US-China conflict over Taiwan | Complete case study

"Peace cannot be kept by force; it can only be achieved by understanding."

Even if the blow is between only two countries, its effect has been seen on the whole world, Especially in today's globalization era.

We recently saw how global markets reacted after the Russia-Ukraine war.

Somewhere there is a food shortage, and somewhere there is an energy crisis.

Crude prices are skyrocketing, which has pulled global economies into rising inflation and stagnant growth.

Geopolitical factors have further aggravated the weak economic factors of many countries.

At present, there are many states which are facing energy, food, and debt crisis. And now another topic that has come again.

You must have understood what I am going to discuss today. Everyone is talking about the increasing tension between the US, Taiwan, and China.

Recently, a high-ranking US official completed her visit to Taiwan, despite the Chinese threat.

And this tour is fueling geopolitical tensions and fears all over the world.

Today we will analyze this situation in detail, where we will give you a brief about the history of this conflict and its impact on the global and Indian markets.

So let's first briefly understand how the China-Taiwan conflict started.

When the Sino-Japanese War ended in 1895, Taiwan was brought under the Japanese Empire.

And for almost five decades, Taiwan was known by its new name, 'Formosa.'

But by the end of World War 2 in 1945, the Japanese Empire had completely collapsed.

With this, Taiwan again joined hands with China, but at that time, China was going through a phase of civil war.

This civil war was occurring between the Chinese nationalist and communist groups.

Seeing itself being defeated in the civil war, Chinese nationalist groups withdrew and settled in Taiwan.

And on the other hand, the communist group in China formed the People's Republic of China. The Taiwan-China conflict started here.

After moving to Taiwan, the Chinese nationalist group claimed it was China's ruling government.

And along with making such a claim, the Chinese Nationalist Party ruled Taiwan for several decades.

And now, China claims that the nationalist party that ruled Taiwan for decades was also Chinese. And historically also, Taiwan has been a Chinese territory.

Secondly, Taiwan states that it has been governed independently since the end of the Chinese Civil War, and the Communist Party has ruled China since then.

Therefore Taiwan was never part of the modern Chinese state or the People's Republic of China.

Currently, only 13 countries in the world consider Taiwan an independent nation.

And these 13 countries do not include the USA, Russia, India, Australia, and most European countries.

Since 1979, no leader from the US ruling party has visited Taiwan, and no leader from Taiwan has come to the USA.

But the United States has informally maintained strategic ties with Taiwan.

And recently, the US sent its high-profile leader to Taiwan, despite warnings from the Chinese government.

China did not like this because it openly supported Taiwan's independence from the USA.

Importance of Taiwan to China.

As in the case of Russia-Ukraine, the geopolitical power dynamic between China and Taiwan is also a bit complex and cannot be seen from economic metrics alone.

Taiwan is strategically important for China to project its political and military power into the western Pacific.

It can play an important role for China in countering the US military. Apart from geopolitical factors, the economies of China and Taiwan are closely related to each other.

China is Taiwan's largest export partner. But it is worth noting that this small island nation has made China dependent on semiconductor chips.

Therefore, Taiwan is economically and strategically important to China.

Impact on markets and the global economy.

So now we hope that you must have understood the complete background.

Let us now analyze these developments' impact on the global and Indian markets.

Investors here already fear the prospect of a global recession due to rising inflation, and US House Speaker Nancy Pelosi's visit to Taiwan has added to the pressure.

Decoupling the two largest economies in the world can shock the global markets.

a) World's reliance on Taiwan's semiconductors.

Taiwan is the center of the world in terms of semiconductor production, which fuels the world's digital economy and is critical to the technological functioning of all countries.

From cars to mobile phones, semiconductor chips are used in everything.

Therefore, any military conflict in Taiwan could seriously affect semiconductor production.

You must be aware of how the global economy was completely handicapped due to the shortage of semiconductor chips after the covid-19 pandemic.

This problem seemed to be improving for a few months, but now it is taking a different mode.

Any restrictions on the export of semiconductor chips could result in a global supply bottleneck that could eventually lead to higher inflation and weaker economic growth.

And if this happens, it can increase the pressure on America to impose economic sanctions against China. And this is the biggest risk to the global economy.

b) Can China go on a selling spree of US Treasury bonds? One of the top holders of US Treasury bonds comes from China.

China holds US Treasury bonds worth $1 trillion. And aggressively selling the debt issued could add upward pressure to US-long-term interest rates.

And if this happens in the current scenario, where the Federal Reserve is already selling US Treasuries, long-term interest rates could rise even further.

Due to this, the slowdown in the US economy may intensify, which can also directly impact the global economy.

And, of course, the market does not like high-interest rates and slow economic growth. So it's a potential ripple effect we can see on global markets.

c) India-Taiwan & the semiconductor push. Taiwan, a small island country, is essential to India.

Our trade relations with Taiwan have grown significantly in the last few years, especially after the border dispute with China.

Besides importing machinery, electrical equipment, plastics, machine tools, and organic chemicals, India also depends on Taiwan for semiconductors.

At the same time, India also exports products like mineral fuels, oil seeds, maize, iron, steel, etc., to Taiwan.

Along with this, the investment of Taiwanese companies in India also seems to be increasing.

Companies like Wistron Corp, Foxconn Technology Group, Pegatron Corp, and Quanta Computer Inc. have set up their plants in India over the years.

Today, Foxconn manufactures 'Made in India' iPhones in Tamil Nadu and has recently expanded its capacity.

Taiwan sees India as a strategic investment destination due to its growing trade with India and excessive Chinese surveillance.

And therefore, if the Taiwan-China conflict escalates and bilateral trade is disrupted, it will harm Indian markets.

But India is already preparing to brace for the impact.

First, in the wake of COVID-19 and then recent geopolitical tensions, the Government of India launched the "Semiconductor Mission" to make India self-reliant

and further, boost the rapidly expanding electronics manufacturing and innovation ecosystem.

The Union Cabinet has approved a total investment of Rs 76,000 crore for developing the country's semiconductor and display manufacturing ecosystem.

d) US-China decoupling: India the next manufacturing hub? In the 1990s, global companies selected China as their manufacturing hub.

Then China provided a lower manufacturing-cost base and a wider market for the big companies in the US and EU.

Because of these benefits, corporations made a profit, and at the same time, China became a manufacturing powerhouse.

So, China's contribution to the global supply chain is enormous. But after COVID and these geopolitical situations, this over-reliance on China has started costing many countries.

Major economies, the US and the European Union, realized that relying solely on China could prove to be too costly.

The main objective of these countries is the availability and reliability of supply and the cost factor.

Due to China's zero-Covid policy, supply-chain disruption issues, high transportation costs, and increasing waiting times, all economies are looking for an alternative to China.

And issuance led to the start of the China+1 strategy.

It has a huge opportunity for Indian manufacturers, especially in the manufacturing sector, such as auto and auto components, engineering-related products, textiles, pharma, and chemicals.

But it also does not mean that tomorrow the entire business will go to India.

There are many other countries like India which have the same profit-taking power.

Indian Industries don't need to take full advantage of this society as to what China has done so far that American and European companies have been associated with them till now.

If India becomes a manufacturing hub and an alternative to China for the world, India will have to undertake significant economic and business-friendly reforms.

In today's hyper-connected global economy, this struggle's future impact is bound to happen.

From the reactions of the global stock market, it seems that they are watching the Taiwan-US-China situation carefully.

But it will be interesting to know how China reacts in the times to come.

The US market has the power to decouple from China, which could also be an opportunity for India.

But will India find a viable alternative option by fixing its manufacturing capacity on time? Only time will tell this.