Semiconductor Tensions Chip Away at Cross-Strait Relations

China-U.S. Relations

Summary:

The escalating US–China technology rivalry and global chip shortage make Taiwan's role as a leading global supplier of semiconductors strategically and economically important to both powers.

US House of Representatives Speaker Nancy Pelosi's visit to Taiwan and President Joe Biden's pledge that the United States would defend the island have escalated tensions in the Taiwan Strait. At the 20th National Congress of the Chinese Communist Party, President Xi Jinping stressed the importance of reunifying with Taiwan.

The escalating US–China technology rivalry and global chip shortage make Taiwan's role as a leading global supplier of semiconductors strategically and economically important to both powers.

The question is what will happen to global chip production in the event of a cross-Strait military conflict. COVID-19 lockdowns have already disrupted global semiconductor supply. Since global semiconductor production capacity is highly concentrated in Asia, including in Taiwan, South Korea and China, a cross-Strait military conflict will crimp the global production of semiconductors. In a military confrontation, China might impose an embargo on Taiwan's exports of critical technologies.

Taiwan is home to several of the world's largest semiconductor foundries. Together they represent more than 63 per cent of the global market share. The world is heavily dependent on the Taiwan Semiconductor Manufacturing Company (TSMC), which produces more than 90 per cent of the world's most advanced semiconductors, including 5-nanometre chips.

Supply disruptions will directly impact Apple — TMSC's largest customer — Nvidia, Qualcomm and AMD. It will also disrupt leading US technology companies specialised in computer processors and chipsets that power modern devices, from consumer electronics and medical equipment to artificial intelligence and military technologies.

With supplies from Taiwan crimped in the event of a cross-Strait conflict, companies may have to look to South Korea for replacement chips. Samsung is the world's second largest semiconductor foundry by revenue, accounting for approximately 17 per cent of the global market — a 35 per cent smaller share than TSMC. But the production capacity of South Korean foundries is unlikely to meet global demand and Seoul could be drawn into the conflict should the United States get involved.

Chinese foundries produce around 8 per cent of the world's semiconductors. But even if Chinese companies maintain their semiconductor production in a cross-Strait conflict, the chips they can mass produce are mainly 28-nanometre and 14-nanometre chips. These are less sophisticated and powerful than the 7-nanometre and 5-nanometre made by TSMC and Samsung.

While there were reports in August 2022 that China's Semiconductor Manufacturing International Corporation had made a great leap in successfully developing 7-nanometre chips, the company's mass production capacity remains unknown. Indeed, the global semiconductor supply chain is complex and involves different stages of manufacturing demanding high-, medium- and low-skilled inputs. Any disruption will have knock-on effects on upstream and downstream industries.

Southeast Asian countries are also involved in semiconductor manufacturing. Malaysia packages and tests newly made semiconductors, accounting for 13 per cent of the global market share. Singapore operates fabrication plants for US-based Micron and GlobalFoundries and several assembly and testing facilities for Taiwanese companies.

Many industries rely on a stable supply of semiconductors, exposing them to the effects of a cross-Strait conflict. The automotive industry is still battling the global chip shortage that emerged in 2020. Over the past few years, automakers have competed with other consumer electronics providers over chips made in Asia. Some automotive giants have already cut production, while others expect the chip crunch to last into 2024. A military conflict involving the global hub of chip production will further strain the industry, creating knock-on effects on other parts of the automotive supply chain.

The effects of a cross-Strait conflict can be mitigated by strengthening supply chain resiliency. Some countries and companies have already started diversifying and securing their semiconductor supply chains. But diversification comes with a cost. The US Chips and Science Act uses federal subsidies to lure technology firms — including US, Taiwanese and South Korean companies — to invest in cutting-edge chip development and manufacturing in the United States. Companies are not allowed to build advanced chipmaking facilities in China for 10 years to receive these subsidies.

While reshoring and friend-shoring incentives may help stabilise the supply of semiconductors, the incentives push the world further away from multilateral trade toward geopolitical trade blocs. The semiconductor sector is the first to experience this shift, but it will not be the last.

