THE PHILIPPINES is preparing for a Taiwan war. That’s known. But the costs of that “inevitable war” are not. It’s time to address them.
In August 2025, President Marcos Jr. said that “a war over Taiwan will drag the Philippines, kicking and screaming, into the conflict.”
Pushing for preparation, the government has boosted US-Philippine military cooperation, military modernization, joint military exercises, and the installation of US mid-range missile systems and anti-ship missile launchers.
These measures are said to foster Philippine prosperity and security.
But how would a major military conflict in the Taiwan Straits, with the active support of Manila’s military logistics, affect the economic futures of the Philippines?
How PH becomes a “co-belligerent”
In the past decade, globalization has given way to geoeconomic fragmentation, replacing economic efficiency along geopolitical lines. Recently, this has morphed into “Cold War II,” a prolonged, systemic rivalry risking substantial, long-term global GDP losses.
While an ASEAN-centered focus would be more beneficial for its economic future, Manila has opted for a US-alignment to counter China.
A Taiwan contingency is the kind of shock in which fragmentation becomes nonlinear under conflict, as the World Bank and the International Monetary Fund (IMF) have warned, implying that economic and human costs will soar.
With that backdrop, let’s integrate a major Taiwan conflict with Manila’s logistics support (bases, ports, airspace, supply, etc.) into a real-GDP scenario.
In this status quo, the EDCA sites – US military bases and facilities in the Philippines – are used for logistics, refueling, repair, and transit. They may have no direct combat role, but they represent de facto alignment.
Faced with the US missiles’ offensive capabilities, China defends itself and treats the Philippines as a “non-neutral,” hostile rear-area state.
By providing significant military logistical support to the belligerents, Manila becomes a de facto co-belligerent in the conflict, according to international law (Hague Conventions of 1907, V and XIII) and customary law.
Short-term Taiwan shock
So, let’s assume two Taiwan contingencies. In one case, there is a major level shock, a one-time GDP hit in the first 2-3 years. This is the scenario that geopolitical analysts favor, perhaps because its costs are lower.
In this case, a short war ensues and lasts 3–6 months. The lethal conflict is followed by a ceasefire.
Here’s what happens with major economic transmission channels. First, there will be a trade disruption as shipping insurance spikes in the South China Sea (which Manila calls the West Philippine Sea). Port risk premiums soar for Manila, Subic, Batangas, and Cebu. Semiconductor and electronics global value chains (GVCs) are disrupted. A regional growth shock ensues.
ASEAN trade volume contracts sharply.
As investors start treating the Philippines as a riskier place to keep money, wealthy Filipinos and foreign investors move part of their money abroad (to Singapore, the US, etc. (a trend that’s already nascent); or they demand higher returns to keep it in the country.
Markets charge the Philippine government more to ensure its debt against default, which increases the risk premium. Repricing raises borrowing costs, discourages long-term investment, and drains domestic capital toward safer jurisdictions, reinforcing inequality. Peso depreciation pressure will soar.
Targeted retaliation ensues, with Chinese import bans, the collapse of tourism, and the freeze of foreign investments. China rejects Philippine products and services. Tourists shun risky regions (Chinese tourism collapsed already in 2023-24). Foreign investors avoid potential military targets.
Some of these measures are already heatedly debated in Manila.
Medium-term Taiwan shock
The first scenario represents a severe but time-bounded disruption. But what if the conflict lasts longer?
In the second scenario, a prolonged blockade can last up to 3–5 years. It doesn’t necessarily mean a formal war, but sustained interdiction: a continuous, long-term, and coordinated effort to divert, disrupt, delay, or destroy the Philippine military supplies and logistics.
This scenario would translate to greater and longer-lasting “kinetic” damage. Now there is a permanent growth penalty due to higher risk and decoupling.
Don’t blame the messenger. This is the way war shocks are modeled in the IMF Article IV stress tests.
The semiconductor and electronics GVCs are broken. Global insurers stop covering ships, cargo, or investments linked to the Philippines, due to geopolitical risk.
Permanent rerouting ensues, as trade and logistics flows are redesigned to bypass the country altogether. This is not temporary, but built into long-term supply chains—so business simply goes elsewhere.
The Taiwan shock becomes Philippines’ structural nightmare.
Revised real GDP scenarios
A short war generates a level shock. By contrast, a long blockade virtually ensures a level shock and a permanent growth downgrade.
In the immediate shock, the first three years after conflict, trade volume will plunge by 15%, tourism by 50%, and foreign investment inflows by 60%. The investment ratio will decrease by 3-4 percentage points of GDP. In this case, the one-time real GDP loss would amount to 6–10%.
These shock assumptions are conservative, however.
In the second scenario, the long-run effects will feature a greater cost of capital and a partial exclusion of the Philippines from China-centered Asia trade. As militarization is likely to crowd out civilian investment, inequality soars and poverty spreads. The best and brightest leave, followed by recurrent streams of blue-collar OFWs.
In the case of the longer shock, the Philippine real GDP index would plunge -43% behind the baseline by 2050, lower than in many Latin American countries. The country would look like Ukraine after 2022.
In the process, the country gets stuck in the middle-income trap, which becomes structural.
The end of the dream
By 2035, the Philippines will lose roughly a quarter of its potential income per person. This is equivalent to 10–15 years of development delay.
In the second scenario, the devastation wipes out 20–40% of long-run real output potential by 2050. Instead of a lost decade, a generation is wasted.
By then, the Philippines will no longer be regarded as a potential ASEAN catch-up promise. It is seen as a textbook case of a growth story that lost its way.
Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net
