Pelosi’s visit exposes Taiwan’s vulnerabilities

Nancy Pelosi’s short trip to Taiwan didn’t go unnoticed, it’s safe to say.While the world watched the US House speaker meet with Taiwan Pres [Bloomberg]( Follow Us [Get the newsletter]( Nancy Pelosi’s short trip to Taiwan didn’t go unnoticed, it’s safe to say. While the world watched the US House speaker meet with Taiwan President Tsai Ing-wen and pro-democracy activists, China’s reaction can only be described as furious. Saying “those who play with fire will perish by it,” the government responded with several days of intense military drills in the Taiwan Strait, then placed [sanctions upon Pelosi]( and [Taiwan](. The trip has been described as a “[reckless gamble](,” an “[egregious provocation](” and “[not a good idea right now](” by people in both the US and China (that last quote was US President Joe Biden’s), but Matthew Brooker has to hand it to Pelosi for [nailing the optics](. Explaining her reasoning in a [Washington Post op-ed](, she portrayed the self-ruled island as a model democracy and free society that’s increasingly menaced by its giant authoritarian neighbor. That sounds somewhat familiar. But while Russia’s invasion of Ukraine has led to a potentially devastating [energy crisis]( and [critical shortage of food]( in some of the world’s most vulnerable nations, Niall Ferguson writes that [a war over Taiwan may be even more disruptive to the global economy](. It would, for example, threaten [some of the world’s busiest shipping lanes]( as well as the production of one of our most precious commodities: computer chips. The chart above illustrates just how big Taiwan’s share of the semiconductor foundry market is. Another stat that will blow your minds: The world’s chip leader, Taiwan Semiconductor Manufacturing Co., [makes]( 92% of the advanced semiconductors necessary for every smartphone, laptop and ballistic missile in the world. According to some [estimates](, a one-year war between America and China would cut US gross domestic product by 5% to 10%. One of China’s retaliations was to halt trade with Taiwan, suspending fish and fruit imports and banning sand exports to the island. But these bans are likely to have only a marginal impact on Taiwan’s economy. [If China really wanted to cause some pain](, it would have banned semiconductors from Taiwanese companies, notes Tim Culpan. The nation clearly needs TSMC’s semiconductors, too. TSMC has been pretty good at being apolitical, saying things like “We are everybody’s foundry.” That’s not exactly the reality, however. For a variety of reasons — including former President Donald Trump’s sanctions on Huawei Technologies Co., a new Arizona factory and the US’s new [multibillion-dollar Chips Act]( — [TSMC is firmly on Team USA.]( That’s good for the company’s financial prospects, though it’ll likely have to learn how to deal with carrots and sticks from Beijing. Of course, sanctions were not the only way China signaled its displeasure. It also launched a series of missile tests and three days of live-fire military exercises in the seas surrounding Taiwan, in what Minxin Pei describes as an “unprecedented escalation.” The goal was to illustrate how easily China could blockade Taiwan and cripple its export-dependent economy. It succeeded. Optically, there are clear parallels between Russia’s invasion of Ukraine and a potential Chinese military campaign against Taiwan. As Russia’s military dwarfed Ukraine’s at the outset, so too does China’s over Taiwan’s: But Minxin explains that a Normandy-style, amphibious invasion of Taiwan would be too expensive and risky for China right now. Instead, it’s more likely to pursue those aggressive gray-zone tactics that it’s demonstrated this week in order to deter support for Taiwan and achieve reunification via peaceful means. [Therein lies the US’s biggest challenge](. The US is woefully ill-prepared to deal with China — so no wonder Biden was anxious about Pelosi’s trip. Hal Brands writes that American leaders from both parties have labeled China the supreme challenge of our era. But across many issues — trade, defense, diplomacy — the response has been uninspiring. Bloomberg’s editorial board writes that it’s [now vital for the US to quietly shore up its deterrent capability]( and for Taiwan to adopt a “porcupine” defensive strategy. Though Pelosi’s visit has shaken things up, tensions were already bubbling under the surface. To make matters more urgent, China’s economy is looking quite dire. Growth is rapidly decelerating, youth unemployment stands at a shocking 19.3%, and consumer confidence has plummeted. Any economy where [widespread mortgage boycotts]( are happening isn’t a healthy one. Niall warns that this makes conflict all the more likely. Xi Jinping needs a source of legitimacy for his party, and [economic growth no longer does the job](. More Conflict Reads It’s not just the South China Sea where things are heating up. Andreas Kluth warns that [ethnic tensions in Serbia and Kosovo could spark another European war](. [Shipping grain through a literal minefield is a really stressful and difficult task, understandably](. James Stavridis has the details and firsthand experience. Bobby Ghosh explores [how the Taliban might react to the US’s killing of Ayman al-Zawahiri.]( More Data From Bloomberg Opinion The next [UK prime minister shouldn’t bash unions]( if they want to win the next election, says Therese Raphael.  You might be surprised at [where all the green power in the US]( is. Liam Denning and Jeff Davies took a look for you. Notes: To contact the author of this newsletter, email Lara Williams at lwilliams218@bloomberg.net. 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