A cross-Strait military conflict would be a lose-lose situation for the warring parties and the world. Given the high stakes, leaders in the United States and China should maintain continuous dialogue to communicate their interests as well as differences. The United States should refrain from acts that would provoke Beijing's suspicion of US support for Taiwanese independence.

Maintaining the status quo is key to keeping the peace across the Strait. To that end, the United States should continue to work with allies in the region, including Japan, South Korea, the Philippines and Australia, to share intelligence and militarily prepare for any future conflict.

Source: eastasiaforum

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Michelle

As national governments continue to battle the crippling economic effects of Covid-19, inflation has emerged among the most immediate threats to social stability. Triggered by the pandemic, central bank policies and the war in Ukraine, among other factors, inflation has engulfed the global economy and exposed its vulnerability to geopolitical shifts.

Rising living costs have also shaken governments across various countries, including in many democracies, as citizens grow agitated with a situation their leaders seem unable to address. The post-pandemic political atmosphere was always set to be fraught with social tensions; this has been compounded by a crisis of legitimacy for the many governments that mismanaged Covid-19 intervention funds.

Fiscal trouble

Even before the pandemic, most economies in the Southern Africa Development Community (SADC) faced slowing growth and rising youth unemployment. Investment in public infrastructure – and the value realized for the costs of those projects that did happen – were already areas of concern.

Major infrastructure in Africa is increasingly built via Chinese lending, and the trickle-down benefits of such projects to their host economies have been questionable, as countries often struggle to realize the economic value and pay back the loans. Now, policymakers must contend with these preexisting structural challenges. Unemployment, inequality and poverty across the continent were already at high levels, threatening social stability.

The pressure on policymakers to align with the public favors populist responses that exacerbate macroeconomic challenges.

In a visit to Zimbabwe in September, International Monetary Fund staff lauded the government's efforts to stabilize the economy amid global shocks. Inflation in Zimbabwe stood at 285 percent in August, as the country sought to emerge from the pandemic shock. It had faced a dire situation before the pandemic, and will require more than currency adjustments to return to a stable fiscal path.

Amid high unemployment (33.9 percent), South Africa is also battling a rising cost of living. Before the pandemic, sovereign rating agencies were concerned about South Africa's growing deficit, particularly the rising public sector wage bill. South Africa's Treasury had since committed to fiscal consolidation, pledging to rein in public sector wages and let go of some troubled state-owned entities, such as South African Airways.

But political interest in belt-tightening was absent, and trade unions vowed to resist any measures to curb their salaries. This has strained relations between labor, business, and government after the pandemic.

Political will

Regional economic powers like South Africa are seeing stagflation and widening deficits, after massive pandemic spending amid high unemployment and slow growth. Due to the fragility of political order in the region, fighting inflation and pursuing fiscal consolidation while still maintaining political stability will be a delicate balance.

Responding to high fuel and food costs, South African trade unions have kicked off a series of “shutdowns” and protests to publicize worsening labor conditions. In July, government workers in Zimbabwe went on strike to demand their pay in American dollars, due to the collapse of the national currency. Public sector workers in the country, including teachers and health professionals, have for years pressured the government over hyperinflation.

Dealing with today's inflation in the SADC will come down to policy interventions and the political will to ensure economic stability. Monetary authorities will have to focus on stabilizing currencies despite political pressure. Treasuries, meanwhile, will have to choose between managing budgets to ensure fiscal consolidation or yielding to political expediency.

Scenarios

Zimbabwe and South Africa are headed toward contentious elections in 2023 and 2024, respectively. Both ballots could bring major policy shifts, even altering the general political order. The outcomes in both countries could signal important changes affecting macroeconomic imbalances, including government responses to inflation and public support for such measures.

Whether Harare and Pretoria will pursue unpopular policies to manage inflation and implement structural economic reforms hinges on their appetites to risk losing the coming elections. Among the policy discussions underway in South Africa, led by the ruling African National Congress (ANC), is the nationalization of the South Africa Reserve Bank. An ANC resolution seeks to nationalize the privately-owned central bank so it can focus on unemployment, not just monetary policy.

