Most countries are currently bystander stakeholders to events transpiring in the Indo-Pacific region as China conducts a range of military exercises in the Taiwan Strait in response to US House of Representatives Speaker Nancy Pelosi’s planned but brief stop to Taiwan (Aug 2-3), part of her congressional tour of the Indo-Pacific.

Pelosi is the highest-ranking US political official to have visited Taiwan in 25 years. Earlier stops on her congressional tour included Singapore and Malaysia, ending with South Korea (Thurs) and Japan (Friday).

Analysts across the world are now on a wait-and-watch mode to see how China follows through on its threats of ‘not sitting by idly’.

We look at some of the recent fallout as well as wider implications for the global economy, including India.

China’s state news agency Xinhua reported that the country’s military exercises in the region will involve its navy, air force, and other wings, and will last from Thursday to Sunday. The exercises will focus on blockade, sea target assault, strike on ground targets, and airspace control.

On Friday morning, Taiwan’s defense ministry reported that Chinese military ships and planes once again crossed the Taiwan Strait median line.

In response, Taiwan dispatched its aircraft and ships and deployed land-based missile systems to monitor the situation; it is preparing for combat readiness.

China has announced sanctions on Nancy Pelosi and her immediate family.

Further, China’s foreign ministry has cancelled and suspended eight talks and areas of cooperation with the US: The China-U.S. Theater Commanders Talk, China-US Defense Policy Coordination Talks (DPCT), China-US Military Maritime Consultative Agreement (MMCA) meetings, China-US cooperation on the repatriation of illegal immigrants, China-US cooperation on legal assistance in criminal matters, China-US cooperation against transnational crimes, China-US counternarcotics cooperation, and China-US talks on climate change.

Representatives from the US government, including Pelosi, have simultaneously asserted the continued US friendship with Taiwan, but also support for peace and status quo in the region. Speaking at a news conference on the sidelines of the East Asia Summit being held in Phnom Penh, US Secretary of State Antony Blinken told media that the US would stick with its allies in the region and that China’s military exercises targeting Taiwan, which included missiles fired into Japan’s exclusive economic zone, represented a “significant escalation”.

Both the US and China are also using their diplomatic offices to communicate their respective positions. Regional stakeholders like Australia and Japan – who are also US allies – have issued statements condemning China’s actions, which could destabilize the region.

Starting Wednesday, August 3, China has suspended the import of citrus fruits and fish (chilled large-head hairtail and frozen horse mackerel) from Taiwan, citing previous detection of COVID-19 and a quarantine pest on the products. China also halted its exports of natural sand to Taiwan, used in construction and manufacture of semiconductor chips.

China has also sanctioned the Taiwan Foundation for Democracy and the International Cooperation and Development Fund for engaging in “separatist activities” and no organization, company, or individual on the Chinese mainland will be allowed to work with these two institutions or provide any financial or other services. Further, the national security organ in Wenzhou, Zhejiang province has detained a Taiwanese citizen for allegedly secessionist crimes.

On its part, Taiwan’s military is on alert and has also staged civil defense drills. The US also has naval assets in the area.

Taiwan holds a critical position in the global supply chain – manufacturing vital semiconductors and electronic equipment and controlling 10 percent of the world’s shipping container capacity.

Taiwan’s technology firms dominate global semiconductor manufacturing capacity, including advanced and efficient chips production. The Taiwan Semiconductor Manufacturing Co Ltd (TSMC) is the world’s largest contract chipmaker; it is now investing in a new US$12 billion plant in Arizona.

Further, the Taiwan Strait is among the world’s busiest shipping routes facilitating movement of technology and natural gas supplies to global markets.

The island’s location, on the northeast tip of the South China Sea, makes it vital on the maritime trade route, connecting East Asia (Japan) with Southeast Asia (Singapore) and providing access to the Suez Canal. For example, ships set off from Singapore towards India and the Middle East or into Europe via the Suez Canal. Analysts contend that about one-quarter of the global trade by volume moves through these waters.

