China’s military exercises in the waters around Taiwan this month — the largest in nearly three decades — highlight the growing risk of a total collapse in relations between United States and China. One possibility is a full-scale invasion of Taiwan; Last year, CIA Director William Burns noted that China’s president, Xi Jinpinghas instructed its armed forces to be prepared for an invasion in 2027.
That is not Xi’s only option. It could use its much larger coast guard and military to impose a “quarantine,” allowing merchant ships and commercial airlines to enter and leave Taiwan only on China’s terms. This strategy would reflect Beijing’s actions in the South China Seawhere its coast guard is trying to assert control over the waters and atolls that are part of the Philippines, a treaty ally of the United States.
If China forces a confrontation over Taiwan, which Beijing claims as its territory, the United States will have to respond decisively: the implications are enormous and could include a global economic crisis far worse than the shock caused by the Covid-19 pandemic.
Right now, the United States is not prepared.
As a House panel report concluded last year: “The United States lacks a contingency plan for the economic and financial fallout from the conflict” with China.
Addressing this lack of preparedness must be a bipartisan priority. The incoming administration should work with Congress and allied governments to develop a coherent plan that clearly outlines a vision for the global economy during and after a crisis that builds on American economic leadership.
The most obvious economic implications relate to semiconductors. Taiwan Semiconductor Manufacturing Company It produces about 90 percent of the world’s most advanced computer chips. Some of them are now made in Arizona, but TSMC’s most advanced chips are still produced in Taiwan. Industries ranging from automotive to medical devices depend on these chips; If Taiwanese chip production is disabled, the global economy could plunge into a deep recession. If TSMC’s factories fall into the hands of China (which also relies on TSMC chips), Beijing could gain a competitive advantage, including in the development of artificial intelligence technology, and put American and European manufacturers in a dire situation. .
But an invasion or quarantine of Taiwan is economically important for reasons that go far beyond semiconductor production. Two commitments form the basis of the economic order in the Indo-Pacific: the first is the warning of the United States, in the Taiwan Relations Law 1979, that any violent action that threatened Taiwan’s political or economic autonomy would be a matter of “grave concern” for the United States. The second is China’s commitment, in 1982, to seek unification with Taiwan through peaceful means, which Xi himself describes as part of the political basis of relations between United States and China.
If the United States did not act in response to an invasion or quarantine, allies such as Japan, South Korea, Australia, and the Philippines would in turn become more vulnerable to economic coercion. The United States’ relations with its closest allies would be called into question.
The United States, then, needs economic contingency plans for any crisis in Taiwan.
Economic sanctions like those the United States has employed against Iran and Russia may seem superficially attractive, but given China’s central role in global supply chains, similar efforts that disrupt its ability to trade would be counterproductive.
In fact, imposing sweeping sanctions on China would undermine the international economic system that the United States is uniquely positioned to protect. Both allies and neutral countries could refuse to cooperate with a US-led sanctions regime, given the enormous costs that compliance entails for their own economies. Many Americans would consider the likely rise in prices of consumer goods unsustainable.
Our leaders must face reality: China cannot be marginalized or expelled from the global economy. Instead, the United States needs an affirmative view of how it would respond in a Taiwan crisis to defend the global economy. Such a plan would include three key elements.
During and after any Taiwan crisis, markets would be in a state of panic. The Federal Reserve would have to coordinate with other countries’ central banks to provide liquidity to avoid a global financial collapse. And to maintain business confidence in the international trading system, the United States and its allies should establish and fund an Economic Security Cooperation Board, open to all nations except rogue states. This board would combine financial support for member countries with a framework for enforcing trade policies rooted in US national security interests.
Washington would also need to work with its allies to urgently repatriate critical products from China, which the United States and other countries have become heavily dependent on, including active pharmaceutical ingredients and drones. (In September, the House of Representatives passed the Biosafety Act, legislation aimed at strategically disengaging from China in the area of biotechnology, but which has stalled in the Senate.)
To reduce dependence on non-critical consumer goods from China (think toasters and toys), the United States should take a gradual approach. A system of predictable, gradually increasing tariffs on Chinese imports could guide manufacturers, importers and retailers to shift production out of China without causing sudden inflationary pressures, unlike Donald Trump’s proposed approach of threatening immediate high tariffs for negotiate concessions. Washington should not try to direct the production of non-critical goods. Instead, it should work to create a level playing field, allowing countries to compete to attract production that moves out of China.
It would not be easy to put this vision into practice. China is very likely to retaliate, including by punishing foreign companies in China. Still, building an inclusive economic security framework would be the best defense against the threat of disruptions in trade and financial markets. To maintain international solidarity, a US-led coalition would have to help all countries that are targets of Chinese economic coercion.
Getting political support for the kind of spending this would require would not be easy. A reasonable first step would be to hold congressional hearings on the economic impact of a confrontation over Taiwan, with the ultimate goal of drafting legislation that can be taken off the shelf if a crisis occurs.
Whatever the answers, Washington must address these questions before anything happens. Remember: if China invades or quarantines Taiwan, it wouldn’t just be targeting an island nation. It would be seeking to forcibly reframe the Indo-Pacific regional order and undermine the rules-based global economy. Without a plan, a crisis in Taiwan risks undermining the foundations of American prosperity and security.
© The New York Times 2024.
