Imagine deterrence fails and China successfully takes Taiwan. How would it affect the U.S. economy and inform whether the U.S. should fight China for Taiwan’s freedom?

Losing Taiwan would be an unrecoverable blow to America’s strength and influence. An absorption of Taiwan’s GDP into China would give it enhanced market power. Taiwan’s centrality to the sea’s busiest lanes of international commerce would give China an even greater launching pad to dominate Asia. Would China abuse its economic superiority and new position atop the strategic crossways of Asia? Its current economic behavior suggests it would.

First, the Chinese are already flagrant violators of trading rules. A Taiwan takeover would give Beijing increased leverage over its regional trading partners and would afford China more opportunity to bend or break rules to its benefit. Already the U.S. has shelved its trade ambitions in Asia by abandoning the Trans-Pacific Partnership. A takeover of Taiwan further cedes the field to the Chinese alternative, the Regional Comprehensive Economic Partnership (RCEP). China could use RCEP to further set the rules of global trade and deepen its economic relationships in Asia at the expense of the U.S.

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Second, a Taiwan takeover would afford the Chinese opportunities for hostile economic activity like preventing or taxing ships in "its waters." Would China abuse its new position? China is certainly capable of such brazenness. Just consider the Chinese "land grab" in the South China Sea. Through a campaign of militarization and coercion over the last decade, China has built massive artificial island bases and actively sought control over virtually all the waters, seabed, and airspace of the South China Sea. Also, in April 2020, a China Coast Guard vessel rammed and sank a Vietnamese fishing boat. Taiwan would give China a new platform to engage in gray zone activities to bully its neighbors for economic benefit. 

Third, a Chinese takeover would put Asia-centric supply chains at the mercy of the Chinese. Take for example the disruptions due to COVID-19. Thousands of unfinished cars and trucks sit idle awaiting Taiwan’s chips which are also critical to smartphones, computers and home appliances. Some reports indicate this cost the U.S. economy $240 million. But this could be modest when compared to China’s new leverage over Taiwan’s semiconductor manufacturing.

Taiwan makes 65% of the world’s semiconductors and almost 90% of advanced chips. One study estimates a one-year loss of $490 billion in global electronics companies in the event of a yearlong disruption. Chinese control of Taiwan’s semiconductor capacity is an unacceptably high risk to the U.S. economy when considering that Taiwan accounts for roughly 70% of the world’s microchip supply.

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Finally, we can expect a China augmented by Taiwan’s market power to exert economic coercion on its neighbors, many of whom are our allies. Just take the example of their relations with Australia. China made 14 infamous demands, among them, that Australia cease faulting China on human rights and other "internal matters." As leverage, China cut off some market access with astronomical tariffs on barley, beef, and wine. Relations between Australia and China went into a near-freeze for two years and are only recently normalizing. China is already the leading trade partner of roughly 130 countries many of whom could conclude that they cannot afford to cross China.

A Chinese takeover of Taiwan is an unacceptably high risk for the U.S. economy. But would the U.S. fight for Taiwan? For deterrence to work, China must believe the American people would lend their support. 

President Joe Biden, on numerous occasions, has suggested we would fight for Taiwan, but his staff confuses the issue by insisting that the U.S. policy has not changed. Although the American distrust of China explains support for Taiwan generally, that’s a far cry from public support for fighting China for Taiwan’s freedom. 

The potential economic harm from a Chinese Taiwan takeover is very serious and the president and members of Congress should explain the stakes to the American people. Public support is fundamental to deterrence and without it, China could reasonably conclude that the American people would never fight a war over a faraway island thousands of miles away.