American Institute in Taiwan Director Raymond Greene warned on September 9 that any Taiwan Strait conflict would cause global economic damage exceeding World War II, as Taiwan’s government adopted a record NT$1.12 trillion defence budget for 2027. The warning, delivered at the Taipei Security Dialogue, comes weeks before Chinese President Xi Jinping is expected to meet US President Donald Trump in Washington.
The timing compresses fiscal, diplomatic, and military signalling into a single window. Taiwan’s legislature must still approve the budget, and the summit’s outcome on arms sales and crisis management will determine whether the current trajectory hardens into deterrence without guardrails or stabilises around explicit restraint.
The US has been warning about the economic costs of a Taiwan conflict for years. What makes this one different is the arithmetic. Taiwan’s defence spending is crossing the NT$1 trillion line for the first time, and the two leaders who could decide the outcome are about to sit down in Washington. The warning, delivered by American Institute in Taiwan Director Raymond Greene at a Taipei security forum on September 9, was not a new sentence. It was the same sentence with a bigger number attached.
Greene’s comparison to World War II — a measure of economic destruction, not a prediction of military scale — arrives as the White House weighs whether to green-light pending arms packages ahead of the summit, and as Beijing calibrates its own military drills. The signal is clear. The mechanisms to interpret it without miscalculation are not.
The arithmetic that makes this warning different
Greene’s warning was precise: “any conflict across the Taiwan Strait would have a bigger impact on the global economy than the Second World War.” Behind it lies a budget that gives the words fiscal weight. Taiwan’s Executive Yuan on August 20 approved a 2027 defence allocation of NT$1.1225 trillion, about 3.01 percent of projected GDP. It is the first time spending has crossed the trillion-dollar threshold, and President William Lai has said it should rise toward 5 percent by 2030.
That trajectory is not a one-off spike. It is a multi-year commitment to accelerated military investment, funding long-range missiles, drones, and domestic defence industry capacity. Shelley Rigger, a Taiwan specialist at Davidson College, argues the spending is primarily a signalling tool to Washington and regional partners that Taipei is serious about self-defence, critical to sustaining US political support without provoking a crisis.
The economic modelling behind Greene’s warning is not speculative. Eric Heginbotham, a senior fellow at MIT, has estimated that even a limited conflict or blockade could cut global GDP by around 10 percent, with second-order effects through shipping costs, insurance premiums, and production losses. The numbers are large, but the political arithmetic that would actually stop a war is still missing.
Japan, South Korea and the Philippines are already adjusting. Tokyo has increased defence outlays, sent Maritime Self-Defense Force vessels through sensitive waters and deepened reciprocal access agreements with Manila and Canberra, tightening a network that could be drawn into any crisis. Seoul quietly strengthens contingency planning for evacuating nationals and managing trade shocks. The Philippines, facing proximity to Taiwan and hosting many Filipino workers there, is building legal frameworks for rescue operations and closer security coordination with Japan and the US.
Kishore Mahbubani, a former Singaporean diplomat and UN Security Council president, told the Penang Peace Dialogue on September 5 that a China–Taiwan war would have “incredibly negative consequences for the whole world,” warning that a formal independence move could trigger Chinese military action and draw in the United States, risking a slide toward global war.
| Entity | Current rule | New rule | Effective date |
|---|---|---|---|
| Taiwan | Defence spending below 3% of GDP | NT$1.12 trillion budget, 3.01% of GDP, with target of 5% by 2030 | 2027 fiscal year |
| United States | Arms sales under Taiwan Relations Act | Pending arms packages under review ahead of Xi-Trump summit | Ongoing |
| European Union | Opposition to unilateral status-quo changes | Reiterated categorical opposition to use of force; highlighted trade and supply-chain risks | 2026 |
| Australia–UK | Joint ministerial statements supporting peace | June 2026 statement reaffirmed opposition to unilateral changes and cited destabilising Chinese exercises | June 2026 |
| Sources: Taiwan Executive Yuan budget documents; US Taiwan Relations Act; European Parliament research service; Australia–UK ministerial joint statement 2026 | |||
The guardrail that is still missing
Greene’s warning is not the first of its kind. The difference is the context: a Trump administration preparing for a summit with Xi Jinping that will test whether there is a reliable framework for managing tensions. That upcoming meeting is therefore not just about managing tensions; it is about whether there is a reliable framework for doing so.
Western governments have recently reiterated concern over Taiwan Strait tensions rather than commenting directly on Greene’s remarks. The Australia–UK ministerial joint statement in June 2026 reaffirmed the critical importance of peace and stability and opposed unilateral status‑quo changes. EU briefing papers stress categorical opposition to force. Washington continues arms transfers under the Taiwan Relations Act, while senior US, Japanese and South Korean diplomats jointly voice concern over coercive actions in the strait.
