From: allin
The potential for conflict between China and Taiwan carries significant global economic implications, particularly concerning the existing deep economic ties between the United States and China [09:23:00]. This potential conflict is seen as a major global risk, following regional conflicts like those in Ukraine and Gaza [06:35:00].
US Policy on Taiwan
The current US policy regarding Taiwan is one of strategic ambiguity, where the US does not explicitly state its intentions if China were to invade [07:31:00]. This approach is considered to have the “virtue of being correct” and potentially the “best” policy, as any precise declaration could “lead to war right away” [07:41:00]. While avoiding World War III is paramount [08:26:00], it would be “quite catastrophic” if Taiwan were taken over [08:32:00].
Economic Decoupling
A potential military conflict between China and Taiwan is predicted to trigger a severe economic decoupling between the US and China [09:13:00]. This is likened to “100 pipelines” blowing up, analogous to the Nord Stream pipeline between Russia and Germany [09:20:00]. The intuition is that this decoupling is inevitable [12:35:00].
Impact on Businesses
Businesses are deeply “coupled” to China through various means, including direct investment, competition within China, and establishing factories for export [11:01:00].
- Domestic Competition: Investing in companies that compete domestically within China is viewed as “virtually impossible” [11:27:00].
- Investing in Chinese Businesses: This is considered “quite tricky” [11:34:00].
- Manufacturing for Export: Many businesses have set up factories in China for export to the West, leveraging significant labor cost arbitrage, with workers earning 2 an hour and living in crowded dorms [11:51:00]. Shifting manufacturing, such as iPhone factories, to the United States is “not that straightforward” [12:16:00].
Decoupling Example: TikTok
The TikTok scenario illustrates the risk: the TikTok CEO was advised to completely decouple the business from ByteDance and China by moving computers and people out [09:48:00]. This was because TikTok was predicted to be banned within 24 hours of a Taiwan invasion, destroying 100% of its value [09:54:00]. The CEO’s belief that companies could sell to both sides in a conflict was dismissed as naive [10:15:00].
The advice given was for every industry leader to consider decoupling from China, describing continued engagement as “picking up nickels in front of a freight train” [10:50:00].
Economic Consequences of Decoupling
The decoupling process is expected to be “pretty inflationary” [12:44:00]. However, it might not be as inflationary as some models suggest, as trade is often modeled between two countries, not considering third-party options [13:02:00]. Instead of reshoring manufacturing to the US, which would be “insanely expensive” [13:13:00], production could shift to other countries like Vietnam or Mexico, where incomes are lower than in China [13:22:00]. This represents a “negative sum trade policy” that would be somewhat detrimental to the US, “extremely bad for China,” and beneficial for countries like Vietnam [13:34:00].
Avoiding Conflict
Avoiding a conflict is not solely up to the US [14:33:00]. A key challenge is China’s deep-seated belief in a historical conflict, often framed by the “Thucydides Trap” — a rising power clashing with an existing one [14:55:00]. To avoid conflict, there must be an admission that China views conflict as inevitable [15:30:00]. Simply promoting “happy talk” is seen as a “recipe for war” [15:40:00]. While engagement with adversaries is generally a good idea [16:01:00], the current US administration’s inability to maintain back-channel communication with countries like Russia is seen as problematic [16:18:00].