When social tensions escalate due to the high cost of living and macroeconomic imbalances, formulating a sound policy response becomes even more difficult for democratic governments. Such dynamics often fuel populist sentiments, including questions over the legitimacy of financial institutions like central banks. The pressure on policymakers to align with the public favors populist responses that exacerbate macroeconomic challenges. Political discord and fragmentation impede governments from attaining the consensus necessary to sustain fiscal consolidation.

SADC leaders are facing questions over their willingness to act in the interests of the people. A decline in credibility, which is exacerbated by corruption, undermines their ability to pursue cost-cutting measures, including cutting public sector wages. Merely extending social funding to despondent unemployed youths, as is happening in South Africa, is proving to be an expensive, short-term solution. Such efforts simply aim at compensating for a lack of policy or aptitude to address structural economic problems.

For governments in South Africa and Zimbabwe, staying in power by pursuing policies only designed to appease an agitated public will bring long-term instabilities – which may eventually become intractable. The prospects of meaningful economic reforms are hampered by the current crisis of legitimacy, and will need major political shifts to happen.

Source: gisreportsonline

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Damon

Cryptocurrency

Recent research by crypto risk monitoring firm Solidus Labs has taken a deep dive into the shady world of crypto scams. The findings do not bode well for BNB Chain.

On Oct. 27, Solidus Labs announced the launch of a real-time on-chain Threat Intelligence tool. It has been touted as a first-of-its-kind approach to the retroactive methods of dealing with crypto scams.

Additionally, the firm also released its findings on the growing number of crypto scams and rug pulls. The report revealed that there has been almost 100,000 rug pulls deployed so far this year. Furthermore, the figure is already up 20% from 2021 which had 82,000 rug pulls.

BNB Chain has the most

More interestingly, Solidus Labs found that Binance's BNB Chain had the most scams. Around 12% of all BEP-20 tokens on the network were tied to scams, it reported. Comparatively, 8% of all ERC-20 tokens were connected with scams in the Ethereum ecosystem, making it second.

Layer 2 network Polygon was third with just 1.2% scam tokens and smart contracts.

BNB Chain was hit with a massive exploit earlier this month resulting in around $100 million in losses. The company suspended the network that it maintains is decentralized to prevent further losses. DeFiLlama reports that BNB Chain is the second largest in terms of total value locked with an 11.3% market share of $7 billion.

The scary statistics were not only related to BNB Chain. Solidus reported that there have been 188,525 smart contract scams detected over 12 blockchains as of October 10, 2022. Its Threat Intelligence tool claims that 15 scams are deployed across various networks every hour.

Furthermore, around $910 million in "scam-related ETH" has passed through centralized exchanges, it stated.

Solidus Vice President of Regulatory Affairs, Kathy Kraninger, said the big rug pulls such as the Squid token made the news. However, she cautioned that:

"The full picture stemming from our data shows the vast majority of these scams go unnoticed."

The firm is touting its new technology as a key weapon in the war against crypto scammers.

Crypto scams surging

Earlier this year, it was reported that crypto scams rose from the seventh riskiest in 2020 to the second riskiest type of fraud in 2021.

Social media continues to be a hotbed of disseminating crypto scams and search engines such as Google listing phishing websites only compound the problems.

Source: beincrypto

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Michelle

The Bank of Japan kept currency easing policy measures unchanged, as expected

The Bank of Japan (BoJ) unanimously decided to keep its short-term and 10Y targets at -0.1% and 0.0%, respectively. The dovish forward guidance on the statement reiterated that the central bank will take additional easing measures if necessary. Meanwhile, the BoJ upgraded its inflation outlook for the next two years. Now, it expects core inflation to rise quite sharply to 2.9% in FY22, then drop to 1.6% in FY23 and FY24. This suggests that this year's higher inflation is only transitory, and inflation will eventually return to below its 2% target.

The BoJ has upgraded its inflation outlook

Meanwhile, fiscal policy will play an important role in reducing the inflation burden

The government unveiled an extra budget plan of 29.1 trillion JPY (5.3% of GDP) to curb inflation pressures. The government will extend fuel tax cuts until next year and subsidise electricity fees by about 20% to households. In addition, the government will provide incentive programmes to encourage companies to be proactive in raising wages. The subsidy programme could help the BoJ earn more time until it sees the long-awaited signs of wage growth.

