A war with Taiwan would have such an enormous cost that even those most dissatisfied with the status quo have reasons not to risk it. Bloomberg estimates the price at around $10 trillion, roughly 10% of the global GDP, more than the wars in Ukraine, the COVID-19 pandemic, and the financial crisis combined.
China’s growing economic and military weight, the emerging sense of national identity in Taiwan, and the tense relations between Beijing and Washington mean that the conditions for a potential crisis are in place. The upcoming elections on January 13 in Taiwan are a possible trigger.
Few believe there is a high probability of an imminent Chinese invasion. The People’s Liberation Army is not massing troops on the coast. Reports of corruption within the Chinese military raise doubts about President Xi Jinping’s ability to lead a successful campaign. China is fighting with difficult economic conditions and a real estate crisis. U.S. officials claim tensions somewhat eased during the November summit between President Joe Biden and Xi, who promised reassuring measures to attract foreign investors.
However, the eruption of war in Ukraine and Gaza serves as a reminder of how latent tensions can escalate into conflict. National security experts at the Pentagon, think tanks in the U.S. and Japan, and international consulting firms are developing scenarios ranging from a Chinese maritime quarantine of Taiwan to the seizure of Taiwan’s outlying islands and a large-scale Chinese invasion.
The invasion of Ukraine by Russia and the subsequent semiconductor shortage following the COVID crisis provides a glimpse of what’s at stake for the global economy. The impact of a conflict in the Taiwan Strait would be far more significant.
Taiwan manufactures most of the world’s advanced semiconductors and many cutting-edge chips. Globally, 5.6% of total value-added products come from sectors using chips as direct inputs, amounting to nearly $6 trillion. The total market capitalization of the top 20 customers of the chip giant TSMC is about $7.4 trillion. The Taiwan Strait is one of the world’s busiest shipping lanes.
In the event of a crisis, the most significant impact would come from the shortage of semiconductors. Factories producing laptops, tablets, and smartphones, in which Taiwan’s high-end chips are a key component, would halt. The automotive and other industries using lower-end chips would also be severely affected.
Trade barriers and a significant risk aversion shock in financial markets would exacerbate the costs. If the conflict were prolonged and turned into something similar to the situation in Ukraine, Taiwan’s economy would be decimated, and its production tools destroyed.
China’s GDP would be significantly affected with severed relations with major trading partners and no access to advanced semiconductors. However, the Chinese population is accustomed to sacrifices, and the country’s unification is a vital national goal. Furthermore, the failure of Western sanctions against Russia suggests that China would be able to mitigate any economic sanctions. For the United States, further away from the action, the effects would likely be more limited from a macroeconomic perspective but potentially more difficult to accept socially. Only a few Americans can locate Taiwan on a map. The United States still has many interests in the region. For example, Apple and other American companies strongly depend on the Asian electronic supply chain.
China’s response to Nancy Pelosi’s visit to Taipei in August 2022 convinced the world that the risk of conflict was real. Beijing saw it as a change in the status quo that made Xi appear weak, especially after national commentators suggested that China could prevent her from landing in Taipei. The fallout from that visit, which saw China conduct large-scale naval exercises, considered blockades, triggered a wave of emergency planning and scenario planning within the Pentagon and the CIA.
Even if the outcome of the elections in Taiwan does not trigger an immediate crisis, it will define the direction of relations between the two sides of the Taiwan Strait. Lai Ching-te, currently the vice president of the Democratic Progressive Party, has sought to present himself as a candidate of continuity with no intention of disrupting relations with Beijing. The DPP, the ruling party and the favourite, is the political party that favours greater independence and autonomy for Taiwan from mainland China. Xi expressed deep concern about the possibility of Lai winning when he met Biden, according to a senior administration official.
In 1979, when the United States transferred its diplomatic recognition from Taipei to Beijing, its GDP was ten times that of China, the Chinese military was in the early stages of modernization, and Taiwan was still under single-party rule.
Today, the situation is different. China has become the world’s second-largest economy, trailing the United States closely; its military enjoys almost equal status, particularly close to its borders. Taiwan’s liberal democracy is a visible contrast to China’s authoritarian system.
Statements by leaders in Beijing and Washington have added to the tension. Xi has repeatedly stated that Taiwan is not a problem that can be “handed down from generation to generation.” Alongside his efforts to modernize the military, these statements have fueled speculation that he wants to achieve reunification under his leadership, with 2027 cited as a dangerous year by U.S. intelligence and military officials.
For his part, Biden has said that the United States would come to Taiwan’s aid in the event of a Chinese invasion. This candour has eroded layers of carefully crafted ambiguity in the American position, fueling anger in China and concerns that the United States is emboldening the independence noise. It has also highlighted differences in perception between the Biden administration and the Pentagon.
The world is preparing for the inevitable. For decades, the phrase “One Country, Two Systems” symbolized the hope for a peaceful dispute settlement. Hope has died since the crackdown in Hong Kong, leaving only one option: the military solution. The question is not if but when. Warren Buffett sold his stake in TSMC in the first quarter of 2023, citing geopolitical risk. Companies and governments have also prepared. New investments in electronics and electrical equipment have risen to $181 billion in 2022, up from $48 billion in 2020, as the U.S., Japan, and Germany opened their wallets to diversify their sources of semiconductor supply.