Why deglobalisation brings war closer over Taiwan

Before Nancy Pelosi’s arrival in Taiwan, Beijing and its proxies have promised a thunderous response, one that befits the House Speaker’s stature in Washington as third in line to the US presidency.

Such threats usually conjure the prospect of a military response. The worst-case scenario in the current stand-off is Chinese fighter jets preventing Pelosi’s plane from landing in Taipei.

The prospect of a potential military conflict between nuclear-armed superpowers the US and China naturally occupies most of the political commentary on Taiwan, in Australia and elsewhere.

The threat is real enough. Because Pelosi will be travelling on an air force plane, any attempt to intercept her would trigger a response from US jets that will be flying nearby.

But the focus on war saps attention from the economic fallout from a conflict over Taiwan, which would arguably be far greater and which would be felt in almost every corner of the globe.

China and the US and their allies and partners have long been trying to mitigate the economic impact of a conflict through the process known by the buzzword of decoupling.

By decoupling their economies, both countries and their partners try to make themselves self-sufficient in everything from strategic resources to daily necessities.

Small garden, high walls

Anyone who has looked at this, be it in Washington, Brussels, Beijing or Canberra, has worked out that a comprehensive decoupling is all but impossible in world of tightly interconnected supply chains.

Hence, the fashion to speak of “small d” decoupling, which in theory allows governments to target sectors essential for a functioning industrial economy, such as high-end semiconductors, rare earths and pharmaceutical chemicals.

In Washington, this policy goes by the shorthand of building “a small garden with high walls”. In other words, putting prohibitively tight barriers around a limited supply of strategic goods to protect national security.

In turn, the notion of “small d” decoupling dovetails with the other favoured backstop to contain superpower tensions, “managed competition”, in which the US and China negotiate strategic off-ramps and guardrails to prevent a slide into war.

As Kevin Rudd writes in his recent book The Avoidable War, the alternative to managed competition is allowing “the primordial dimensions of Thucydidean logic to simply take their natural course, ultimately culminating in crisis, conflict, or even war”.

Given the dimensions of the possible conflict between the US and China, some form of managed competition would be a fantastic result.

Military conflict over Taiwan is neither certain nor inevitable, but it is increasingly possible.

But the notion that a stable solution can be negotiated between the superpowers is so beguiling that the much worse, though plausible, alternative is barely talked about in public.

In even a limited conflict involving Taiwan, “small d” decoupling would not cut it. You would have wholesale decoupling within a week.

Container ships with cargos to fill Wal-Marts in the US and Bunnings in Australia would cease. There would be no more iron ore bulk carriers departing from the Pilbara to ports in China.

The interruption of chips from Taiwan Semiconductor Manufacturing, which alone makes about half the world’s semiconductors, would bring the manufacture of everything from the iPhone to other electronics to a rapid halt.

China, Japan, South Korea, Taiwan and parts of South-East Asia are now locked into a seamless supply chain for all manner of goods. These links would be severed almost overnight.

That may sound alarmist, but it is the sort of scenario that policymakers, including in Australia, are having to contemplate.

The good news is that China has as much at stake as its rivals to find a modus vivendi. Its biggest import is semiconductors. Oil and energy are next. China needs foreign soybeans to feed its population and iron ore to fill demand for steel.

China has been quietly eyeing decoupling for decades. It is now part of official policy, under the name of building a “dual circulation” economy. But the country’s import profile means it is a long way from where it wants to be.

Military conflict over Taiwan is neither certain nor inevitable, but it is increasingly possible.

Decoupling was once considered to be the path to stabilising superpower competition. The less leverage each country felt they had over each other, the more secure they would feel in their own walled gardens.

In truth, the opposite is the case. The less integrated the global economy, the more likely that each side thinks they could survive a military clash, and the more they might countenance one.