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Monday, August 8, 2022

OPINION:

An economical and/or hot war between China and Taiwan will be a global economic and political disaster.

Upon taking office, President Biden took actions to implement his promised war against the oil and gas industry. He shut down the Keystone Pipeline, restricted oil and gas drilling of federal lands, and took other actions to reduce future supply. Almost none of his actions affected supply and production at that time, but even so, oil and gas prices immediately began to rise — well before Russian President Vladimir Putin’s invasion of Ukraine. Why did this happen?


These price rises — along with Fed monetary policy — helped to ignite inflation, which has had the predictable result of hurting lower-income people (as they say, women, children and people of color) much harder than old, white, well-educated males. Many of the Biden people seemed surprised by what happened. It is obvious that the president’s actions were not “gamed out” beforehand.

Useful game theory was invented and developed by John von Neumann, John Nash and others when programmable computers first became available nearly 80 years ago. The military was one of the first users because the ability to look at the probable consequences of different policies, strategies and tactics was critical to their mission (being able to look beyond stage I).

Game theory was quickly adopted by businesses because it gave them a powerful tool in evaluating competitive strategies. Most MBA programs have had game theory as part of their course of study since at least the 1960s. Through the use of experiments and games, economists like Nobel laureate Vernon Smith have been able to prove or disprove many of the insights of the leading economic thinkers of the past 200 years.

It is striking to the extent that Biden administration policymakers and their allies in the Congress and media have been in denial about the economic consequences of their actions. Their spending, taxing and regulatory actions have been grossly irresponsible and have put us in a very precarious situation if a war breaks out between China and Taiwan. They appear to have “gamed out” nothing.

The Europeans, particularly the Germans, have been even more irresponsible for the last number of years. They have crucified themselves on the altar of global warming — assuming they could shut down their nuclear and coal plants and just rely on Russian gas. How has that worked out? The Germans and many other Europeans are in for a cold dark winter.

Now consider what will happen if China attacks Taiwan. For the last half-century, we (of the Western political, economic and military establishment) assumed that if we deepened economic ties (trade and investment) with the communist Chinese, they would moderate their political system in the same way they moderated their economic system. In many ways, the EU served as a model because, as the European economies became increasingly integrated, war between ancient enemies was viewed as impossible. Up till the reign of President Xi Jinping, China appeared to be becoming less authoritarian.

Most large global companies now produce and sell products in China. China became the largest trade partner of the U.S. (The U.S. has a massive trade deficit with China, but it is offset by the Chinese purchase of U.S. government securities and other Chinese investments in the U.S.) Their currency is indirectly tied to the U.S. dollar. Americans consume massive amounts of Chinese-made manufactured products. At the same time, the Chinese are a huge customer of American agricultural products. China-U.S. trade accounts for about 2% of U.S. GDP and 3% of China’s GDP (not counting Hong Kong).

The economic ties between China and Taiwan are much greater, with China accounting for 28% of Taiwan’s exports last year, while the U.S. share was 15%. Taiwan runs a very large trade surplus with China, offset by heavy Taiwanese investments in China. The Chinese also have major investments in Taiwan.

It is not so much the volume of trade that is important, but how much of it cannot be readily substituted from other countries in a crisis. There is much talk about global supply chains, as illustrated by Apple, which sources parts for the iPhone from 43 countries. Apple probably has sufficient redundancy in its supply chain to be able to quickly switch from one supplier to another. The problem with Taiwan is that it is a very high-tech center, producing certain products like high-end semi-conductors that no other country does, including the U.S. and China.

It would seem improbable that China would bomb Taiwan back to the stone age, which it could, but that would destroy its value. More likely, China will blockade Taiwan, destroying its economy and ability to obtain adequate food. The Biden administration is likely to try to avoid a hot war with China over a blockade of Taiwan. A hot war or even a blockade would be economic and probably military suicide for both China and the U.S. It would so disrupt the world supply chain that global chaos would reign for many months — leading to many unforeseen consequences, including even nuclear war. Let us hope that all the alternatives have been “gamed.”

It is worth remembering that WWI — a war no one wanted — was caused by a series of miscalculations by weak leaders.

• Richard W. Rahn is chair of the Institute for Global Economic Growth and MCon LLC.


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