A war over Taiwan would be even more damaging to the US economy than COVID was, Bloomberg forecasts

• A war over Taiwan could wipe out 6.7% from the US economy in its first year, according to a Bloomberg Economics analysis.
• The US economy could take a 3.3% hit to its GDP growth if China blockades Taiwan.
• Taiwan is a major semiconductor chip supplier to the world. The island heads to the polls on Saturday.

The US economy could take a major hit if war breaks out over Taiwan, according to a Bloomberg Economics analysis published on Tuesday.

US GDP could take a 6.7% hit in the first year of conflict if Washington gets drawn into the war, Bloomberg forecasts. In the case of a Chinese blockade of the island — a major semiconductor chip producer — the US could see 3.3% shaved off its GDP in the first year.

Per Bloomberg's forecast, the economic impact in both scenarios would be worse than in 2020, when US GDP contracted 2.2% due to the COVID-19 pandemic.

But the impact on the US economy pales in comparison to the impact on other economies, Bloomberg found.

Overall, a war over Taiwan could hit the world's economy to the tune of $10 trillion — or about 10% of global GDP — Bloomberg forecasts.

Taiwan could see 40% shaved off its GDP in the first year of a war while China's GDP could tank 16.7%, Bloomberg predicts.

Other countries most affected by war over Taiwan include South Korea and Japan, which could see their growth contract by 23.3% and 13.5% respectively in the first year of the conflict, Bloomberg predicts. Southeast Asia's GDP as a region could tank by 20.1%.

Bloomberg Economics' analysis is based on geopolitical considerations and economic modeling.

The report came days ahead of Taiwan's general and presidential elections, which are slated to be held on Saturday.

Taiwan's elections are closely watched because China claims the self-ruled island — a semiconductor powerhouse — as its own territory. There are fears a Chinese invasion of Taiwan could have a significant impact on the global economy and regional security.

While it doesn't appear as if China is set to invade Taiwan any time soon, Beijing has been ramping up military drills over the last few years. On New Year's Eve, Chinese President Xi Jinping said "reunification" with Taiwan is inevitable.

Tensions between China and Taiwan could rise if presidential frontrunner William Lai Ching-te from the ruling Democratic Progressive Party, or DPP, win the presidential race. Beijing views Lai as a separatist.

In the case Lai wins, China could step up retaliatory measures such as import bans and intensify military drills, Vishnu Varathan, the head of Asia economics and strategy at Mizuho Bank, wrote in a note on Monday.

"A DPP win may not be exactly business as usual as Beijing is likely to continue viewing Lai as an obstacle towards reunification," wrote Varathan.