After US House Speaker Nancy Pelosi’s trip to Asia, China imposed sanctions on trade with Taiwan. Seen in isolation, the sanctions do not have a major economic impact. However, they could signal an acceleration of US-China decoupling.
Chinese markets have tended to underperform during past trade disputes with the US, while moves to limit China’s access to semiconductors could slow its economy.
In the longer term, less efficient supply chains are likely to have a negative impact on the global economy. However, some emerging markets will benefit if they can secure a share of the manufacturing market. Those that succeed are likely to achieve structural improvement in their economies that would ultimately support better local asset performance.
return of protectionism
Pelosi’s trip to Asia, which included a visit to Taiwan, has fueled regional and Sino-US tensions. Beijing has signaled that military exercises in the Strait of Formosa are now complete, but regular patrols in the area are planned.
So far, the disruption to shipping appears to have been short-lived. However, with around half of all container ships worldwide transiting the narrow waterway, there is undoubtedly a risk that further military operations could impact supply chains in the future.
Heightened geopolitical tensions have led to a resurgence of protectionist trade policies. Alongside military drills, Beijing also announced a ban on importing food from Taiwan and exporting sand the other way. Taken by themselves, these measures do not have a major impact. the total food exports from Taiwan to China accounted for only about 0.2% of gross domestic product (GDP) in 2021, while trade in sand is also minimal.
However, a further escalation of trade tensions could have serious consequences, not only for China and Taiwan, but also for the global economy.
Global consequences of local tensions
After all, China is by far Taiwan’s most important trading partner. China is the destination of more than a quarter of all exports, and China’s end-use value added accounts for about 10% of its GDP.
China is also very dependent on imports from Taiwan in some areas; in particular, it sources about a third of its total semiconductor imports from Taiwan. Given China’s importance in global supply chains, there is a risk that local trade tensions could have a global impact by causing renewed shortages of manufactured goods.
The uneasy symbiosis between China and Taiwan likely means neither side will escalate trade tensions to unacceptable levels, but the decision could be taken out of their hands.
US President Joe Biden enacted the Chips Act last week. This law aims to subsidize the development of onshore semiconductor manufacturing and prevent firms taking advantage of the deal from investing in high-tech manufacturing in China. The Biden administration is also reportedly planning to ban the export of high-quality semiconductors and manufacturing equipment using US technology to China in a bid to stifle its attempt to become self-sufficient.
The performance of regional markets is under pressure
In the near term, heightened trade tensions are weighing on the performance of financial markets in the region. For example, while US tariffs (see: Why tariff reversal won’t save the US) largely missed their economic targets, China’s stocks and currency fared poorly during the trade war a few years ago.
In the longer term, the recent dispute between the US and China should help accelerate the decoupling of the two superpowers. In addition to US action on semiconductors, five Chinese SOEs (state-owned companies) announced last week that they will delist from the New York Stock Exchange.
Meanwhile, Beijing has temporarily suspended cooperation with Washington on issues like climate change, and companies are likely to reconsider the location of their supply chains. A reversal of the current integration (see: What a new world order might mean for the global economy) would likely reduce the efficiency of global supply chains, thereby hampering long-term growth and increasing inflationary pressures.
Could some markets be happy about an investment boost?
However, as we discussed back in 2020, other emerging markets could benefit from the US-China decoupling if they can secure a share of global manufacturing output. Finally, all emerging markets that move to industrial export-based growth models should see a boost in investment and productivity growth.
This would ultimately lead to structural improvements in their external position and inflation dynamics. In return, central banks would be able to facilitate lower interest rates and ultimately less volatile returns on local assets.
Vietnam has already managed to gain market share in some sectors. But companies are also likely to consider emerging markets with large domestic markets and an ample supply of relatively cheap labor. India and Indonesia are two such emerging markets, and recent reform momentum could speak in their favour.
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