The struggle Taiwan is waging against China’s attempts to change the status quo in the Taiwan Strait would lead one to believe that the greatest threat currently facing Taiwan is that China will try to unify the island with the mainland by force. As worrisome as this possibility is, the most fundamental threat Taiwan faces is to its economy and its energy system.
Soon after U.S. House Speaker Nancy Pelosi’s visit to the island in early August, China launched military drills and “war games” around Taiwan – the largest ever. These operations took place in large swaths of the ocean around the island, with China issuing navigation warnings to ships and aircraft to stay out of these areas. The People’s Liberation Army (PLA) Eastern Theater Command said that the drills were designed to prepare for “defense” and “blockade” operations. However, these incursions into Taiwanese-controlled areas were more intense and extensive than ever before. There are growing fears that an elevated level of PLA military activity in and around Taiwan will become a “new normal,” creating instability and threatening regional security, with potential ongoing impacts on Taiwan’s maritime trade and commerce.
A total blockade of Taiwan is regarded as highly unlikely, unless China were to attempt to take Taiwan by force – a measure that is regarded by many analysts, including in Taiwan, as being unlikely in the short term. However, China has explicitly stated it is keeping the option open. Since the fallout from a forceful annexation of Taiwan would negatively impact China as well, there is reason to believe that Beijing would only do so as a last resort. Nonetheless, by crossing the unofficial median line between the mainland and Taiwan in early August, China has already unilaterally changed the status-quo in the Taiwan Strait
Even with the constant threat of Chinese aggression in the background, Taiwan plays an outsized role in the global economy. It was the 22nd largest economy and the world’s 15th largest exporter of merchandise in 2020. Taiwan’s economy proved very resilient to the COVID-19 pandemic with manufactured product exports helping power real GDP growth to 3.3 percent in 2020 and 6.5 percent in 2021, according to data from the Chung-Hua Institution for Economic Research in Taiwan, even while economies in the U.S. and E.U contracted over the same period. Semiconductor exports account for about 38 percent of Taiwan’s total exports and chipmakers such as TSMC, UMC and others helped Taiwan’s economy through the worst of the pandemic.
Taiwan’s continued economic prosperity is contingent on a stable geopolitical environment, and especially on stable cross-strait relations with mainland China, which is also Taiwan’s largest trading partner. Taiwan itself is critically important in a geopolitical sense not only because of its strategic location in the “first island chain” guarding access to and from the Western Pacific but because of the world’s reliance on its supplies of advanced semiconductors, many of which are at the heart of a wide range of products from iPhones to advanced defense systems. Increased demand for electronic products during the pandemic contributed to a global chip shortage and forced automakers and others to slow or even halt production.
Taiwan’s economy and its manufacturing prowess is in turn highly dependent on steady, reliable sources of energy. Taiwan manufactures about 65 percent of the world’s semiconductors and almost 90 percent of the most advanced chips. Producing these chips consumes huge amounts of electricity. TSMC alone accounted for 6 percent of Taiwan’s total energy consumption in 2020 and this is expected to rise to 12.5 percent by 2025 as the company continues to build new chip plants.
Taiwan is an island with no physical power interconnections with neighboring countries. In addition, there are very few indigenous energy sources available – hydro and pumped storage are limited by a lack of adequate river systems, utility-scale solar power is limited by available land, geothermal energy is limited by suitable locations and public opinion, and there are no domestic sources of fossil fuels. In addition, there is opposition to nuclear power, dams, and even to onshore wind installations. This is partially offset by excellent offshore wind resources in the Taiwan Strait.
Taiwan is therefore almost totally dependent on imports for its energy requirements. In 2021 Taiwan relied on imports of fossil fuels for 97.7 percent of its total energy supply. Electricity is primarily generated from coal and natural gas, representing 81.5 percent of total generation, while nuclear power accounted for only 9.6 percent and renewables (mostly solar and wind) for 6.0 percent. Taiwan began implementing an energy transition policy in 2016 which has set goals to promote green energy, increase use of natural gas, reduce coal-fired power, and end the use of nuclear power. The one remaining operational nuclear power plant is to be decommissioned by 2025.
Taiwan’s energy system vulnerabilities are an ongoing concern. While Taiwan’s government has specific energy resource stockpile requirements, the resiliency of Taiwan’s energy system to potential disruptions is limited in part by the relatively low level of its oil, natural gas, and coal stockpiles. Currently stockpiles slightly exceed the minimum requirements with 39 days of coal, 146 days of oil, and 11 days of natural gas, according to the Bureau of Energy, part of Taiwan’s Ministry of Economic Affairs. Should China implement a full or even partial blockade, Taiwan would incur severe damage to its economy after 11 days since natural gas accounts for about 37 percent of electricity generation and oil-fired generation is negligible, leaving coal as the only baseload backstop since Taiwan’s remaining nuclear power plants are set for phase out.
Electricity grid stability is vitally important to Taiwan’s manufacturing industry, particularly the semiconductor industry. Taiwan has experienced frequent blackouts due to malfunctions in feedlines and transformers, much of which is due to centralized and aging infrastructure. In its latest sustainability report, TSMC noted that the risk of power outages or disruptions are rising and that grid instability could impact on its operations on the island within the next three years.
There is already some evidence that China’s recent actions may have started to have an impact on major energy projects in Taiwan. An offshore wind project being built off Taiwan’s west coast has seen some international financial institutions drop out of project financing while others are flagging the increased level of risk associated with financing such projects in Taiwan.
China’s actions have highlighted the vulnerability of Taiwan’s economy to disruptions in the surrounding sea lanes and airspace. The Joint War Committee (JWC) of insurers based in London, which classifies the world’s waters according to risk, says that while some shippers have had to take detours around Taiwan’s eastern coast, they do not currently consider China’s actions to pose an elevated risk to shipping. However, if militarization in the region were to increase in level and/or frequency, risk assessments could change.
A blockade or even an increase in frequency of Chinese drills and military maneuvers in the airspace or the sea lanes around Taiwan could potentially disrupt Taiwan’s exports and delay or disrupt inbound shipments of energy, minerals, food products and other critical components needed to keep Taiwan’s economy running. China could also employ a selective “blockade” by attempting to limit certain types of freight or goods from entering or leaving Taiwan. If airlines and shipping companies are compelled to take alternate routes as a result of increased risk, it could cause delays and increased freight costs and insurance, not only in the Indo-Pacific but globally. Because of Taiwan’s importance in global trade, especially for electronic components such as semiconductors, such disruptions could be catastrophic for the world economy.
The risks to Taiwan’s economy and its energy security are rising in the wake of China’s more aggressive stance, as the island faces an elevated level of security threats that could further disrupt trade and cause financial and investment risk to rise. Given Taiwan’s almost total reliance on imports of energy resources to sustain its economy and the global reliance on Taiwan’s “democracy chips” – as President Tsai Ing-wen has quipped – Taiwan’s allies and partners have a real self interest in promoting peace and security in the Taiwan Strait and pressuring China to stand down on its provocations. At the same time, Taiwan should review its energy policies with a view toward further diversifying its energy sources, developing contingency plans in the case of disruptions, and reviewing its policy on nuclear power./ By Jeff Kucharski/ The Diplomat