US-China War Would Be Economic Disaster for Both
Comment of the Day

September 19 2023

Commentary by Eoin Treacy

US-China War Would Be Economic Disaster for Both

Thanks to a subscriber for this article by Niall Ferguson. Here is a section:

It is impossible to say how far the Chinese would prepare for a full-scale war with the US in the scenario of a blockade. It’s estimated by Western experts that that it would need a minimum of four months to be ready for prime time. The dilemma for Chinese strategists is that, if there is to be a war with the US, they would be better off striking the first blow, probably by attacking American naval assets in the Indo-Pacific, exploiting the classic vulnerability of ships in port.

Eoin Treacy's view

Taiwan’s younger generation have no personal memory of the flood of refugees fleeing Communist rule. There has been a generational change and the continued success of the Democratic Party is a clear sign the population has no intention of ever recombining with China voluntarily. Therefore the are only two ways Taiwan can be encouraged to come back to the mainland fold.

The first is economic. Right now, Taiwan is a geopolitical jewel because of the strength of the semiconductor sector and the local ecosystem that supports it. However, the semiconductor sector has always been cyclical, capital intensive and low margin. That’s why companies were willing to stop competing for the prize of being the most efficient.

China is currently building large numbers of older generation fabs. Once complete, that will flood the market with low cost chips and the established global base of manufacturing will be devalued. The most fervent hope must be that a deep Taiwanese recession would be enough for the island to rely on China’s economic support and be reabsorbed. The cyclicality of the semiconductor sector is still intact and the jump in supply is inevitable but I don’t believe a recession would encourage Taiwan to recombine with China.
The Philadelphia Semiconductors Index continues to pause in the region of the 2021 peak and above the 200-day MA. The next area of potential support would be the 1000-day MA.

The second is military. If it is going to take four months for the Chinese to be ready to invade or blockade, I would expect a massive airlift of engineers out of Taiwan. Once vital people have been exfiltrated the obvious counter measure would be to bomb manufacturing capacity. Destruction of the Nord stream pipeline is another example of this kind of strategy. There is no way the rest of the world is going to tolerate China controlling the primary location of top grade manufacturing capacity.

Meanwhile, the bifurcation of the global economy continues at pace. India, Mexico, and Vietnam are the primary beneficiaries. 

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