Working Paper

The economic effects of a potential armed conflict over Taiwan

Abstract: This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, banking problems, and would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only marginal effects on yields in the longer term. Long-term effects would include disrupted trade, higher price levels, higher levels of nominal debt and higher taxes.

Keywords: war; Taiwan; foreign exchange reserves; asset prices; flight-to-safety; international trade; sanctions;

JEL Classification: H56; F40; O24; G14; G15; G12;

https://doi.org/10.20955/wp.2024.034

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2024-09-27

Number: 2024-034