In the world of international relations, tensions between global superpowers often have far-reaching economic implications. The recent move by the United States to simulate a conflict with China over Taiwan has set the stage for a potentially ‘trillion-dollar’ war, with investors and bankers closely monitoring the situation. In this article, we’ll delve into the economic consequences of a US-China conflict over Taiwan and the escalating tech war between these two giants.
The Economic Consequences of a US-China Conflict Over Taiwan
US-China Conflict Over Taiwan: The year 2023 witnessed a significant escalation in tensions between the United States and China. One of the key developments was the provision of military aid to Taiwan, a move typically reserved for sovereign nations. To emphasize the risks associated with investing in China, the US organized a ‘Taiwan war game’ with financial and business executives in New York on September 11.
This move comes on the heels of the Biden Administration’s efforts to curb China’s economic influence. In August 2023, the US government announced restrictions on investments by US venture capital and private equity firms in Chinese industries such as artificial intelligence, quantum computing, and semiconductors. These proposed rules are currently open for public comment and are expected to become effective next year.
The primary aim of these investment restrictions is to safeguard national security, particularly at a time when tensions between the US and China are running high. The US House of Representatives China committee, led by Mike Gallagher and Raja Krishnamoorthi, is collaborating with representatives of investment banks, pharmaceutical companies, and retired military officers to assess the economic implications of a US-China conflict over Taiwan.
In August, the panel accused BlackRock and US Equity Indexes MSCI of indirectly funding groups involved in developing weapons for China’s People’s Liberation Army, raising concerns about national security. The simulation aims to shed light on the potential economic fallout of a conflict between the two nations.
US-China Conflict: The Economics Of Conflict Over Taiwan
The US State Department estimated in 2022 that a conflict over Taiwan could result in an annual loss of approximately US $2.5 trillion. This projection assumes a blockade scenario where the conflict does not escalate into kinetic warfare. The consequences of such a conflict would be immediate and challenging to reverse.
One of the most significant global economic activities that would come to a halt is the semiconductor industry. Sectors heavily reliant on chips, such as electronics, automotive, and computing, would be severely affected. Taiwan, as the world’s 16th largest trading economy, plays a crucial role in the global supply chain, with imports and exports totaling around US $922 billion.
Approximately US $565 billion of Taiwanese value-added trade would be at high risk of disruption during a conflict over Taiwan. Additionally, trade between China and the rest of the world, amounting to more than US $270 billion, would be disrupted even before any sanctions are implemented. Foreign investors would likely divest from Chinese securities holdings in such a scenario.
As of June 2022, foreign investors held over one trillion dollars in onshore Chinese bonds and equities. By September 2022, they held more than $775 billion in offshore Chinese equities listed in the United States. Despite efforts to decouple the US and China, trade between the two nations hit a record high in 2022, reaching US $690.6 billion.
The Escalating US-China Tech War: Implications for National Security
The US-China tech war has been intensifying, with both nations taking measures that have far-reaching consequences. In July, Beijing restricted the export of critical minerals like Germanium and Gallium, crucial components used in mobile phones, electric vehicles, nuclear energy, and even weapons. These minerals are indispensable for national security as they are integral to semiconductor production and essential for military and civilian technologies.
They play a pivotal role in the development and operation of advanced weapons systems and critical infrastructure. These minerals are essential for military communication, navigation systems, and complex weaponry, including the F-35 Joint Strike Fighter. Moreover, they are crucial for emerging technologies such as artificial intelligence and 5G.
Additionally, semiconductor technologies are essential for advancing autonomous systems, ensuring cybersecurity, space exploration, and developing hypersonic and directed energy capabilities. Recognizing the significance of these minerals, the US government identified four fields in 2021 where Chinese dominance could pose a threat to national security:
US-China Conflict Over Taiwan: Semiconductors Manufacturing and Advanced Packaging
China’s growing influence in semiconductor manufacturing and advanced packaging poses a considerable concern. Semiconductors are at the core of modern technology, and any disruption in their supply chain could have profound implications for national security.
With the increasing importance of electric vehicles and renewable energy, large-capacity batteries have become crucial. Chinese dominance in this field could potentially give them an upper hand in future energy and transportation industries.
Critical Minerals and Materials
As previously mentioned, minerals like Germanium and Gallium are critical for semiconductor production and national security. Control over these minerals can significantly impact a nation’s ability to develop and maintain advanced technologies.
Pharmaceuticals and Active Pharmaceutical Ingredients (APIs)
The COVID-19 pandemic highlighted the vulnerability of pharmaceutical supply chains. Chinese dominance in the production of active pharmaceutical ingredients (APIs) raises concerns about the availability and security of essential medicines.
The US-China tech war is not limited to economic competition but extends to areas vital for national security. As tensions between the two nations persist, monitoring developments in these key fields is of paramount importance.
In conclusion, the simulation of a US-China conflict over Taiwan and the escalating tech war between these two global giants have far-reaching economic and security implications. The potential economic losses in the event of a conflict are staggering, particularly in sectors like semiconductors. Additionally, the competition for dominance in critical fields underscores the need for careful monitoring and strategic planning to protect national security interests. As the world watches these developments unfold, the economic and geopolitical landscape may undergo significant shifts, impacting nations and industries around the globe.