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  First Thoughts

    Dan Gilmore.


    Supply Chain Digest

Feb. 24, 2023

Nearing Supply Chain Armageddon?

If China Crosses this Red Line, the World May never be the Same, Author Says


Regular SCDigest readers will know we have kept pretty close tabs on two areas of geo-political danger that could upend supply chains, to say the least.

The first would be China's activities in the past 5 years in the South China Sea, where China claims sovereignty (contrary to international law) over large areas of the ocean, building fake islands across the region that it is loading with military equipment. Every few months or so, US Navy ships sail through these waters, triggering condemnation and warnings from China - and sometimes China Navy ships as escorts to US vessels.

More recently, tensions over Taiwan have risen to perhaps all-time highs, with some convinced China is readying plans for an invasion soon.

The other of course is Russia's invasion of Ukraine, coming one year ago tomorrow as I write this. Few I think would have predicted then that the war would still be raging 12 months later. The war has caused global supply chain disruptions in many areas, from wheat to natural gas and more.

Gilmore Says....

Williams says: If Xi arms Russia and the West retaliates with sanctions against China, hardliners in Beijing will argue that now is the ideal time to annex Taiwan.

What do you say?

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Just yesterday, China's top diplomat, Wang Yi, met Putin in Moscow to reaffirm their "ongoing co-operation."

"If China weighs in with open support for the Russian dictator's beleaguered army, then our whole way of life could be threatened," Williams writes.

 Why? Such support would "cross a red line," Williams says, in which "China's president Xi will be declaring China an implacable enemy of the democratic world, especially the US - while the war in Ukraine will be indefinitely prolonged," Williams predicts.

The West would have to react, Williams says, which could lead to severing our trade ties with the Chinese - an economic earthquake that would dwarf anything seen with Russia over Ukraine.

 "We are hopelessly reliant on Chinese electronics, engineering and much else," Williams correctly points out, adding "There is barely a supply chain that does not run through China and we in the West have been too slow to reduce critical dependencies."

 One example: despite shifting some of its production to India and Vietnam, Apple relies on China for 95% of its iPhone output. The supply chain created to build these smartphones is more complex and highly tuned than any seen in any other industry.

It would be impossible to quickly rebuild outside of China. That could lead to phone shortages - and soaring costs.

That if it even could be done. Electronics, batteries, defense equipment and more today require use in manufacturing of "rare earth metals" -17 obscure minerals (neodymium, dysprosium, yttrium, cerium, etc.) that are essential to modern life.

China currently mines as much as 63% of the world's rare earths and performs around 85% of the processing, which is expensive and messy, Williams notes, so messy Western governments haven't wanted the process in their countries despite the perilous supply situation that is the result. But without these materials, Western defense systems could be irreparable when they break down, along with creating shortages of many other vital products.

Then there is this, Williams says: If Xi arms Russia and the West retaliates with sanctions against China, hardliners in Beijing will argue that now is the ideal time to annex Taiwan.

Whether the US jumps in to defend Taiwan is unknown, but even if not the damage to Taiwan's ability to make semiconductors, of which it supplies some 67% of the world's total, would be devastated. And you thought there was a chip shortage in 2022? Trivial compared to this, causing prices of many goods to soar or be simply unavailable, further tanking the economy.

There's more, but you get the picture. We are in dangerous times - and Williams ends by saying if "Xi Jinping crosses that red line, the world will change forever."

What is your reaction to the possibility of supply chain Armageddon? Let us know your thought at the Feedback section below.


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