconductors, microchips, technology);
2. Scarcity downstream of these productions;
3. Direct consequences and involvement in sectors and products such as computers, smartphones, household appliances, cars, medical devices, industrial equipment, and electronic devices like LEDs, solar cells, and sensors;
4. Inflation, initially directly affecting these sectors and products, then spreading to sectors and productions downstream or connected to them;
5. Redistribution of supply chain leadership: global suppliers in second and third positions, those after Taiwan, would take over.

The unknowns: sanctions and relocation

Now, let’s pause the waltz of hypotheses to introduce some unknown variables.

Let’s add two variables to the evaluation of the consequences for technological globalization in an economy without Taiwan – variables not yet proven by concrete facts but supported only by political narratives on the topic.

1. Expensive sanctions. This contradicts the idea that China is only interested in the political and territorial motivations behind the invasion of Taiwan. It is in fact carefully evaluating the economic impact of the invasion option because it is wary of the sanctions applied to Russia: how damaging would it be to be isolated from the Western economy overnight?
2. Rapid relocation. This concerns Europe: for at least two years, Brussels has been thinking that once much of the production of technological components is moved to the West, Taiwan could be “left” to its fate, in other words, handed over to China.

Like in a spy story, the U.S. and Europe would be in the loading file moment, where the protagonist is quickly transferring data and is waiting for it to load onto a USB drive.

The U.S. and the EU have allocated $52.7 billion through the Chips & Science Act and €43 billion through the Chips Act to carry out the great relocation of valuable assets (production today, and perhaps personnel tomorrow?).

But will it be enough?

And will the timing be sufficient?

Is China perhaps waiting for the end of the relocation to act?

The lesson for the post-global economy

In any case, the lesson for the global economy concerns the flows of goods, people, capital, and supply chains: for them to move freely and without obstruction, the concentration of critical products in one single country must be avoided.

But this might just be a European story. Since the U.S. is not only interested in production independence and the free movement of goods, people, and capital, but also in security and control over the South China Sea.

Written for Changes Unipol

#supply-chain #Taiwan #china #microchip #semiconductor