Is a U.S. -China War over Taiwan Imminent?

By ACM Wealth

ACM Wealth Administrator

Is a U.S.-China War over Taiwan Imminent? If you believe some of the recent headlines, yes.  For example, Forbes published an article titled Those Bombers China Sent Toward Taiwan? They Were a Dress Rehearsal For War. The piece discussed military tactics China would use to attack and unify Taiwan.  The article suggested a military invasion is inevitable and that a massive Chinese offensive insures a quick victory and limits prospects for a U.S. counterattack.  Such alarmist reporting certainly adds to readership, but the article is fanciful, short on logic, and conveniently omits important facts about the Taiwan issue.

True, reports of China’s display of firepower have escalated lately.  New Chinese military weapons have filled the mainstream media.  This includes advanced stealth drones, satellite-destroying lasers, submarine-fired missiles capable of hitting the continental U.S., and aircraft carrier-targeting, ultra-high-speed hypersonic vehicles.  The fact that China sports the world’s largest fleet of warships and pursues regular joint military operations with Russia, including a recent bomber exercise, adds to concern about the balance of power in the Asian theater.  Even with the U.S. advanced intelligence systems and precision-strike weapons, the thought of military confrontation between the two superpowers is a scary thought indeed.  Of course, the media seemingly delights in such military muscle flexing since these articles add readership and subscriptions.  Media leaks help hawks in both countries pursue their agenda and most of these events get excessive exposure.  Thus, any new military maneuver by either side receives prominent headline coverage such as China sending bombers and fighters into Taiwan airspace in response to the U.S. sending the USS Theodore Roosevelt through the South China Sea.  However, these actions have almost become routine.  China flew 380 fighter jet sorties into Taiwan’s air defense identification zone last year and U.S. aircraft sorties numbered 1,500 in the South China Sea.  The USS Theodore’s passage through the South China Sea follows multiple South China Sea movements by the USS Nimitz and USS Reagan carrier groups, each of which “enjoyed” a Chinese warship escort at certain points on their journey.  Both navies regularly sail through the Taiwan strait.

Although worrisome, we look for these types of engagement to continue, but expect both sides to be disciplined and restrained.  China’s military modernization of both naval and air capabilities combined with the U.S. commitment to free navigation and the security of other countries in the region assures further encounters.  However, just as the concept of mutually assured destruction kept conflicts between the U.S. and Russia from escalating out of control, we look for a similar, uneasy and intense at times, yet mostly peaceful, coexistence with China.  We see no reason why the “coopetition” relationship between the U.S. and China, where the need for cooperation limits extreme competitive actions, would not include the South China Sea.  Comparatively, the interdependence of the U.S. and Russia is limited, but U.S. and China interdependence is extensive extending into medical, technological, mining, environmental, and other economic areas.  The idea that U.S. and China will become pure enemies makes for great print, but has low probability.

True, there is not an easy answer to the Taiwan question.  The island is viewed as sacred to China, stolen by Japan in 1895, with reunification a core Beijing goal. But Washington, other governments, and most of the Taiwanese people remain steadfast for a democratic, at least semi-independent Taiwan.  That said, the idea that China will have to invade the island, at least in the immediate future, is false.  China’s strategy seeks soft power over the island.  With Taiwan already heavily dependent on China for its economic livelihood, China seeks to intertwine Taiwan’s economic dependence with political transition.  The success of this proposed assimilation effort will take a decade or more to determine.

Many fear China’s reaction to the U.S. efforts to starve China of high-end semiconductors.  Since much of this advanced technology is manufactured in Taiwan, some believe this will lead to war.  To date, however, U.S. technology sanctions have been largely ineffective with the named Chinese companies creating new entities not on the sanction list which are free to trade with Taiwan Semiconductor and others.  Certainly, from China’s perspective, this is not worth going to war against the U.S. and its military might.  China is now doubling down on bringing more advanced technology “in house.”  Further, we’re starting to see discussions about an accord in the South China Sea where all claimants would share in the resource extraction.  China’s existing fortifications in the area would have to be accepted, but maritime water and aerial sovereignty zones would be forfeited.  Beijing understands such a deal would defuse a volatile corridor with competing interests from Vietnam, the Philippines, and Taiwan.  This should also provide a much-needed burnishing of China’s reputation in the region.

Which brings me to the investment implications.  We note China’s economy, despite U.S. frictions and the pandemic, continues to grow, posting 2.3% GDP growth in 2020, while the remainder of the world’s major economies shrank.  Indeed, many of the largest multinational companies, including those based in the U.S., only registered growth from their China operations.  Economists project 7% GDP growth in 2021 as the economy benefits from signing the world’s largest trade agreement involving its Asian neighbors and completing negotiations on a major investment deal with the EU.  Many of our International ADR and Global portfolio positions are leveraged to China’s economic success.  Further, our China and Hong Kong based investments are not state-owned enterprises and not subject to current U.S. sanctions.

In summary, we don’t advise selling all your investments or building a bomb shelter and stocking it with canned foods.  We believe neither Taiwan (nor the South China Sea) will be the catalyst for World War III.  Increased military activity will no doubt continue to be centered around political events.  In China’s case, it could be Taiwan elections where China shows its displeasure with candidate talk of independence, or the recent change in U.S. administration where China hopes to reset the relationship with President Biden.  With the U.S., it may be China’s mistreatment of minorities, human rights abuses in Xinjiang and Tibet, or the Hong Kong crackdown.  Indeed, these sabre rattlings are intended to send a message, but should not be viewed as a prelude to war.  Although an imminent war is not the reality, reality is not that exciting.  Thus, don’t look for this piece (or peace piece) to be in Forbes anytime soon.

ACM is a registered investment advisory firm with the United States Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. All written content on this site is for information purposes only. Opinions expressed herein are solely those of ACM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. ©ACM Wealth

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