If China were to go to war with Taiwan, one of the many negative consequences would be an immediate and severe disruption to ocean shipping. The waters around Taiwan are some of the busiest in the world for commercial vessels, and the Port of Kaohsiung, Taiwan’s busiest, is a top-20 port globally.
As such, shipping lines have a lot to lose if China’s aggressive rhetoric turns into aggressive action. Wars that affect ocean trade are not as common as they used to be (thanks largely to the global peacekeeping presence of the U.S. Navy), but they still do happen from time to time.
To mitigate risk, the maritime insurance industry designates areas of the sea according to the likelihood of war. Currently listed sites include Ukraine, the Strait of Hormuz, Libya, and Yemen. Insurers have taken note of China’s military exercises following Nancy Pelosi’s visit to Taiwan. Elisabeth Braw of the American Enterprise Institute writes for Foreign Policy:
I asked Neil Roberts—head of marine and aviation at Lloyd’s Market Association, which represents underwriters, and secretary of the Joint War Committee (JWC), a London-based body that classifies the world’s waters according to risk—how concerned insurers are. Higher risk means more expensive insurance. And if the JWC places a body of water in its highest-risk category—as it did with the Sea of Azov and the Russian and Ukrainian parts of the Black Sea on Feb. 15—the terms of cover have to be confirmed through negotiation instead of slotted into preexisting arrangements, making it difficult to obtain insurance at all.
The maritime insurance industry got the Russian invasion right when many commentators were still doubtful of Putin’s resolve to invade. The simple explanation of that: Commentators don’t lose money for being wrong, but maritime insurers would have been in deep trouble if they were wrong. It’s not just a matter of being overly cautious, either. Insurers would have also been in trouble if they had jacked up rates only for nothing to happen.
What are they saying now about Taiwan? Braw writes:
As of Sunday, the JWC had not elevated any waters around Taiwan to its highest-risk category. In fact, those waters are not listed by the JWC at all, which means they are not considered to pose an elevated risk to shipping, though it goes without saying that crews have been informed of the exercise areas and are expected to avoid them. “Underwriters were naturally asking questions but were reassured by JWC’s advisors, who said that there are no real signs of preparation or intent to follow through [on military attacks against Taiwan],” Roberts told FP. “If there were other signs like a media blackout, that would indicate differently. JWC considers the situation to be as it appears: an exercise, albeit amidst aggressive rhetoric.” China’s intent seems to be to send a message to Taiwan and the United States, not undertake a hugely difficult and highly risky amphibious invasion or even attempt to seize outlying islands like Kinmen. “There are navigation warnings that shipping companies will take into account, but access to Taiwan’s ports is entirely possible with just some extra awareness needed,” Roberts added.
So far, that judgment was proven correct. Sky News reported that ships were able to navigate around the Chinese military activities without much difficulty:
Lloyd’s List Intelligence reports that there has been no reduction in port calls nor has there been any further reports of disruption to ports in Taiwan.
The impact is largely being felt through detours around Taiwan’s eastern coast, which analysts say are inconvenient but manageable.
“Delays are obviously never good and especially not for a supply chain that has been riddled with delays for a long time,” said [BIMCO shipping analyst Niels] Rasmussen. . . .
“Small speed increases in the vessels’ onward schedule should be able to make up for these delays during the next month or two.”
Rasmussen’s last point about speed is important. Environmentalists are pressuring the shipping industry to reduce its carbon emissions. The International Maritime Organization, a U.N. agency, wants to reduce the industry’s emissions by 50 percent by 2050, compared to 2008 emissions. New ships are powered by cleaner-burning fuels, such as liquefied natural gas, but the only practical way for most existing ships to pollute less is by slowing down.
The ability to decide ship speed ought to belong to the shipping companies, not to the environmentalist zealots at the U.N. The advantages of flexibility are on display right now. With high fuel prices, ships have slowed down to save money. Then, when something like the Taiwan incident pops up, ships are able to take detours at higher speeds to maintain their schedules. Taking that flexibility away from carriers would make situations such as this much more disruptive and costly.
Insurance markets certainly aren’t perfect, but insurers have better incentives to get difficult questions about risk correct than just about anyone else. They see the risk of war over Taiwan as being very low, so that’s good news.