Preface
The U.S.-China relationship has recently intensified its geopolitical tug-of-war, and cross-strait relations have become increasingly tense. You may think that the international situation of these three countries is not new. There is nothing to make a fuss about.
However, it is worth noticing that the significant deterioration in U.S.-China relations recently has sparked strong major investment banks’ concerns.
The CEOs of three major investment banks, including Wall Street investment bank JP Morgan Chase, Bank of America, and Citigroup, have publicly pledged to withdraw from the China market if Beijing resorts to force against Taiwan, in accordance with the U.S. government’s request. Last year, news of Pelosi’s confirmed visit to Taiwan pushed Goldman Sachs Securities’ newly launched “Cross-Strait Risk Index” above 80. According to the latest report of the Council on Foreign Relations (CFR), China’s intensified pressure on Taiwan and the fear of a serious crisis in the Taiwan Strait ranked the highest in the world’s potential conflicts for the third consecutive year.
We can examine whether our investment portfolio may be affected in the future by knowing the tripartite relationship between China, Taiwan and the U.S.
A Brief Summary of the U.S.-China-Taiwan Relationship
The U.S., China, and Taiwan maintain a complex and sometimes tense relationship. The United States has unofficial relations with Taiwan and is committed to supporting Taiwan’s self-defense. China considers Taiwan to be a breakaway province and does not recognize Taiwan’s sovereignty. The United States maintains that the status of Taiwan is to be decided by the people in Taiwan.
Impact of US-China Tensions on Trade Relations and Global Supply Chains
Taiwan is the world’s sixteenth biggest economy, and it manufactures roughly two-thirds of all semiconductors and 90% of all chips. Additionally, Taiwan is estimated to supply 35 percent of the world’s automotive microcontrollers and 70 percent of smartphone chipsets.
On the other hand, China is the world’s largest steel manufacturer, accounting for over half of global steel production. Additionally, for certain products, China relies significantly on imports from specified nations. Australia provided more than 39% of China’s natural gas in 2021. Australia also imported nearly 73% of its oil from the United States. Other countries rely on China for critical raw materials as well. Among the 30 raw materials classified as critical by the E.U., 19 are primarily imported from China, including magnesium, rare earth, and bismuth, accounting for 98% of the E.U.’s needs.
As a result, a conflict between China and Taiwan would not only disrupt the global supply chain of semiconductors but would also have an impact on the numerous industries that rely on chips, such as e-commerce, logistics, entertainment, and other businesses, which could lose up to $1.6 trillion in revenue each year.
Economic sanctions would lead to an estimated $270 billion in trade disruptions. Not to mention the knock-on consequences of such an economic blockade or the impact of outside investors pulling out.
How the Conflict Can Affect Your Investing Portfolio
So what kind of portfolio should investors pay attention to under such an intensive trilateral relationship?
The first is ETFs directly related to Taiwan, such as iShares MSCI Taiwan. Investors who have purchased Taiwan company stocks via American Depositary Receipts (ADRs) should also pay attention to the related news in advance.
In addition, stocks that are relevant to semiconductors will be affected, including Intel Corporation (INTC), Advanced Micro Devices (AMD) Apple Inc. (AAPL), Samsung Electronics Co., Ltd. (SSNLF), and Dell Technologies Inc. (DELL) General Motors Company (G.M.), Ford Motor Company (F), and Tesla, Inc. (TSLA).
Although the war did not happen, we can see the impact of the Taiwan-China crisis on U.S. stocks from Pelosi’s visit to Taiwan. Pelosi landed in Taiwan, and the S&P 500 fell 27 points to close at 4,091. The DJ30 declined 1.2%, and the NASDAQ lost 0.2%.
The Bottom Line
The conflict between China and Taiwan would disrupt the global supply chain of semiconductors and impact the numerous industries that rely on chips. Economic sanctions would also disrupt China’s trading with other nations. As a result, it is important to be aware of this national relation and start reviewing your investment portfolio. Don’t forget to make sure that they are properly diversified and protected from risks associated with geopolitical tensions.
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