An uptick in military drills around Taiwan and bans on a handful of imports imposed by Beijing are not likely to have a significant impact on foreign investment and trade in and out of Taiwan, although some companies may be looking to diversify their supply chains.

An uptick in military drills and activity around Taiwan, including live fire drills, in the wake of U.S. House of Representatives Speaker Nancy Pelosi’s visit on Aug. 2, is unlikely to have a significant adverse impact on production, exports, travel and investment in Taiwan, say legal experts.

“So far, we haven’t seen any effect upon our clients, although there may be efforts for companies to get more geographic diversity with regards to semiconductor chips,” John Eastwood, a partner at Eiger Law, a law firm based in Taiwan, told ALB.

Pelosi’s rare visit sparked furious responses from the PRC government and led to a series of military drills and exercises in the area on Aug. 4, drills, and exercises of unprecedented size. Beijing also banned trade of bread, fruits, and packaged tea.

The trade bans are not likely to have a significant impact on Taiwan’s trade, given that agricultural products accounted for only 0.6 percent of total exports in 2021, according to DBS Group.

In the near term, the growth impact of new trade restrictions should be less than 0.1 percent of Taiwan’s GDP, Goldman Sachs Group economist including Goohoon Kown stated in a note. The note also said, however, that a wider disruption could be “highly damaging” to Taiwan’s economy.

This would be the case if similar bans were to be imposed on more critical products, such as semiconductor chips.

“The concentration of tech exports in cross-strait trade, Taiwan’s dominance in the foundry business and its prevalence in processing trade, suggests that any broad disruptions in cross-strait trade would be highly disruptive to global tech supply chains,” the economists wrote.

Indeed, the bigger concern for companies is whether Beijing will expand the ban to other products, such as semiconductor chips, or whether shipments will be disrupted by military exercises around the island.

“What needs to be watched is whether Beijing will broaden the trade bans into the manufacturing sector, particularly semiconductors/electronics going forward,” said Ma Tieying, senior economist at DBS.corporations

However, for the time being, companies are staying put. Eastwood of Eiger notes that “none of our clients are getting out of Taiwan, and we are wrapping up a series of due diligence for companies that are coming into Taiwan. I am not seeing any companies changing their plans.”

Still, some companies may shift some of their operations as part of diversification strategies.

“Taiwan-based companies with manufacturing facilities in China may accelerate the trend of recent years to move manufacturing to other countries in the region that have sufficient infrastructure and lower worker wages,” Eastwood says.

The value of foreign direct investment (FDI) in Taiwan reached $9 billion in the first half of 2022, 275 percent more than a year earlier, according to Taiwan’s Ministry of Economic Affairs (MOEA).

The green energy industry, which includes semiconductors and products used in wind power, were the two major attractors of FDI to Taiwan in 2021. Taiwan is the source of about 65% of the world’s high-end semiconductors and the economies of Taiwan and mainland China are closely intertwined, with the electronics industries “highly dependent on each other.”

Mainland China depends to a large extent on Taiwanese semiconductors, which accounted for about a third of mainland China’s semiconductor imports in 2020.

The mainland’s comprehensive shift towards information technology and digitalisation along with the rapid development of emerging technologies such as 5G, smart cars, artificial intelligence and the Internet of Things have also driven demand for more semiconductor chips.

Mainland China imported 635.48 billion chips in 2021, an increase of 16.9 percent year-on-year, and the import value reached nearly $432.6 billion, up 23.6 percent year-on-year.

The COVID-19 pandemic likely had a greater impact on the profits of multi-national corporate and the confidence of global investors, especially in traditional energy, heavy industry and construction, says the MOEA. On the other hand, FDI in pharmaceuticals, information technology, renewable energy and electric vehicles increased.

The MOEA says geopolitics, pandemic-related disruptions to supply chains and demand for higher Environmental, Social, and Governance (ESG) standards, are among the main factors likely to affect FDI.

For example, ongoing COVID-19 outbreaks have disrupted supply chains for the semiconductor industry.

Another consideration is the ongoing global tax regime reform, which may prompt multinational companies to rethink their choices, the local labour force, supply chains, infrastructure and tariff conditions for exports to Europe and the U.S.

On the other hand, joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership Agreement could significantly reduce regional or bilateral trade and investment barriers.