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Potential Impact of Regional Tensions on Economic Security

In the weeks immediately preceding Russia’s full-scale invasion of Ukraine in February 2022, Russian Federation President Vladimir Putin and his Chinese counterpart Xi Jinping declared that the friendship between their countries “has no limits.” The attention of the world then quickly shifted towards the Taiwan Strait, where the People’s Republic of China (PRC) intensifies military pressure on Taiwan and makes no secret of its readiness to seize its smaller, democratic neighbor by force.

If China decides to escalate the current tensions with Taiwan, many regional and global actors would assuredly be drawn in. Part of the conflict would presumably take place in the economic sphere, where some countries would respond with sanctions. China would expectedly retaliate by adopting countersanctions. Such a conflict may have much more severe consequences for the world economy than in the case of Russia, which has never been integrated into the world economy to the extent that China is today.

Democratic governments should carefully analyze their dependencies on authoritarian regimes and the security threats they represent, identify potential vulnerabilities should such a conflict materialize, and proceed to systematically downsize or remove them. Various simulations and economic models can help map certain dependencies and so identify vulnerabilities in national economies. These models can help policy-makers prioritize those areas in which state autonomy and national security are at stake. This would enable governments to implement the economic security policies necessary to strengthen resilience to future contingencies while withstanding the costs of attendant economic warfare.

This paper summarizes some of the economic consequences of the Russian war against Ukraine, introduces potential scenarios around Taiwan, considers methods of predicting the economic consequences of regional tensions, and affords summary takeaways and recommendations.