Taiwan 'matters far more to the world economy' than many people realize, economist explains

Dani Romero

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China's latest military exercises encircling Taiwan have clear ramifications for the global economy, following U.S. House Speaker Nancy Pelosi’s recent visit to Taipei.

"Taiwan matters far more to the world economy than its 1% share of global GDP would indicate," Gareth Leather, Senior Economist in the Emerging Asia team at Capital Economics, wrote in a note.

The military exercises included live-fire drills and missile launches, restricting access to ships and aircraft in the area. Data compiled by Bloomberg shows more than 40 vessels have navigated around the drill zones south of Taiwan’s main port.

(Source: AFP)

"A further escalation in cross-strait tensions that cut Taiwan’s export off from the rest of the world would lead to renewed shortages in the automotive and electronics sectors and put further upward pressure on inflation," Leather wrote.

He noted that Taiwan is the world’s largest producer of the processor chips "that are increasingly ubiquitous in new products," having twice the market share of the next biggest producer.

Leather added that 92% of the most advanced semiconductors are made by TSMC in Taiwan, making its dominance at the high end even greater. So if Taiwanese semiconductor supply were disrupted for a prolonged period, electronics and automotive manufacturers would struggle to find alternative suppliers.

Taiwan is by far the world’s biggest producer of the processor chips that are increasingly ubiquitous in new products.

Taiwan’s autonomy has become a key geopolitical interest for the U.S. due to the island's dominance in the global market for microchips. Semiconductors, which go in everything from smartphones to cars, have become an integral piece to our daily lives.

In a 2021 report from the Biden Administration, it was explained that "the United States is heavily dependent on a single company – TSMC – for producing its leading-edge chips." Also in the report, "the lack of domestic production capability also puts at risk the ability to supply current and future national security and critical infrastructure needs."