The Global Economic Disruptions from a Taiwan Conflict, Rhodium group, Dec. 14, 2022.
Charlie Vest, Agatha Kratz, and Reva Goujon
Recent tensions in the Taiwan Strait have stoked fears of a conflict between China and Taiwan, and raised questions about the implications of such a scenario for the global economy. How a conflict would unfold is impossible to predict, complicating any assessment of its economic and commercial consequences. Yet the risks of a crisis around Taiwan have risen, making these questions more important than ever for policymakers and business leaders.
Over the course of 2022, as the war in Ukraine shone a spotlight on geopolitical risks, Rhodium Group examined the potential global economic disruptions resulting from a hypothetical conflict between China and Taiwan. Our work builds on research dating back to 2004 that examined Taiwan’s global economic relationships.[1] Unsurprisingly, we find 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 in international responses or second-order effects. The disruptions would be felt immediately and would be difficult to reverse. They would impact trade and investment on a global scale, leaving few countries untouched. Such disruptions could occur even if the conflict does not become kinetic.
The challenge of estimating disruptions from a conflict between China and Taiwan
Estimating the economic consequences of a Taiwan-centered conflict is challenging. Such a conflict could take many forms, varying in duration, scale, and in terms of the parties involved. Crucial data, particularly on semiconductor supply chain activity, is not publicly available. Important aspects of disruption scenarios are not easily quantified and often left out of trade shock models, including impacts on cross-border flows of people and ideas.[2] The ripple effects from trade and supply chain disruptions are also very difficult to estimate.
With these challenges in mind, our analysis adopts a necessarily simplified and partial approach to estimating the range and nature of economic activities at risk of disruption in a Taiwan-China conflict. We define conflict—for the purposes of our hypothetical assessment—as a blockade of Taiwan by China that halts all trade between Taiwan and the rest of the world. Based on these parameters, we identify the main channels of economic disruption, and where possible, provide an estimate of the minimum scope of economic activity at risk. We do so by using conservative assumptions throughout our analysis and by focusing our attention on the most serious areas of economic disruption.
We do not purport to estimate GDP losses or other measures of foregone economic welfare. Instead, we provide a snapshot of activity at risk at the beginning of a blockade, were it to happen today, making no predictions or assumptions about how such a crisis might evolve. Where we provide estimates of economic flows at risk, they are annualized figures. We discuss potential longer-term risks in qualitative terms throughout this note, but our quantitative estimates do not factor in second-order effects. Importantly, our analysis does not attempt to estimate the costs associated with additional disruptions from a military escalation or the imposition of international sanctions.[3] As such, our analysis should be considered a conservative and partialestimate of potential economic activity at risk.
(To be continued…)