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3 ways the Taiwan-China standoff could impact world markets

The standoff between China and Taiwan (and the U.S.) has heightened tensions to their highest level in decades but — so far at least — economic observers haven’t seen a worst-case scenario.

The island’s crucial semiconductor industry has dodged a direct hit and, while China currently has Taiwan effectively blockaded, that is expected to end this weekend.

But White House officials and other observers say that doesn’t mean Taiwan’s economy and world markets are getting off scot free. There are three key economic ripples — from global shipping to cyber attacks to trade wars — that may be felt across world markets in the weeks and months to come, even if tensions don’t get any worse.

“We will not seek, nor do we want, a crisis,” NSC Coordinator for Strategic Communications John Kirby told reporters Thursday, but he was clear that China’s actions “erode the Cross-Strait status quo” on both economic and military issues.

Here are some of the immediate economic effects likely to be felt even if China stops short of full scale economic (or actual) warfare following House Speaker Nancy Pelosi’s trip to the island.

FILE - In this photo released by the Taiwan Presidential Office, U.S. House Speaker Nancy Pelosi, left, and Taiwanese President President Tsai Ing-wen gesture during a meeting in Taipei, Taiwan, Wednesday, Aug. 3, 2022. China is staging live-fire military drills in six self-declared zones surrounding Taiwan in response to a visit by U.S. House Speaker Nancy Pelosi to the island Beijing claims as its own territory. (Taiwan Presidential Office via AP, File)

China’s effective blockade of the island

Pelosi was the highest-level American politician to visit Taiwan in 25 years and, according to the White House, China launched an estimated 11 ballistic missiles towards Taiwan in response as part of a dramatic show of military force. The drills have taken place all around the island's coastline and had the effect of instituting an effective economic blockade.

But even with military tensions at the highest level in decades, there may be limited economic implications if China’s fleet of ships eventually heads back to their home ports as they are scheduled to do this weekend.

Video screenshot shows a missile launched by the rocket force of the Eastern Theater Command of the Chinese People's Liberation Army PLA, targeting designated maritime areas to the east of the Taiwan Island, Aug. 4, 2022. The Eastern Theater Command on Thursday conducted joint combat exercises and training around the Taiwan Island on an unprecedented scale. (Photo by Xinhua via Getty Images)
Video screenshot taken from Chinese state media shows a missile launched targeting designated maritime areas on the east of Taiwan on Aug. 4. (Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

In the meantime, airlines are adjusting with some flights to Taipei being canceled completely while others appear set to go ahead by avoiding certain contested airspace in the waters around Taiwan.

Ships in and out of Taiwan, though, are largely at a standstill, though are expected to be back on the move soon. Even if they do, one longer term economic consequence could be shippers that are less likely to wade into the waters around Taiwan, especially if China continues to let its dissatisfaction known to ships passing through.

Herbert Lin, senior research scholar at the Center for International Security and Cooperation at Stanford, told Yahoo Finance Friday that, “You could easily imagine if the shipping lines going into and out of Taiwan are threatened in any way [then insurance rates could go up] and that's a BFD.”

For her part, Speaker Pelosi made increased economic ties and trade between the U.S. and Taiwan a centerpiece of the trip, noting how she told the Taiwanese “our CHIPS and Science Act will go a long way to strengthening both our economies, as well as expressed our support for a 21st Century trade framework.”

House Speaker Nancy Pelosi and her Congressional delegation depart Taipei Songshan Airport after their visit to Taipei on August 3. (Taiwanese Foreign Ministry/Handout/Anadolu Agency via Getty Images) (Anadolu Agency via Getty Images)

Chinese cyberattacks

Another closely monitored area is any change in China’s ongoing campaign of cyber warfare against Taiwan.

China and its allies are suspected of being behind cyber attacks to disrupt Taiwan's society and economy for years. In recent days alone, it has apparently hacked everything from 7-Eleven stores to Taiwan's presidential office to show their displeasure with the visit.

The question is whether China will increase the ferocity of attacks in the coming days and whether the U.S. could get dragged into that conflict.

On Thursday, Kirby was asked about the cyberattacks and declined to weigh into any specific measures, but made it clear that the U.S. was monitoring the situation closely. “For lots of good reasons, we don’t talk about steps we take either unilaterally or bilaterally in cyberspace,” but immediately added “we are committed, as we have been now for decades, to Taiwan’s self-defense [and] I’ll leave it at that.”

Professor Lin notes that increased cyberattacks might continue for a long time.

“It's really expensive to keep on conducting large-scale military operations like they've been doing," he said of China, noting that missile launches could tail off but cyber warfare is "a cheap and easy way of expressing your dissatisfaction."

Experts have also often reminded that, if the conflict were to drag out, Americans are also never safe from direct cyberattacks. American business vulnerabilities in the cyber arena from both the Chinese and Russians governments — as well as unofficial actors — have been demonstrated repeatedly in recent years.

Economic coercion

Economic coercion efforts are another continued risk.

Kirby brought such efforts up from the White House podium on Thursday, and Beijing has announced it will indefinitely block selected imports such as citrus, fish, and other foods from Taiwan, even after the effective blockade ends.

Still, China has notably said it will continue allowing semiconductor imports from Taiwan. The Taiwan Semiconductor Manufacturing Company (TSM) is the world's biggest semiconductor company, with its products powering countless electronics in China and around the world.

Experts have noted the divided response from Beijing to suggest economic coercion efforts may not have as deep an effect as some might fear.

Taiwan Semiconductor Manufacturing Company (TSMC) Fab 15B, one of the company's four giga semiconductor fabrication plants, is pictured in Taichung, Taiwan September 2, 2021.    REUTERS/Yimou Lee     T
One of the Taiwan Semiconductor Manufacturing Company's semiconductor fabrication plants is pictured in Taichung, Taiwan (REUTERS/Yimou Lee) (Yimou Lee / reuters)

In the past, China has banned Taiwanese imports of things like sugar and wax apples and pineapples but the actions are often limited to more symbolic products — as opposed to exports that would severely disrupt either economy.

This week’s action was another example in that trend.

On semiconductors, for example, Beijing is not seen as likely to institute a ban anytime soon. Sarah Kreps, a professor and director of the Cornell Tech Policy Lab, recently told Yahoo Finance that “chips have become almost a third rail,” which China is not keen to touch.

Ben Werschkul is a Washington correspondent for Yahoo Finance.

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