The tension between China and Taiwan is currently at its height. China and Taiwan are the two leaders in solar panels, batteries, rare earth elements, and semiconductors production. With rising tensions across the Taiwan Strait, new energy infrastructures and electric vehicle productions could face unprecedented disruption that, given the highly concentrated supply chain, will likely have global repercussions. We analyse how China and Taiwan would respond to a potential conflict and the impacts that their responses would have on global decarbonisation.

China-Taiwan Tensions and the International Response

Tensions between China and Taiwan have reached an unprecedented height after the official visit of US House Speaker Nancy Pelosi in early August. The ongoing military drills encircling the island nation by the People’s Liberation Army (PLA) and the recent official visit to Taiwan by the US lawmakers and Lithuanian deputy minister further intensified the hostilities and uncertainty of the relationship between the People’s Republic of China (PRC) and Taiwan.

Reunification with Taiwan and its archipelagos is the major political goal of China’s leader Xi Jinping to fulfil his political agenda of “road to national rejuvenation”. Additionally, with the stagnated domestic economy, strict COVID-19 policies, and the failure of Wolf Warrior diplomacy – the aggressive style of diplomacy adopted by China since 2017, Xi faces unprecedented pressure from the Chinese Communist Party (CCP), the general public, and the rising ultra-nationalists. With the 20th National Congress of the CCP – the political event that decides the party leader for the next five years – coming up in October, unifying Taiwan could consolidate the support for Xi’s third term as the party’s leader and divert the domestic economic and political pressure overseas by creating an external enemy. In their latest White Paper on Taiwan, the PRC declared the aim to reunify with Taiwan peacefully but refused to rule out the use of military forces to annex the island nation.

The annexation of Taiwan and its archipelagos will extend the Chinese influence and disrupt the balance of power in the East Asian region. Given the geopolitical importance of Taiwan to the US Island Chain Strategy and the economic importance of Taiwan to the world, the US will most likely support Taiwan’s sovereignty through economic and military aid if the PRC was to invade the island. A similar mentality to support Taiwan is also reflected in a statement released by the G7 foreign ministers, urging the PRC not to “unilaterally change the status quo by force” between the Taiwan Strait and thus reflecting the G7’s desire to maintain the de facto independence of Taiwan. 

Given the historical relationship and diplomatic ties between Taiwan and the G7, its members will most likely support Taiwan in a potential conflict between China and Taiwan. While it is still unclear how the situation in Taiwan will evolve, a war would have significant impacts on the global economies and geopolitics. The following article aims to analyse the influence on sustainability and decarbonisation of the potential Chinese invasion of Taiwan.

The Importance of the PRC for Global Decarbonisation

Solar Photovoltaics

China plays a significant role in the race to decarbonisation, mainly due to its advancements in renewable energy infrastructure and EV batteries. According to the latest report by the International Energy Agency (IEA), the PRC dominated the global supply chain of the solar photovoltaics (solar PV) industry. In 2021, the PRC accounted for over 80% of the production capacity in all major manufacturing stages (e.g. polysilicon, ingots, wafers, cells and modules) of solar panels. The IEA predicted that the Chinese domination in polysilicon and wafers manufacturing would account for over 95% of the global production capacity in the coming years. 

Battery and Electric Vehicles (EVs)

As the adaptation rate of EV and off-grid renewable energy systems grows, the importance and demand for batteries also increases. According to IEA, China dominated the production of lithium-ion batteries, accounting for about 75% of the global production capacity in 2021. In addition, 70% of cathodes and 85% of anodes production capacity lies in the country. 

China dominates by far the supply chain of batteries. It is estimated that in 2020, the country controlled 85% of the global battery-ready cobalt, as well as over half of the global cobalt, graphite and lithium processing and refining capacity. The battery firm Contemporary Amperex Technology Co (CATL) supply batteries to almost all the world’s automotive companies, from General Motors and Tesla to Volkswagen and BMW. The Chinese domination in battery production will continue to rise, with the IEA estimating that it will account for 70% of the global production capacity by 2030.