However, doing this will require the government to issue more debt, but at least domestic funding costs will be cheap, as long as the BoJ keeps its yield curve control (YCC) policy. Otherwise, when the time comes to raise rates, the government will see expensive paychecks, which can be even more painful.

FX: Dovish BoJ undermines intervention efforts

Unchanged and dovish BoJ policy will continue to undermine the Finance Ministry's FX intervention efforts to stabilise USD/JPY. One could argue that the government's fiscal stimulus package is also an acknowledgement that it cannot protect its consumers from a weaker yen and higher energy costs.

On Monday, the Ministry of Finance should release statistics for the size of FX intervention for the month of October. This could be close to $40bn, following the $20bn of intervention in September. Japan has around $1.1trn of FX reserves, so there will be no question of Japan running out of FX reserves. For reference, the Czech National Bank has spent 20% of its FX reserves this year on defending the koruna. But Japan's FX reserves are not limitless and we would expect this FX intervention campaign to continue in a strategic and judicious manner.

In practice and given our strong dollar view, we doubt Japanese authorities can prevent USD/JPY from retesting 150 later this year – and it could go even higher were the recent benign conditions in energy markets to take a turn for the worse.

Source: think.ing

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Glendon

Russia-Ukraine Conflict

President Yoon Suk-yeol said Friday that South Korea has never sent lethal arms to Ukraine, dismissing Russian President Vladimir Putin's warning that the relations between Seoul and Moscow would be ruined if Seoul did so.

"We have always been providing humanitarian and peaceful support to Ukraine in coalition with the international community, and have not provided any lethal weapons," Yoon told reporters on his way into the presidential office in Seoul.

"In any regard, however, this is a matter of our sovereignty and you should know that we are making efforts to have peaceful and sound relations with all countries in the world, including Russia."

Yoon made the comments when asked about Putin's remarks at the Valdai international discussion club meeting in Moscow, Thursday (local time).

"We have very good relations with the Republic of Korea, and we have always had the opportunity to have a dialogue with both the Republic of Korea and the Democratic People's Republic of Korea (North Korea)," Putin said. "But now we know that the Republic of Korea has decided to supply weapons and ammunition to Ukraine. This will destroy our relationship."

Putin continued by bringing up Russia's involvement in inter-Korean relations, saying "How would the Republic of Korea react if we resume cooperation with North Korea in this area? Would it make you happy?"

So far, the South Korean government has maintained its stance that it will only provide non-weapon supplies to Ukraine, such as bulletproof vests, helmets, tents, blankets and medical supplies.

During his virtual address to South Korea's National Assembly in April, Ukrainian President Volodymyr Zelenskyy asked South Korea to provide help so that the country could stand up against Russia, but Seoul responded by providing humanitarian aid, in apparent consideration of its relations with Moscow.

Despite Seoul's stance, there have been reports and allegations that South Korean shells, missiles and other types of weapons have been supplied to Ukraine via third countries.

In May, Canada, which was trying to supply artillery shells and ammunition to Ukraine, asked South Korea to export more than 100,000 155-millimeter shells, sparking speculation of indirect assistance. However, this did not result in a deal.

Foreign analysts also point out that Seoul's recent large-scale arms deals with Poland, which involve howitzers and battle tanks, are providing indirect assistance to Ukraine.

When asked about indirect or unintended weapon support to Ukraine, an official at South Korea's defense ministry said it is "very difficult" to answer questions on how weapons exported to other countries are being used.

Against this backdrop, Putin's remarks are interpreted as a potential warning to rule out any possibility of Seoul providing weapons or ammunition to Ukraine in the future, as well as preventing indirect assistance to Ukraine via Poland, by leveraging its relationship with North Korea.

Russia and North Korea have been strengthening their ties in recent years, following a summit between Putin and North Korean leader Kim Jong-un in April 2019. In July, North Korea recognized the independence of Donetsk People's Republic (DPR) and Luhansk People's Republic (LPR), which were created by Russia-supported separatists in Ukraine. Other than Russia itself, only North Korea and Syria have recognized the two entities as countries.

Seoul's presidential office is accepting Putin's remark as Russia's stance on this matter, rather than a warning, but noted that the matter of supporting Ukraine is up to South Korea.

