Taiwanese tanks and armored vehicles are used in a two-day fire exercise in September amid mounting threats from China. Taipei is getting more arms and gun sales from the US while strengthening ties with countries like Japan, Britain, Canada and India as Beijing vows to unite Taiwan without ruling out the potential for using force. (Photo: Ceng Shou Yi/NurPhoto via Getty Images)
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Japan, South Korea and the Philippines will suffer probably the most in the event of a conflict between Taiwan and China Economist Intelligence Unit report.
The EIU defines a conflict as “a full-fledged conflict scenario involving direct military participation by China, Taiwan and the US” and based on a presumption of escalation by China.
For clarity, the EIU rates the chance of a direct Chinese military attack on Taiwan as “impossible.” But when it involves that, these three economies will be the “most vulnerable” attributable to their proximity to the Taiwan Strait and strong trade links with China, but more importantly since the three countries are US treaty allies.
China views self-governing Taiwan as a breakaway province that ought to be reunited with the mainland. Chinese President Xi Jinping he said earlier China will “pursue the prospect of peaceful reunification” but “never promise to finish using force.”
Taiwan considers itself a sovereign state independent of China, having ruled for the reason that Nationalist government fled the mainland in 1949 after a protracted civil war. Through the years, tensions between the governments of Taiwan and China have grown, and visits by high-ranking American politicians to Taiwan have drawn the ire of Beijing.
The report indicated that Japan, South Korea and the Philippines host US bases, highlighting their vulnerability to a pre-emptive Chinese attack should China resolve to go to war.
“We expect U.S. participation to activate the country’s regional security alliances by moving them directly
implications for Australia, Japan, Latest Zealand, the Philippines and South Korea (in addition to other countries with US bases comparable to Thailand and Singapore).
Spokesmen for the Chinese Embassy in Singapore and the Taipei Representative Office in Singapore weren’t immediately available when contacted by CNBC.
![There is no 'duty' for the US to defend Taiwan if China attacks: research institute](https://image.cnbcfm.com/api/v1/image/107204789-16782414861678241483-28487951498-1080pnbcnews.jpg?v=1678247952&w=750&h=422&vtcrop=y)
The US doesn’t have a mutual defense treaty with Taiwan and just isn’t obligated to defend the island. Nonetheless Taiwan Relations Act of 1979 states that the USA will “make available to Taiwan such defense items and services” as could also be obligatory to “enable Taiwan to keep up sufficient self-defense capabilities.”
“Severely Exposed”
The EIU also listed several “seriously affected markets”: Australia, Malaysia, Thailand and Vietnam, in addition to Hong Kong.
Within the case of Hong Kong in particular, the EIU stresses that it faces less risk from physical devastation than from the results of likely economic, investment and financial bans imposed on China.
Hong Kong, a former British colony, returned to China in 1997. The Asian financial center is governed by the principle of “one country, two systems”, which provides it more autonomy than other cities in mainland China.
The report stated that in the event of conflict and sanctions imposed on each China (and by extension Hong Kong), this might result in an exodus of much of town’s population and capital flight, in addition to a pointy drop in incoming capital flows.
For Australia, Malaysia, Thailand and Vietnam, the EIU assessed that the risks they face are primarily attributable to their extensive trade links with China; their reliance on semiconductors from Taiwan; and the importance of worldwide trade flows to their local economies.
As well as, each Malaysia and Vietnam could be vulnerable to potential conflict with China should cross-strait hostilities spill over into conflict in the South China Sea. Malaysia and Vietnam have competing claims with China in the disputed waterway.
Individually, the EIU assessed that Australia could be at high risk of conflict because the country is more involved in regional security issues, suggesting it could play a more direct role in any Cross-Strait conflict.
Furthermore, its participation in the AUKUS pact and the deployment of warships in the South China Sea indicate a “strong interest in deterring (and punishing) violations of the Asian security establishment.”
AUKUS is a security alliance involving Australia, the UK and the USA that goals to extend intelligence cooperation and advanced capability cooperation between them.
![How Australia-China trade relations collapsed](https://image.cnbcfm.com/api/v1/image/107065974-GettyImages-113172073.jpg?v=1653384592&w=750&h=422&vtcrop=y)
Domestically, Australia also has “a scandalous public and official perception of China that would create enough impetus in domestic politics for the country to react decisively in the event of a war over Taiwan.”
Taiwan and the worldwide chips industry
Taiwan, being the economy at the middle of all the things, will suffer probably the most severe consequences in the event of a cross-strait conflict, sending shockwaves that will take a toll on the worldwide semiconductor industry.
The Economist in March estimated that Taiwan produces only 60% of the world’s semiconductor chips and 90% of probably the most advanced chips.
The EIU said the conflict would cut off Taiwanese foundries and, at best, air and sea connections could be disrupted. Within the worst case scenario, the chip production facilities in Taiwan could be completely destroyed.
In each cases, the impact will be felt each upstream and downstream.
Manufacturers of advanced chip manufacturing equipment will not give you the option to provide their goods to Taiwan foundries, and finished chips from Taiwan will not give you the option to be exported, affecting customers who depend on these finished chips in their products comparable to smartphones and cars.
The conflict over Taiwan will also affect other markets.
The EIU report assessed “exposure to imported Taiwanese chips” as a threat to Asian economies and found Japan to be the leader in the region, with 47.6% of total Taiwanese chip imports. Singapore and Malaysia rounded out the highest three, depending on Taiwanese chips, with 40.5% and 27.2% of their total chip imports respectively.
The EIU acknowledged that China itself is a serious exporter of semiconductors, but said that in the event of a Cross-Strait conflict, sourcing from the Chinese market could be difficult attributable to disrupted logistics and likely bans from the US and other countries.
![China will put more pressure on Taiwan if it does not stop the](https://image.cnbcfm.com/api/v1/image/107222921-16811763651681176362-28965659386-1080pnbcnews.jpg?v=1681186475&w=750&h=422&vtcrop=y)
While efforts have been made to diversify semiconductor manufacturing to other parts of Asia and the USA, the EIU believes these efforts will likely “take years” and require massive capital investments.
Which means firms or policy makers have limited immediate recourse in the event of lack of Taiwanese production.
In line with the EIU, Taiwan’s importance in global trade is unlikely to alter anytime soon, and given its competitiveness in manufacturing, logistics and transportation networks, its current level of diversification will only provide firms with “limited isolation” in the event of conflict.
In light of this, “Cross-Strait conflict preparation strategies will likely must concentrate on risk mitigation reasonably than risk avoidance altogether,” the EIU said.