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

Russia's invasion of Ukraine earlier this year has disrupted global energy markets and led to food shortages in some parts of the world. The disruptions could intensify in the winter when soaring energy costs cause a recession in Europe and weaken the economies of the United States and many other nations. A broader and devastating conflict remains possible.
A war with China would be orders of magnitude worse. House Speaker Nancy Pelosi's recent visit to Taiwan has infuriated China's communist government, which has fired rockets over the island and conducted threat drills to remind the world that China plans to one day destroy Taiwan peacefully or by force annex.
Armed conflict would probably do more damage to the global economy and markets than any military confrontation since World War II. Unlike Russia or Ukraine, China's strong manufacturing sector is closely linked to economies everywhere, including the United States and Europe. The seas around China and Taiwan are among the busiest shipping lanes in the world.
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A disruption to all trade during the war would be devastating. For example, before Russia invaded Ukraine, US trade with Russia was $36 billion a year. Trade with Ukraine was US$4 billion a year, totaling US$40 billion in direct trade jeopardized by the war.
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 amounts to US$656 billion per year, including imports of consumer goods in every American household and components in many goods manufactured 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 they are products far more important to the US economy. The same interdependencies exist between China, Taiwan and most of the world's advanced economies.
In the event of war, "the economic consequences would be catastrophic," argue Hal Brands and Michael Beckley in their new book, Danger Zone: The Coming Conflict with China. They add: “A global depression would be all but guaranteed. ”
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Taiwan broke away from China in 1949, at the end of the Chinese Civil War, and today operates as an independent democracy. However, China views Taiwan as a breakaway republic, and President Xi Jinping insists that "reunification" with Taiwan is inevitable. Since Taiwan is not interested, China would have to force reunification.
A heavy blow to US prosperity
The United States has a deliberately vague policy towards Taiwan, intended to imply that the US military would help defend Taiwan if China attacked, without overtly saying so. President Biden clarified that policy in May when he said yes, the United States would defend Taiwan if China invaded. While this would be Taiwan's best chance of surviving as an independent democracy, it could also be the worst-case scenario for the economic catastrophe that a war over Taiwan would unleash.
The research organization Rand estimates that a war between China and the United States would wipe out 5% of the $23 trillion US economy. That would be the biggest blow to American 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 bottomed in 2009, 55% below its previous peak, which could only be a taste of the losses investors could expect from a US-China war.
China's President Xi Jinping speaks upon his arrival by bullet train ahead of the 25th anniversary of the former British colony's handover to Chinese rule in Hong Kong, China June 30, 2022. Selim Chtayti/Pool via REUTERS
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China's $17 trillion economy would suffer much more as its GDP would collapse by as much as 25%, according to Rand. As with Russia's economy after invading Ukraine, the damage would likely come from multiple 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 potentially protracted war and China's decoupling from many international systems.
Taiwan's relatively small $670 billion economy would likely suffer the most as the nation struggles to survive. Ukraine, currently embroiled in a similar existential struggle, could suffer a devastating 45% drop in production this year as it struggles to oust invading Russian forces. In Taiwan, the semiconductor industry is so important that capturing it intact could be a daily goal for the Chinese military if it came up with it. It's also possible that Taiwan and its allies could destroy state-of-the-art factories to keep this vital technology out of Chinese hands.
"One could rationally argue that the West would be much better off with Taiwan's chip industry being a smoking hole in the ground than under Chinese control," Herbert Lin, a Stanford University scholar, recently told Yahoo Finance's Ben Werschkul .
“Grey zone” tactics.
These scenarios assume that the United States will step in on Taiwan's behalf if China mounts a military attack and unleashes a horrific war between two nuclear-armed nations. There could be other results. For one, China may never attack Taiwan militarily, instead opting for "grey area" tactics such as cyber warfare and ongoing military drills that make it riskier and more costly for other nations to do business with Taiwan. If China took this approach, it could cautiously avoid some sort of threshold action that could trigger American involvement.
If a shooting war ensues, Americans should not assume that they will be on the winning side. First, it is not 100% clear that the US President, whoever he or she is, would be willing to risk the lives of thousands of Americans in Asia by sending ships and planes into a war against China on behalf of Taiwan. There are ways to "defend Taiwan" without sending American military personnel to war, such as providing hardware and intelligence that the United States is now supplying to Ukraine.
If the United States actually went to war, victory would hardly be predetermined. China has aggressively built its military for two decades, deliberately creating a force capable of defeating the United States in a war over Taiwan. China would fight off its own shores while American supply lines would stretch across the vast Pacific.
Taiwan's own military is the first line of defense, and it's not clear that the island's armed forces are as war-ready as China's. One concern is a possible army of Chinese spies embedded in Taiwan's national security apparatus. Even the vaunted US military could be unprepared. As Brands and Beckley point out, US military power is “about to decline” as the Pentagon withdraws legions of industrial-era warships and bombers. Newer 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. to fulfill this mission.”
Markets have 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 blew up rockets as investors misinterpreted the chest bloat as posturing. There is no tangible sign that China is preparing to launch a real war, or that President Xi is prepared to plunge his nation into a maelstrom that he himself might not survive.
That'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 invading forces cross a border. Then there is everything to worry about.
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