Finance Monthly - September 2022

• It takes far longer to acquire the expertise to run it and produce top-end designs. • Taiwan produces over 65% of the global chip supply. It has a monopoly on producing the most complex chips. • Both the US and China are heavily reliant on Taiwanmanufactured chips. • Nancy Pelosi’s most important meeting last month wasn’t with the Taiwanpresident, butwith the mighty Taiwan Semi-Conductor Manufacturing Company (TSMC) – trying to persuade them to expedite the establishment of US production sites. • Sophisticated modern weapons rely on chips. US and NATO stockpiles are being run down to supply Ukraine. China stockpiles remain intact. Raytheon recently reopened the Stinger production line – but could take years to deliver 1200 new missiles to an old design. • Wargames modelling a Taiwan invasion and US intervention suggest a war could cost the US Navy and Air Force over 900 aircraft (half the US inventory) and the bulk of the Pacific Fleet. The Chinese would not win and would see their amphibious forces destroyed. Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply. The Chinese have enough on their economic plate – property fallout, the domestic loan market, youth unemployment, plus the ongoing damage of COVID restrictions to contend with. The conflict would simply exacerbate their economic weakness ahead of critical party meetings. But… If China wanted to inflict economic self-harm by inviting Western Sanctions and lost manufacturing orders, then they could. The Chinese don’t actually need to invade to thoroughly destabilise the West. All they would need to do is institute a blockade of Taiwan. The West would not be certain of global support against such a move. If the Chinese frame it as domestic police action, the same countries that failed to rally against Russia’s invasion of Ukraine – critically the Gulf States – may decide to withhold support and wait and see how it plays out. A global shortage of chips will swiftly impact the West’s manufacturing capabilities, closing down the auto sector and causing chip rationing towards defence spending. It would be dangerous – a blockade would raise the likelihood of mistakes, miscalculations and raise the risk of confrontation turning a cold war hot. Sprinkle in some more confusion – like a new Trump administration likely to unravel the Western Democratic Alliance and break NATO. Trump had his successes, but his first presidency was an unmitigated disaster in terms of America’s international standing and relationships. He offended US allies and diminished the reputation of the Bastion of Democracy as a reliable partner. Should Trump’s new MAGA republicans win the mid-terms it will further change the signals – perhaps encouraging China to take a risk on Taiwan’s chips… Finance Monthly. Fron t Cove r Fea t ur e 15

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