China will conduct live-fire military exercises in the Taiwan Strait and around Taiwan from Thursday to Sunday in retaliation for House Speaker Nancy Pelosi’s visit — exercises that are expected to breach Taiwan’s territorial waters and block some busy international shipping lanes.
Any escalation of tensions would create yet another major threat to global supply chains.
If the strait were ever closed to commercial traffic, it would be a negative for cargo shippers and a positive for ship owners and operators. Delays would push up transit time and reduce effective vessel capacity, boosting freight rates.
“The Taiwan Strait is one of the busiest straits in the world,” said Maersk CEO Soren Skou during his company’s quarterly conference call on Wednesday.
“Obviously, if it were to close, it would have a dramatic impact on shipping capacity, in the sense that everybody would have to divert around Taiwan and add to the length of the voyages,” Skou said. “That would absorb significant capacity. But I have to say that there seems to be no suggestion that this is where we’re going.”
Bloomberg calculated that almost half of the world’s container ships and 88% of larger container ships transited the Taiwan Strait this year. It also reported that some liquefied natural gas (LNG) carriers have already rerouted or slowed speed in response to the coming military exercises.
Brief ‘partial blockade’ or something bigger?
According to Peter Williams, trade flow analyst at VesselsValue, “With China conducting significant military drills and military tests around Taiwan … there is potential for substantial disruption to trade in the region.”
VesselsValue analyzed location data on commercial ships currently in Taiwanese waters, as well as those en route to Taiwan. As of Wednesday, it found 256 container ships, tankers and bulkers in Taiwanese waters, with another 308 destined to arrive. Of inbound container ships, tankers and bulkers, 60 are scheduled to arrive before the Chinese military drills conclude on Sunday.
Shipping agency GAC warned in customer notice that “some of the exercise areas are within the VTS [Vessel Traffic Service] range of various ports of Taiwan. The port control bureau has set up a warning range. If a vessel enters the area, it will prompt a warning by the port VTS and be requested to leave as soon as possible to avoid any accidents.”
According to Evercore ISI analyst Krishan Guha, “With China warning foreign planes and ships to stay away while its military exercises proceed, the result is what Taiwan’s ministry of foreign affairs terms a blockade, though possibly only a partial one, with some air and sea lanes still potentially open.”
Guha continued: “The current exercises and effective partial blockade are scheduled to last only a few days but could be extended or restarted, leading to a more prolonged crisis, as well as more serious disruptions to global chip and other tech-component supply chains.”
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