Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal and I'm Tracy Alloway.
Tracy, you know, for years, I've always thought that if you want to be like a smart sounding pundit at the beginning of the year and someone ask you, like, what risks are you thinking about right now, you like stroke your chin and look off and you say, I'm really worried about like geopolitical risk. And that's always like a safe answer anytime any year. Like that always makes you sound sophisticated.
Yes, unexpected geopolitical risks are an evergreen category of punditry.
This is true.
There is one specific risk within that category that I feel like has come up every year for almost as long as I can remember, and that is the risk of something happening between China and Taiwan. And I have a really embarrassing confession to make, Okay. I wrote my dissertation on I wrote it in Beijing, and it must have been in like two thousand and five or two thousand and six, predicting that China would invade Taiwan before
the Beijing Olympics. I think that was like two thousand and eight or something.
So when people talk about the risk of China invading Taiwan or attempting to formally reunify, this is like twenty years people have been talking about this and it keeps not.
Happening, Yes, and getting it wrong consistently for twenty years, or at least I have.
But it does seem right like for whatever reason. And we'll get into it that we are once again in a wave of heightened concern. And you know, there are two very active wars happening right now currently between Russia and Ukraine, the Israel and Hamas war, and so the idea of war, unexpected war is on people's minds. And then we know that tension has been building in various
ways Taiwan. There was all of the angst over the Nancy Pelosi trip a couple of years ago, for example, and the heightened awareness that the world has on semiconductors that are manufactured in Taiwan, and sort of a more aggressive posture I believe from Xi Jinping and the military of more aggressive war games and exercises. So many people are concerned about some prospect of a hot conflict in the next few years.
Yeah, you mentioned semiconductors and I feel like this is really the key thing, which is in the past two or well, I guess four years now, since the outbreak of the global pandemic, we have had a sort of crash course in the importance of the Taiwanese economy to the broader world. And I feel like that's sort of done a couple things. So one, it's made everyone a lot more nervous about what could happen if that supply chain gets disrupted again, although in a very different way.
And then secondly, maybe it's given a little bit of ammunition to China to saber rattle on this issue even more. Right, if it threatens something against Taiwan, the whole world now knows what's at stake.
Yeah, that's absolutely right. So this is one of these things that is you could feel it building more and more people are talking about it. My understanding and what I've seen is people say, oh, in DC, everyone is like obsessed with this question. I don't feel like that's as much the case in New York, but I do get the impression that in DC talk of a war
is very high. And so I think, like, you know, we have to do more on this, And I think geopolitics in general, thinking back to some of our conversations with Zultan et cetera about you know, the sort of rearranging world, like, we need to dive into these questions a little bit more.
Yeah.
Absolutely, And the other reason we need to do it is Taiwan is holding an election. In fact, we are recording this on January ninth. By the time this episode comes out, the election will have been held and so we'll know who the winning candidate is. But in the meantime, like, there is clearly a big reason to discuss this.
Yeah.
Absolutely, Well, I'm very excited. We have two of our colleagues here at Bloomberg that we've never had on the podcast before, but they are the perfect guests to discuss this because they've been doing a lot of work in this area. We're going to be speaking with Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics, and Gerard De Pippo,
Senior geoeconomics analyst at Bloomberg Economics. They've both published a lot of work on some of these questions related questions wargaming the risk the economic stakes involved here, and so we're going to start to go down our path of understanding this tension better. So, Jennifer and Gerard, thank you so much for coming on odd lots.
Thank you so much for having us.
Glad to be here.
I have a sort of very basic, I don't know, maybe it's not basic zoom od question. You know, we talked to like normal talk to economists who you know, they have their recession forecast or forecast of soft landing, whatever, and I sort of have some idea of how they go about, you know, modeling different scenarios when it comes to wargam and modeling the odds of a war or modeling how a war might go if one were pursued.
What do you economics analysts, like, what is the toolkit that you have to actually go about modeling the risks and the outcomes of a war.
That's a great question, and let me dry it. I'll start off, and then if you want to jump in as well, so on the first part of your question of how do we estimate the probability of war? To be perfectly candid, this is definitely more art than science.