Bonnie Glaser, managing director of the Indo-Pacific Program at the German Marshall Fund, warns that rapid militarisation and sharper rhetoric on both sides increase miscalculation risks. The missing piece, she argues, is not more weapons but channels for crisis communication that can prevent episodes of Chinese pressure from spiralling into open conflict. The historical pattern is not encouraging: previous summits have produced statements of intent, not binding constraints. The next one will either break that pattern or confirm it.
Beyond the headline
The timing
Greene’s warning lands just as Taiwan’s record 2027 defence budget heads into legislative review and Xi prepares for a politically charged Washington summit. That alignment compresses fiscal, diplomatic and military signalling into a single month. The risk is that each actor interprets the others’ moves through a crisis lens, turning routine budget and summit choreography into perceived tests of resolve rather than opportunities to stabilise the status quo.
The reach
One actor largely absent from the headline is the global shipping and insurance industry, which now models Taiwan Strait disruption alongside Suez or Hormuz scenarios. Their mechanism of influence is pricing: war‑risk surcharges and rerouting costs quietly reshape trade flows long before shots are fired. For Western ports, manufacturers and consumers, that means higher logistics bills and more fragile delivery schedules even in a no‑war environment of chronic military signalling.
The power behind it
Formal sovereignty claims dominate public narratives, but the power that ultimately shapes outcomes lies with domestic political coalitions in Washington, Beijing and Taipei. US legislators decide how far to expand arms transfers and economic statecraft; Chinese elites weigh the economic costs of using force against the political costs of restraint; Taiwan’s parties contest how much society should spend on deterrence versus social programmes. It is these internal calculations—not speeches alone—that determine whether the current trajectory ends in hardened deterrence, negotiated understandings or miscalculation.
The costs of a war that hasn’t started
With the Xi-Trump summit weeks away and Taiwan’s record defence budget heading to lawmakers, the practical questions for those outside the region are now about risk, not rhetoric.
- Western semiconductor procurement manager
You must assess the robustness of your current supply chain, explore diversification strategies, and identify alternative sourcing options. Taiwan produces over 90% of the world’s most advanced chips; a conflict would disrupt that output for months, possibly years. Review your firm’s exposure to single-source components and begin qualification runs at alternative foundries in South Korea or the US, while monitoring the summit’s outcome on arms sales for any signal of easing or tightening tensions.
- US-based investor with APAC emerging market exposure
Re-evaluate your risk exposure to companies and markets reliant on Taiwan’s stability. The Duke Center’s estimate of a 10% global GDP loss from a major conflict is a systemic risk that would cascade through equities, currencies, and credit. Consider hedging strategies or rebalancing toward less exposed assets, and watch for any joint statement from the summit that explicitly commits to avoiding unilateral status-quo changes—a signal that could marginally reduce near-term risk premiums.
- European maritime shipping and insurance executive
Update contingency plans for rerouting vessels, reassess insurance policies and premiums for East Asian routes, and prepare for significant increases in operational costs. War-risk premiums for vessels in high-risk zones could reach 10% of ship value, and rerouting losses could hit 2% of goods value per day. The summit’s outcome on crisis-management mechanisms will directly affect whether these premiums spike or stabilise; a vague communiqué could trigger immediate repricing.
- Western government foreign policy advisor
Analyse the implications of these developments for your nation’s diplomatic engagement with China and Taiwan, assess potential economic fallout, and review existing security cooperation agreements in the Indo-Pacific. The summit’s joint language on the Taiwan Strait—particularly any explicit commitments to avoid unilateral changes—will be the most important diplomatic signal. If the White House delays arms packages, it may indicate a shift toward negotiated restraint; if it green-lights them, prepare for intensified Chinese pressure and a higher risk of miscalculation.
Explainer
- American Institute in Taiwan
- The American Institute in Taiwan is the de facto US embassy in Taiwan, carrying out diplomatic and consular functions in the absence of formal relations. It was established after the US switched recognition to Beijing in 1979 and operates under the Taiwan Relations Act. Its director functions as the unofficial US ambassador to Taiwan.
- Taiwan Relations Act
- The Taiwan Relations Act is a US law passed in 1979 that governs unofficial relations with Taiwan and commits the US to providing defensive arms to the island. It mandates that the US maintain the capacity to resist any coercion or force that would jeopardise Taiwan’s security. The act is the legal basis for US arms sales to Taiwan and a recurrent source of tension with Beijing.
- A war-risk premium is an additional charge added to insurance policies for vessels, cargo, or other assets operating in zones deemed at high risk of conflict or political violence. It can be levied as a percentage of the insured value and can spike sharply during crises. In a Taiwan Strait conflict, such premiums could reach 10% of a ship’s value, effectively pricing some vessels out of the region.
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