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There is no doubt that a potential conflict over the island democracy of Taiwan would undoubtedly have a high cost in terms of human life. But what about the economic costs in a world already in a fragile state?
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Built from rubble of the old world order of colonial empires, the potential of the new world order, post the Second World War, was quickly dashed as two new, armed, ideologically driven camps emerged with competing visions of the global future.
Revolutionary Marxist Communism – as championed by Stalin’s Soviet Union – and then, in short order, Mao’s People’s Republic of China, stood diametrically opposed to the “exploitative” nature of the capitalist Western world, citing centuries of exploitation of the working class and native populations by the ruling elite and colonial expansion to support a global revolution and rapid post-war decolonisation of the “global South”.
Standing opposite this order of revolutionary powers was the capitalist, Western, liberal democratic world, led in large part by the United States, which throughout the war, emerged as the world’s pre-eminent economic, industrial, and for a short time, nuclear power.
As both blocs solidified into a dichotomy of East versus West, the competition would – despite being kept below the threat of direct, nuclear exchange and confrontation between the two global hegemons – effectively keep this potentially world-ending, hot competition, cold.
Despite kinetic proxy conflicts in southeast and central Asia breaking out periodically, the “grey” zone operations conducted by intelligence agencies on both sides expanded this geopolitical competition across the world, until ultimately, the final collapse of the Soviet Union in 1990 heralded the “End of History”, and if many policymakers, analysts, and historians were to be believed, the ultimate victory of liberal and democratic capitalism on the global stage.
Fast forward to today and the jubilation and hubris which characterised the years immediately following the collapse of the Soviet Union has now transformed into a far less optimistic vision of the future, as once again, great power competition and multipolarity are alive and well.
Where the previous incarnation of Cold War was largely defined by the ideological competition between East and West, this contemporary “Cold War”, despite the rhetoric to the contrary by political leaders on both sides, is largely defined by a combination of economic, strategic, and demographic competitions, marking the emergence of a rapidly different form of competition.
Despite the “novel” nature of this new Cold War, territorial expansion still remains firmly on the cards, particularly for the People’s Republic of China under Xi Jinping, who has repeatedly stated his intent to reunite mainland China and the breakaway island democracy of Taiwan, potentially bringing the rising superpower into direct, kinetic conflict with the United States.
It goes without saying that when it comes to Taiwan, the stakes are high.
Highlighting the true destructive potential of a confrontation of Taiwan are Jenny Leonard, Maeva Cousin, Jennifer Welch, Gerard DiPippo, and Tom Orlick writing for The Japan Times in a piece, titled, Xi, Biden and the $10 trillion cost of war over Taiwan, detailing what would be a truly astronomical cost in the conflict over Taiwan.
A truly destructive event
The group pulled no punches in their opening analysis of conflict over Taiwan, stating, “War over Taiwan would have a cost in blood and treasure so vast that even those unhappiest with the status quo have reason not to risk it. Bloomberg Economics estimate the price tag at around US$10 trillion (AU$14.8 trillion), equal to about 10 per cent of global gross domestic product – dwarfing the blow from the war in Ukraine, COVID-19 pandemic and 2007-08 Global Financial Crisis.
“China’s rising economic and military heft, Taiwan’s burgeoning sense of national identity, and fractious relations between Beijing and Washington mean the conditions for a crisis are in place. With cross-strait relations on the ballot, Taiwan’s January 13 election is a potential flashpoint,” the group explained.
Taiwan’s integration in the globalised economy, particularly as a hub of global semiconductor manufacturing in particular, coupled with the island nation’s geographic location at the crossroads of globally sensitive sea lines of communication through the South China Sea and Western Pacific serve as major factors behind the truly devastating potential of any conflict over the island and its surrounds.
This has only become increasingly recognised in light of the ongoing molestation of global maritime trade transiting through the Red Sea by Iranian-backed Houthi rebels, giving the West a taste of what is potentially to come.
Stressing this, the group explained, “Taiwan makes most of the world’s advanced logic semiconductors, and a lot of lagging edge chips – technologies older than seven nanometers – as well. Globally, 5.6 per cent of total value added comes from sectors using chips as direct inputs — nearly US$6 trillion (AU$8.9 trillion). Total market cap for the top 20 customers of chip giant Taiwan Semiconductor Manufacturing Co (TSMC) is around US$7.4 trillion (AU$11.1 trillion). The Taiwan Strait is one of the world’s busiest shipping lanes.”
As part of assessing the impact, the group leveraged a series of research conducted by Bloomberg Economics which modelled two detailed scenarios:
- A Chinese invasion drawing the US into a local conflict.
- A blockade cutting Taiwan off from trade with the rest of the world.
