China’s growing pressure on Taiwan has heightened fears of military conflict, but the economic costs of such a move could be severe and far-reaching. From disrupted supply chains to investor flight and energy insecurity, war would jeopardise China’s long-term ambitions and destabilise the global economy.

Tensions in the Taiwan Strait have reached a critical juncture, prompting renewed fears of conflict. On 31 March 2025, China launched fresh military drills near Taiwan, stepping up pressure on President Lai Ching-te and intensifying regional unease. While much attention has been given to the military and geopolitical dimensions, the economic consequences of any significant conflict—ranging from a limited military engagement to a prolonged total war—could be catastrophic, not only for the region but for the global economy. Despite its growing assertiveness, China stands to lose far more than it could ever gain.

China’s economy is fundamentally dependent on exports. A war that severs access to international markets would be devastating. Sanctions, blockades, and retaliatory measures from the West could significantly reduce China’s trade volume, leading to factory closures and rising unemployment. As global supply chains adjust, major multinational corporations may accelerate their exit from China, shifting production to more stable regions such as India, Vietnam, and Mexico. Unlike past conflicts, where war economies could sustain prolonged engagements, China’s industrial base is built on just-in-time production and global integration. While parts of the domestic economy may show greater resilience, a war would introduce significant economic uncertainty, and recovery could be prolonged depending on the scale of financial disruption and policy response.

A conflict would likely weaken the Chinese yuan as investors seek safer assets, prompting Beijing to tighten capital controls to stem financial outflows. While this may cushion short-term shocks, it could further erode investor confidence and limit foreign capital inflows. Given the centrality of real estate to China’s domestic economy—fuelling household wealth, local government revenue, and corporate borrowing—such instability would exacerbate vulnerabilities in an already fragile sector. With consumer confidence waning and economic uncertainty mounting, a prolonged downturn could entrench stagnation, making recovery increasingly difficult.

Compounding this issue is the fragility and interconnection of modern supply chains. The notion of total war—where an economy fully pivots to wartime production, is increasingly difficult to sustain in a globally interconnected economy, as manufacturers depend on complex international supply networks. China’s dominance in global manufacturing is contingent on access to foreign technology, raw materials, and semiconductor components, many of which originate in Taiwan and other US-aligned nations. A war would not only disrupt these supply chains but also force multinational corporations to accelerate their diversification efforts away from China—or, in the event of a total war, risk the nationalisation or seizure of their China-based assets—permanently altering the global economic landscape.

Beyond the direct military and economic risks, the financial entanglement between China and Taiwan adds another layer of complexity. Taiwan’s business elite, including billionaires and corporate magnates, have deep financial ties to China. Over the past few decades, Taiwan’s high-net-worth individuals and businesses have invested heavily in China, integrating their fortunes with cross-strait economic stability. While a China-Taiwan conflict could trigger capital flight and destabilise Taiwan’s economy, an escalation involving the United States would likely overshadow these effects amid broader global financial turmoil.

While national security concerns remain paramount, these economic realities act as a counterbalance against any reckless escalation by Taiwan’s leadership, such as a declaration of independence. For the time being, Taiwan’s role in the global semiconductor industry makes stability essential. As the world’s leading producer of advanced microchips, Taiwan holds  a critical and difficult to replace position in global supply chains. Any military conflict would disrupt production, sending shockwaves through industries reliant on semiconductors, from consumer electronics to military defence systems. The economic incentive for maintaining peace is therefore not just a Taiwanese concern—it is a global one.

One of the most pressing concerns for China in a prolonged conflict is energy independence—or rather, its lack thereof. China remains highly dependent on imported energy, particularly oil and natural gas, with major supplies coming from the Middle East and Australia. Any conflict with Taiwan would likely trigger blockades and sanctions that could severely disrupt these imports. The US and its allies have the capability to restrict China’s access to critical energy supplies, particularly by asserting naval dominance over key strategic chokepoints such as the Malacca Strait and the South China Sea.

China’s demographic trajectory presents another long-term economic challenge. The country is already facing an impending population decline due to low birth rates and an aging workforce—trends that place growing strain on economic productivity and social stability. A large-scale conflict would likely exacerbate these pressures, leading to workforce disruptions, population displacement, and an accelerated erosion of economic confidence, all of which would further weaken China’s long-term growth prospects. Already, its growth model is under immense strain due to an impressive real estate bubble and dwindling productivity gains. A military conflict could be a turning point that accelerates economic stagnation.

History is replete with examples of military leadership suffering from overconfidence, leading to disastrous strategic miscalculations. China’s high command, like many before it, operates within an incentive structure that encourages optimism and aggressive posturing. It’s tightly controlled political system not only suppresses dissent across society and within the military and political circles, but also incentivises the overreporting of successes and the concealment of failures. Much like during the Great Leap Forward, officials may exaggerate capabilities and outcomes to meet unrealistic benchmarks and avoid punishment, creating a distorted internal feedback loop that could lead to catastrophic miscalculations in a conflict scenario.  Without internal checks, China’s leadership may misjudge its ability to withstand the economic and military fallout of a prolonged conflict. The decision to go to war, once made, could be nearly impossible to reverse, regardless of its consequences. The risk is that decision-makers in Beijing could underestimate Taiwan’s defensive capabilities, the effectiveness of US military intervention, or the broader economic ramifications of war.

One of the most overlooked economic deterrents to war is the massive debt burden carried by the major players involved. China, the United States, and Japan—the three largest economies that would be affected—are all deeply indebted. A large-scale war would necessitate massive military expenditures, further inflating deficits and creating financial instability. While China could seek to finance these costs through domestic bond issuance—similar to war bond efforts seen historically in other nations—the strain on household savings, banking liquidity, and broader economic confidence would still be significant. China’s economic model has historically been a pillar of social stability, and a major downturn could test the Chinese Communist Party’s ability to maintain control. For the US and Japan, the economic costs of war would similarly be unsustainable, leading to market disruptions and inflationary pressures that could ripple across the world.

Conclusion: A high-stakes gamble for China

China’s strategic calculus in a potential war with Taiwan must consider not just military risks but also crippling economic consequences. While few powers in past conflicts, such as the United States and briefly Germany, managed to sustain prolonged wars through relatively self-sufficient wartime economies, modern global interdependence presents a far greater challenge. Despite China’s decade-long drive for greater self-reliance, the economic risk it faces make war a perilous gamble rather than a strategic opportunity.

A conflict in the Taiwan Strait would likely prove to be an economic disaster, not just for China but for the entire world. While the risks of conflict remain, the evidence overwhelmingly suggests that China has far more to lose than to gain, making military action an unwise gambit that could permanently derail its economic ambitions.

Joseph Zeller is a Senior Manager at the Australian Maritime Safety Authority and a serving naval officer with extensive experience in defence and national security. He is a graduate of the Australian War College (Australian Command and Staff Course) and holds a Master of Business Administration (ANU), a Master of Policing, Intelligence, and Counter Terrorism (Macquarie University), and a Bachelor of Policing (Charles Sturt University). Joseph Zeller | LinkedIn

This article is published under a Creative Commons License and may be republished with attribution.