Mounting tension across the Taiwan Strait erupted into force this morning when the Chinese military fired numerous DF-11 short-range ballistic missiles at the capital Taipei and the industrial centers of Kaohsiung and Tainan.

The US-installed Taiwanese Patriot Missile Defense System instantly destroyed all missiles, although falling debris is said to have killed 22 people and injured hundreds.

US destroyers and aircraft carriers in the region responded under their agreement with Taiwan and a somewhat symbolic barrage of missiles were fired at disused factories on the outskirts of Shanghai.

A ceasefire was declared just four hours after the incident when the Chinese government backed down in the stark reality of the potential trade impact.

Across the world retailers and manufacturers woke up to discover that supplies from China and Taiwan might not make it to market this week. Key US exchanges were 30% down in panic selling.

ANALYSIS >> SYNTHESIS: How this scenario came to be

Background

In mathematics there is frequent use of a type of proof known as reductio ad absurdum. This is used where a mathematical concept cannot be proven directly and so is shown to be true by proving that alternatives are impossible.

Globalization has led to the belief that wars are less likely, but no-one (except for Thomas Friedman) has tried to declare that war is over. This particular scenario illustrates what would happen should China actually be prepared to go to war with Taiwan to impose its will.

As can be seen, it is highly unlikely. It is not, however, impossible.

China is certainly one of the largest investors into the US holding astonishing Dollar capital reserves. Business does not make friendship. The US has squabbled with China over the massacre at Tiananmen Square but put pressure on Taiwan over their overt moves towards a declaration of independence. Clearly the threat of conflict must be real if the US fears war enough to make these sorts of demands.

Just how dangerous is that threat? And, how likely is it to happen?

2004: Asian Tiger
Through nearly five decades of hard work and sound economic management, Taiwan has transformed itself from an underdeveloped, agricultural island to an economic power that is a leading producer of high-technology goods. Taiwan is now a creditor economy, holding one of the world’s largest foreign exchange reserves of more than US$200 billion in 2002. Despite the Asian financial crisis, the economy continues to expand at about 5% per year, with virtually full employment and low inflation.

Some of the most important technology manufacturers in the world are based here: Asustek Computer, whose China factories produce iPods and Mini Macs for Apple; and Quanta Computer, the number one global maker of notebook PCs and a key supplier to Dell and Hewlett-Packard. Taiwan Semiconductor Manufacturing Co. is the biggest chip foundry on the planet, an essential partner to US companies such as Qualcomm and Nvidia. Dozens more companies dot the Neihu-Hsinchu corridor. There’s AU Optronics, a big supplier of liquid-crystal display panels, and Hon Hai Precision Industry, which makes everything from PC components to Sony’s PlayStation 2, and which is a fast-rising rival to Flextronics International, the world’s biggest contract manufacturer.

Taken together, the revenues of Taiwan’s 25 key tech companies hit US$122 billion this year.

No one knows for sure how much of China’s exports in information and communications hardware are made in Taiwanese-owned factories, but the estimates run from 40% to 80%.

As many as one million Taiwanese live and work on the mainland. “All the manufacturing capacity in China is overlaid with the management and marketing expertise of the Taiwanese, along with all their contacts in the world,” observes Russell Craig, of tech consultants Vericors Inc.

“In 1999 we had about 300 employees in China”, says Alexander Lee, head of operations for Asustek in Suzhou, China. “Now we have more than 45 000.”

2005: Anti-secession Law
On 14 March 2005 Hu Jintao, President of the People’s Republic of China, promulgates the Taiwanese Anti-secession Law which meets with much controversy. It formalizes the long-standing policy of the People’s Republic of China to use “non-peaceful means” against the “Taiwan independence movement” in the event of a declaration of Taiwanese independence.

It states that the state shall use non-peaceful and other necessary means under these conditions: (1) that Taiwan independence under whatever name and method accomplishes the fact of Taiwan’s separation from the Mainland, (2) there is a large event which occurs to force Taiwan’s separation from the Mainland and (3) that there is no hope for unification.

US Secretary of State Condoleezza Rice comments that the law is “not necessary,” while White House spokesman Scott McClellan called its adoption “unfortunate,” adding, “It does not serve the purpose of peace and stability in the Taiwan Strait.” In speaking about the law the United States repeated that it remained supportive of the one China policy, did not support Taiwan independence, and opposed any unilateral action to change the status quo.

The US reiterates its support for the Taiwan Relations Act of 1979. The act stipulates that the United States will “consider any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States.”

