Global Shock: Concerns Grow Over Possible U.S.-China Military Conflict

Analysts suggest the current trend toward deglobalization – movement away from cooperation and interconnectivity among governments and economies – began with the Great Recession. For many nations, the financial crisis suggested they had become too dependent on other countries for goods and services.[1]

Since then, the world has been subject to a steady stream of various global shocks and stresses – Brexit, the global pandemic, and Russia’s invasion of Ukraine, to name just three. And against the backdrop of those shocks and stresses, the deglobalization trend has intensified.[2]

We tend to think of deglobalization as an economic phenomenon. But there can be other manifestations, as well, including military conflict.

“Financial crises can amplify global economic inequalities; inequality feeds populism; populism generates conflict,” explains Erik Knutzen, chief investment officer at global asset managers Neuberger Berman.[3]

More generally, it seems that the less interconnected nations are, the easier it is for new rivalries to emerge and existing rivalries to intensify.

Knutzen says Russia’s invasion of Ukraine is one example.[4] Now there are concerns that armed conflict between the U.S. and China could be another.

During the current period of deglobalization, the relationship between China and the U.S. has become obviously more contentious. The Council on Foreign Relations notes that a variety of issues have contributed to the heightened discord. This includes blame for the coronavirus, the ongoing trade war, competition over technologies (including 5G networks), disagreements over rights abuses in Hong Kong and elsewhere, territorial disputes in the South China Sea, and, of course, the sovereignty of Taiwan.[5]

Oh…and we now can add the very-recent effort by China to float a surveillance balloon over America’s heartland. U.S. Secretary of State Antony Blinken just postponed a scheduled trip to Beijing because of it.[6]

As the U.S.-China relationship deteriorates, signs suggest Beijing may be even less inclined than it has to maintain a more-reserved posture toward Taiwan. Fundamentally, it is China’s position that there is only “one China,” Taiwan is a part of that “one China,” and China eventually will do what it must to unify Taiwan with the mainland.[7]

In fact, one U.S. Air Force general – a lieutenant general (four-star), no less – thinks a U.S.-China military conflict over Taiwan in the very near term is a foregone conclusion. In a recent memo, Gen. Mike Minihan told officers under his command to prepare for a war with China that he expects to break out within two years.

I this article, I’m going to talk more about what Minihan and others have said about the growing possibility (in their view) that the U.S. and China actually will engage in a shooting war relatively soon.

I also will cover what the economic consequences of that conflict could be. And then I’ll close out by discussing what retirement savers might do to help mitigate the fallout from global shocks like a military engagement between the U.S. and China.

Let’s dig in.

Four-Star Air Force General on China Threat: “We Will Fight in 2025”

NBC News obtained and reviewed a copy of Gen. Minihan’s memo to his officers. According to NBC, Minihan suggests the presidential elections that will play out in both Taiwan and the U.S. next year will “distract” both countries, opening the door for President Xi to move against Taiwan.[8]

“My gut tells me we will fight in 2025,” Minihan says in the memo.[9]

That memo is not merely an expression of belief or philosophy on the general’s part, however. Minihan discusses the preparations he says should be made in advance of the fight, including the construction of “a fortified, ready, integrated, and agile Joint Force Maneuver Team ready to fight and win inside the first island chain.”

In the memo, Minihan orders all air wing commanders and other Air Force operational commanders to report back to him by the end of February with an update on the meaningful steps they’re taking to prepare for a war with China.[10]

Minihan also instructs commanders to be sure they’re adopting a serious, sober approach to their war preparations.

“If you are comfortable in your approach to training, then you are not taking enough risk,” Minihan writes.[11]

The general also gets specific in the objectives he wants to see realized by his officers in preparing for this fight. According to NBC, the memo contains a directive from Minihan for KC-135 aircraft (a jumbo-sized aerial refueling plane) to become capable of “delivering 100 off-the-shelf size and type UAVs (drones) from a single aircraft.”[12]

The administration distanced itself from the comments made by Minihan in his memo. The Defense Department issued a statement saying, “These comments are not representative of the department’s view on China.”[13]

Officially, that may be true. However, other high-ranking U.S. military and political figures agree with Minihan that America could find itself in a direct engagement with China in the near to intermediate term.

One of those figures is retired U.S. Navy Admiral Philip Davidson, former commander of the U.S. Indo-Pacific Command. In addressing the China threat during an appearance before the Senate Armed Services Committee back in March 2021, Davidson said, “Taiwan is clearly one of their ambitions. … And I think the threat is manifest during this decade, in fact, in the next six years.”[14]

Even public comments made by Secretary of State Antony Blinken last October suggest an admission on the part of the administration that China could prove to be big trouble in the not-too-distant future. Blinken noted the administration’s assessment that China seems “determined to pursue reunification [with Taiwan] on a much faster timeline.”[15]

Blinken went on to say that China’s posture on reunification with Taiwan now seems to be that “if peaceful means didn’t work, then it would employ coercive means and possibly, if coercive means don’t work, maybe forceful means — to achieve its objectives.”[16]

It seems even those who might prefer to downplay Gen. Minihan’s bluntly expressed concerns admit that a path to war between the U.S. and China could, indeed, be clearing.

What might the economic fallout from open hostilities between the U.S. and China look like?

One expert has some ideas.