What we did in the case of our recent project on Taiwan and the trajectory we might see in the Taiwan Strait was take a look at sort of baseline conditions, what are the sort of structures in place there that lean towards stability or that lean towards increasing tensions and even to the extreme of a crisis or conflict, And we examined all those key variables and their trajectory and what weight they might have to be candid. This is an area of a lot of debate among people who
focus on the Taiwan Street. You know, to what extent does Beijing wield the most agency over it versus Taiwan, versus the United States, which has historically been a key balancing power in the street. And then from there we kind of developed our sense of probabilities. But again, this
is a really complex and dynamic geopolitical environment. The election that Taiwan will be having in advance of this recording is an example of how things can really shift at quick notice depending on how events like that turn out. But overall, we think our sense of what the risks of crisis or conflict in the Strait are are meant to be, you know, standing the test of time and looking out over the next five years. And then in terms of how we study what the outcome of a
war would be were one to happen. This is a little bit more of a rigorous process, and there are a lot of think tanks, a lot of internal government entities, not just in the United States, but Japan, Taiwan, all around the world that are increasingly looking at how a crosstright conflict could play out, and it often is very
much focused on the military dynamics. That's historically the origin of these war games is testing military tactics and battle plans and playing out how different scenarios can produce different outcomes depending on sort of what you go into the battle with and how different conditions can change those outcomes. So for that particular exercise, there's a lot of different variations of war games related to Taiwan out there, and
a lot of them produce a variety of results. It really depends on kind of the assumptions going into it on. You know, for example, how does the worst start, is there any warning of it, how prepared is Taiwan to defend itself? Does the US get involved? But what all of them point to is a war would be incredibly costly at all sides. Most of the war games focus on sort of the military and the humanitarian impact of that.
But we looked at also the economic impact, and what we found is especially for China, Taiwan, and the United States, but also the global economy, the toll would be quite immense were the cross street tensions to erupt into a broader conflict.
Maybe this is obvious, but I think it's worth pointing out that we're dealing with something that is mostly beyond the historical sample set. So normally, when you're trying to model something, you think of what's happened before. You think of like Tetlock's book Super Forecasters, where they talk about outside in analysis, right, you look at what's happened before they might be analogous and say, what are the chances
that would apply in this case. Of course, there are many wars in history, including wars that are happening right now, but there aren't that many that involve China, and there are none that involve cross rate conflict. And there aren't actually that many to involve a major essentially continental power seizing an island power, right, And so it actually is
a quite limited sample set. And what we essentially do with think of plausible outcomes and then kind of back in relative probabilities at least compared to other outcomes, and then say, okay, that tells you, sort of cumulatively, what the odds are of these of these scenarios.
Can you tell us a little bit more about how you choose which scenarios to focus on, because obviously you can't you can't examine the entirety of possibilities when it comes to, to Jared's point, like a relatively unknown and unpredictable conflict. But there are clearly some scenarios that are seen as more likely than others. And I remember when I was working in Hong Kong, we did a big piece on the news side of things about, you know, this is what a war between China and Taiwan might
look like. And our source for that was we went out and we spoke to geopolitical experts such as yourselves, and we tried to get their sense of what the most likely scenarios were. But when you guys are doing it, who are you talking to, what are you looking at?
Part of it is a constraint on how you're trying to answer the question. So in this case, we're trying to model economically what these outcomes are. The range of outcomes is more of a gradient. I mean, in a technical sense, there could be thousands of outcomes, right, but you can't actually model all of that. So what we tried to do was decide what are the sort of key outcomes that are more or less analogous within themselves
than try to model that. But I should also say we're putting out other pieces on the terminal that are actually more detailed and maybe more nuanced than you might have seen on the sort of econometric side in the big take.
No, I think this is exactly right to kind of underscore the point on some of these scenarios have more direct economic implications than others. So, for example, there's a lot of different variations of what a major crisis industry
could look like short of a war. We chose to model a blockade because that's the scenario, even though it's one of the more unlikely ones for a lot of reasons we can get into that would have more direct implications for the global economy versus something like a seizure of one of Taiwan's outlying islands, where it would be incredibly escalatory and risky from a geopolitical perspective, but the impact to markets and to the global economy directly might
be less so because it's not necessarily directly affecting trade.
But all that to say, you know, in terms of what we looked at for the big take in the overall exercise was looking across the spectrum of possibilities from sort of best case scenario, by which we define that as sort of an enduring or stable piece, to absolute worst case scenario, by which we define that as an all out conflict, including a conflict between the United States and China, and then everything in between, the status quo kind of being the base case, something slightly worse than that,
which we define as increased tensions, and there there's a lot of variation and what specifically that could look like, but the economic implications are probably not all that different across those various inter scenarios, and then major crisis short of a war. Again, a lot of different variation in there, but the one that we think would have the most impact on the global economy would be something like a blocking that directly interrupts Tree.
