Blockade of Taiwan by China could cost world economy over $2 trillion, report finds

Tensions between the People's Republic of China (PRC) and Taiwan have ramped up to their highest level in decades over the past year, and a new report warns that more than $2 trillion in global economic activity could be disrupted if China attempts to blockade Taiwan.

The PRC regards Taiwan as a rogue, breakaway province, although it has never ruled the democratic, self-governing island nation since the Chinese Communist Party (CCP) seized control of the mainland in 1949 following a 22-year civil war. Chinese leader Xi Jinping and other senior CCP officials have repeatedly declined to rule out the use of force to bring about Taiwan's "reunification" with the PRC.

The Rhodium Group, a think tank that analyzes economic data and specializes in research related to China, recently released a report on potential disruptions to the global economy caused by a conflict between China and Taiwan, which their team characterized as a conservative and partial estimate of the potential economic impact. Rhodium's researchers noted, "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 international responses or second-order effects."

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'Catastrophic' impact

Rhodium's report found that the primary economic disruption would result from Taiwan being cut off from global trade, given the major role Taiwan plays in semiconductor supply chains. According to some estimates, Taiwan produces 92% of the world's most advanced computer chips in addition to one-third to half of the less sophisticated chips that play a critical role in the manufacturing processes for things like cars, smartphones and PCs.

"A rough, conservative estimate of dependence on Taiwanese chips suggests that companies in these industries could be forced to forego as much as $1.6 trillion in revenue annually in the event of a blockade," Rhodium found. The researchers noted that trillions more in economic activity could be disrupted due to second-order effects that hit industries reliant on Taiwanese chips: "Ultimately, the full social and economic impacts of a chip shortage of that scale are incalculable, but they would likely be catastrophic."

Rhodium also projected that banks' willingness to extend credit to businesses engaged in global trade, particularly firms doing business with China, would likely be reduced amid a blockade. The analysis found that this dynamic could potentially result in the disruption of more than $270 billion in trade between China and the rest of the world.

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A blockade of Taiwan by China would likely trigger a sell-off by investors holding Chinese equities traded on U.S. capital markets, similar to what transpired in the lead-up to Russia's invasion of Ukraine. Rhodium noted that with $775 billion in Chinese securities held in U.S. markets as of September 2022, hundreds of billions of dollars would be imperiled and the sell-off could prompt the CCP to implement capital controls to trap foreign investment in China like those deployed by Russia in 2022.

Furthermore, Rhodium assessed that up to $127 billion in direct investment to and from Taiwan, in addition to $100 billion in annual outbound investment and lending by China, could be cut off in the event of a blockade.

Rhodium's report concluded, "When taken together, our estimates suggest that the global disruption from a Taiwan conflict would put well over two trillion dollars in economic activity at risk, even before factoring in the impact from international sanctions or a military response. This note offers a look at just some of the likely disruption channels in a blockade scenario, and this figure should be regarded as a floor; the full scope of imperiled activity would surely be greater."

According to a report by the Financial Times, Rhodium Group previously produced a non-public analysis of the impact of a blockade of Taiwan for the State Department to share with U.S. allies and partners to prepare contingencies for such a scenario.

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China-Taiwan tensions

Following a visit by then-House Speaker Nancy Pelosi, D-Calif., to Taiwan last August – the first visit by such a high-ranking U.S. politician since Speaker Newt Gingrich, R-Ga., visited in 1997 – the PRC responded to what it called a provocation by holding its largest-ever military drills around Taiwan and ratcheted tensions to their highest level since the Third Taiwan Strait Crisis of 1995-96.

Those live-fire exercises involved missiles launched into several areas around the main island of Taiwan that are astride key sea lanes and caused commercial shipping traffic to be rerouted for safety purposes – a small taste of what would transpire if China embarked on a full-fledged blockade of Taiwan.

The Taiwan Strait is a critical route for vessels traveling between China, Taiwan, Japan and South Korea. About half of the global fleet of container ships and 90% of the world's largest ships by tonnage passed through the waterway in 2021, per the Wall Street Journal.

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It should be noted that a blockade is technically an act of war under international law, although it's uncertain whether countries around the world would treat it as such if China attempted to blockade Taiwan. Rhodium's analysis doesn't take into account the potential military escalation of a China-Taiwan conflict beyond a blockade.