A war over Taiwan would devastate the economies of both Asia and the globe.
While the world’s eyes were fixed on the unfolding horrors of the latest Middle East war, China was busy pushing the envelope in the South China Sea. On Sunday, a Chinese coast guard vessel and another Chinese ship rammed a Philippine supply boat and coast guard ship in international waters claimed by China around the Spratly Islands. The State Department gravely noted that the Chinese actions “violated international law,” but China appears unimpressed.
As readers of this column know, the most important international development on President Biden’s watch has been the erosion of America’s deterrence. The war in Ukraine and the escalating chaos and bloodshed across the Middle East demonstrate the human and economic costs when American power and policy no longer hold revisionist powers in check.
Washington’s attention is understandably fixed on the threat of a wider Middle East war. The human and economic toll would be significant, and the U.S. might be drawn into the conflict. But if the erosion of America’s deterrent power leads China and North Korea to launch wars in the Far East, it would be a greater catastrophe by orders of magnitude.
For the past two weeks I’ve been on the road—in Pearl Harbor, Tokyo and Seoul—and the American, Japanese and Korean officials and think-tankers I met with kept hammering two thoughts into my head. First, a war over Taiwan would be far more serious for the world economy than the war in Ukraine or even a wider regional war in the Middle East. Second, our margin of safety is shrinking: The power of American deterrence in the Far East is declining. While there are some favorable long-term trends, for the next few years at least, China and North Korea are likely to see more reasons to test the will and the power of the U.S. and its allies.
If China decides on forcible unification with Taiwan, it has two principal options. It can invade the island directly, or it can try to blockade it. Taiwan, which imports 97% of its energy supply and also depends on food imports, is vulnerable to such a blockade. But Taiwan would not be the only country affected. Whether China invades or blockades, the regional and global consequences would be the gravest shock to the global economy since World War II.
Regionally, the effect of closing the South China Sea and the waters around Taiwan to international trade would be calamitous. South Korea and Japan are both heavily dependent on imported fuel and food. Both economies depend on the ability of their great manufacturing companies to import raw materials and export finished goods. A suspension of maritime trade would effectively put both economies on life support, while making it difficult for tens of millions of people to heat their homes, run their cars or feed their children.
It isn’t unlikely that North Korea, seeing an opening in the global and regional chaos, would take the opportunity to attack at a time when U.S. forces would have enormous difficulty reinforcing and resupplying the South.
China would also be hit. Ships wouldn’t travel through war zones to Shanghai, Qingdao or Tianjin. The U.S. would likely, in addition to sanctions, enforce a blockade against ships seeking to supply China with goods deemed important for war.
For the rest of the world this would mean a massive supply-chain headache. From Taiwan’s semiconductors, vital for many industries and consumer products, to all the things that China, Japan and South Korea produce, the products of the Far East would vanish from inventories and store shelves. Globally, makers of the raw materials for those countries, as well as growers of such agricultural commodities as soybeans and grain, would lose access to major markets.
Even as supply-chain bottlenecks and blockages throw goods markets into turmoil, the financial consequences of the war could pose insurmountable challenges for the world’s central banks. Stocks would crash. Currencies would gyrate. Debt markets would implode as sovereign borrowers like China and Japan faced wartime conditions and corporations dependent on Asian economies struggled to manage their debts.
Lulled into complacency by a long era of peace, most of us have yet to appreciate fully the dangers we face. Vladimir Putin’s invasion of Ukraine and the Hamas attack on Israel should have made clear that we live in an era when the unthinkable can happen overnight. These days, we must not only learn to think about the unthinkable, in nuclear strategist Herman Kahn’s phrase. We also need to prepare for it.
A Philippine supply boat, left, and a Chinese coast guard vessel collide in the South China Sea, Oct. 22. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGE
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Appeared in the October 24, 2023, print edition as ‘How China Could Turn Crisis to Catastrophe’.