Taiwan conflict: Economy threatened with next supply crisis

Created: 06/08/2022, 06:14

By: Corinna Maier

At the end of July, Taiwan rehearsed the emergency during an annual military exercise.

(Archive image) © Sam Yeh/AFP

Taiwan plays a big role in the global economy, especially in microchips.

A failure would hit German car and machine manufacturers hard, explains economist Christian Rusche in an interview.

Munich – Germany's economy fears that the already existing semiconductor crisis will worsen if the Taiwan conflict escalates further.

The supply chains that were torn apart by the corona pandemic are not yet intact again, as Taiwan, the largest chip producer in the world, is threatened with failure.

TSMC and UMC are the names of the Taiwanese groups that are the world's largest contract manufacturers.

Taiwan conflict: In Germany, vehicle construction would be particularly affected

The economist Christian Rusche from the German Economic Institute (IW), which specializes in industrial economics and competition, explains how threatening the current crisis is for the economy.

Taiwan is by far the largest producer of microchips.

What would be the economic consequences if this supplier were to fail?

Taiwan plays a huge role in the world economy in several areas, most notably in microchips.

These components are now in almost every device – from smartphones to cars.

If they fail or are only delivered exclusively to Chinese customers - which is also conceivable - then we have a problem in many areas.

Which sectors of the economy would be particularly affected?

In Germany, primarily vehicle construction.

The effects of this can be seen, for example, in the Volkswagen Group, which has not yet reached the production level of the pre-Corona period after the supply chain problems caused by the pandemic.

Mechanical engineering would also be hit hard.

The industry already has orders - also as a result of the pandemic - that cannot be processed in the next year and a half.

This is the supply side.

On the demand side, it is primarily about electrical engineering, household technology and consumer electronics.

Everything would be affected, from smartphones to washing machines to game consoles.

How do you assess the magnitude of the problem compared to the supply chain disruptions caused by the pandemic?

The failure of Taiwan as a chip supplier alone would have serious consequences.

After all, a third of the microchips produced worldwide come from there.

But the problem is bigger.

As a result of the Taiwan crisis, supply relationships with China could also be in jeopardy.

In addition, China in the South China Sea could disrupt the West's trade relations with South Korea or Japan.

That would be a great danger for the German economy.

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Some are already talking about an imminent collapse of the global economy.

Exaggerated?

I'm not assuming the worst.

But China has an export surplus in its trade relations with all countries.

Many countries rely on the production of China.

If it fails, you can't replace it, at least not in the short term.

We saw that last year when the container ship got stuck in the Suez Canal.

So: That would have very serious consequences.

Which scenario do you think is likely?

A lot is conceivable.

From blocking trade routes across the sea or in the air to intervention in Taiwan itself. But you also have to realize that China is dependent on exporting its products.

The government there is unlikely to have any interest in high unemployment and a loss of prosperity.

China wants to demonstrate strength with its military actions.

In my opinion, however, the really big escalation should not happen.

China itself is also heavily dependent on Taiwan.

That would be an argument for annexing Taiwan.

or how do you see it?

I suspect China wants to secure know-how.

So that even in Mainland China, it can produce these parts, subsidize the manufacturing, and then become competitive on the price.

This has worked in other areas, and they will most likely try again.

An annexation is not necessary for this.

During the pandemic, Europe launched a multi-billion dollar program to become less dependent on Asia for semiconductors.

How realistic is that?

We see what economic problems the Ukraine war is causing in Europe.

Europe's dependency on products from Russia is only three percent.

In China it is 52 percent.

Europe knows how dependent and vulnerable it is.

Hence the attempt to restore these strategic goods themselves.

There are initial successes, for example the Intel factory in Magdeburg.

But these are not short-term solutions.

After all, a work like this costs billions, which you don't get installed so quickly.

Is the end of globalization proclaimed by many now even closer?

That would be bad.

Almost all countries still rely on goods from China.

Trade is booming.

Now that Russia is failing, we must hope to get gas, coal and oil from other countries.

So globalization is not over, but continues to offer opportunities.

Gone are the days of relying on a single supplier.

It will not be possible to bring the complete production of everything that is important back to Europe.

However, experience has taught us that in the future we will always try to find several providers.

Interview: Corinna Maier