by Bill O’Grady | PDF

Tensions over Taiwan have been steadily escalating in recent years.  When President Trump was elected in 2016, one of the first official contacts he made was with President Tsai Ing-wen, the leader of Taiwan.  Accepting this call infuriated Beijing, which views Taiwan as a province of the People’s Republic of China (PRC).  Recently, there have been alerts from American military officials warning that China has hostile designs on Taiwan.  Chinese warplanes regularly enter Taiwan’s airspace, normalizing this hostility.

There are numerous subcurrents in Asia; the predominant one is that China no longer accepts U.S. hegemony in the region and seeks to become the dominant power of that continent.[1]  However, having the goal of hegemony and becoming a hegemon are two different issues.  The size of China’s economy clearly makes it a world power.  The country has been rapidly building its military to compete with the U.S.  At the same time, it has serious vulnerabilities that prevent it from ousting America from the Pacific region.

Taiwan encapsulates many of the issues surrounding China’s goal of hegemony.  In this report, we will examine them in depth.  In a subsequent report, my colleague, Patrick Fearon-Hernandez, will build off this research to examine the global semiconductor industry which has much of its critical infrastructure in Taiwan.  To some extent, the geopolitics of Taiwan, in general, and the semiconductor industry, specifically, detail the current situation surrounding globalization.  As globalization comes under strain, the stresses are being exhibited clearly in Taiwan and in semiconductors.[2]

In Part I of this report, we will begin with a history of Taiwan.  Next, we will address current relations between the PRC and the Republic of China (ROC) and the end of strategic ambiguity.  In Part II, we will analyze the geopolitical importance of Taiwan and China’s military options.  In Part III, we will examine how Xi Jinping may react, in light of his ascendency to power.  Finally, we will conclude with market ramifications.

Read the full report

[1] Allison, Graham. (2017). Destined for War: Can America and China Escape Thucydides’s Trap? New York, NY: Houghton, Mifflin, Harcourt. Our review of the book and concept can be found here and here.

[2] Because these reports touch on not just macroeconomic and geopolitical issues, but will also discuss industries and companies, we want to acknowledge the support and counsel provided by our colleagues at Confluence Investment Management on the Value Equities and International Equities Investment Committees.  Dan Winter, Matt Sinkovitz, Mark Keller, Joe Hanzlik, and Greg Tropf provided insight and information in our research.  While acknowledging their contributions, any errors and omissions in this report are mine alone and the research reflects my sole conclusions.