World War I. Raid of German Gothas over Paris, on June 16, 1918. Photo: AFP / Maurice-Louis Branger / Roger-Viollet

Besides the human toll and physical damage to Taiwan and the likely staggering casualties on all sides, the global economic and financial ripple effects of a war for Taiwan will be immense and long-lasting.

It is not hyperbole to suggest the world will be unrecognizable afterwards: think of the powerful empires that ruled most of the world in 1914, and their decline into rubble by the end of 1918.

China is so deeply integrated into the world economy – given its position as a manufacturing hub and exporter as part of global supply chains and as a huge consumer of many nations’ raw commodities – that serious disruptions to global economic activity are unavoidable.

Soon after the shooting starts, there will be economic chaos worldwide at least on a par with the 2008 financial collapse; probably much worse given that it arises from a war involving major powers – by definition more dangerous and frightening than an event ultimately caused by Wall Streeters and others merely looking to fleece the unsuspecting public for as long as possible.

Stock markets will plummet – and keep plummeting. Economic activity worldwide will slow immediately, shaken as supply chains are cut and demand and business activity slacken. The halt in China trade alone will be damaging enough, but this will have a snowballing effect.

Everything Taiwan produces – semiconductors, in particular – will be off the market. Estimates vary, ranging from Taiwan producing 30% of the world’s semiconductors – to nearly half of all outsourced chip production and 90% of the most advanced chips. Taiwan’s periodic earthquakes cause disruption enough to semiconductor production.  But recovering from earthquake damage is one thing: recovering from wartime destruction and disruption is quite another.

And besides semiconductors, products produced by Taiwanese companies in the PRC for export overseas – iPhones being an obvious example – won’t be moving anywhere.

Shipments of everything to and from Taiwan – and more importantly to and from China – will decline to a trickle or stop. Shipping and air freight companies will be unwilling to enter a war zone and insurance rates will skyrocket. One expects US financial and commercial sanctions (and even military operations) to further interdict or curtail ‘China trade’ worldwide.

And expect the PRC to make its own efforts to disrupt US and partner-nation shipping.  Japan, in particular, dependent on open sea-lanes for imports and exports, will feel immediate pain – far beyond that experienced after the 3/11 earthquake and tsunami.

Even those nations that have overlooked many of Beijing’s egregious actions over the years in exchange for Chinese money, including the European Union, will feel the effects. That pain just might be galvanized against the PRC – out of principle, embarrassment, fear or the realization that Chinese Belt and Road money will not materialize.

China battered

The problems are obvious for foreign companies reliant on China sales, manufacturing and components. But the problems are even bigger for the PRC, which relies on commodity imports – including food and oil – and on exports and foreign direct investment that earn currency that’s convertible, which the Chinese yuan is not.

So beyond the butcher’s bill from the fighting, the Chinese economy will be battered. Today’s US-PRC trade war might result in trade reductions; but if the PRC attacks Taiwan militarily, China’s global trade will lurch to a near halt. The PRC’s Belt and Road project and its Asian Infrastructure Investment Bank will be on hold a long, long while — most likely permanently.

Chinese companies that can produce without US components and technology will be making products nobody will buy. Companies dependent on foreign components, materials, and markets will grind to a halt – and quickly.

Ironically, in line with Xi Jinping’s efforts to revive Mao Zedong’s reputation, an attack on Taiwan might move China back towards a Mao-era agrarian economy.

Cut out of the US dollar system, China will find itself grubbing for convertible currency. Chinese researchers and students will be sent home from the US and other countries; joint ventures, halted; foreign investments, curtailed.

Beijing’s firms will be left to do business with such economic powerhouses as North Korea, Myanmar, Cambodia and Russia. Even the Russians will probably strike hard bargains if they sense that China is in trouble.

Indeed, Russia’s response to a Taiwan fight could break two ways; it might offer direct support and assistance to the PRC, and perhaps make a diversionary move against the Baltic States or otherwise keep NATO and the US occupied. Or it might make token pro-Beijing statements but stand back and shed crocodile tears while watching China and the US go at each other.

War recovery

After the disruption caused by a fight over Taiwan, it will take some time for Western economies to right themselves – as the China market and Chinese manufacturing disappear and Western and other producers reconfigure supply chains. It’s anybody’s guess, but a conservative estimate would be five to 10 years.

One speculates if the US and free-world allies have better prospects for recovery than the PRC. It is worth remembering they were doing fine until the late 1990’s when the PRC economy took off – juiced by Western investment and technology and open US and Western markets. China’s “rise” was aided and abetted by America’s CEO class, which moved businesses to China to chase cheap labor or even sold their companies to make a quick buck.

Free markets and free enterprises are nothing if not adaptable, but it takes time. Once the free nations have collected themselves, the outcome might be a “community” of free nations standing alone from the PRC. So much for borderless globalization and Thomas Friedman’s “flat world.” But this would not be the first time civilization has had to dust itself off after fending off a dangerous enemy.

Psychological scars

Beyond the military and economic effects of a Taiwan war, there is the psychological damage – regardless of outcome – to Western and pro-Western societies that have thought themselves to have “moved beyond” this sort of war. Such things only happened to earlier, less enlightened generations, or else only in “less civilized” countries; not, in this era, to a “first-world democracy” like Taiwan.

Just as the carnage of the First World War stunned European societies and laid the groundwork for another global war 20 years later, a fight arising from Taiwan may similarly shape the future in ways one hardly imagines. The one certain assessment of the future is that it will not be pleasant.

For example, a decade of global economic stagnation as the free-world readjusts might easily cause social unrest – and might allow extremist politicians (with leftists and rightists not being much different) to take hold as Lenin and Hitler did following WWI. The consequences will be unpredictable and will occur in “first world” countries, too. It has happened before.

Read part 1: War in the Taiwan Strait is not unthinkable

Read Part 3: How to avoid a war for Taiwan

Grant Newsham is a retired US Marine Officer. He was the first USMC Liaison Officer to the Japan Self Defense Force and has spent many years in Asia. He conducted research in Taipei in 2019 as a Taiwan Ministry of Foreign Affairs Fellow.  His research topic covered improving Taiwan’s defense by helping the Taiwan Armed Forces break out of 40 years of isolation. He originally wrote this article for the Journal of Political Risk, where it appeared on November 1, 2019. It is reused with permission.

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