A global economic shock will trigger a conflict over Taiwan, the US is warning European countries in a bid to speed up contingency planning amid growing concern about military action in the Indo-Pacific.
The State Department has shared research with Western partners and allies that estimates a Chinese blockade of Taiwan would cause annual economic losses of $2.5 trillion, according to six people familiar with the research, which was commissioned by the Rhodium Group.
The stern warning was communicated to with European Commission and European government officials as the US and partners begin to consider how they might use sanctions against China for any military action against Taiwan, the Financial Times reported.
Washington is using the report to stress to European countries that a conflict in Taiwan would have significant implications for them as well.
Two officials said the US and EU had begun talks on how to prepare for a potential conflict over Taiwan.
The Financial Times earlier this year reported that the US had held emergency planning talks with the UK for the first time.
Two people familiar with US-EU discussions said some officials believe preparing contingency plans and making them public could become part of a strategy to deter China.
Some US and European officials argue that the spectrum of massive global economic damage from a conflict in Taiwan is necessary to gather international support to deter China.
The US also used the example of the Russian invasion of Ukraine to emphasize the need to consider contingencies.
The sharing of the research comes as senior US officials and military officials are increasingly talking about the threat facing Taiwan.
Foreign Secretary Antony Blinken noted twice last month that the US believes China has stepped up efforts to “reunify” with Taiwan.
Joe Biden and Xi Jiping are expected to discuss Taiwan when the US and Chinese presidents hold their first face-to-face meeting as leaders in Bali on Monday (11/14) on the sidelines of the G20 summit.
Over the past year, Biden has said on four occasions that the US would defend Taiwan against an unprovoked Chinese attack.
The State Department declined to comment on the report.
A spokesman emphasized that the US has “an enduring interest in peace and stability in the Taiwan Strait, which is a matter of international concern.”
A senior EU official compared the release of the report to the US move last year to release information about Russia’s military build-up around Ukraine, when some EU countries rejected the idea that Vladimir Putin would invade.
“We have learned a lesson from this,” the official added.
Daniel Rosen, a partner at Rhodium, declined to comment on whether the consulting firm had prepared a report for the State Department. However, he said the company had worked on financial scenarios related to Taiwan for years.
The report said Taiwan would take the biggest hit, but the economic consequences in China would also be huge and the effects would reverberate throughout the global economy.
He said Southeast Asia – a region where many countries want to avoid taking sides and claim that a China-Taiwan conflict has nothing to do with them – would take a big economic hit.
In terms of industries, semiconductor-dependent supply chains led by the automotive, server and PC and mobile phone sectors will suffer the most disruption, the report predicts.
The US has grown increasingly concerned in recent years about its reliance on Taiwan for chips.
The report warns that trade finance for Chinese companies will dry up once Beijing crosses the conflict line over Taiwan, causing a major shock to global trade.
It also said that because of China’s importance as an economic partner to developing countries, such a shock could push more than a dozen emerging markets into financial crisis.
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