Taiwan, China, and the United States: How Does This Conflict Impact the U.S. Stock Market?
Hapi Pills
9.11.2024 1:03 AM
The conflict between Taiwan and China has escalated to unprecedented levels in recent weeks. Many political analysts fear a situation similar to that between Ukraine and Russia, which has had significant impacts on the global economy. At this point, it's impossible to know for sure if a similar war will occur. What is certain is that these fears are already having a strong impact on the U.S. Stock Exchange and other markets worldwide.
For this reason, it’s important for investors to understand the economic and political relationships between these countries. In this article from Hapi, we explain how the conflict started, what could happen in the future, and what the impact of this conflict might be on the U.S. Stock Exchange.
Taiwan is an island located southeast of China. Between 1945 and 1949, there was a civil war on mainland China between the nationalist government forces and Mao Zedong's Communist Party. The communists won in 1949 and took control of Beijing. The nationalists fled to Taiwan, where they have governed ever since.
As a result of these events, China claims that Taiwan was once a Chinese province. However, the Taiwanese argue that they were never part of the modern Chinese state formed after the 1911 revolution or the People's Republic of China, established under Mao in 1949.
It’s important to note that Taiwan is officially known as the Republic of China, while mainland China is called the People's Republic of China.
China sees Taiwan as part of its territory and promises to reunify the democratically governed island with mainland China, using force if necessary. Tensions between the two sides are rising.
Taiwan is a friendly territory of the United States and crucial to its foreign policy. Any military clash over Taiwan would likely be strongly defended by the U.S. The U.S. claims its goal is to ensure peace and stability in the Taiwan Strait and aims to maintain the status quo.
Only 14 countries recognize Taiwan as a sovereign nation, limiting Taiwan's political influence.
There are three possible scenarios:
The first is that tensions are significantly reduced through diplomacy and trade agreements. This has been the situation over the past few decades, so it’s possible it could continue in this manner.
The second scenario is that China gains progressive control over Taiwan without the use of force by increasing direct investment, as it has done economically in other eastern countries. This could lead to a more connected and empowered Chinese economy in the development of technological tools. However, it's unlikely that Taiwanese politicians and their allies would allow this strategy.
The final and most conflict-ridden scenario is that China invades Taiwan and uses its full military force. This would be similar to the situation between Russia and Ukraine. The key difference is that Taiwan has much stronger military and economic support from the U.S.
In a potential war over Taiwan, countries would likely defend their respective allies, escalating the conflict to extremely high levels. Due to the severity of this scenario and Taiwan’s economic importance, it is unlikely that a military war would occur.
The unprecedented economic growth between the 1960s and 1990s made Taiwan one of the “Asian Tigers”. This was achieved through extensive land reforms, U.S. aid, and export-oriented industrial development.
Taiwan is a major trading nation with $246.7 billion in exports. Surprisingly, its main export destination is China, followed by Japan and the U.S.
Electronic products account for more than 50% of Taiwan's trade, and most of these components are essential to the global economy. The services and industrial sectors make the greatest contributions to its economy.
One example of Taiwan’s economic significance is its leading semiconductor company, Taiwan Semiconductor Company, with a market capitalization of over $400 billion. This places it among the fifteen largest companies on the U.S. Stock Exchange and makes it the second most valuable company in Asia, surpassed only by Saudi Aramco.
Taiwan produces nearly two-thirds of the world’s semiconductors and more than 90% of the most advanced chips. Semiconductors or chips are components that both conduct and insulate electricity. The two most well-known types of chips are memory and microprocessors (CPUs, for example).
A loss in chip production and the sanctions that could result from an invasion of Taiwan could worsen the already grim global economic outlook.
Semiconductors are a critical part of the global economy. A study by Goldman Sachs found that 169 industries are affected in some way by chip shortages. For example, a 10% shortage of chips for cars resulted in a $200 billion revenue loss for manufacturers.
This situation amplifies recession fears in the U.S. and impacts publicly traded stocks. Typically, with slower economic growth, companies’ future profits decrease, affecting their earnings reports. With lower expected profits, stock prices drop. If the conflict escalates, it’s possible stock prices will fall.
The impact on the U.S. Stock Exchange is substantial. After sustained declines early in the week due to fears of war, major U.S. indices rebounded 2% on the day Nancy Pelosi visited Taiwan. China had threatened a violent response if Pelosi landed in Taiwan, but since it didn’t happen, those fears temporarily subsided.
In the future, economic sanctions could affect Chinese, American, and Taiwanese companies listed in the U.S. This includes many of the highest market-cap stocks today.
The U.S. has been pushing initiatives to delist Chinese government-influenced companies from the U.S. stock exchange, and this conflict further escalates tensions between China and the U.S. This increases the likelihood that these efforts will materialize.
Moreover, due to these companies' importance in the global supply chain, the situation could affect other global companies with stocks in the U.S. market, particularly due to the shortage of advanced semiconductors in nearly all tech components.
Beyond the “chip” sector, the automotive industry is already feeling the effects of reduced semiconductor supply, which is critical for the sector. As a result, new car deliveries are delayed, and manufacturers cannot meet demand.
This power struggle increases the likelihood of a recession. While recessions bring immediate economic challenges, they are often seen as good opportunities for long-term investments.
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