August 30, 2022 | Supply Chain
Earlier in August, China conducted a major military exercise around Taiwan in response to U.S. House Speaker Nancy Pelosi’s visit to the self-ruled island, which China claims to be part of its territory.
The Chinese government chose six zones near the Taiwan island to carry out the live-fire and submarine exercises. During this time, ships and aircraft could not enter the waters and airspaces where the military drills were on.
This affected the international shipping route of Taiwan Strait.
Ships carrying goods from Asian manufacturing hubs to markets in Europe, the U.S., and everywhere in between mostly travel through the Taiwan Strait on their way to points west, passing through China, Japan, South Korea, and Taiwan.
This year, Taiwan strait handled the movement of more than 80% of the largest ships by tonnage and more than 40% of the world's container fleet.
The strait operates as the main shipping route between China, Japan, the U.S., and Europe. Some of the world’s biggest and busiest ports such as Shanghai, Ningbo, Shenzhen, and Guangzhou are all located on the coast directly across from the Taiwan Strait. It also serves as a trading route for South Korea, transporting manufactured goods from Asian factories to many global consumers.
The global supply chain is already suffering from the aftereffects of the COVID-19 pandemic and Russia's invasion of Ukraine.
If the situation between China and Taiwan worsens, numerous shipping vessels would have to be diverted from their intended course, causing lengthy delays and increasing transportation costs.
Some oil and gas tankers traveling in the area were reportedly rerouted or advised to reduce their speeds by the suppliers.
Supertanker Barakah was diverted to the Sha Lung port at the northern end of Taiwan and was moored off Kaohsiung. It was carrying Middle-Eastern crude oil. Crude oil tanker Ghinah was also rerouted to Sha Lung.
In case of a conflict, vessels may need to be diverted around the eastern side of the Taiwan island rather than through the congested waterway between mainland China and Taiwan, and this could result in delays.
Ships were already cautious about advancing the important port of Kaohsiung in southern Taiwan because of the military drill zone.
After the Chinese military closed off six zones in the Taiwan Strait, the number of ships operating there decreased from about 250 per day to just 15-20 ships.
Even scheduled loadings were shortened by many shipping lines for importers in Asia.
Exporters in the area may need to look for a backup plan if one stretch is blocked and unrestricted trade in and out of Taiwan becomes more challenging.
Transit times will increase on all shipping routes and goods will take even longer to reach consumers. Freight rates will be the most impacted in the short term if the Taiwan Strait is declared a zone of no-free passage.
Carriers will need to reorganize the services they provide to customers, some may even feel the need to stop shipping goods to Taiwan altogether, while others will do less frequently. The impact will spread throughout before a new normal is established for trade lanes in the area.
Currently, due to the time and effort required to establish shipping routes, shipping companies are hesitant to change their business practices if they are experiencing a short-term issue.
If China chooses to impose an air and maritime blockade against Taiwan, it will largely depend on how much political and economic risk the Chinese government is willing to take. The duration of this disruption will determine the degree of impact.
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