Geopolitical Analyst: Economic Cost of U.S.-China Conflict “Could Be Gargantuan”

Last year, Professor Hal Brands of Johns Hopkins University’s School of Advanced International Studies detailed in an article for Bloomberg what – in his view – the economic consequences likely would be if China launches a military invasion of Taiwan.

As you might imagine, he suggests those consequences will be very ugly.

“A major war over Taiwan could create global economic chaos that would make the mess produced by Russia’s war in Ukraine look minor by comparison,” Brands writes.[17]

He points out that “a war over Taiwan would not be a conflict between two lackluster economies, as with Russia and Ukraine. Assuming the U.S. intervened, it would be a brawl involving the two largest economies in the world — perhaps the three largest if Japan fought in support of Washington and Taipei.”[18]

“The fighting would turn parts of the most economically dynamic region on earth into a free-fire zone,” Brands go on to say. “It would threaten critical shipping lanes through which perhaps one-third of the world’s seaborne traffic passes. Commercial and financial decoupling between the U.S. and Chinese economies would accelerate dramatically, whether due to deliberate policy choices or simply the turmoil the war creates.”[19]

In his article, Brands cites RAND Corporation research that suggests such a conflict could result in America’s GDP sinking by up to 10% and China’s by as much as 35%.[20]

He notes, as well, that the world’s supply of advanced semiconductors would be placed in significant jeopardy. Taiwan makes 90% of those. If the country were to find itself either taken over by China or structurally ravaged by the conflict, Brands says the interruption in supplies of advanced semiconductors “would constitute a global economic emergency.”[21]

Ultimately, says Brands, the economic price of a war between the U.S. and China “could be gargantuan.”[22]

Precious Metals Could Help to Diminish the Impact of Global Shocks

It may seem inappropriate to consider the economic fallout from a possible U.S.-China military conflict when the human toll is likely to be so great.

Nevertheless, there will be significant economic consequences that reverberate around the world if that conflict was to transpire. And for most of the world, which isn’t likely to find itself a party to whatever active military engagement unfolds, those economic consequences surely would be of paramount importance.

It’s possible such a conflict could be averted. But even if it is, just the existence of so many credible concerns about it underscores the prevalence of global uncertainty nowadays.

I’ve mentioned before that a metric called the World Uncertainty Index has been steadily rising since the beginning of the millennium.[23] The architects of the index project that global uncertainty will continue to increase due to “a new normal of greater global turbulence, driven by domestic and international political fragmentation.”[24] Again, a move away from globalization.

I’ve also mentioned before that gold has strengthened meaningfully since the beginning of the millennium. The price of gold is up nearly 600% since January 2001.[25] To be clear, it’s not possible to prove a direct, correlated relationship between the rise of gold over this period and the increase in global uncertainty the index measures. However, that doesn’t change the fact that gold has, in fact, thrived as a longer-term asset at the same time the index has climbed over the last two decades.

And both gold and silver have demonstrated historically why they are broadly viewed as safe-haven assets during acute economic and geopolitical crises. Examples of precious metals thriving under such conditions include the pandemic lockdowns of 2020, the Great Recession and the first phase of Russia’s invasion of Ukraine.[26]

……..

[1] Douglas Irwin, Peterson Institute for International Economics, “The pandemic adds momentum to the deglobalization trend” (April 23, 2020, accessed 2/9/23).

[2] Erik Knutzen, Neuberger Berman, “Ukraine and the Path to Deglobalization” (July 2022, accessed 2/9/23).

[3] Ibid.

[4] Ibid.

[5] Elizabeth Economy et al., Council on Foreign Relations, “How 2020 Shaped U.S.-China Relations” (December 15, 2020, accessed 2/9/23).

[6] CNBC.com, “Suspected Chinese spy balloon spotted over Montana” (February 3, 2023, accessed 2/9/23).

[7] Lindsay Maizland, Council on Foreign Relations, “Why China-Taiwan Relations Are So Tense” (August 3, 2022, accessed 2/9/23).

[8] Courtney Kube and Mosheh Gains, NBCNews.com, “Air Force general predicts war with China in 2025, tells officers to prep by firing ‘’a clip’ at a target, and ‘aim for the head’” (January 27, 2023, accessed 2/9/23).

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Adela Suliman, NBCNews.com, “China could invade Taiwan in the next 6 years, assume global leadership role, U.S. admiral warns” (March 10, 2021, accessed 2/9/23).

[15] Rebecca Falconer, Axios.com, “Beijing speeding up plans to seize Taiwan, Blinken says” (October 18, 2022, accessed 2/9/23).

[16] Ibid.

[17] Hal Brands, Bloomberg.com, “Economic Chaos of a Taiwan War Would Go Well Past Semiconductors” (June 23, 2022, accessed 2/9/23).

[18] Ibid.

[19] Ibid.

[20] David C. Gompert, Astrid Stuth Cevallos and Cristina L. Garafola, RAND, “War with China: Thinking Through the Unthinkable” (2016, accessed 2/9/23).

[21] Brands, “Economic Chaos of a Taiwan War.”

[22] Ibid.

[23] WorldUncertaintyIndex.com, “World Uncertainty Index” (accessed 2/9/23).

[24] Nicholas Bloom, Hites Ahir and Davide Furceri, Harvard Business Review, “Visualizing the Rise of Global Economic Uncertainty” (September 29, 2022, accessed 2/9/23).

[25] London Bullion Market Association, “Precious Metal Prices” (accessed 2/9/23).

[26] Ibid.