So I should just say both Jared and Jenny have mentioned a big take, which is basically a Bloomberg piece based on the report that they did for Bloomberg Economics, where they're estimating the exact or rough price tag of
some sort of military action between China and Taiwan. They're estimating the price tag at about ten trillion dollars, which would be equivalent to ten percent of global GDP, which would be more more than the loss from Russia's invasion of Ukraine, the COVID pandemic, and the global financial crisis.
So some pretty big numbers there. But Jenny, I'm curious why you say that the blockade is in some respects a less likely scenario here, because my impression was that that was kind of becoming I don't want to say consensus, but like it was certainly a realistic possibility of what military action could look like.
No, that's right, and I think it still remains a realistic possibility. I think though, changing military dynamics suggests that it is probably one of the tactics that is likely lower on Beijing's list of preferred options. And I say that because a blockade is technically an act of war, would be incredibly risky in terms of tipping into a conflict.
For example, if China were to put in place a true military blockade of Taiwan and Taiwan we're trying to challenge that Beijing would be forced to either use military force to keep that blockade in place or to have to remove it. So it has a really high chance of tipping into a conflict, but at the same time,
it's not guaranteeing an outcome. Right. If Beijing was going to risk war, it would seem to make more sense to go for the all out amphibious invasion, which has the chance of securing control over Taiwan, whereas a blockade isn't likely to do that on its own. All that being said, most of our understanding of what the Chinese military strategy might be for Taiwan and in general how amphibious campaigns are carried out, we think that a blockade would be likely part of their campaign, part of a
multi step process. Were they to try and undertake an amphibious invasion of Taiwan to try and keep enemy combatants from leaving, to try and keep any third part from intervening, it would be part of it, but to launch it in advance would also give a lot of time in warning and the tendency and more recent military campaigns has been to try and take advantage of the element of surprise, and you lose that with something like a blockade, which
is a very obvious demonstration of force. But all that being said, it could still very much be a realistic possibility. Particularly one of the things that we've talked about too is it might not take the form of an overt campaign or an overt blockade. It could take the form of something that looks more like what we call lawfare or legal warfare, enacting, for example, a customs regime where you're trying to subject all craft that are coming in
and out of Taiwan to Chinese customs. But you'd still need to enforce that in some way, shape or form, So it still bears a pretty high risk of tipping into something more connect.
I have a very i don't know, maybe rudimentary question. So I'm looking at this wargame scenario that was conducted by the Center for a New American Security and in their report they have like this map that looks like a big risk board and they even have dice, so like it's like, let's say, is that really like a part of these sort of geoeconomics analyst toolkit to actually have these sort of dice games and maps because you see them in movies and the general has that stick
if they push things around. But is that actually like a real part of how this is done or is that just an affect for the report?
The war gaming industry is skewed heavily towards actual military scenarios. The actual economic war games are quite rare. I mean that's growing in part because of Taiwan issue. I have played in a number of these, including think tanks and in US government. The economic side is typically less sophisticated or treated as sort of just an effect or something in the background. And I think when you're doing military scenarios you can do things like saying, roll the dice.
If you're fighter jets, take out the other fund.
They really do that. So there is a serious military analyst rolling the dice on a glorified risk board.
Yes, but it's much with economics. There are far more actors involved. And it's not like national decision making is everything, because how do you simulate quote the market right? Yeah, and or supply chains for that matter. And so the body of let's say, economic war gaming literature when it comes to Taiwan is much much smaller than the military wargaming literature.
Well, why don't you talk to us about the economic modeling aspect of this, because it seems hard enough to game out what military action could actually look like, but then when you start trying to estimate the cost of various types of action, that seems even more complicated. But you've put a number on it, ten trillion dollars, So how do you actually go about doing that?
Sure? So, first I want to give credit to our outstanding modeling team in Europe, mostly as part of Bloomberg Economics. They did most of the actual mathwork which Jenny and I were doing was helping to define the scenarios and then working with them to come up with essentially like scenario inputs that will be relevant to those scenarios that would have relevant economic outcomes. And so we already talked
about how we develop scenarios. When it comes to the actual modeling, you know, it's essentially layering on three things. The first is a sort of standard wto trade shock model which people use for tariffs and other stuff like that. We played with tariff rates in some ways to simulate the effect of sanctions. These models don't really have a sort of sdning the PBOC effect button in them, but you can get some of the trade shocks in there.