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Rare Earth Elements

Besides solar PV and batteries, PRC also monopolises the global production of rare earth elements. Despite only composing 37.9% of global rare earth element reserves, the PRC accounted for over 58% (140,000 tons) of the global rare earth element mining production and 87% of the global rare earth elements production. Rare earth elements are essential for decarbonisation as they are a necessary element for renewable infrastructures. Rare earth elements are used, among others, in manufacturing generators for wind turbines as well as electric motors and batteries for EVs and hybrid vehicles. The average rare earth elements requirement of EVs is about 0.5 kg/vehicle, and the rare earth element demand for wind plants is up to 239 kg/Megawatt.

Since 2021, rare earth elements in the PRC have been subjected to the Export Control Law. The law allows the Chinese government to control the rare earth elements industry directly, controlling both their export and re-export and establishing a blacklist regime on importers or end-usage. The regulations and state involvement in the rare earth industry show the strategic importance of rare earth elements for China as an economic weapon.

The Importance of Taiwan for Global Decarbonisation

Semiconductor Industry

Taiwan dominates the semiconductor industry, the steam engine for EVs and renewable energy infrastructures. The chips requirement of an EV is up to three times higher than those required by vehicles with an internal combustion engine. In renewable energy systems, semiconductors responsible for converting the power from the power plant and transmitting the electricity generated from the plant to the power grid. This perfectly illustrates the importance of semiconductors in decarbonising the energy and transportation sector. 

In 2020, Taiwan accounted for 63% of the global semiconductor market share. South Korea, which ranked second, accounted for only 18%. Among the global semiconductor manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC) alone accounted for 54% of the market share in 2020. Although Samsung ranked as the second manufacturer in terms of market share, it only accounted for 17% of the global semiconductor market. 

Given the dominating role of Taiwanese semiconductor firms, a disruption in the supply chain in the event of escalations between China and Taiwan will have serious repercussions on the global supply of EVs and renewable infrastructures. 

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How China and Taiwan Might React in the Event of A Conflict

How the PRC Might React to the Potential Sino-Taiwan War

To avoid direct conflicts with the PRC, the West would impose economic sanctions on the PRC or arms sales to Taiwan, just like sanctions and arms sales to Ukraine. Therefore, China would implement a series of countermeasures against the West as retaliation to the sanctions and exert leverage over their sanctions.

Historically, China has utilised its market monopoly on rare earth elements to manipulate global supply and achieve its diplomatic goal. For instance, before 2015, the Chinese government imposed export quotas and duties, taxation and stockpiles on rare earth elements to control the rare earth element market. Moreover, after the 2010 Senkaku boat collision incident – a diplomatic dispute between Japan and the PRC over the collision of a Chinese trawler and Japanese Coast Guard boats near the disputed Senkaku Islands – multiple international media reported that the PRC banned the export of rare earth oxides to Japan as a retaliation for the detention of the Chinese skipper. Despite Chinese officials denying such reports, many industry officials were informed by Chinese customs stating that exports of rare earth elements to Japan were prohibited

In an article published by the state media Global Times, an industry insider claimed that PRC would consider banning the export of rare earth to the US on the basis of “national security” or “during wartime”. The strategy indicates the attitude of the Chinese authority toward the weaponisation of its monopoly on rare earth to gain leverage in potential conflicts. 

Rare earth elements can also be the raw materials for military equipment. For instance, terbium is used in naval sonar and sensor systems, dysprosium is used in making lasers, and F-35 Lightning II aircraft demand about 920 pounds of rare earth elements. 

