This is what would happen to the markets and the economy if China attacked Taiwan

The Russian invasion of Ukraine this year has choppy global energy markets Y caused food shortages in some parts of the world. The interruptions could intensify during winterwith sky-high energy costs causing a recession in Europe and weakening the economies of the United States and many other nations. A broader and more devastating conflict remains possible.

A war involving China would be much worse. from House Speaker Nancy Pelosi recent visit to taiwan it angered China’s communist government, which has launched missiles on the island and held threatening military exercises meant to remind the world that China plans to annex Taiwan one day, either peacefully or by force.

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

The interruption of all that trade during the war would be devastating. Before the Russian invasion of Ukraine, for example, US trade with Russia was $36 billion a year. Trade with Ukraine was $4 billion per year, for a total of $40 billion in direct trade endangered by the war.

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

Taiwan’s 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 per year, including imports of consumer products in every American household and components in many goods assembled in the United States. US trade with Taiwan is $114 billion, and that includes some of the world’s most advanced semiconductors. Combined, US trade with China and Taiwan is 10 times US trade between Russia and Ukraine, and involves products much more crucial to the US economy. The same interdependencies exist between China, Taiwan and most of the world’s advanced economies.

In the event of a war, “the economic consequences would be disastrous,” argue Hal Brands and Michael Beckley in the new book “Danger Zone: The Coming Conflict with China.” And they add: “A global depression would be almost guaranteed.”

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Taiwan separated from China in 1949, at the end of chinese civil war, and now functions as an independent democracy. However, China considers Taiwan a rogue republic and President Xi Jinping insists that “reunification” with Taiwan is inevitable. Since Taiwan is not interested, China would have to force reunification.

A huge blow to US prosperity.

The United States has a deliberately vague policy toward Taiwan, intended to imply that the US military would help defend Taiwan if China attacked, without saying so outright. President Biden clarified that policy in May, when he said yes, the United States would defend taiwan If China invaded. While that would be Taiwan’s best chance of surviving as an independent democracy, it may also be the worst case scenario for the economic catastrophe that a war over Taiwan would bring.

The Rand research organization estimates that a war involving China and the United States would reduce the $23 trillion US economy by 5%. That would be the biggest blow to American prosperity since the Great Depression in the 1930s. In 2009, in the midst of the Great Recession, US gross domestic product fell just 2.6%. The S&P 500 stock index bottomed out in 2009 55% below its previous high, which could be just a taste of the losses investors might expect from a US-China war.

Chinese President Xi Jinping speaks as he arrives via high-speed train ahead of the 25th anniversary of the former British colony's handover to the Chinese government, in Hong Kong, China, 30 June 2022. Selim Chtayti/Pool via REUTERS

Chinese President Xi Jinping speaks as he arrives via high-speed train ahead of the 25th anniversary of the former British colony’s handover to the Chinese government, in Hong Kong, China, 30 June 2022. Selim Chtayti/Pool via REUTERS

China’s $17 trillion economy would suffer much more, with its GDP falling by as much as 25%, according to Rand. As with Russia’s economy after the Ukraine invasion, the damage would likely come from several directions: economic sanctions imposed by the United States and other allied nations, 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 would likely suffer the most as the nation struggled for its own survival. Ukraine, in a similar existential struggle right now, may suffer a devastating 45% decrease in production this year as he fights to expel the invading Russian forces. In Taiwan, the semiconductor industry is so important that capturing it intact could be the first day goal of China’s military, were it to invade. It is also possible that Taiwan and its allies could destroy state-of-the-art manufacturing plants to keep this vital technology out of Chinese hands.

“One could rationally argue that the West would be much better off if the Taiwanese chip industry was a smoking hole in the ground than if it were under Chinese control,” Stanford University academic. Herbert Lin recently told Ben Werschkul of Yahoo Finance.

‘Grey Zone’ Tactics

These scenarios assume that the United States intervenes on Taiwan’s behalf if China launches a military attack, triggering a terrifying war between two nuclear-armed nations. There could be other results. On the one hand, China may never attack Taiwan militarily, but choose “gray area tactics such as cyber warfare and ongoing military exercises that make it more risky and costly for other nations to do business with Taiwan. If China were to take this approach, it could carefully avoid some kind of threshold action that might trigger American involvement.

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

If the United States went to war, victory would hardly be preordained. China has been aggressively building its military for two decades and deliberately creating a force capable of defeating the United States in a war over Taiwan. China would be fighting on its own shores, while 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 forces are as prepared for war as China’s. A concern is a possible Chinese spy army integrated into Taiwan’s national security apparatus. The boastful US military could also find itself off guard. As Brands and Beckley point out, US military power is “on the verge of collapse” as the Pentagon retires legions of industrial-age warships and bombers. 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, you will have your best shot at accomplishing that mission.”

Markets have shown no concern about Pelosi’s visit to Taiwan or China’s threatening response. The S&P 500 rose the week Pelosi visited Taiwan and China launched missiles into the air, as investors interpreted the chest puffs as posturing. There is no tangible sign that China is preparing to launch an actual war or that President Xi is willing to plunge his nation into a maelstrom that he himself cannot survive.

It’s probably correct. But many analysts thought Russian President Vladimir Putin would never risk the wrath of the West by invading Ukraine, and Putin proved them wrong. There is nothing to worry about until the moment the invading forces cross a border. Then there is everything to worry about.

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