Here’s what would happen to markets and the economy if China attacked Taiwan

Russia has invaded Ukraine this year Global energy markets were in a frenzy And There was a shortage of food In some parts of the world. May be interrupted Intensify in winterWith rising energy costs Creating recession in Europe and weakening the economies of the United States and many other nations. A wider and more destructive conflict is possible.

A war involving China would be worse. Speaker of the House Nancy Pelosi A recent visit to Taiwan This angered China’s communist government, which fired missiles at the island and conducted threatening military exercises meant to remind the world that China plans to annex Taiwan someday, whether 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. Unlike Russia or Ukraine, China’s powerhouse manufacturing sector is deeply connected to economies everywhere, including the United States and Europe. The seas around China and Taiwan are the world’s busiest shipping lanes.

A wartime disruption of all that trade would be devastating. Before Russia invaded Ukraine, for example, US trade with Russia was $36 billion per year. Trade with Ukraine was $4 billion per year, with a total of $40 billion directly threatened by the trade war.

Taiwan President Tsai Ing-wen greets military commanders during a ceremony in Taipei, Taiwan on June 28, 2022. REUTERS/An Wang

US trade with China is $656 billion annually, including imports of consumer products for every American household and components of many goods assembled in the United States. US trade with Taiwan is $114 billion and includes some of the world’s most advanced semiconductors. Combined, US trade with China and Taiwan is 10 times that of US trade with Russia and Ukraine, and includes products more important to the US economy. A similar interdependence exists in China, Taiwan, and most of the world’s advanced economies.

In the event of a war, “the economic fallout would be devastating,” argue Hal Brands and Michael Beckley in the new book “Danger Zone: The Coming Conflict with China.” He adds, “A global recession will be guaranteed.”

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At the end of 1949, Taiwan broke away from China Chinese Civil War, and now functions as an independent democracy. However, China considers Taiwan a renegade republic and President Xi Jinping insists that “reunification” with Taiwan is inevitable. With Taiwan not interested, China would have to be forced to regroup.

A big blow to America’s prosperity

The United States has a deliberately vague policy toward Taiwan, meaning that the U.S. military will help defend Taiwan in the event of an invasion by China, without explicitly saying so. President Biden made that policy clear in May, when he said yes, the United States Will defend Taiwan If China invades. While this is Taiwan’s best chance to survive as an independent democracy, it could also be the worst-case scenario for the economic disaster caused by a war on Taiwan.

The Rand Research Institute estimates that a war between China and the United States would cut 5% of the $23 trillion US economy, the biggest blow to US prosperity since the Great Depression of the 1930s. In 2009, during the Great Recession, US gross domestic product fell by just 2.6%. The S&P 500 stock index is down 55% from its previous peak in 2009, which will be just a taste of the damage investors expect from the US-China war.

Chinese President Xi Jinping speaks during his arrival by high-speed rail ahead of the 25th anniversary of Chinese rule in the former British colony on June 30, 2022, in Hong Kong, China.  Bridge via Selim Chatty/Reuters

Chinese President Xi Jinping speaks during his arrival by high-speed rail ahead of the 25th anniversary of Chinese rule in the former British colony on June 30, 2022, in Hong Kong, China. Bridge via Selim Chatty/Reuters

According to Rand, China’s $17 trillion economy would suffer even more if its GDP fell by 25%. As with the Russian economy following an invasion of Ukraine, the damage is likely to be multidirectional: economic sanctions imposed by the United States and other allies, attacks on Chinese infrastructure by Taiwan, the cost of sustaining a costly and perhaps protracted war, and China’s disengagement from many international systems.

Taiwan’s relatively small $670 billion economy will probably suffer the most, as the nation fights for its survival. Ukraine, currently in a similar existential battle, could suffer a devastating 45% reduction in production Struggling to repel invading Russian forces this year. In Taiwan, the semiconductor industry is so important that capturing it intact may one day be a goal of China’s military, should it invade. Taiwan and its allies could dismantle sophisticated fabrication plants to keep this vital technology out of Chinese hands.

“You could make a logical argument that Taiwan’s chip industry would be better off with a smoking hole in Western territory than under Chinese control,” said a Stanford University scholar. Herbert Lin recently told Ben Werschkul of Yahoo Finance.

‘Grey Zone’ Tactics

The United States is presumed to intervene on Taiwan’s side if China launches a military attack, setting off a deadly war between the two nuclear-armed nations. There may be other consequences. For one thing, China could never attack Taiwan militarily, instead “Gray Zone” strategy Such as cyber warfare and ongoing military exercises that make it more dangerous and expensive for other nations to do business with Taiwan. If China takes this approach, it can carefully avoid the kind of threshold actions that could lead to American involvement.

If there is a shooting war, Americans should not assume that they will win. First, it’s not 100% clear that an American president, whoever he or she is, would be willing to risk thousands of American lives in Asia by building ships and planes to wage war against China on Taiwan’s behalf. There are ways to “defend Taiwan” without sending American service members to war, such as providing the hardware and intelligence that the United States now provides to Ukraine.

If the United States goes to war, victory is hardly a foregone conclusion. China has been aggressively building up its military for two decades and is deliberately building a military capable of defeating the United States in a war on Taiwan. While China would be fighting on its own shores, American supply lines would stretch across the vast Pacific Ocean.

Taiwan’s own military is the first line of defense, and it is not clear that the island’s military is as ready for war as China’s. A concern is a A potential army of Chinese spies embedded in Taiwan’s national-security apparatus. Even an enthralled American military may find itself unprepared. As Brands and Beckley put it, as the Pentagon retires its fleet of industrial-era warships and bombers, US military power is “on the verge of sinking.” New and better combat systems are coming, but not for a while.

“Mr. Xi has repeatedly said that the task of ‘liberating’ Taiwan cannot be passed down from generation to generation,” Brands and Beckley recently wrote in the Wall Street Journal. “In the mid to late 2020s, it will have the best chance to accomplish that mission.”

Markets showed no concern about Pelosi’s visit to Taiwan or China’s threatening response. The S&P 500 soared the week Pelosi visited Taiwan and China sent missiles flying, as investors interpreted the chest pounding as a gesture. There is no concrete sign that China is ready to start an outright war, or that President Xi is ready to plunge his nation into a crisis it might not survive on its own.

That’s probably right. But many analysts believed that Russian President Vladimir Putin would not risk the wrath of the West by invading Ukraine, and Putin proved them wrong. Nothing to worry about until the invading army crosses the border. Then there is everything to worry about.

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