Since the US is the main weapon supplier to Taiwan, in the event of a conflict between PRC, Taiwan, and its allies, China would likely implement an embargo on rare earth elements exports to the West on the basis of national security to prevent the weaponisation of rare earth element by Taiwan and its allies. Furthermore, as the essential material for EV and wind energy, the embargo on rare earth elements prevents other nations from developing their wind energy farm and EV production line that block the diversification of the global supply chain.

The European Union (EU) imports most of the solar energy infrastructure and heavily depends on Chinese solar energy infrastructure. In 2020, the PRC accounted for 75% of EU solar panels imported. The current strategy for solar energy released by the European Commission aims to double the solar PV production capacity to 320 gigawatts (GW) by 2025. The EU’s dependency on Chinese batteries can expose them to higher vulnerability.

Given the importance of Chinese solar PV and batteries to Europe, the PRC might also impose export control on solar PV and batteries to Europe to stop the EU from supporting Taiwan, further exacerbating the the current energy crisis, and high fuel prices contributed by the Russo-Ukrainian war in Europe.

How Taiwan Might React to the Potential Sino-Taiwan War

The conflict between the PRC and Taiwan could disrupt or halt semiconductor production in Taiwan. Chinese military and security policy expert Oriana Skylar Mastro suggested that the PLA’s recent military drills surrounding Taiwan were a rehearsal for the future invasion of Taiwan. The rehearsal hinted that the PLA would deploy warships, submarines and aircraft to blockade the island nation. The blockade on Taiwan will block all the maritime transport essential for the resource-deficit island nation to manufacture or export semiconductors.

If the semiconductor production continues, Taiwan might implement an embargo on semiconductor export to the PRC as one of their countermeasure and exert some leverage over the PRC. Additionally, as an ally of the US, South Korea will most likely impose sanctions on China. In the early days of Russia’s invasion of Ukraine, Taiwan and South Korea implemented an export ban on semiconductors to Russia. In June, Taiwan tightened its semiconductor export restriction, expanded the export ban to Belarus and banned the export of obsolete semiconductors. The combined market share of South Korea and Taiwan in semiconductor manufacturing accounted for 81% of global production in 2020. In contrast, China only accounts for 6% of the market share. Although Chinese authorities attempted to advance the country’s semiconductor manufacturing, they failed. For instance, the state-supported multi-billion-dollar Hongxin Semiconductor Manufacturing Co ran out of business in 2021, with billions of public money lost with it.

China’s failure to domestically produce chips, the global transition into renewable energies and electrification of the transportation system as well as the sanctions that Taiwan and South Korea might impose could create a huge supply deficit in the semiconductor market and intensify the current chip shortage. This will have a devastating impact on global EV manufacturers but especially Chinese ones. Being the largest EV producer in the world, a chip embargo would halt China’s EV production. For Europe – the world’s second-largest EV producer – the disruption of logistics or semiconductor shortage could also likely result in a reduction in EV production.

Conclusion

The lack of diversification is the primary cause of the current vulnerability of the supply chain. China’s manufacturing industry and natural resources and the semiconductor industry of Taiwan show the interdependence of the global economy and how vulnerable and fragile the global economy really is. 

The lack of alternatives in the market to complement the potential loss of production capacity from Taiwan and China would likely lead to a huge supply deficit that would inevitably delay the timeline for achieving decarbonisation in the energy and transportation sector. In addition, the disruption of the supply chain and the corresponding supply deficit will significantly increase the market price for the aforementioned items. The price surge in solar PVs, batteries, and semiconductors would directly impact the development of green technologies in developing regions that prevent them from escaping poverty. Such as the opium industry in Afghanistan, the adaptation of solar power in the Helmand region resulted in increased productivity and water availability.

The aforementioned example demonstrated that the potential conflicts between the PRC and Taiwan would have a detrimental effect on the deliverance of the global carbon-neutral pledge and devastating impacts on the livelihood of Taiwanese. Therefore, Taiwan and China need to engage in diplomatic actions to increase transparency and rebuild trust to prevent the further escalation of the current crisis.

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