There's also a financial model that is layered on top of you play with things like the vics and you can see how market uncertainty or capital and flows move and what the economic outcome or effect is of that. But actually, in this case, because we're dealing with Taiwan, the most important factor in terms of the cumulative economic impact was supply chain impacts. And I know you guys have talked a lot about this on the show, the
importance of Taiwan, seeing particular for advance semiconductors. And what we did with that was talk to various industry research professional people, including at Bloomberg, who work on these things, and using the OECD trade and value added data and input output tables, so essentially estimate at the end of the day, how much of certain sectors, and these are generally high level sector, it's just how the data is presented, how much of those would get knocked out if, for example,
the world did not have access at TSMC's chips. You could debate how bad it would be, and in fact we got a range of estimates. We took sort of something in the middle that is like awful but not completely apocalyptic. But I think if you look at the bottom of the big take, there's a note explain this that essentially we knocked out in the war scenarios something like eighty five percent of global electronics production, so things like smartphones and all that computer's laptops, and then something
like sixty two percent of global autos and transport. So that's a massive shock, and it's actually doing a lot of the work in terms of the simulation of economic impacts.
Yeah, and just to add to that, shout out to you our Bloomberg Intelligence colleagues who helped us better understand the role that these chips play in different industries. And the point that Jarred noted on what we call the golden screw problem of trying to determine you know, a chip itself might not cost that much, but it's hard sometimes to know for sure how essential it is to a particular product. You know, for example, could the car
be made without that chip? Is there the possibility that the manufacturer could substitute for something else, And as Yard noted, we worked with our BI colleagues to kind of estimate within that range of how essential these chips are. But our rough estimate is that chips we know are really important to high end products like smartphones and PCs, but they also play a really critical role in other major
industries autos, home electronics, et cetera. And I think there's a huge question of not just what happens if those products can't get produced, but everything that relies on those products, in particular in our more advanced service economies, what that means going forward if you can't get new smartphones, if you can't get new autos, and if you can't get
new PC. So I think this is an important figure, the ten tillion dollar one and the impact that we're estimating to advanced economies, But it is in some ways the beginning of the conversation, because there's more work that can be done to really refine those numbers and then estimate the downstream impact.
I want to ask a question that actually takes this step way back. And you know, as Tracy mentioned in the intro, and I didn't know that you wrote a thesis almost almost twenty years ago predicting an imminent.
Now I feel old, old and wrong, sorry, but why now?
Why are we this seems to go in waves of people concerned, why do you like set the stage for us of like, why are we at this point again where people are seriously running these scenarios and doing the math and talking about this and such a high level, like what are the conditions that have got this like so top of mind, particularly in DC for people who think about these things.
So, I think the first thing I acknowledge is I think Tracy was not far off and assessing back in the two thousand to two thousand and eight period that there was a high risk of a conflict at that point in time. The reality is that risk ebbs and flows. It's not a particularly necessary or I should not say, it's not a particularly or essentially linear process, right. It
depends on the various factors at play. The two thousand to two thousand and eight period was a period of really heightened cross street tensions owing to an administration in Taiwan that Beijing found to be incredibly problematic and very close to crossing its red lines, and there were a lot of periods of white knuckling over how, for example, Beijing was going to respond to elections back in that time period. What I think has evolved since then that
ads to the level of concern. Are a couple of really important drivers of the cross street stability dynamic, and the first one is really the military balance, not just in this strait, but more broadly so. Since roughly two thousand and five to the late twenty tens, China has
really eclipsed Taiwan militarily. There was a period of time where Taiwan still had, even though a smaller force, a much more advanced force, and that has really changed in recent years with all of China's investments in its military modernization, and we see that on a day to day basis where China is just overwhelming Taiwanese forces with the amount
of military planes that's putting into Taiwan's nearby airspace. The second piece of that dynamic, though, and arguably one of the more impactful ones, is the changing military balance of power between the United States and China. US now regards China as its pacing challenge, as the military closest to matching it, and that's particularly important closer to China, where China has a lot of local advantages and obviously for Taiwan being you know, just across the street, for China,
they're right sort of at the center of that. So that's an incredibly important shift over the past twenty years that I think Kitan's concerned. And then the third part is the political dynamics at play Taiwan over the past thirty years of becoming a more full fledged democracy. We've seen that go in parallel with changing attitudes on the island towards its relationship with China and its identity and
how that relates to that crosstraight relationship. And you look at pulling today and the vast majority of Taiwanese identify as Taiwanese, not as Chinese, not as Chinese, and Taiwanese Taiwanese. And at the same time, support for unification, which was never that high but was about twenty percent in the nineteen nineties, has dropped to you know, below this year. So it's it's an incredibly unpopular idea. The vast majority of folks would just prefer the status quo, which is
de facto separation. And then simultaneous that you have on China and the mainland, you know, a growing sense that China is a rising power that creates both sort of a need and an opportunity to make progress towards these historic goals of territorial integrity and unification, which in their minds is all leading up to this, you know, national rejuvenation of China, and key to that is the idea
of finally bringing China back together. That's their vision for what their end state should look like, and Taiwan is
one of the most important outstanding elements of that. So there's really sort of these divergent forces at play where Beijing is becoming much more focused on advancing progress towards unification and more concerned about trends in Taiwan which are taking the island towards the idea of a very different sort of identity than it would share with in a unification picture with China.
