Taiwan: the world’s tinderbox

7 min read

A war over the island would make the financial crisis look like a rounding error, says Ruffer’s Alexander Chartres

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On 3 April, Taiwan was hit by its biggest earthquake in 25 years, a potent reminder that the island nation sits atop a major geological fault line. Mercifully, casualties were limited. But Taiwan – officially the Republic of China (ROC) – is positioned along another potentially far more dangerous tectonic fault, this one geopolitical.

On one side lies America, determined to remain the dominant Indo-Pacific power; on the other, president Xi Jinping’s increasingly assertive People’s Republic of China (PRC), which wants that role for itself. The PRC has never ruled Taiwan – to which the defeated nationalist Kuomintang retreated at the end of China’s civil war in 1949 – but still claims it as a renegade province. For markets, that leaves a multi-trillion-dollar question mark hanging over the island. But why is Taiwan so critical?

A ROC and a hard place

Taiwan is the epicentre of the manufacturing of advanced semiconductors. It produces around a third of all global processing power and 90% of the most advanced chips. These are the foundation stones of the modern economy, vital for artificial-intelligence (AI) systems, smartphones, laptops, guided weapons, cars and much else besides. Taiwan’s leaders hoped being a critical production base for computer chips would provide a “silicon shield”. China would never dare attack for fear of the economic fallout. Bloomberg recently estimated that a US-China war over Taiwan could cost up to $10trn, 10% of global GDP – making the credit crunch and Covid look like a rounding error.

The problem is not simply the risk to the supply of chips. Trade between China and other major economies would also be imperilled, partly via sanctions and partly due to physical disruption. Nearly nine in ten of the world’s largest cargo vessels transit the Strait every year.

And that’s before you face the prospect of escalation between thermonuclear powers. A Taiwan crisis could be our generation’s Cuban Missile Crisis. Only this time, the economic stakes are much higher, as Sino-Western trade linkages run extremely deep.

Then there’s the broader strategic value of Taiwan. US general Douglas MacArthur called Taiwan the unsinkable aircraft carrier because its main island sits at the heart of the “first island chain”. This runs from South Korea via the Japanese archipelago, Taiwan and the Philippines (all