Another global conflict is more likely than most realize

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COVID-19 will have lasting effects geopolitically. In particular, China and the East Asian pacific. The pandemic has worsened already frayed relations between China and the US. This will accelerate manufacturing outside of China, but this was going to happen anyway as China transitions to a service economy. However, the US and other countries are taking provocative actions by supporting Taiwanese independence, probably to distract their population from their own failures at home in containing the outbreak. China has made it clear that Taiwanese independence will trigger an invasion from the mainland. This is not surprising since Taiwan is essentially China’s Cuba, and any hostile nation so close to the mainland is a huge national security threat for them.

I don’t rule out the possibility of U.S. formally recognizing Taiwan as an independent nation; in fact the Trump administration is so edgy that I think this is likely if he gets a second turn. If Taiwan declares independence, either by the U.S. formally recognizing them, or them declaring it themselves, mainland China will likely retaliate militarily and launch an amphibious invasion of Taiwan.

The second possibility is severe economic sanctions on China. There has been some discussion of this at the political level, but this will not “make China behave” as some would think, but make China more aggressive militarily. This would be similar to the US oil embargo on Japan in the 1940s. An isolate country with a worsening economy will have no choice left but to launch all out war in order to keep legitimacy.

Some people say, since China has nukes that a U.S.-China hot war is impossible. However, I do not buy that. If you look at China’s nuclear capabilities, they have nowhere near the capabilities of the U.S. or the Russians. China can nuke Japan and Hawaii but I doubt they will be able to nuke much of the U.S. Whereas U.S. has complete nuclear superiority over China and can nuke them several times over.

I strongly believe that U.S. will have a “hot war” with China in <= 10 years. How would this affect global markets?



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