"Our stance remains the same that we have not provided non-humanitarian aid or lethal weapons to Ukraine," an official at the presidential office said. "However, Yoon's comment on the sovereignty means that whatever type of support we provide to Ukraine, it is our decision."

Source: koreatimes

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Michelle

Alook at economic policy in Europe today offers a gloomy and rather puzzling picture. While inflation has been climbing for months and is now touching 10 percent in the eurozone (and running at unprecedented levels of more than 20 percent in some member states), the European Central Bank's policy rate did not get above zero until September this year. Until then, it had been idling in negative territory for the better part of 10 years.

And it is not just the eurozone. The non-euro European Union countries are also experiencing remarkably high inflation. In none of them does the policy rate exceed the current inflation reading. Real interest rates (the central bank rate minus inflation) therefore remain negative in many European countries, even more so than during the pandemic.

Governments, with some notable exceptions, are meanwhile continuing to amass new debt. Ratios for debt to gross domestic product (GDP) are comparable with those at the end of World War II not only in Europe, but throughout the developed world.

Anyone looking at this picture solely through the lens of macroeconomic textbooks would probably shake their head in disbelief. But economics alone is not enough to understand where we are today. On the contrary, a knowledge of economics may paradoxically get in the way.

When the rules do not work

At the beginning of the process of deeper European economic and monetary integration, the future euro area members adopted a set of rules intended to curb politicians' fiscal profligacy. To ensure discipline, government deficits and debts were capped at 3 percent and 60 percent respectively.

These relatively simple rules were constructed in 1997 and called the Stability and Growth Pact. They were mainly intended to ensure "monetary policy dominance" – a situation where central bank decision-making on interest rates and exchange rates is not paralyzed by irresponsible government fiscal policy and where debt problems in one part of the euro area do not prevent stabilization in other parts and do not easily spill over from neighbor to neighbor.

It soon became apparent, though, that it would not be all that simple. How can such strict and restrictive rules be enforced among sovereign states? With great difficulty.

Analyses have shown that compliance with the fiscal rules was only around 50 percent between 1998 and 2019. And this score excludes the Covid-19 pandemic years when the main fiscal policy rules were switched off throughout the EU.

No revisions of the original rules (the six-pack and two-pack reforms), no stronger enforcement mechanisms and no attempts to rewrite the rules to make them more consistent with the logic of the business cycle have led to greater compliance. What is more, these changes have made the rules so complex that even those who are meant to apply them no longer understand them. That is another reason the willingness to follow them has fallen.

This is having a fundamental impact of course. Monetary and fiscal policy experts know full well that the contagion of irresponsibility almost always goes from the government to the central bank, not the other way around. When the International Monetary Fund's experts travel around the world to determine where macroeconomic problems might be festering, they always start with the government and investigate its behavior, decisions and blunders. That is why it is often joked that IMF stands for "It's Mostly Fiscal" – the monetary fund is to a substantial extent a fiscal fund.

When public budgets go wrong, the government finds it more difficult to finance itself or even becomes unable to service its debt. The central bank takes a hit in the next round. It is implicitly or even explicitly required to intervene to help the government, calm the markets and reduce the unsustainably high returns on government debt. These are all things we are very familiar with in Europe.

In such a situation, the desirable and, in the early days of the euro, well-intentioned monetary policy dominance ends. Fiscal policy dominance then begins, which is highly undesirable because it ties the central bank's hands or even completely deprives it of the ability to act. It restricts it most of all when its actions are most needed and would be most effective, such as at times of high inflation.

Few doubt that the growing fiscal policy dominance is one of the reasons why monetary policy in the eurozone cannot be more aggressive in combating inflation, why conversely it had to be so overactive during the fiscal crisis in the south of the eurozone, and why it now has to come up with such highly unconventional measures as the Transmission Protection Instrument (TPI), which is intended to prevent growth in interest rates from having a stronger effect on riskier, more over-indebted member states.

