Investors are exaggerating the likelihood of a military confrontation over Taiwan, a senior US diplomat has said.
Michael DeSombre, US assistant secretary of state for East Asian and Pacific affairs, told CNBC on Thursday that investors were “overpricing the risk of something happening across the Taiwan Strait.”
“Both China and the US don’t want conflict, and we’re able to deter conflict,” he said.
Beijing regards Taiwan as part of its sovereign territory and says it seeks peaceful reunification, although it has not ruled out using force. The self-governing island remains a source of friction between China and the US, which maintains a one-China policy but continues to supply Taipei with weapons.
Experts, however, warn that financial markets may be ill-prepared for the economic fallout of a crisis.
Taiwan dominates global production of advanced semiconductors, supplying chips essential to smartphones, vehicles, and AI systems. A blockade or military escalation could disrupt manufacturing and key shipping routes, sending shock waves through global trade and technology supply chains.
A confrontation could also derail US-China trade relations, triggering new tariffs, export restrictions, and investment controls. Asian markets and American technology companies would be particularly vulnerable. Investors have already priced geopolitical risks into Taiwan-linked stocks, including chipmaking giant TSMC, according to MarketWatch.
Bloomberg Economics estimated in February that a US-China war over Taiwan could wipe $10.6 trillion, or 9.6%, off global GDP in its first year. The EU would be among the hardest-hit regions, according to British think tank Chatham House.
Johns Hopkins University professor Hal Brands has warned that Beijing could opt for a blockade or customs quarantine rather than a full-scale invasion.
“No one has a good idea how to price in the risk of a US-China military conflict over Taiwan,” he told an investment conference in September, according to Business Today.
Meanwhile, Beijing has repeatedly denounced US arms sales to Taiwan as interference in its internal affairs, demanding that Washington stop the shipments.
Last week, the US delivered the first two of 66 new F-16 fighter jets ordered by Taipei under an $8 billion deal. It followed talks between US President Donald Trump and Chinese President Xi Jinping, during which Xi urged Washington to oppose “Taiwan independence” and “handle the Taiwan question with caution.”
Washington approved a record $11 billion arms package for Taiwan last December. Trump has reportedly delayed approval of another $14 billion deal, calling the potential sale a “very good negotiating chip” in talks with Beijing.
US officials have claimed that Xi ordered China’s military to be ready for a potential operation against Taiwan by 2027, although Beijing has not confirmed this.
DeSombre, however, described the Chinese leader as “a very rational actor” who would carefully weigh the consequences of military action.
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