A A US war with China over Taiwan’s democratic sovereignty would have dire consequences. After the loss of life, the economic impact would be paramount.
A war with China would lead to the collapse of the financial markets. The stock markets would be in turmoil. The Great Housing Recession of 2007-2009 caused US stock markets to plummet by 50%. A war with China could cause stock prices to fall even further. The market cap of the S&P 500 is approximately $34 trillion. A 50% drop would wipe out $17 trillion in wealth, or 66% of current GDP. The US Treasury market would experience a true black swan event. International investors hold up to 30% or $7.5 trillion in US Treasury bonds. Global and national wealth would be destroyed, consumer confidence would collapse, and business investment would freeze. The impact on GDP is likely to be highly significant. For example, due to COVID-19, US economic output fell by 9% of GDP for a quarter.
A 10% drop in GDP would reduce annual economic output by $2.5 trillion. The result would be mass layoffs. Consumption, which accounts for 70% of US production, would take a nosedive. The government would respond with massive economic stimulus packages. The government deficit, already at 100% of GDP, would increase rapidly. At the very least, the debt burden of future generations would become even more unbearable. Economic trade between the US, China and Taiwan exceeds US$700 billion annually.
In an all-out economic war, semiconductors would be the first casualties. The world economy runs on semiconductors. Taiwan’s semiconductor factories are a global treasure. They are the modern equivalent of the Middle East’s oil fields. Neither the US nor China could allow control of semiconductor manufacturing facilities to be usurped by either country. In the event of an all-out conflict, destruction of the facilities would be likely.
Taiwan produces 92% of the world’s most advanced chips and up to 50% of standard chips. As Rhodium Group notes, “Taiwan’s leading chipmaker TSMC is estimated to produce 35% of the world’s automotive microcontrollers and 70% of the world’s smartphone chipsets. It also dominates the production of chips for high-end graphics processing units in personal computers and servers. A rough, conservative estimate of reliance on Taiwanese chips suggests that companies in these industries could be forced to forego up to $1.6 trillion in revenue annually in the event of a lockdown.”
In the event of an all-out economic war with China, global supply chains would have to be reconfigured. The magnitude of the supply chain restructuring would exceed that caused by COVID-19. The supply chain for Apple products, including iPhones, would need to be relocated. Imagine life without a smartphone.
Companies as diverse as Caterpillar, GM, Ford and Starbucks would be badly affected. Every company generates more than 25% of its sales in China. Among the chip companies with the most to lose in a war with China are Qualcomm, Broadcom and Texas Instruments. The US also relies on China for clothing, shoes, electronics, furniture and other daily essentials, and consumer giants like Nike and Procter and Gamble source their products from China.
Top line: China’s manufacturing is embedded in the US economy. It would take years to equip supply chains for such products. Meanwhile, many retailers selling goods imported from China would collapse due to both sourcing issues and the collapse in consumer consumption. Walmart wouldn’t go bankrupt, but it would suffer serious economic damage since up to 80% of its products are sourced from China.
The waves of a deep recession caused by all-out conflict with China would become a tsunami for the global economy. The negative supply chain impact of the conflict in Ukraine would be relatively insignificant compared to the global economic impact of an all-out economic war with China. A global depression would be inevitable.
So what to do?
The US should take economic steps to prepare for war. But by definition, economic resources are limited. The US job markets are tight. The US does not have the material or human resources necessary to prepare for war with China and fight climate change or pursue any other progressive policies. In addition, the government has been culpably negligent in tying financial support for the domestic semiconductor sector to social issues such as childcare and applicable union wages. The US should immediately embark on a semiconductor “Manhattan Project” to exponentially increase domestic semiconductor manufacturing capacity. In times of impending crisis, economic and social eggs have to be cracked.
Redundancy must be built into US financial systems. Markets must be prepared for the immediate sale and buyback of physical and financial assets invested by China in the US. Such financial and physical assets exceed $1 trillion. Resilience must be built into domestic supply chains. International supply chains need to be reconfigured to trade with countries like India, Vietnam and Mexico rather than China.
But Americans should have no illusions: a war with China would entail military and economic costs unprecedented since World War II.
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James Rogan is a former US Field Service Officer who later spent 30 years in finance and law. He writes a daily note on finance and economics, politics, sociology and criminal justice.
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