I think it's worth mentioning the economic dynamics, which I actually think are secondary to the factors Jenny was mentioning. But the economics does matter. I think what makes it difficult though, is that it doesn't the direction in which it matters is not necessarily clear. Right, So when the US and China or the PRC itself established diplomatic relations in nineteen seventy nine, Chinese GDP was one tenth of USGDP right now, it's something like sixty six seventy percent,
depending on which exchange rates you're using. So you might think, okay, so China is much more powerful now, which might make it more aggressive, But on the other hand, it has more to lose. It's much more integrated into the global economy. It is worth keeping in mind, however, that Chinese policy Sugi Being's policies very much focused on industrial policy and
self reliance. In particularly, they're worried about three things. The reliance on foreign technologies, which include semiconductors, but it's not limited to that, important commodities so things like oil and food and other things. And finally, the reliance on the US dollar for international finance. And all three of these things are Beijing as efforts under way to address with vulnerabilities.
I'm not saying this is just about Taiwan, but they do see themselves as being vulnerable, and there's definitely a geopolitical rationale for why they're worried about those things. And the more powerful and essentially insulated or robust, let's say the Chinese economy and financial sector becomes, you might think they might have more confidence or less restraint as that
single variable is concerned. And then of course there's the issue of Taiwan semi conductors, which is kind of like in some ways a gun pointing in both directions, right, because yes, Taiwan makes most of the advanced semi conductors, but those primarily are going into inputs throughout Asia, including China, and so you could debate whether it's deterrence or not, because it could also mean that that Beijing believes that other economies, particularly non US advanced economies, are less likely
to intervene for those reasons. But it is part of the conversation.
Actually, this reminds me of something I wanted to ask you, which is, you know, it's hard enough to model these types of economic scenarios because there are so many different factors involved, but also one of the things that makes it difficult is you're trying to model the response to
whatever is happening. And so I'm curious, when you're looking at something like the cost ten trillion dollars or variations of it, depending on you know, the exact nature of the action, how much of that cost depends on or is affected by either the wes's ability to ramp up things like semiconductor manufacturing or China's ability to I guess, offset a bunch of resources being diverted to war.
So we modeled one year shocks. We actually internally were looking at and debating doing five year shocks. The five year shocks, the confidence intervals get much much wider, and it's because you have to make bigger assumptions as to whether, for example, TSMC's production can move elsewhere, would private industry have the resources and middle of the war, for example, to get funding to say, open a fab or whatever
it's necessary. I think with a one year scenario, it's it's it's still you know, speculative, but it's still difficult, but it's still it's more plausible, which is that the economy in some cases could rely more in existing inventories of things. You would be more likely to see an immediate shocked production safe for things like autos or electronics. But if you're saying, okay, what about five years into this, how much of that is back online? Then it gets
more speculative. But that is part of it. Another part that I don't think we modeled directly is sort of wartime fiscal impacts. So you could imagine particularly on the Chinese side, a lot of expenditures going into you know, wartime measures, defense, et cetera. On the other hand, if you assume the conflict is let's say a few months or six months, depending on what your parameters are, it's
probably not going to look like World War Two. It's not going to be five years of ramping up and coming back, in part because what we're talking about in each stream case is from a US perspectively, it's mostly a naval and air war, and the US defense industrial base, at least in my view, doesn't really have the capacity to replenish as force as quickly, so it's kind of
a one and done in a very powerful way. There are others, i should say, in DC and think tank land that talk about the potential for a long war. I find that from a US perspective not all that credible.
