Pelosi... Don't Poke the Dragon.
By Alonso Munoz
U.S. House Speaker Nancy Pelosi concluded her visit to Taiwan Wednesday; a sign of relief for the market: no shot down planes, no fighter jets and no WWIII (at least for now). We won’t comment on Taiwanese politics and the contentious history that always comes along with that, but we will offer a perspective on the decision of the trip itself. Since we’re investors, let’s do a cost benefit analysis: what did the U.S. gain and at what cost?
Pelosi noted that her visit served as a signal of friendship to Taiwan. If that was the goal, then HOORAH! mission accomplished. We sent the 3rd highest office holder abroad for 2 days to say “America stands with Taiwan” after weeks of heated debate. A better reason for the visit would be to stabilize the global semiconductor shortage and supply chain issues. Pelosi met with Taiwan Semiconductor Manufacturing Company (TSMC) founder Morris Chang. TSMC produces as much as 90% of the world’s highest tech chips. The visit comes right after the passing of the Chips and Science Act which provides over $52 billion in subsidies to chip manufacturers. While we can’t say for certain, we’d suspect that Pelosi’s conversation with Chang mentioned how TSMC would see some of that money in their new Arizona plant. That’s good news for everyone (including Pelosi’s chip stock positions, but that’s another story). Taiwan is still strategically vital to solve tech supply chain disruptions, but less we forget, TSMC isn’t a U.S. company.
The U.S. Beijing relationship has been strained for years now. We saw some brief improvement as communication lines between Xi and Biden opened last month, with even possible talks of lifting some U.S. Chinese tariffs on the table. Pelosi’s stint to Taiwan has likely erased all progress in that regard. Is a show of support worth jeopardizing the relationship with our biggest trading partner? And that goes for Taiwan as well. The mainland is still Taiwan’s largest provider of goods, and importantly also houses an enormous military force (not a great strategy to annoy your neighbor in this case). In retaliation to Pelosi’s visit, Beijing executed on live fire military exercises around the strait with missiles likely flying OVER the island and trade sanctions on raw materials. This was an obvious consequence. Military advisors, policy strategists and the White House all warned against the visit weeks prior. Now tensions are heightened again with the tailwind prospect of international Chinese revenue for American equities dwindling.
Alonso Munoz at firstname.lastname@example.org
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