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Taiwan-China: An Outright Invasion Would Be A Serious Threat To The Global Economy

The recent escalation in tensions surrounding Taiwan's status raises the spectre of yet another regional conflict with adverse consequences for the global economy. An outright invasion of Taiwan by China would likely fuel significant militarisation within the region. Combined with ensuing sanctions, this would cause a major rupture in global supply chains and weaken global growth. The ultimate impact would depend on the length and severity of the conflict and any resulting sanctions and counter-sanctions. DBRS Morningstar takes the view that other forms of intervention into what Chinese authorities view to be a renegade province could elicit a similar, albeit more gradual policy response.

DBRS Morningstar also takes the view that given the strong trade links of China and Taiwan with major advanced economies and both countries' roles as crucial suppliers of important industrial input goods (e.g. semiconductors, rare earths), these rising tensions could have a far more significant economic and financial impact than the current conflict between Russia and Ukraine. This alone gives strong reasons for China and the major advanced countries to seek to avoid direct conflict, but as history tells us, economic disincentives often don't preclude military action. DBRS Morningstar highlights the importance of Taiwan and China to the global economy, and discusses some of the potential transmission channels and overall impact on sovereigns.

Key Highlights:
-- The recent tensions surrounding Taiwan's status raise the possibility of a global recession.
-- Weaker demand would be accompanied by increased shortages of key consumer and manufacturing goods and rare commodities, potentially leading to rising inflation and severe financial market volatility.
-- A trade war and/or sanctions and counter-sanctions regimes would be very damaging for both sides.

"In an outright invasion of Taiwan by China, a broad range of sovereign ratings could come under downward pressure, but especially China, countries with close trade and investment links with China and those in the Asian region," said Nichola James, Co-Head of Sovereign Ratings, DBRS Morningstar. "Manufacturers in the advanced economies would face significant supply chain problems, which could be very costly to the more export-oriented economies such as Germany." Thomas Torgerson, Co-Head of Sovereign Ratings, DBRS Morningstar, added: "Countries outside the Asia region could be adversely affected by a deteriorating global growth outlook, increased demands for security spending, and significant disruptions in global trade flows. Countries most likely to oppose Chinese intervention in Taiwan, particularly the U.S., (AAA, Stable) would face additional fiscal demands and difficult political decisions regarding the extent of their own military interventions and sanctions."