A new report by the Mercatus Center think tank at George Mason University, analyzes the potential consequences if China invades Taiwan. As it says, such a reality could lead to increase in operational costs, loss of ships, and delays.
Containerized shipments in the Taiwan Strait
The disruption from a crisis in the Taiwan Strait could affect containerized shipments to or from major ports in China, Japan, the Philippines, South Korea, Taiwan, and Vietnam.
Such a disruption has occurred with the Russian invasion of Ukraine, which insurance data suggest has caused significant decline in Black Sea traffic. For instance, according to Bloomberg, in April 2022, a $50 million, five-year-old tanker hauling a standard one million barrels of Russian cargo would need to pay $5 million just in war-risk premium to sail in the Black Sea—about $1.5 million greater than the cost of hiring the carrier.
Yet before the invasion, such insurance cost practically nothing.20 Similar war-risk premiums would be likely for other types of air and shipping cargo.
US production is more reliant on China and Taiwan for intermediate inputs than on Russia and Ukraine. Data from the Organisation for Economic Co-operation and Development on value added in US final demand indicate that China accounts for 2.2 percent and Russia accounts for 0.2 percent.
For imported intermediate inputs, China accounts for 17.8% of US final demand and Russia accounts for 1.5%. The heavy reliance on China is starker in manufacturing, and even more so in computers and electronic and electrical equipment.
A grimmer possibility is the loss of container ships in the Taiwan Strait and nearby routes in the South China Sea or East China Sea. Such a loss could occur if those ships are sunk by PLA naval submarines imposing a hard blockade on Taiwan or if US or Chinese missiles hit a commercial ship.
And although missile targeting technology is sophisticated, existing research and recent events suggest misses do happen, leaving the odds of an accidental hit a commercial consideration.
Rerouting Costs
In the event of a crisis, shipping routes that would normally go through the Taiwan Strait could be delayed, rerouted, or both, and this could affect US trade with at least China, Japan, the Philippines, South Korea, and Vietnam, let alone Taiwan. Rerouting to avoid the war-risk premium would be possible but not costless.
If the crisis were contained, existing traffic in the Taiwan Strait could be rerouted to the waterways to the east of the island, but doing so would lengthen shipping times.
For instance, one of the busiest shipping routes is in the Straits of Malacca, given that it is the shortest sea route between the Indian and Pacific oceans. Costs of rerouting all traffic around the Straits of Malacca have been estimated between $279 million per month (if rerouting through Indonesia) and $2.82 billion per month (if rerouting through Australia). Actual costs would depend on the length of the disruption and whether energy shipments were affected.
The geographic reach of a crisis that starts in the Taiwan Strait may not be limited to the strait. If US, Chinese, and possibly Japanese fleets end up exchanging missile and torpedo fire, then the geographic reach of the crisis could extend to the farther reaches of the Western Pacific and through the Luzon Strait, which is a key shipping and communications route for the Americas.
Any geographic expansion of a crisis that begins in the Taiwan Strait would easily make rerouting harder, if not impossible.
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