Taiwan has two of the largest ports in the world – the Kao-hsiung and Taipei ports. A quick check on the website Cargorouter of shipping routes between and Taiwan sees 17 days’ transit time between Taipei port and Jawaharlal Nehru (Nhava Sheva) port at Mumbai via Colombo port, 15.35 days for direct shipping between Taipei port and Mumbai port. Another shipping alternative, as per the website, is the cargo route from Taipei’s Taoyuan International Airport to Guangzhou Baiyun International Airport to Indira Gandhi International Airport, taking a transit time of 7.6 days. China inevitably factors into efficient logistics movement from the region.

Since 2020, global supply chains have already experienced unprecedented levels of disruption due to the COVID-19 pandemic and China’s zero-COVID approach. These have escalated shipping costs, now additionally burdened by the Russia-Ukraine conflict due to trade and supply route blockages.

Among the many consequences of a China-Taiwan conflict could be blockade or slowdown of shipments of semiconductor chips that would impact multiple industries worldwide from manufacturing, internet communications technology (ICT), to research and development. A butterfly effect could see hyperinflation, job losses as factory operations get suspended, and economies in recession.

In recent years, India and Taiwan have developed an economic relationship coupled with increasing political interactions. In December 2021, the two countries began negotiations on Free Trade Agreement (FTA), with a special focus on developing India into a semiconductor manufacturing hub. India’s ‘Act East Policy’ and Taiwan’s ‘Southbound Policy’ will further strengthen economic cooperation between the two countries.

Meanwhile, India has embarked on an ambitious mission to establish a semiconductor manufacturing and design ecosystem in the country. Key objectives of the ‘Semicon India Program’ include setting up greenfield semiconductor fabs and display fabs, developing R&D and design capabilities, and being able to compete with other bases in Asia to reduce India’s import dependencies.

As per reports, India-Taiwan bilateral trade stood at over US$7 billion in 2021, and over 120 Taiwanese companies are operating in India with cumulative investments over US$2.3 billion.

In January 2022, the Indian public sector bank State Bank of India (SBI) raised US$300 million issuing Taiwanese “Formosa bonds,” the first Indian commercial entity to do so. 

More recently, in June 2022, Indian PM Narendra Modi met Taiwan-based manufacturing giant Foxconn’s Chairman Young Liu and discussed the company’s electronics manufacturing plans in India, including in semiconductors. Foxconn’s electric vehicle (EV) manufacturing arm, Foxtron, is also planning to set up an EV manufacturing plant in India.

Despite India-China diplomatic relations hitting a new low due to the prolonged military standoff in eastern Ladakh, economic ties between the two countries continue to record new highs.

India-China bilateral trade crossed the US$100 billion mark in FY 2021, reaching US$125 billion. In fact, China has asserted that it was India’s largest trading partner in FY 2021, refuting New Delhi’s claims of the US being its top trade partner; China has cited methodology discrepancies.

The upward trend has continued, with Sino-Indian bilateral trade recorded in the first half of 2022 (H1 2022) worth US$67.08 billion. A closer look at the trade data shows a widening trade deficit in favor of China, which stood at US$47.9 billion in H1 2022.

India and China also seem to be making progress on the investment front. Although India has amended its FDI policy for countries with whom it shares a border following the Sino-Indian border skirmishes in 2020, New Delhi has begun to give approvals. As of June 29, 2022, as many as 80 China-linked FDI proposals out of a total of 382 have been approved by India. The Indian government had not approved any applications from Chinese entities for FDI until mid-2021. Now, it is starting to consider applications on a case-to-case basis.

Nevertheless, India has sharpened its scrutiny of Chinese origin apps and companies doing business in India.

For example, as China’s ByteDance seeks to re-enter India in partnership with local business group, Hiranandani, the Indian government has taken issue with its data collection and storage and well as the function and scope of its AI algorithm. If the partnership gets New Delhi’s approval, the Mumbai-based company would launch a Tiktok-type short video app under a different name in India and store all user data in India.

In another example, India’s Directorate of Revenue Intelligence (DRI) stated that it detected a customs duty evasion to the tune of INR 22.17 billion when investigating smartphone company Vivo Mobile India Private Limited. Four Chinese smartphone brands feature among the top five in the Indian market and reported healthy growth in Q2; Xiaomi reported 20 percent growth in Q2 2022, Realme reported 16 percent growth, followed by Vivo (15 percent) and Oppo (10 percent). 