In doing so, Bloomberg developed a suite of model to estimate the impact on GDP, by taking into account the impact to semiconductor supply, the ensuing disruption to shipping in the region, likely trade sanctions and tariffs (based off the Russian experience following its invasion of Ukraine), and the impact on both regional and global financial markets.
Detailing this, the group stated, “For the main protagonists, other major economies, and the world as a whole, the biggest hit comes from the missing semiconductors. Factory lines producing laptops, tablets and smartphones – where Taiwan’s high-end chips are the irreplaceable ‘golden screw’ – would stall. Autos and other sectors that use lower-end chips would also take a significant hit.
In the context of a direct conflict, precipitated by a Chinese invasion of Taiwan, the group stated, “Taiwan’s economy would be decimated. Based on comparable recent conflicts, Bloomberg Economics estimates a 40 per cent blow to GDP. A population and industrial base concentrated on the coast would add to the human and economic cost.
Unpacking this further and detailing the impact of such a conflagration on the “major combatants”, the group detailed, “For China, with relations to major trade partners turned off and no access to advanced semiconductors, its GDP would suffer a 16.7 per cent blow. For the US, further from the centre of the action but still with a lot at stake – through the reliance of Apple on the Asian electronics supply chain, for example – GDP would be down 6.7 per cent.”
However, these aren’t the only implications, with the global economy, already in a state of stagflation in the aftermath of the COVID-19 pandemic era of quantitative easing which rapidly inflated the global money supply and poured jet fuel on inflation rates.
The group detailed, “For the world as a whole, GDP would be down 10.2 per cent, with South Korea, Japan and other East Asian economies most impacted. A key assumption in this scenario is that the US would succeed in enlisting allies in concerted and severe economic sanctions against China.”
For Australia, this would spell utter devastation for our export-dependent economy, driven in large part by the resource and agricultural demand from Beijing and would rapidly accelerate our own spiral into economic depression, far more than our regional neighbours.
Shifting to the impact of a blockade, the group explained, “Bloomberg Economics also modelled what a yearlong blockade of Taiwan by mainland China would mean for the global economy: For Taiwan, a small, open economy that has thrived through trade, GDP in the first year would be down 12.2 per cent. For China, the US, and the world as a whole, GDP in the first year would be down 8.9 per cent, 3.3 per cent and 5 per cent, respectively."
Still, not exactly a pretty picture, especially for Australia.
The group further explained the reason for a reduced impact on the respective economies as a result of a blockade, stating, “The reason for the smaller impact relative to the war scenario is that while the global economy still loses access to all of Taiwan’s chips, other shocks – including tariffs between the US along with its allies and China, the disruption to Asian shipping and financial market fallout – are scaled down.”
Final thoughts
For Australia, the potential for conflict over Taiwan, no matter the scale, presents an immense challenge and indeed, threat to our way of life, even if only confined to a blockade.
Accordingly, it is critical for us to understand that Australia’s security, prosperity, and stability will not be determined by events in Europe, nor will they be determined by circumstances in the Middle East. While they may influence circumstances, our national future will not be determined by these areas.
Equally, only by recognising the relative decline of the United States and accepting that the United States has limitations in the face of this new, multipolar world can Australia truly begin to take stock of the challenges of operating in this increasingly multipolar world.
It is important to highlight that in the coming era of multipolarity, Australia will face an increasingly competitive Indo-Pacific. Indeed, separate to the People’s Republic of China, our immediate region is home to some of the world’s largest populations with its fastest growing economies with their own unique designs and economic, political, and strategic ambitions for the region.
Rather, we have to accept that while the world is increasingly becoming “multipolar”, the Indo-Pacific, in particular, is rapidly becoming the most hotly contested region in the world. Underpinned by the emerging economic, political, and strategic might of powers like China, India, Pakistan, Thailand, Vietnam, and the established and re-emerging capability of both South Korea and Japan, in particular, are serving to create a hotbed of competition on our doorstep.
Recognising this array of challenges and opportunities, both the Australian public and its policymakers need to look beyond the myopic lens that has traditionally dominated our diplomatic, strategic, and economic policymaking since Federation.
As I have said multiple times before, we need to see Australia begin to play the long game to fully capitalise on the opportunities transforming the Indo-Pacific.
The most important questions now become, when will we see a more detailed analysis and response to the challenges and opportunities facing Australia? And when will we see both a narrative and strategy that better helps industry and the Australian public understand the challenges faced and opportunities we have presented before us?
As events continue to unfold throughout the region and China continues to throw its economic, political, and strategic weight around, can Australia afford to remain a secondary power, or does it need to embrace a larger, more independent role in an era of increasing great power competition?
Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below, or get in touch at
