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How the Taiwanese civil war might cause the UK economy to falter

Photo by Nick Fewings on Unsplash

As the world struggles with the economic fallout from the Ukraine war, fears are mounting about a conflict that would be even more consequential: a Chinese invasion of Taiwan.

Last week, Taiwan’s foreign minister said he was preparing for the possibility of a conflict with China in 2027, and a leaked memo from a four-star US general said his “gut” told him the US – which is committed to defending Taiwan – would be at war with China in 2025.

The UK foreign secretary warned last week that such a war would destroy world trade and deal a catastrophic blow to the global economy. James Cleverly said in a speech on Britain’s relations with Beijing that “no country could shield itself from the repercussions of a war in Taiwan”, and cited an estimated cost to global trade of $2.6tn.

Taiwan is the world’s largest manufacturer of microchips, so any damage there would severely disrupt global supply chains for goods ranging from defibrillators to cars.

Western governments would probably respond to an invasion with sanctions against China, severing at least some trade and financial links, as they have with Russia. While sanctions have led to inflation, stopping imports from the world’s workshop could lead not only to more price rises, but to shortages.

Mark Williams, chief Asia economist at consultancy Capital Economics, says: “War between China and Taiwan would deliver a shock to the global economy that would be bigger than anything we’ve seen in modern times.”

For the UK, he says, it would mean a huge supply blow, reflecting China’s status as the nation’s biggest single source of goods imports, and hitting everything from medicines to smartphones.

“Governments would have to respond with massive support,” says Williams. “Prices for many products would surge, but the main problem would be scarcity.”

Here we outline the various ways in which the UK economy is linked to China.

Central to Cleverly’s $2.6tn estimate of the economic damage of a China-Taiwan conflict, which is based on research by Nikkei Asia, is the impact on the global semiconductor industry.

Semiconductors, or microchips, are wafers of silicon that are essential to nearly all forms of modern technology, from cars, smartphones and TVs to advanced weaponry. They are the “brains” of all electronic devices. There would be an obvious knock-on effect for British manufacturers’ ability to supply products to consumers, and to the cost of those products.

About 60% of all microchips – and more than 90% of the more advanced types – are made in Taiwan, largely by the Taiwan Semiconductor Manufacturing Company. That fact alone could see a conflict bringing the global economy to a shuddering halt.

Some analysts argue that Taiwan’s strength in semiconductors is actually a helpful deterrent to an invasion. China has been working to develop its own domestic chip industry, but its companies are still lagging several generations behind the most advanced firms.

In November the UK government ordered Nexperia, a Chinese-owned company, to sell off at least 86% of Newport Wafer Fab, the UK’s biggest semiconductor factory, on national security grounds. The south Wales facility manufactures the more basic type of chips, but its products are still vital to the UK economy.

The government argued that a Chinese company should not have access to British knowledge. But the subtext to this was also important: the UK no longer feels safe having its supply of chips anywhere near Chinese hands.

The car industry in the UK has already had to cut production for a while as the consequence of a chip shortage. Carmakers were caught out when demand for vehicles surged after the coronavirus pandemic. Production dropped back to levels last seen in the 1950s, costing the European automotive sector €100bn in lost output over 2021 and 2022, according to insurer Allianz.

“We have already seen the impact shortages can have,” says Richard Gane, a director of consultancy Vendigital, who has worked with carmakers across the UK, Europe and the US. “And this would be 10 times worse.”

Modern cars are stuffed with microchips: they are in everything from door handles to rear-view mirrors. Disruption in the supply from Taiwan could slow the industry’s adoption of driver assistance and self-driving technologies.

The geopolitical crisis could also threaten the supply of parts from China. The country’s economic rise has been built on deep integration into western manufacturing. China controls between 50% and 70% of global refining capacity for lithium and cobalt, two of the key ingredients in electric car batteries, according to the International Energy Agency. Even the most basic car parts often come from China, including most alloy wheels. No one can make cars without wheels, Gane notes wryly.

The automotive industry is a cornerstone of the UK’s manufacturing base: factories for brands including Nissan, Jaguar Land Rover and Mini employ 182,000 people and exported £32bn of vehicles last year. China is the third largest export market for UK-made vehicles, with luxury brands such as Bentley and Rolls-Royce enjoying particular success. Jaguar Land Rover, the UK’s largest manufacturing employer, has relied heavily on Chinese buyers for British-made vehicles and also has a joint venture near Shanghai, producing cheaper Range Rover models.

Neither would China’s automotive industry be spared. The ruling Communist party poured in huge subsidies when it spotted an opportunity to dominate the new electric car sector. Its manufacturers are racing to sell more cars in Europe and the US, which could make them a prime target for economic retaliation after an invasion – or a victim of any public backlash.