Political hawks and business pundits alike had been nervous in the weeks leading up to Pelosi’s visit about the unintended consequences of the trip, especially in the wake of economic headwinds caused by the Ukraine-Russia war and already volatile US-China ties.

All manner of scenario building has been complicated by Moscow’s moves in Europe, which alongside the COVID-19 pandemic, has several economies reeling from inflation and a looming energy crisis.

The US is in a technical recession, having shown a second consecutive quarterly decline in real GDP. US real GDP declined 0.9 percent in the June quarter after a 1.6 percent decline in the March quarter; analysts had been optimistic about a 0.4 percent growth.

UK media, meanwhile, are reporting on the impact of rising living costs as prices are projected to rise by 13 percent, which have forced 24 million people in the country to cut energy use at home and 16 million to reduce spending on food and essentials.

Earlier, in mid-July, as G20 finance ministers and central bank governors gathered for talks at Bali, US Treasury Secretary Janet Yellen stated: “”We are seeing negative spillover effects from that [Russia-Ukraine] war in every corner of the world, particularly with respect to higher energy prices, and rising food insecurity.” The US has been pushing for a price cap on Russian oil.

Towards the end of the month, on July 22, officials from Kyiv and Moscow signed separate agreements with Turkey and the United Nations clearing the way for Ukraine grain exports via the Black Sea as well as Russian grain and fertilizer exports. 22 million tons of grain and other agricultural products had reportedly been stuck in Black Sea ports due to the war.

Under the deal, Russia agreed not to attack shipments of food and fertilizer if inspection (by Ukraine, Russia, Turkey, and UN officials) would be allowed at a location in the Bosphorus strait. Now, Ukraine is asking Russia to extend the deal to cover other products like metals.

Western-led sanctions on Russia following its mostly unanticipated invasion of Ukraine starting in February have thrown light on how countries around the world would respond to such strategic misadventures. The bottom line for most countries has been determined by their respective economic and trade linkages with Russia and its sphere of influence, and the ability to absorb the impact of joining sanctions.

With regards to the situation in the Taiwan Strait – neither China nor the United States appear to be keen on triggering a full-scale conflict. However, given the volatile state of bilateral relations, both countries could stumble into an avoidable war – to save face, support allies, set precedent, or by accident.

In the medium term, Beijing could well seek proxy theatres, such as within Belt and Road Initiative (BRI) participant countries, to apply economic pressure or demand open political solidarity.

Similarly, the US could be expected to strengthen its direct presence in the Indo-Pacific region, with clear strategic overtures. How this plays out remains to be seen.

The US, along with Australia, Japan, and India, are members of the Quadrilateral Security Dialogue (Quad), which emerged to address Beijing’s growing economic and military clout in the Indo-Pacific region.

Besides the Quad, the US recently launched the Indo-Pacific Economic Framework (IPEF) to bring together 13 countries, including India, to shape rules on key focus areas like the digital economy, trusted supply chains, clean economic growth, corporate accountability, and anti-corruption.

Given the state of play by China, it will be assumed that ongoing US strategy in the region may get bolstered. Yet, will Washington be able to support such goals in a mid-term election year is another question on everyone’s minds.

As Pelosi continued her trip in the region, South Korean President Yoon Suk-yeol, who took office this May, did not meet her in person on Thursday but rather spoke on the phone. Yoon was reportedly in Seoul at the time – an indication that countries in the region may actively seek to not stir China the wrong way.

Pelosi instead met with South Korean National Assembly Speaker Kim Jin Pyo and neither fielded questions from the media. No direct comments were made during this stop with respect to relations with China and Taiwan, including during the telephonic conversation between Pelosi and Yoon.

Just recently, the South Korean economy bore the brunt of Chinese political displeasure, to the tune of billions of dollars in losses, when Seoul had agreed to deploy the THAAD US missile defense system in 2017.

China immediately shut out South Korea’s culture (K-pop, K-drama, gaming) and tourism industries, targeted S. Korean conglomerates like Lotte Group and Hyundai Motor Co. and denied market access – even as Seoul offered to refuse US plans just months later.

In 2019, South Korean goods exports to China were worth over US$136 billion, a quarter of the country’s total exports.

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for more support on doing business in in India.

We also maintain offices or have alliance partners assisting foreign investors in Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.

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