Right now, we are in a period in which there
is a lot of talk about poor Chinese economic growth. Obviously, as your model shows, and just for any common sense, a war, how or any version of a war, would be incredibly domestically costly at a time when already there's concerns about growth and frustration with the Chinese economic model, How does that play into Beijing's thinking or Hijinping's thinking about doing something at some point, the state of the domestic economy and the fact that any activity maybe you
would potentially reunify China and Taiwan, but would be extremely disruptive to all of the factories in China that rely on Taiwanese inputs.
The narrative that some people will propose is that over time, if we assume the Chinese economy is weakening substantially, then the Chinese leadership will be more inclined to sort of pivot to nationalists concerns as a distraction. But it's worth noting at least two things. One, I don't think they're there yet. I don't think they think they're there yet, right. I don't believe Xi Jinping is all that pessimistic about Chinese economic growth. Is new Year's speech and other indicator
suggests that he's still fairly optimistic. You could debate whether he ought to be, but I think that's basically right in terms of his view. The second is that I think we are both quite skeptic of the claim that some people make that China might pursue a quote diversionary war, and the reason for that is that this would not be diversionary, it would be all encompassing, right, And so do you really want to bet your house on a distraction?
And the answer is no. But in the longer run, I think there is a credible argument that if the Chinese economy is weakening, that the government might pivot to other priorities. And in fact, we can observe they're already
pivoting to national security. Right. There's there's a greater emphasis on national security and self sufficiency now in Chinese policy than it was say five, certainly ten years ago, and so over time it might be the case that it changes their relative willingness, but at the end of the day,
they would know how cataclysmic this could possibly be. And our general view, and Jenny might want added to this, is that she think probably doesn't have a specific timeline in terms of saying, on you know, twenty twenty eight we go. It's more the timelines People talk about it more about military readiness, which is not the same thing. And ultimately, if I had to bet in which ness we are if this ever does happen and be based
on perceived provocations, or crossing of red lines. It wouldn't just be sort of a unilateral poof on the blue.
Yeah. And I think just to add on to that, Beijing's stated preference is still for peaceful unification, and I think there's reasons to believe that that's true. One I think they assess, as Yard was indicating the military readiness issue,
they haven't reached that milestone yet. And in fact, some of the reporting that our news colleagues have done on recent purges of senior military leaders, I think reaffirms the idea that there might still be concerns about corruption and the impact that that could have on readiness and more broadly, this would be an incredibly risky and difficult campaign for any military to undertake, you know, particularly if there's a
risk of the United States getting involved. That's no small gamble to make, and it's not one that Chinese leaders would take lightly. I think to Gerard's point, it's more question in their mind, I think of whether or not their hand is forced if they would need to take that action to prevent Taiwan's permanent separation, which to them is it is hard to exaggerate the importance that that plays in their calculus and the costs that they would
be willing to pay to prevent that from happening. I think if we were in a world in which they felt that that was necessary to take action, even if they didn't think they were militarily ready for it, the economic considerations would probably not be a driving factor in their calculus. I think what would be the overarching priority would be preventing that from happening at all costs and
at all risks. So it really depends on I think their perspective of whether or not that's essential, and the economic considerations I think are more secondary in that sense.
So the obvious parallel here would be Russia's invasion of Ukraine in the sense that it was something that was, you know, at once long discussed, but also very unexpected at that particular moment in time, And of course there had also been a discussion of why would Russia ever do this given the economic costs involved and the risk of sanctions and things like that. How has the experience of Russia's invasion of Ukraine affected your thinking about Taiwan and China if it has.
It all so, Genny, you can jump in terms of the Chinese perspective. But I'll just say kind of a more standback perspective based on some of the work I was doing previously at CSIS the think tank. One observation is that the internal estimates in Russia of how bad it was going to be for their economy were actually worse than things ended up being. In other words, it wasn't the case that Putin was misled in terms of the economic pain. He actually thought it was going to be worse than it was.
Wow.
And yet he still went, so where was the delusion. The delusion was on the military side. He thought that they were going to roll in the Kiev in two weeks or whatever, and then that they could present the world with the beta complet and eventually they we could
dial back the economic sanctions or whatever. I actually think that, you know, there are definitely, you know, government versus private sector blind spots, but in general, I think a lot of people, including investors, might underweight nationalist consideration considerations more than they should. And even believing that the Russian economy was going to take a massive shock, he still decided to roll the dice. And that, to me is is not necessarily indicative of what China would do she jimping
is not Putin. I think Putin is more of a gambler in some ways, and probably is has A has a less sophisticated apparatus beneath him. But it is telling that that could still happen yea.