China is the UK’s fourth largest trading partner after the US, Germany and the Netherlands. Total UK-China trade in goods and services rose by 9% to £104bn in the 12 months leading up to the third quarter of 2022, according to the Office for National Statistics. In the same period, the UK exported goods and services worth £32bn to the world’s second largest economy, and £72bn of imports came the other way.

The biggest export from the UK to China is cars, followed by petroleum products, pharmaceuticals and power-generating equipment. London is the biggest exporting region, followed by the West Midlands and the north-west.

Andrew Seaton, chief executive of the China-Britain Business Council (CBBC) says the “huge and fast-growing” Chinese middle class is becoming a critical market in the global economy. “China is a key export market for UK businesses,” he says. “These exports, with their associated supply chains, support, on a conservative estimate, between 115,000 and 130,000 jobs across every region of the UK, from the south-west to Scotland.

“Clearly it is right to protect our national security interests and stand up for our values. But with exports a vital driver of the economic growth the country so badly needs, it is also right to promote our trade and economic interests in China.”

British success stories including AstraZeneca, drinks group Diageo and luxury fashion brand Burberry are among the major exporters, and they could all suffer.

In a recent report Rhodium, a US research firm, said: “Companies could also face boycotts and protests, both in the Chinese market (due to home country statements of support of Taiwan), and in their home countries if they continued to operate in China during a period of aggression against Taiwan.”

The biggest category of imports from China to the UK was telecommunications equipment, with the top 10 dominated by consumer goods such as mobile phones. And the competitive pricing of Chinese imports is helping mitigate the cost of living crisis, says the CBBC.

Taiwan is a less significant export market for the UK: it is worth £3.8bn, with imports worth £4.6bn.

UK banks are the largest foreign lenders to China, with claims on a guarantor basis of about $238bn (£208bn), out of a global total of $835bn, according to the Bank for International Settlements. Those loans would come under pressure in any conflict scenario.

“UK banks may be forced by sanctions to write off loans they have made to Chinese partners, and western firms could end up having their investments in China expropriated,” says Williams at Capital Economics. The UK has more than £10bn tied up in foreign direct investments in China.

A key player in the region, and a major UK financial institution, is HSBC. It is the leading foreign bank in mainland China and has exposure of just under $17bn to the Chinese commercial property market, with the majority of it related to Hong Kong. HSBC made impairment charges of $1.3bn related to the Chinese commercial property sector last year, but said in its annual results that the west’s relationship with China “appears to be relatively stable”. Standard Chartered, another London-based bank, also has a strong presence in China.

TikTok, the hugely influential and popular viral video app, has already come under pressure because of the tensions between Beijing and the west. The Chinese-owned business has more than a billion users worldwide and about 18 million in the UK, including influencers for whom it is a cornerstone of their livelihoods. For advertisers targeting the youth market, it is equally important. Fears that the Chinese state may be able to access TikTok user data, which the company has denied, have led to the app being banned on government-issued phones in the UK, US and Canada.

Pressure for a complete ban on TikTok will grow in the event of a conflict. It is widely feared that the Chinese Communist party (CCP) could manipulate the app’s For You feed to affect public opinion – a possibility that TikTok has denied.

Prof Alan Woodward, an expert in cybersecurity at the University of Surrey, says: “If China attacks Taiwan, all bets are off. The sanctions on China would very probably include banning products like TikTok. The UK would want to send the strongest signal possible, just like the US. Any company that might potentially harvest data for Chinese authorities is likely to disappear from the app stores available to western users, including those in the UK.”

Sanctions could also have a devastating effect on British higher education, according to experts, potentially causing a loss of £2bn a year in fees from 150,000 international students.

“Any disengagement from China would have a very severe effect on UK universities because a quarter of international students in the UK come from China,” says Nick Hillman, director of the Higher Education Policy Institute.

He says large, research-intensive universities such as Manchester, Edinburgh and UCL would need to quickly recruit students from other parts of the world, “or face a severe funding shortfall that would affect their research and the viability of many courses”.

Prolonged sanctions would also complicate partnerships that see 70,000 Chinese students a year study remotely for British university qualifications, and disrupt operations for those, such as the University of Nottingham, which have satellite campuses in mainland China.

Confucius Institutes – Chinese-government-funded bodies that teach Chinese language and culture at British universities – are already under increased scrutiny from the UK government, and some campaigners are calling for them to be closed. Critics argue that they suppress academic freedom and promote CCP values in the classroom.

Britain’s private schools would also be hit if wealthy Chinese families were unable to send their children abroad. More than 10,000 pupils from China and Hong Kong attend boarding schools in the UK, paying up to £50,000 a year each.

Like Nottingham University, top schools such as Harrow have exported their brand, earning useful income by operating more than 50 satellite schools in China and Hong Kong. Dulwich college alone is involved in six schools in China.

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