Synopsis: The outcome of the war between China and Taiwan will be a major disruption to world markets. The semiconductor industry, trade and technology will be dramatically impacted, creating great risk for investors across the globe
After recent US actions in Venezuela, geopolitical tension is at an elevated level. Now, all eyes are focused on a much larger global risk, not only for the US but also for global investors, a potential Chinese invasion of Taiwan. Although the US action’s impact on oil prices and other regional markets is severe, a conflict over Taiwan will severely affect the entire global technology and manufacturing system, thus creating significant turmoil for financial markets.
Red Dragon’s Dominance
The production of the world’s most technologically advanced chips is possible only through the use of extremely specialized EUV equipment manufactured by ASML in the Netherlands, which no other manufacturer can replicate.
These tools and ultra-pure materials, such as semiconductor-grade silica, are transported to Taiwan through extensive fragile global supply chains. If China conduct a swift military attack or a blockade, the flow of these supplies would cease instantaneously.
For TSMC, a company that cannot afford to store or stockpile an abundance of tools and materials, even the briefest disruption in production may result in a complete halt of production. All parties in this situation depend on a stable geopolitical environment and an open trade route; while China is the primary supplier of raw materials used to manufacture chips, ASML produces the essential machines to create chips, and TSMC manages the production of chips.
If a conflict should erupt between China and Taiwan, it would not only be detrimental to Taiwan but also severely impact global supply chains that manufacture technology, defence, and industrial products by paralyzing their supply chains. In turn, it would send shockwaves throughout all global markets.
The Semiconductor Risk That Could Shake the World
As the world’s largest semiconductor manufacturer, Taiwan Semiconductor Manufacturing Company, or TSMC, is a key player in the global technology ecosystem. TSMC produces more than 90 percent of advanced semiconductor products for smartphones, AI servers, data centres, automobiles, military applications, and all modern industrial equipment. If there is a conflict in Taiwan, semiconductor production and exports from Taiwan could halt almost immediately.
There is currently no other global production capability that could replace TSMC in the short or medium term. Bloomberg Economics estimates the total economic impact of a full-scale war over Taiwan would be approximately $10 trillion (or roughly 10 percent of the world’s GDP), with the semiconductor industry contributing materially to this overall economic loss.
How Global Stocks Could React
The first and most severe impact would probably occur in semiconductor and high technology equities. Most of the world’s high-tech and IT companies, such as Apple, NVIDIA,AMD, Google and some of the largest global automakers, are reliant upon Taiwan’s semiconductor manufacturing capabilities.
Without access to these chipsets, many companies across several industries would find themselves unable to continue operating, resulting in lost productivity. In addition, due to the highly specialized nature of semiconductor manufacturing, companies are unable to rapidly switch their semiconductor suppliers as they can with raw materials; therefore, the effects of the shortage on the global equity markets will be much more significant and longer-lasting, especially within technology and manufacturing sectors.
Trade Disruption and Financial Market Stress
Should a conflict emerge over Taiwan, the disruption of global trade would be tremendous. The Taiwan Strait is one of the busiest shipping lanes in the world, accounting for nearly 50 percent of container shipping worldwide, and if any military action escalates, the shipping lane would be blocked or delayed, which would affect over $2.45 trillion in the flow of goods.
Western nations would likely respond by enacting severe trade sanctions against China. China may retaliate by cashing out its holdings of U.S. Treasury bonds or placing restrictions on foreign assets, which could lead to substantial volatility in the bond market, as well as the U.S. dollar and interest rates, all of which could be significant. According to Bloomberg Economics, the estimated economic costs from a conflict over Taiwan would likely be greater than the total losses incurred during the 2008 Financial Crisis and COVID-19 combined.
Where Investors May Move Their Money
When there is extreme uncertainty, investors will typically liquidate risky assets like stocks and currencies from emerging markets to invest in safe-haven assets. Historically, gold has performed well during crises; the US dollar and Swiss franc have appreciated against other currencies, as there is a flight to safety. Additionally, defence stocks have often outperformed during periods of increased geopolitical tension due to higher expectations for defence spending. This trend seems to repeat over time, and it is anticipated that defence stocks will also experience increased demand in the event of a Taiwan-related crisis.
What This Means for Investors
To put it simply, a dispute between China and Taiwan will have nothing to do with Asia but everything to do with the world economy in general. The conflict would create a global recession, have a lasting negative impact on the global semiconductor supply chain for several years and lead to a significant reconfiguration of how the world’s trade and manufacturing operate together. Many industries may see short-term benefits from a Chinese-Taiwanese conflict, but overall, it will be very difficult to operate in the current economic environment.
A potential Chinese-Taiwanese conflict is considered to be a low-probability/high-consequence risk to the global market. This means that it emphasises how attached the global economy is to the tech and semiconductor industry at this point. Investors will be more likely to understand this type of disruption due to the types of problems that can be caused by these types of conflicts, and markets will be looking at the development of the region closely.
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