he famous economist N. Gregory Mankiw wrote in Macroeconomics, 5th ed.
that bilateral trade balances, such as between the US and China, are not
meaningful. All that really matters is the overall trade balance,
which is a symptom of a low savings rate. According to Mankiw, policies
that increase investment or decrease saving are the main cause of a trade
deficit, while policies that decrease investment or increase saving cause
a trade surplus.*
Okay, now that you're all asleep and calm and relaxed, let's talk about the upcoming war with the People's Republic of China, aka World War III.
Taipei 101, completed in 2003, was the tallest building in the world between 2004 and 2009 and is a source of enormous pride for Taiwan and its people. Photo by Anthony Santiago, CC BY-SA 4.0. Source: Justapedia
If the economists are correct, it means that US President Trump's tariffs, which are based on bilateral trade deficits, don't make any economic sense. But . . . they just might save the world.
It doesn't take a psychic to know that China is planning to take Taiwan by force and that early 2027 is the most likely time for them to start.
Parallels between Taiwan and Ukraine have been made repeatedly, but there are also big differences. Taiwan is a democracy and a strong ally of the United States. Their high-tech industry is first-rate. A few decades ago, we thought of Taiwan as an exporter of toys and frivolous items like the fictional Talkie Toaster [warning: crawling with ads]. Now they are the world's largest contract producer of computer microprocessor chips and their technology is state of the art. I just bought a tool for use around the house and was so impressed at its quality I checked its country of origin: it was made in Taiwan. Loss of Taiwan would be catastrophic for the United States and for the world.
What are the strengths and weaknesses of Taiwan in this situation?
As with Ukraine, Taiwan cannot defend itself against its neighbor. A few years ago, their media showed an aircraft carrier that Taiwan had bought from somebody being towed into port. The news reporter's pride in it was easy to detect. It was a piece of junk, rusty and barely afloat, but it showed that Taiwan was aware of what was needed.
The most likely scenario will be a PRC naval blockade of the island. The Chinese government will likely install submarine nets, mines, and underwater sensors to deter US subs. The PRC army's military skill is barely above the level it was in Korea, but their missile technology makes them a serious threat. The “million-man swim” isn't joked about anymore. Even if their missiles can't yet sink a carrier, both the US and China have powerful A2/AD (anti-access/area denial) capabilities. The US response will be to keep its high-value assets far from the front. Neither side is ready for a conflict, and both sides know a direct confrontation would be disastrous for both countries. So the PRC will look for points of weakness.
One is our dependence on satellites and underwater fiber optics. We can assume that a mysterious disappearance of all our GPS and imaging satellites and a sudden inability to communicate with Taiwan would be the first, and maybe the only, clue that an invasion has occurred. Our news media, which routinely distort their coverage and invent stories when it suits their political views, may not be up to the task. But Westerners will know what's happening from social media, maybe including Tik Tok if the US government doesn't ban it.
US politics determines the exact date
The timing will be determined by the fractured political landscape in the US. China will likely take advantage of the US Democratic party's hatred of all things military and all things Trump.
If the Democrats take the House and Senate in 2026, they will impeach Trump repeatedly and do everything in their power to sabotage his attempts to strengthen the American economy to favor their policy of European-style deindustrialization and degrowth. But if the PRC waits until 2028, an invasion would ensure a Vance presidency instead of Newsom or whomever the Democrats assign. Waiting until after 2028 gives the Americans more time to prepare and recover from the decline that happened during the ‘woke’ era. This means early 2027 is the most dangerous time for Taiwan.
When the conflict occurs, it will be a challenging time for all the Chinese students and immigrants who continue to be warmly welcomed by the USA. It will also be challenging for the Chinese people, who are innocent victims. And of course for our Taiwanese brothers and sisters.
The Panama Canal
Trump's attempt to drive China out of the Panama Canal is likely also a part of this strategy. In a conflict, the Canal will be essential. If Panama's government recognizes that allowing China to control it means their country would become a battleground, they should be eager to get them out ASAP, even at the cost of replacing them with a corporation, no matter how disreputable.
Terrible tariffs of territorial totalitarianism
This makes Trump's tariffs all the more important. The goal is to make it more cost-effective to manufacture here instead of abroad. But basing tariffs on bilateral trade imbalances, as Trump is doing (assuming it's not another negotiating ploy), is pure economic lunacy. The Chinese government knows that the true purpose of those tariffs is national defense and they will do whatever they can to eliminate them. They also know, as our own historians know, that whichever side has the stronger technology usually wins in any war.
The Chinese government also surely knows that under Trump, an invasion of Taiwan would mean a total embargo of all Chinese exports and imports. This would not be an ordinary embargo with the Europeans and South Asians sneaking around it; it would include an embargo against any country that trades with China, as Trump is threatening against Russia. It would probably include the interdiction and possibly sinking of any merchant ships headed to or from China, over the loud and probably violent objections of the Democrats.
Economic power is powerful leverage, but it can only be credibly threatened if America restores its industrial base. Globalism is now dead and buried. As clumsy and unfair as Trump's tariffs may seem, a tariff is an essential first step toward reindustrialization. And whether or not Trump sees it this way, those tariffs are likely the world's only chance of saving Taiwan.
* Update The old saying says that for every economist there is an equal and opposite economist, and both are wrong. Frederic S. Mishkin, for example, in The Economics of Money, Banking, and Financial Markets (8th ed.) generally agrees with Mankiw, saying a large US current account deficit will cause the dollar to depreciate, possibly by up to 50%. This, he says, could disrupt financial markets and hurt the economy. However, Thomas Sowell in Basic Economics says there's nothing to worry about because trade deficits are merely an accounting trick and the US balance of trade deficit is a sign of prosperity. Murray Rothbard in Man, Economy, and State with Power and Market agrees with Sowell, saying “Worries about national balances of payment are the fallacious residue of the accident that statistics of exchange are far more available across national boundaries than elsewhere.”
Which one is right? Mankiw makes the most convincing argument, which is that Country A has a trade deficit with Country B, B has a deficit with C, and C has a deficit with A. But all three countries do fine because each has a surplus with somebody such that no one has an overall trade deficit.
apr 06 2025, 7:39 am. edited for brevity apr 09 2025