And I think, just to add on on Beijing's perspective, I think it's a mixed bag. I think, you know, on one hand, the fact that the war is approaching it's to year anniversary, when from the outset it was largely expected that Russia's massive army would be able to pretty quickly overwhelm Ukrainian forces, especially with a surprise attack, is probably a cautionary tale in terms of how much
more complicated invasions can be. And Russia's invasion again is a land invasion, which is a very different sort of operation than an amphibious one. In some ways, the hill is much higher to climb with the latter, so I
think in that respect it's a cautionary tale. On the other hand, the war is not yet over, and in particularly in this moment in time, where there's a lot of questions about whether Western support for Ukraine will be sustained and what the end state of the war might look like it's not entirely a case closed for Beijing in terms of whether or not a conflict is something
that they can endure. As Gerrard noted, the conflict has cost Russia less in terms of international sanctions in a probrium than Moscow likely anticipated internally, and they are weathering the storm probably better than expected, which might in some way provide a little bit of confidence to Beijing, which has in many ways more economic advantages than Russia does, and might bet on the fact that Western countries might be less willing to sanction China to the extent to
which they've sanctioned Russia.
And I just have one last quick question. We're running out of time here, but what is the consensus on what the US would do in some sort of some version of an attack? You know, what's the policy? And then like, you know, suppose the US didn't really do anything,
and you think about ramifications. Do you think about variations where there's spillovers in which are other partners or other friends in the region where we have military bases, I don't know, freak out, get anxious, and that it's sort of like dominoes in some way depending on the sort of confidence that other countries have in the US security umbrella.
There's a lot of debate about what the United States might do, and that's in part due to intentional US policy to make that ambiguous we call it strategic ambiguity, about whether or not the United States would actually come to Taiwan's defense. If we look though at statements President Biden has made about how he personally would act in that situation, I think that's increased folks sense that the
United States would get involved in some way. From my perspective, I think one Beijing probably has to assume from a military planning perspective that they would be dealing with some sort of US intervention because that is a risk that they can't afford to not calculate, given how important and
critical it could be to the outcome. The second piece is I think it really in large part might depend again on variables like is there any warning before an attack, what is the duration of the attack, Because it's not just a question of intent, but also process in time to marshal a reaction to it. You know, there there is a process lead out in the Taiwan really Act for the President to consult Congress before officially determining what
to do. And then there's also the tyranny of geography when it turns to where US forces are located in their ability to respond to a conflict that is so close to China, And then to your question about the role that other countries in the region might play in terms of a conflict, again, I think that's going to really depend quite a bit on what Washington does, but
also on what Beijing does. A lot of the wargames that we have looked at have studied the possibility that Beijing, in an effort to try and keep the US out of the war, might preemptively strike US forces in the region, including some of our bases, and that could inadvertently draw not just the United States but some of the partners
that host those bases into a conflict. So a lot of this is very much variables at play, and that's why these wargames can be a really valuable way of studying potential scenarios and their outcomes, because we might not be able to predict the future, but we have at least a good sense of what the key variables would be and what the future could look like depending on how those turn out.
I was going to add in terms of sanctions, So this is something in DC that has talked about a lot over the past two years, is would the US sanctioned China in any degree like it has with Russia? And my basic view is that in a conflict, the US probably would. People will say, but isn't China so much bigger therefore wouldn't be much more painful? Yes, But the question there is our US force is directly involved.
If the US is an active naval and ara war with China, I think that the political wherewithal would be there. But maybe the more important point, at least in the early days is I do not believe the US and its allies will sort of preemptively use massive sanctions unless they're very confident that a war is imminent and therefore that you know, and Beijing would have already planned for that.
So I actually don't think of sanctions as being a very useful media to turn, but in a conflict they probably would be used very quickly.
We are recording this before the Taiwan elections, and by the time this episode comes out, we should have a result. What are you looking out for? What are the particular points or developments that we should be watching.
I think the key thing on everyone's mind is going to be, well, first of all, this is an incredibly close race, and there's probably the closest race that we've seen actually in several election cycles. So there's a lot of questions about what the results on Saturday night are going to be. That's obviously the front of folks minds. And then I think the second immediate question after that
is how does Beijing react to it? And already we've seen signals from China indicating that elements of their approach to Taiwan are very much going to be shaped by the election's outcome. There have been some senior officials kind of warning and not so subtle terms that this is kind of a key election for Taiwanese voters to think
hard about what choices that they want to make. And then, in more specific terms, a lot of connections between China's ongoing investigation to taiwan trade practices and measures coming out of that that restrict Timanes sex sports that they've signaled they'll continue to take in the wake of the election, depending on the policies of the new government.
