Russia’s invasion of Ukraine this year has disrupted global energy markets and caused food shortages in several parts of the world. The turmoil could intensify in the winter, and soaring energy costs could trigger a recession in Europe, weakening the economies of the United States and many other countries. Wider and more devastating conflicts are likely to continue.
A war involving China would be orders of magnitude worse. House Speaker Nancy Pelosi’s recent visit to Taiwan has infuriated the Chinese Communist government. The government has launched missiles over the island and conducted menacing military drills. This is to remind the world that China plans to one day annex Taiwan, either peacefully or by force.
If it involves armed conflict, it will probably do more damage to the global economy and global markets than any military conflict since World War II. The sector is closely tied to economies everywhere, including the United States and Europe. The waters around China and Taiwan are her one of the busiest shipping routes in the world.
All that trade chaos in wartime would be devastating. For example, before Russia invaded Ukraine, US-Russia trade was $36 billion a year. Trade with Ukraine is $4 billion annually, with a total of $40 billion of direct trade endangered by the war.
US trade with China is worth $656 billion annually. This includes imports of consumer goods in all US households and parts of many goods assembled in the US. US-Taiwan trade is her $114 billion, which includes the world’s most advanced semiconductors. Combined, US trade with China and Taiwan is ten times her US trade between Russia and Ukraine, and involves products that are far more important to the US economy. The same interdependence exists between China, Taiwan and most of the world’s developed countries.
Hal Brands and Michael Beckley argue in their new book, Danger Zone: A Looming Clash with China, that if war were to occur, “the economic impact would be disastrous.” “A global recession is almost guaranteed.”
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Taiwan separated from China after the Chinese Civil War in 1949 and now functions as an independent democracy. But China sees Taiwan as a rebellious republic, and President Xi Jinping has argued that a “reunification” with Taiwan is inevitable. Taiwan has no interest, so China must force reunification.
A major blow to US prosperity
The United States has a deliberately vague policy toward Taiwan, intended to imply that U.S. forces will help defend Taiwan if China attacks it. President Biden clarified that policy in May, saying the United States would defend Taiwan if China invaded. While that is Taiwan’s best chance of survival as an independent democracy, it could also be the worst-case scenario of the economic catastrophe that a war over Taiwan would bring.
Rand’s research institute estimates that a war involving China and the United States would cut the $23 trillion U.S. economy by 5%, which would be the biggest blow to U.S. prosperity since the Great Depression of the 1930s. In 2009, in the midst of the Great Recession, US Gross Domestic Product fell by just 2.6%. The S&P 500 stock index hit its trough in 2009, putting him 55% below its previous peak.
According to Rand, China’s $17 trillion economy will be hit even harder as GDP plummets by 25%. As with the Russian economy after the invasion of Ukraine, the damage is likely to come from several directions. Economic sanctions by the United States and other allies, attacks on China’s infrastructure by Taiwan, the cost of sustaining a costly and possibly protracted war, and China’s decoupling from much of the international system.
Taiwan’s relatively small $670 billion economy will probably suffer the most, as the country fought for its very existence. Ukraine is currently in a similar struggle for survival, but as it struggles to dislodge invading Russian forces, production could withstand her devastating 45% drop this year. In Taiwan, the semiconductor industry is so important that capturing it unscathed could be the Chinese military’s first day goal if China invades. It’s also possible that Taiwan and its allies will destroy a state-of-the-art manufacturing plant to keep this vital technology out of China’s hands.
Herbert Lin, a researcher at Stanford University, recently told Yahoo Finance’s Ben Werschkul:
“Gray zone” tactics
These scenarios assume that the United States will intervene on Taiwan’s behalf should China launch a military strike and a horrific war between the two nuclear powers erupts. There may be other results as well. For one thing, China will never attack Taiwan militarily. Instead, it opted for “gray zone” tactics such as cyber warfare and ongoing military exercises, making it more risky and costly for other countries to do business with Taiwan. may deliberately avoid certain marginal behaviors that may lead to
In the event of a shootout, Americans should not assume that they will win. First, whether the president of the United States would be willing to risk the lives of thousands of Americans in Asia by throwing ships and planes into the war against China on behalf of Taiwan. he is not 100% clear. There are ways to “protect Taiwan” without sending US military personnel to war, such as providing hardware and information like the US currently supplies to Ukraine.
Victory is unlikely to be predetermined if the United States actually goes to war. In her two decades of aggressive military build-up, China deliberately built the power to defeat the United States in the war over Taiwan. China will fight on its own coasts, and America’s supply lines will stretch across the vast Pacific Ocean.
Taiwan’s military is the first line of defense, and it is not clear whether the island’s military is as ready for war as China’s. It is possible that The vaunted U.S. military could also find themselves unprepared. As Brands and Beckley point out, U.S. military power is “descending” as the Pentagon retires its fleet of industrial-age warships and bombers. A newer, better combat system is coming, but not for a while.
“Mr. Xi has repeatedly stated that the task of ‘liberating’ Taiwan cannot be passed from generation to generation,” Brands and Beckley recently wrote in The Wall Street Journal. “He will have the best chance of accomplishing that mission in the mid-to-late 2020s.”
The market has shown no concern over Pelosi’s visit to Taiwan or China’s threatening response. The S&P 500 rose the week Pelosi visited Taiwan and China launched missiles. There is no concrete indication that China is preparing to launch an actual war, or that President Xi Jinping is willing to plunge his country into a havoc that he himself may not survive.
That’s probably correct. But many analysts believe Russian President Vladimir Putin would never risk incurring the wrath of the West by invading Ukraine, and Putin has proven them wrong. Don’t worry until the moment an invading force crosses the border. Then there is everything to worry about.
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