The tension has gone up a notch between China and Taiwan in recent days, after the visit of Nancy Pelosi, the speaker of the House of Representatives, the highest American official to have visited the island for several decades. What could be the economic consequences in the event of open war? Interview with Samy Chaar, chief economist at Lombard Odier.
The Express: Has the proliferation of military maneuvers by Beijing around Taiwan already had economic repercussions?
Samy Chaar: At this stage, if the events stop there and do not degenerate in the next few days, the economic consequences are practically nil. Except on one point: it would now be quite surprising if Washington reduced its tariff barriers on Chinese products, when we had heard rather encouraging speeches since the beginning of the year… That said, this rise in tensions is not not welcome. The United States and the China, the world’s two biggest powers, are showing their red lines, and these do not bode well in the medium term. The Americans have sent the message that they will pay a very high price to anyone who tries to take Taiwan by force, and China that they will not give up considering the island as part of their territory…
And if the situation does not calm down, or even escalates, what economic consequences can be expected?
The economic consequences would then be significant, even disastrous. We have drawn different scenarios, all of which would have a greater or lesser impact on trade flows, but also on the production of microprocessors – Taiwan is one of the world leaders – on which the global industry is extremely dependent. The most likely scenario, and the least painful for the economy, is that of military maneuvers which would intermittently disrupt trade flows for a year or two. The second scenario, less probable, but which would have much more economic consequences, is that of a deliberate action by Beijing to impose a “quarantine”, or even a blockade on Taiwan. Finally, the worst-case scenario, that ofan “open war” between the United States and Chinathe probability of which is extremely low but not negligible, would expose the world economy to massive shock waves, disproportionate to the conflict between Russia and theUkraine. These last two scenarios, fortunately very unlikely in the short term, are on the other hand much more so in the next ten years…
Why do these two scenarios seem unlikely to you in the short term?
On the Chinese side, the dependence on the American consumer is still too great. In addition, the country has rather suffered since the beginning of the year, because of its “zero Covid” strategy. Xi Jinping therefore has no interest in further degrading China’s economic prospects as the 20th Communist Party Congress approaches, which will take place this fall. The Americans are also in a difficult economic situation, because of the surge of inflation which affects the country. And both countries are also far too dependent on Taiwanese microprocessors, they can’t afford to disrupt production. But in a few years, China may have advanced in the diversification of its economy, and may be less dependent on the outside, which could then change the situation…