Fiscal policy is now so dominant that the single currency area needs multiple monetary policies. Why Combating Inflation Will Not Be Easy in Europe_1

Why Combating Inflation Will Not Be Easy in Europe_1

Why Combating Inflation Will Not Be Easy in Europe_2

The long run as the sum of a series of short runs

Looking back at the single monetary policy, this is exactly what we see. Through gradual, stepwise breaches of the rules, deviations from standards and noncompliance with obligations, first by just some members and then progressively by the majority, the monetary integration project has arrived at the situation it wanted to avoid. The excessively large debts of the largest borrowers – and the biggest single borrower in any country is the government – are destroying monetary dominance and, as seen so many times in history, giving rise to government and fiscal policy dominance.

In the end, fiscal policy is more acute, more immediate and more understandable, as it is made by elected politicians directly for their voters. It is thus typically focused more on the short run. But monetary policy should not be like that. The Stability and Growth Pact was designed as a long-run tool.

There may be a good reason for each "crisis." But if we are always able to define at least some sort of crisis, we also always have a good reason not to look to the long run.

As the last 20 years have shown, however, the long run is only ever the sum of a succession of short runs. And in those short runs there are always enough good reasons to borrow a little more than we have, spend a little more than would be responsible and sacrifice a little more of the future for the present than would be sensible.

Politicians typically speak of a "new reality" that makes it impossible at a particular moment to respect the rules of responsibility. Such "new realities" have included the great financial crisis, then the fiscal crisis and later the migration crisis. Recently we have had the pandemic crisis, and now there is the energy/war crisis. And in the absence of those, it is the climate crisis. It is always something.

There may be a good reason for each "crisis." But if we are always able to define at least some sort of crisis, we also always have a good reason not to look to the long run.

The super short-run approach to budgets was summed up brilliantly by Charlie McCreevy, the former Irish minister of finance and later European commissioner: "When I have the money, I spend it. When I do not, I do not." We have taken his maxim to the next level: "When I do not have the money, I borrow it."

The current energy crisis is another example of all this. There is no doubt that the events of recent months have sent energy prices to dizzying heights. But instead of addressing the roots of these problems, policymakers are again only able to tackle the immediate impacts in the short term.

In Europe, this means compensating consumers or cutting indirect taxes, measures that are very costly and sending budgets back into large deficits.

What has almost been forgotten in the current turmoil is that when we are truly at war, taxes go up, not down. The welfare state model, however, does not allow this.

Guns or butter? Both

Economists have long been aware of the "guns or butter" dilemma – the situation where, in difficult times, a nation must choose whether to spend public money on defense and security (including energy security) or on maintaining current wealth.

It is a trade-off, but it is one which in Europe we are "resolving" by offering the electorate both weapons and butter – by taking on more debt.

Countries are copying each other when it comes to adopting measures to "mitigate" the impacts of inflation. But these measures are often purely inflationary, not anti-inflationary. They are merely increasing the quantity of money in the economy. Governments are supplying this money by borrowing, and the resulting debt is being financed either by commercial banks or by central banks through the creation of new money.

The European debt crisis after 2010 showed that when it comes to keeping our houses in order, we are not as harsh on ourselves as we are on the neighbors we have lent money to.

All this is being exacerbated by the lack of anyone to keep discipline. The developed countries still have a dominant influence in the IMF. After a fashion, they act as policy enforcers regarding less developed countries, as they have the political and financial leverage to do so.

But how can the developed countries be kept in line? Who among them will enforce rules and responsibility? The European debt crisis after 2010 showed that when it comes to keeping our houses in order, we are not as harsh on ourselves as we are on the neighbors we have lent money to.

This thorny question remains unanswered if we refuse to let the market enforce discipline and if we always smooth its interventions with central bank assistance because we fear the severity of the punishment.

The urgency of the issue of enforcing responsibility is being increased by the bad example effect. In the EU, more and more finance ministers from traditionally fiscally conservative countries are logically asking: Why should we keep our debt below 60 percent of GDP when most large countries are above that criterion, the average debt-to-GDP ratio in the EU is 90 percent and no one is getting into trouble?

The contagion of irresponsibility has not ended. Quite the reverse: it is happening before our eyes. Fiscal consolidation is constantly being deferred to the next government.

The fact that we have no answer also indicates how long we may ultimately be fighting inflation. We have tied the hands of monetary policy and are continuing to untie those of fiscal policy. So, unless there is a strong demand shock, it may truly take a long time to rein in inflation.