China’s military exercises in the waters around Taiwan this month — the largest in almost three decades — highlight the growing risk of a total breakdown in United States-China relations. A full-scale invasion of Taiwan is one eventuality; last year, the C.I.A. director, William Burns, noted that China’s president, Xi Jinping, has instructed his armed forces to be ready for an invasion by 2027.
That isn’t Mr. Xi’s only option. He could use his far larger coast guard and military to impose a “quarantine,” allowing merchant shippers and commercial airlines to travel in and out of Taiwan only on China’s terms. This strategy would mirror Beijing’s moves in the South China Sea, where its coast guard is trying to assert control over waters and atolls that are part of the Philippines, a U.S. treaty ally.
If China forces a confrontation over Taiwan, which Beijing claims as its own territory, the United States will need to respond decisively: The implications are enormous, potentially including a global economic crisis far worse than the shock caused by the Covid-19 pandemic.
Right now, America isn’t ready.
As a report from a House panel concluded last year: “The United States lacks a contingency plan for the economic and financial impacts of conflict” with China.
Addressing this lack of preparation must be a bipartisan priority. The incoming administration must 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 is anchored in American economic leadership.
The most obvious economic implications relate to semiconductors. Taiwan Semiconductor Manufacturing Company produces about 90 percent of the world’s most advanced computer chips. Some are now made in Arizona, but T.S.M.C.’s most cutting-edge chips are still produced in Taiwan. Industries from autos to medical devices depend on these chips; if Taiwanese chip production is disabled, the global economy could be plunged into a deep slump. If T.S.M.C.’s factories fall into China’s hands — it relies on T.S.M.C.’s chips, too — Beijing could seize a competitive edge, including in the development of artificial intelligence technology, and have American and European manufacturers over a barrel.
But an invasion or quarantine of Taiwan matters economically for reasons far beyond semiconductor production. Two commitments form the basis of the economic order in the Indo-Pacific: The first is America’s warning, in the Taiwan Relations Act of 1979, that any violent move to threaten Taiwan’s political or economic autonomy would be a matter of “grave concern” to the United States. The second is China’s commitment, in 1982, to pursue unification with Taiwan through peaceful means, which Mr. Xi himself describes as part of the political foundation of U.S.-China relations.
If the United States failed to act in response to an invasion or quarantine, allies including Japan, South Korea, Australia and the Philippines would become more vulnerable to economic coercion in turn. America’s relationships with its closest allies would be called into question.
The United States, then, needs economic contingency plans for any Taiwan crisis.
Economic sanctions like those America has employed against Iran and Russia might seem superficially attractive, but because of China’s central role in global supply chains, similar efforts that disrupt its ability to trade would be self-defeating.
Indeed, imposing sweeping sanctions on China would undermine the international economic system that the United States is uniquely positioned to protect. Allies and neutral countries alike might refuse to cooperate with an American-led sanctions regime, given the huge costs of compliance for their own economies. Many Americans would find the probable rise in prices of consumer goods untenable.
Our leaders must face reality: China cannot be sidelined or expelled from the global economy. Instead, the United States needs an affirmative vision for how it would respond in a Taiwan crisis to defend the global economy. Such a plan would involve three key elements.
During and after any Taiwan crisis, markets would be in a state of panic. The Federal Reserve would need to coordinate with other countries’ central banks to provide liquidity to prevent global financial collapse. And to sustain 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 American national security interests.
Washington would also have to work with allies on a crash reshoring of critical products from China on which America and other countries have become heavily dependent, including active pharmaceutical ingredients and drones. (In September, the House passed the Biosecure Act, legislation aimed at strategic decoupling from China in the area of biotechnology, but that has stalled in the Senate.)
To reduce reliance on noncritical consumer goods from China — think toasters and toys — the United States should adopt a gradual approach. A system of predictable, incrementally increasing tariffs on Chinese imports could guide manufacturers, importers and retailers to move production out of China without causing sudden inflationary pressures — unlike Donald Trump’s proposed approach of threatening immediate high tariffs to bargain for concessions. Washington shouldn’t try to direct the production of noncritical goods. Instead, it should work to create a level playing field, allowing countries to compete to attract production that moves out of China.
Putting this vision into effect would not be easy. China would very likely retaliate, including by punishing foreign companies in China. Still, building an inclusive economic security framework would be the best defense against the threat of disruption to trade and financial markets. To maintain international solidarity, a U.S.-led coalition would need to aid all countries that are the target of Chinese economic coercion.
Gaining political support for the kind of spending this would require wouldn’t be easy. A reasonable first step would be congressional hearings on the economic impact of a confrontation over Taiwan, with the eventual goal of drafting legislation that can be pulled off the shelf if a crisis arrives.
Whatever the answers, Washington needs to address these questions before something happens. Remember: If China invades or quarantines Taiwan, it wouldn’t just be targeting one island nation. It would be seeking to forcibly reshape the Indo-Pacific regional order and undermine the rules-based global economy. Without a plan, a Taiwan crisis risks undermining the foundations of American prosperity and security.
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