SCMAP Perspective is our fortnightly column on PortCalls, tackling the latest developments in the supply chain industry, as well as updates from within SCMAP. On this column, Henrik Batallones looks at the impact of potential military conflict between China and Taiwan on supply chains in the Philippines.
How worried should we be?
Let me begin this column by answering a question in meme form.
Q: How worried should we be about the prospect of war in Taiwan?
A: Yes.
I’m not even thinking of the geopolitical aspects of the potential conflict, as I wouldn’t consider myself as an expert on that front. As an observer of Philippine and global supply chains, however, I (and, I assume, many others who have been here for longer) can say there are many reasons to be worried.
One cannot underscore the economic impact of a possible Chinese invasion of Taiwan, which the former deems to be part of its territory. Dare I say, the impact would be bigger than the ongoing Russian invasion of Ukraine. Sure, that conflict saw wide-reaching economic disruptions, particularly in the prices of oil and certain food items, but both countries play a smaller role in the global economy. There’s much more on the line when China, an economic superpower, asserts control over Taiwan, an important plank of several global value chains – and if, as expected, the United States, another economic superpower, intervenes.
China is known as the “world’s factory” thanks to cheap labor, lower regulation and competitive practices. Multinational companies would face more difficulty in disentangling their supply chains with the country the same way they quickly exited Russia in the first months of the Ukraine war. Efforts at “reshoring” are ongoing – particularly in the US where this has become a political chorus on both sides of the aisle – but those will take a while, particularly as businesses seek to reduce disruption as much as possible, and governments look to see how what they can offer to incentivize such moves.
Disruption would also be great on global shipping routes. There is, of course, the contentious issue over the South China Sea and China’s claims over most of it. One expects the military installations already in place there would also come into play in a possible invasion; ships would likely elect to take alternate, longer routes, which means delays especially in Asia-Pacific trade. That would have ripple effects around the world, as goods and products made in Asia (not just in China) would be held up, one way or another.
It goes without saying that the Philippines will be greatly affected by a potential conflict. (This makes what little coverage is made on the news about these geopolitical tensions all the more frustrating, but that’s a different topic altogether.) China is one of our major trading partners, and the movement of goods between both countries will definitely be disrupted, if not by military conflict, then by any possible economic sanctions. As an import-reliant country we will also be heavily affected by rising prices, both on key commodities as well as pretty much everything on our shelves, physical or digital. And again, I’m not even going to talk about the geopolitical implications, as a country which is next door to both China and Taiwan.
I’m not writing this column to stoke fears. If anything, the possibility of military conflict in Taiwan – and how it might blow up into a bigger fight – has been on the horizon of many decision makers for years now, more so in the past few months. But of course, they have to discuss it. Unlike the COVID-19 pandemic, which has caught pretty much everyone unaware, we have the opportunity to plan ahead and ensure businesses and economies remain competitive, with as little disruption as possible, for however long a conflict may run. It’s entirely possible that all of the posturing we’ve seen in recent months is just saber-rattling – some experts are saying both sides are keen not to have a full-blown conflict because of its wide-reaching consequences – but it is worth having this discussion now to raise awareness, especially for stakeholders who may not have had this in their view for one reason or another. Whether your business is primarily within our borders or reaches out across Asia – whether as a market for finished goods, or as a source of raw materials or components – you should be ready to act if and when things reach a boiling point.
I wonder if the Philippines itself is ready for the potential impact of such a conflict. I’m seeing some moves towards more self-sufficiency, as well as expanding trade relationships with other countries, through agreements such as the recently ratified Regional Comprehensive Economic Partnership. But, as I noted earlier, any effects may not come so soon, as businesses will have to take their time in recalibrating to new realities. Minimize disruption, remain responsive to the needs of today’s customers, and all that. As for us consumers… keep that in mind too. We might have to brace ourselves for difficult times ahead. It goes without saying, however: I hope not.