This act also requires the United States “to provide Taiwan with arms of a defensive character,” and “to maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.”

2006: Fourth Taiwan Strait Crisis
With the US Dollar plunging and the Chinese economy overheating, the Chinese government de-links the Yuan from the basket of currencies it selected in 2005 and allows limited flotation. The Yuan doubles in value against the Dollar overnight.

Chinese exports suffer and factories begin layoffs. More than 100,000 people are retrenched on a single day on 22 June. Riots follow. The government, nervous, chooses the usual suspects: raising concerns about Japan and Taiwan. Bombing resumes of the Taiwanese outpost on Quemoy Island which China has targeted sporadically for almost 40 years.

Nationalist sentiment is stoked and thousands of rioters destroy Taiwanese-owned factories. The US and EU express outrage. The Communist Party is horrified, more at the threat to their manufacturing output as Taiwanese businessmen threaten to close down operations, and quickly stifle rioting.

The US promptly raises interest rates and the world economy stabilizes.

Not so fortunate, the French. US inspectors note that some of the ordinance fired at Quemoy came from French weapons manufacturers and appears to have been sold to China in contravention of EU assurances. The US threatens sanctions.

August 2008: Beijing Olympics
On 8 August 2008 the world’s attention shifts to Beijing for the official opening ceremony of the 29th Summer Olympics.

Behind the pomp PRC officials are nervous. If ever there were a time for Taiwan to unilaterally announce independence, this is it. China can do little about it.

The stakes have changed as well. After the Fourth Crisis China is aware of how much their economy is dependent on the outside world. Another panic situation could well result in the overthrow of the state.

Two hours after the end of the opening ceremony a grinning President Chen Shui-bian of Taiwan congratulates China on the success of the Olympics and announces, “Taiwan would also like to announce that we too are celebrating. Taiwan is officially declaring its independence.”

The Chinese leadership can do little but smile for the cameras.

President Chen Shui-bian quickly steps up the pressure by applying for Taiwanese membership of the UN. With the Olympics still on a surprised United Nations finds itself accepting the application.

As the Olympics are ending on 24 August, mounting pressure at home from pro-nationalists results in frequent mob violence. Newspapers, both government and private, declare that war is imminent.

The US dispatches the 7th Fleet to the Strait.

Sept 2008: The Four Hours War
At 01h05 the Chinese military fire numerous indigenous DF-11 missiles at Taipei along with the industrial centers of Kaohsiung and Tainan. Commanders claim to have been given orders to do so by the President. The President claims later that commanders acted alone.

The US-installed Patriot Missile Defense System instantly destroys all of the rockets, although falling debris kills 22 people and injures hundreds. No infrastructure is damaged.

US destroyers and aircraft carriers in the region automatically respond under their agreement with Taiwan and a devastating barrage of missiles are fired at strategic sites in Shanghai. The US aim to send a message, not cripple the country and so they bomb a set of vacant factories alongside the main Chinese military base in Shanghai. The French had recently installed their own version of the Patriots for the Chinese government, but their de Gaul system proves unreliable.

A single US jet flies inside Chinese airspace and destroys the Beijing National Olympic Stadium. A few minutes later US President George W Bush receives a phone call from President Hu Jintao. The message has been received, “Back down now or we will cause real damage.”

A ceasefire is declared at 04h15. Loss of life and damage to infrastructure is minimal but the economic fall-out is tremendous.

2009: Aftermath
Despite China’s attraction as a low cost manufacturer, multinationals declare that the political risk is too great. By the end of 2008 factories are springing up in India as companies hedge their bets.

The potential political disruption in China is magnified by unrest caused by unemployment and fear. The Chinese Communist Party has been shown to be full of rhetoric. Amidst the anti-American protests a new democratic movement starts to take hold, dedicated to bringing down the oppressive state.

As 2009 begins the world economy is in free fall. Manufacturers are pulling out of China and fleeing to more expensive havens in India, Bangladesh, Indonesia and Pakistan. Inflation and shortages follow across OECD countries. The effects are worse in poor developing countries who had depended on cheap imports.

Property values plummet in major centers around the world. Recession hits Australia, the EU, Russia and the US. Trade sanctions are threatened and the WTO is gridlocked in acrimony. The UN is enfeebled.

China threatens nuclear attacks on Taiwan. The US announces that several nuclear submarines are situated off the Chinese mainland. China backs down in confusion.

War is averted but the world’s economy is shattered.