Jennifer Welchin, Gerard de Pippo. Thank you both so much for coming on odd lots fascinating conversation on a topic that I definitely think we will be doing more on in the opportunity.
Thank you for having us, Thank you for having us.
Tracy, I thought that was really fascinating. Well, I'll just say I found it really helpful because there is a lot of noise about, you know, the risk of some sort of invasion or attack or blockade, but actually sort of hearing about well, why now, why is there so much talk now on how do you even attempt to sort of quantify these risks? I thought they were a book great at explaining that.
I learned a lot. The point about Russia actually estimating that the economic costs of invading Ukraine were going to be higher than they turned out to be. I thought that was really really interesting.
Absolutely, And in fact, Gerard made a really interesting comment there that about investors sort of ignoring the nationalist impulse right totally, and so this idea that everyone's like, well, it wouldn't work. They'd lose a lot of money, they'd lose a lot of jobs, they wouldn't be able to
sell as much oil. Therefore, it makes no sense, and I get why, Like that's a classic investor thinking, right, that it's like always going to come down to a profit and laws, but the idea that no, like actually nationalism, the nationalist impulse is a real factor in decision making and it's not all sort of strict materialism.
I think is.
Probably a good thing in general for investors to appreciate about both politics and geopolitics.
Of course, Like it just seems so obvious to me that like, not everyone is ruled by pure economic considerations. But on the other hand, there are plenty of them at play in the China Taiwan situation. As that ten trillion dollar prist tag actually indicates the other thing I learned. I'm just looking at the big take that was published based on this report. I didn't know that Bloomberg has
like a Taiwan stress index. I don't know if stress is the right way of putting it, but basically to see how intense the saber rattling is on this issue at any particular moment, and.
It has it includes measures like exercises that flyovers into Taiwanese airspace and stuff like that, so really interesting. Everyone should go read that. It's on bloomberg dot Com the results of their work. A war over Taiwan is a
ten trillion dollar risk to the global economy. It's one of the cool things about working at Bloomberg is like I'm always you know, I sort of pinch myself working here because how many different experts and sophisticated people who understand this stuff, the bottlers who work on these different models went into this, so it's really quite a project,
I thought. The other interesting thing Gerard made the point about a war, were it to happen, would not likely be a diversionary war, and the idea, yeah, oh, it's not gonna be one of these things where they would do it because people morale has banned, the economy is bad, so therefore we have to do something that actually it would be such an all encompassing well be fair, that it can't just be sort of yeah.
Also Jenny's point about the blockade, so I remember, you know two I guess two years ago, now that was sort of seen as the foremost possibility that China could do something, but it wouldn't do an outright invasion because that was so like risky and I guess would up
the stake. So much. But her point that maybe now a blockade is basically seen as having like all the downsides of outright military invasion in the sense that it could bring Western allies into the conflict, but none of the upside because it could be prolonged and you know, drawn out, and maybe at this point it's better to just do something quickly. That kind of shows how far things are. Yeah, that kind of shows how much things
have changed just in a couple of years. And again I suspect a lot of that comes from the Russia Ukraine example.
I want to do more this year for sure on the sort of a defense industrial base in the US and China. And you know, you see these stories. Of course, there was the recent Bloomberg report about how the corruption in the Chinese military and these missiles that were fired were actually filled with water and or not as advanced as thought. But on the other hand, you know, we certainly have in the US all kinds of issues with our defense procurement and projects that get delayed forever and
overspending on certain things. So I think this is an area of for sure more episodes to come.
We should start wargaming, Joe. We need to get some dice, it started rolling back.
I did not really realize that it was kind of like in the movies and they actually have these dice and maps and boats on a map. And yeah, it's we need to have.
Like an Odd Thoughts headquarters where we have a bunch of maps. Oh yeah, let's do it with little like figurines of various superpowers and we start moving them around the board.
These are the games that you play with your friends right in your house in Connecticut, right, all these all these sort of gigantic board games.
Right, sometimes we play board games.
That's true.
Shall we leave it there.
Let's leave it there.
This has been another episode of the Odd Loots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow Jennifer Welch, She's at that Jenny Welch. Gerard de Pippo, he's at GDP nineteen eighty five. Follow our producers Carman Rodriguez at Carman Arman, dash Ol Bennett at Dashbot and kel Brooks at kel Brooks. Thank you to our producer Moses on them for our Odd Lots content. Go to bloomberg dot com slash odd Lots, where we have transcripts,
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