Here’s what will happen to the markets and the economy if China attacks Taiwan

Russia’s invasion of Ukraine this year Troubled global energy markets And the Cause food shortage in some parts of the world. turbulence can condenses during winterwith rising energy costs Caused a recession in Europe weakening the economies of the United States and many other countries. A broader and more destructive conflict is still possible.

A war involving China would be much worse. House Speaker Nancy Pelosi Last visit to Taiwan Enraged by China’s communist government, it launched missiles over the island and conducted threatening military exercises designed to remind the world that China plans to one day annex Taiwan, either peacefully or by force.

If it involved an armed conflict, it would likely cause more damage to the global economy and global markets than any military confrontation since World War II. Unlike Russia or Ukraine, China’s robust manufacturing sector is closely linked to economies everywhere, including the United States and Europe. The seas around China and Taiwan are among the world’s busiest shipping lanes.

Disrupting all that trade in wartime would be devastating. Before the Russian invasion of Ukraine, for example, American trade with Russia was $36 billion annually. Trade with Ukraine was $4 billion annually, for a total of $40 billion of direct trade that was compromised by the war.

Taiwan President Tsai Ing-wen greets military generals at a ceremony in Taipei, Taiwan, June 28, 2022. REUTERS/Ann Wang

US trade with China is $656 billion annually, including imports of consumer products into every American home and components in many goods bulked in the United States. US trade with Taiwan is $114 billion, and this includes some of the most advanced semiconductors in the world. The combined US trade with China and Taiwan is 10 times the US trade between Russia and Ukraine, and it includes products far more important to the US economy. The same interrelationships exist between China, Taiwan and most of the world’s developed economies.

In the new book “Danger Zone: The Next Conflict with China,” Hal Brands and Michael Beckley argue in the event of war, “the economic fallout would be catastrophic,” and add, “A global depression would be guaranteed.”

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Taiwan separated from China in 1949, at the end of Civil War in Chinaand now operates as an independent democracy. However, China considers Taiwan a breakaway republic, and President Xi Jinping insists that “reunification” with Taiwan is inevitable. Since Taiwan is not interested, China will have to force its reunification.

A fatal blow to the prosperity of the United States

The United States has a deliberately ambiguous policy toward Taiwan, intended to imply that the U.S. military will help defend Taiwan if China attacks it, without explicitly saying so. President Biden clarified that policy in May, when he said yes, the United States He will defend Taiwan If China invaded. While this would be Taiwan’s best chance to survive as an independent democracy, it could also be the worst case scenario for the economic disaster that would result from a war on Taiwan.

The RAND research organization estimates that a war involving China and the United States would cut 5% of the $23 trillion US economy, and that would be the biggest blow to American prosperity since the Great Depression of the 1930s. In 2009, amid the Great Recession, the gross domestic product of the United States declined by only 2.6%. The S&P 500 stock index reached 2009 lows 55% below its previous peak, which may just be a taste of the losses investors may be expecting from the US-China war.

Chinese President Xi Jinping speaks upon his arrival via high-speed rail, ahead of the 25th anniversary of the handover of the former British colony to Chinese rule, in Hong Kong, China, June 30, 2022. Saleem Stetaiti/Paul via Reuters

Chinese President Xi Jinping speaks upon his arrival via high-speed rail, ahead of the 25th anniversary of the handover of the former British colony to Chinese rule, in Hong Kong, China, June 30, 2022. Saleem Stetaiti/Paul via Reuters

According to Rand, China’s $17 trillion economy will suffer much more, with GDP falling by as much as 25%. As with the Russian economy after the invasion of Ukraine, the damage is likely to come from several directions: economic sanctions imposed by the United States and other allied countries, attacks on Chinese infrastructure by Taiwan, the cost of continuing a costly and possibly protracted war, and the separation of China from many of international regulations.

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Taiwan’s relatively small $670 billion economy will likely suffer the most, as the nation has struggled for its survival. Ukraine, in a similar existential battle at the moment, may suffer a devastating catastrophe 45% decrease in production This year as it struggles to expel the invading Russian forces. In Taiwan, the semiconductor industry is so important that capturing it intact could be a first-day goal for the Chinese military, if it were to conquer it. It is also possible that Taiwan and its allies will destroy modern manufacturing plants, to keep this vital technology out of Chinese hands.

“You could make a rational argument that the West would be in a much better position if the Taiwanese chip industry were a smoke hole in the ground rather than under Chinese control,” said a Stanford researcher. Herbert Lane recently told Ben Wershkull of Yahoo Finance.

Gray Zone Tactics

These scenarios assume that the United States would intervene on behalf of Taiwan if China launched a military attack, resulting in a terrifying war between two nuclear-armed nations. There could be other results. For one thing, China may never attack Taiwan militarily, and instead choose “gray area tactics Like electronic warfare and ongoing military exercises that make it more dangerous and expensive for other countries to do business with Taiwan. If China takes this approach, it may cautiously avoid the kind of actions that could lead to US intervention.

If there is a shooting war, Americans should not assume that they will end up on the victorious side. First, it is not 100% clear that a US president, whoever he is, would be willing to risk the lives of thousands of Americans in Asia by committing ships and planes to a war against China on Taiwan’s behalf. There are ways to “defend Taiwan” without sending US service members to war, such as by providing the kind of hardware and intelligence the US is now supplying to Ukraine.

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If the United States went to war, victory would not be a foregone conclusion. China has been aggressively building its army for two decades, deliberately creating a force capable of defeating the United States in a war on Taiwan. China will fight its shores, while America’s supply lines will stretch over the vast Pacific Ocean.

Taiwan’s military is the first line of defense, and the island’s forces are not as prepared for war as China might be. One concern is a A potential army of Chinese spies is an integral part of Taiwan’s national security apparatus. The vaunted US military may find itself unprepared. As Brands and Beckley point out, American military power is “on the cusp of decline,” as the Pentagon pulls in hordes of industrial age warships and bombers. Newer and better combat systems are coming, but not for a while.

“Mr. Shi 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 middle and late 2020, he will have the best chance of getting the job done.”

Markets showed no concern about Pelosi’s visit to Taiwan or China’s threatening response. The S&P 500 rose in the week that Pelosi visited Taiwan and sent China missiles flying, as investors interpreted chest bulge as a situation. There is no concrete sign that China is preparing for an actual war or that President Xi would be willing to plunge his nation into a downward spiral from which he himself may not escape.

Maybe that’s true. But many analysts believed that Russian President Vladimir Putin would never risk the West’s wrath by invading Ukraine, and Putin proved them wrong. There is no need to worry until the moment the invading forces cross the border. Then there is everything to worry about.

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