National Defense

A China-Taiwan War Could Bring The Global Economy To Its Knees, Top Diplomat Warns

Xi Jinping/UN Geneva

A war over Taiwan could unleash an economic shock greater than World War II by choking off one of the world’s busiest trade routes and crippling the semiconductor industry, a top U.S. diplomat in Taipei warned Wednesday.

Taiwan sits at the center of the global technology economy, producing roughly 60% of the world’s semiconductors and more than 90% of its most advanced chips, according to Taiwan’s Ministry of Foreign Affairs. The Taiwan Strait is also a commercial artery carrying more than $2.4 trillion in goods annually, meaning even a blockade short of a full-scale invasion could send economic shock waves around the world, according to the Center for Strategic and International Studies (CSIS).

“Beyond the human toll, any conflict across the Taiwan Strait would have a bigger impact on the global economy than the Second World War,” Raymond Greene, director of the American Institute in Taiwan and Washington’s de facto top envoy to the island, said at a defense forum in Taipei Wednesday, Reuters reported.

“With China substantially increasing its capabilities and seeking to rival that of the USA, and China under a cautious [leader] like in Xi Jinping, it will not resort to this unless Xi calculates that he will either force Taiwan to accept surrender terms without combat or win even if Taiwan receives US support and intervention,” Steve Tsang, professor of China studies and director of the SOAS China Institute at SOAS University of London, told the Daily Caller News Foundation. “The implication is that the U.S. will have to call on its allies if it wants to win.  Not only Japan and South Korea, and Australia, but the Western democracies more generally.”

The South Korean Embassy in Washington, the Japanese Embassy in Washington, Taiwan’s Ministry of Foreign Affairs, the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office did not respond to requests for comment.

The potential damage would extend far beyond Taiwan itself.

More than $2 trillion in economic activity could be directly exposed to disruption under a hypothetical Chinese blockade of Taiwan, even before accounting for sanctions, military escalation or broader knock-on effects, according to an analysis by the Rhodium Group, an independent research firm specializing in economics, energy and China.

Roughly $565 billion in Taiwanese value-added trade could be placed at high risk under such a blockade, while semiconductor shortages could force chip-dependent industries to forgo as much as $1.6 trillion in annual revenue, according to Rhodium Group.

“Kinetic action across the Taiwan Strait would immediately suspend and even destroy 60-70% of semiconductor production globally,” Victor Shih, professor and Ho Miu Lam Chair in China and Pacific Relations at the University of California, told the DCNF. “U.S. chip companies which heavily rely on Taiwan fabs would immediately see a suspension of cash flows. U.S. software and AI companies which use GPU and memory chips would see a curtailed ability to provide services to customers.”

“What we will be looking at will therefore be a complete rupture of the global economy, between China and its partners on one side, and the U.S. and the democracies on the other,” Tsang told the DCNF.

Automakers, electronics manufacturers and computing companies would be among the industries most immediately exposed because of their dependence on Taiwanese chips, according to Rhodium Group. Shortages could eventually spread to equipment used in telecommunications, health care, logistics and other critical sectors.

The economic threat would also extend to commercial shipping.

More than $2.4 trillion worth of goods passed through the Taiwan Strait in 2024, accounting for roughly 21% of global maritime trade and 10% of all global trade, according to a July CSIS analysis. Nearly $1.3 trillion in Chinese trade transited the strait that year, including roughly one-third of China’s imports and 16% of its exports, according to CSIS.

“The consequences of a blockade or embargo would be severe and highly costly to absolutely everyone, but nowhere near as impactful and lasting as a kinetic military conflict that led to casualties, the destruction of production capacity, a long-term shortage of semiconductors, US and Chinese sanctions on each other, and potential other kinds of escalatory actions,” Scott Kennedy, senior adviser and Trustee Chair in Chinese Business and Economics at CSIS, told the DCNF. “In short, the impact depends heavily on how such a conflict would occur.”

China relies on the waterway for nearly one-third of its imports, including oil, natural gas, coal and industrial materials, according to CSIS.

“This is a scenario that will have to be pre-empted, and this will require the U.S. being able to persuade the democracies to collectively deter China,” Tsang told the DCNF. “Moving forward, the capacity for the U.S. to do it alone successfully is getting smaller and smaller. Whether it can or will is of course a different matter.”

Several Southeast Asian governments have begun shifting their rhetoric and behavior closer to Beijing’s position on Taiwan, reflecting a broader regional recalibration as China deepens its political and economic influence, Foreign Policy reported.

Malaysia, for example, has adopted stronger language backing Beijing’s sovereignty claims over Taiwan, while Prime Minister Anwar Ibrahim drew criticism from Taipei in August after suggesting governments have a right to defend their territorial integrity against separatism, according to Taiwan’s Ministry of Foreign Affairs.

Indonesia has also moved cautiously closer to Beijing on the Taiwan issue, including by conducting a naval drill with China east of Taiwan in August, Reuters reported.

“Peace and stability in the Taiwan Strait are not simply matters of Taiwan’s national interest. They are increasingly matters of global economic and security interest,” Yao-Yuan Yeh, professor and Fayez Sarofim-Cullen Trust for Higher Education Endowed Chair in International Studies at the University of St. Thomas, told the DCNF. “A conflict would not remain geographically confined to Taiwan and China; its consequences would quickly reach businesses, consumers, and governments around the world.”

Beijing could also face severe financial consequences if a conflict triggered Western economic retaliation.

Sanctions targeting China’s largest financial institutions could immediately place at least $3 trillion in trade and financial flows at risk, not including foreign reserve assets, according to Rhodium Group. China’s position as the world’s second-largest economy and largest trading nation would make sweeping sanctions far more costly globally than similar restrictions imposed on smaller economies.

“A Taiwan Strait war would occur at the intersection of several critical components of the international economic system: advanced semiconductor production, maritime trade, global manufacturing networks, and the economic relationship between China and the world’s major economies,” Yao-Yuan told the DCNF.

Greene said the Trump administration is attempting to prevent such a scenario through diplomacy while strengthening the U.S. presence and partnerships in the Indo-Pacific, Reuters reported.

Chinese President Xi Jinping is expected to travel to the United States later in September to meet President Donald Trump, and Greene called the summit an opportunity to reduce the chances of “misunderstandings and miscalculations,” Reuters reported.

China has never renounced using force to bring Taiwan under its control, while Taiwan’s government rejects Beijing’s sovereignty claims.

“An unspoken assumption here is that Xi is not in a rush,” Tsang told the DCNF. “I don’t expect he so orders the PLA in the next few years. The timeframe he is working on is that for the fulfilment of his China Dream of national rejuvenation, meaning 2050 at the latest. It gives nearly a quarter of a century for the US and the democracies to work together to pre-empt such a scenario. It needs to be done.”