Tensions between the People's Republic of China (PRC) and Taiwan have reached their highest level in decades, and a new report warns that more than $2 trillion in global economic activity could be disrupted if China attempts to blockade Taiwan. The PRC considers Taiwan to be a rogue, breakaway province, although it has never ruled the democratic, self-governing island nation since the Chinese Communist Party (CCP) seized control of the mainland in 1949 after a 22-year civil war. Chinese leader Xi Jinping and other senior CCP officials have repeatedly declined to rule out the use of force to bring about Taiwan's "reunification" with the PRC.
The Rhodium Group, a think tank that analyzes economic data and specializes in research related to China, recently released a report on potential disruptions to the global economy caused by a conflict between China and Taiwan. Their team characterized their estimates as conservative and partial, but noted that "the scale of economic activity at risk of disruption from a conflict in the Taiwan Strait is immense: well over two trillion dollars in a blockade scenario, even before factoring international responses or second-order effects."
The primary economic disruption would result from Taiwan being cut off from global trade, given Taiwan's significant role in semiconductor supply chains. Taiwan produces 92% of the world's most advanced computer chips, as well as one-third to half of the less sophisticated chips that play a critical role in the manufacturing processes for things like cars, smartphones, and PCs. According to some estimates, "companies in these industries could be forced to forego as much as $1.6 trillion in revenue annually in the event of a blockade," the Rhodium report found. Trillions more in economic activity could be disrupted due to second-order effects on industries reliant on Taiwanese chips. The report stated that "the full social and economic impacts of a chip shortage of that scale are incalculable, but they would likely be catastrophic."
In addition to the impact on global trade, the Rhodium report also projected that banks' willingness to extend credit to businesses engaged in global trade, particularly firms doing business with China, would likely be reduced amid a blockade. This could potentially result in the disruption of more than $270 billion in trade between China and the rest of the world. The report also noted that a blockade of Taiwan by China would likely trigger a sell-off by investors holding Chinese equities traded on U.S. capital markets, similar to what transpired in the lead-up to Russia's invasion of Ukraine. With $775 billion in Chinese securities held in U.S. markets as of September 2022, hundreds of billions of dollars would be imperiled and the sell-off could prompt the CCP to implement capital controls to trap foreign investment in China like those deployed by Russia in 2022.
Furthermore, the Rhodium report assessed that up to $127 billion in direct investment to and from Taiwan, in addition to $100 billion in annual outbound investment and lending by China, could be cut off in the event of a blockade. The report concluded that "when taken together, our estimates suggest that the global disruption from a Taiwan conflict would put well over two trillion dollars in economic activity at risk, even before factoring in the impact from international sanctions or a military response. This note offers a look at just some of the likely disruption channels in a blockade scenario, and this figure should be regarded as a floor; the full scope of imperiled activity would surely be greater."
The potential economic impact of a conflict between China and Taiwan highlights the importance of finding a peaceful resolution to the tensions between the two. The full scope of the economic disruption that could result from such a conflict is likely to be greater than the estimates provided in the Rhodium Group's report. It is crucial that all parties involved work towards finding a peaceful solution to avoid the catastrophic consequences that could result from a blockade or other violent conflict.
In conclusion, the potential economic impact of a conflict between China and Taiwan is staggering, with estimates suggesting that more than $2 trillion in global economic activity could be disrupted if China were to blockade Taiwan. It is clear that the consequences of such a conflict would be catastrophic, not just for China and Taiwan, but for the global economy as a whole. It is therefore imperative that all parties involved work towards finding a peaceful resolution to the tensions between the two. It is in everyone's best interest to avoid the devastating consequences that could result from a blockade or other violent conflict.
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