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Chinese Ambitions = American Insecurity; Finding Equilibrium in the Pacific
China's Global Ambition Creates American Insecurity: China is pivoting from a manufacturing-centric role to a leader in invention, aiming to ascend the global economic hierarchy. However, this strategic transition has prompted global leaders, primarily the U.S., to protect their technological edge. While the U.S. has escalated restrictions, especially concerning high-end semiconductor technology, the race for innovation supremacy continues. As China progresses towards the 7nm technological threshold, we assert that its progress is more dependent on imitation than genuine innovation. The resilience and depth of China's financial backing for this transition remain pivotal. Strategically, underestimating China's capabilities to develop independent technology poses a higher risk than overestimating them.
Critical Minerals tit-for-tat: China recently restricted access to a small corner of the rare earth (REE) market. China’s leverage on key minerals could absolutely disrupt global manufacturing. However this would backfire like their previous restriction of REE’s, where China's production share plunged from 97% to 60% within a decade.
Western Businesses Have Important Decisions to make on Supply Chains: The tug-of-war between the U.S. and China on technology access and intellectual property continues. U.S. firms grapple with the decision to operate in China, balancing economic interests with geopolitical risks. Additionally, with China's economy slowing down, alliances are shifting, and there's potential for a period of stability. Yet, businesses must remain vigilant to early warning signs of a potential conflict.
Economic ‘De-Risking’: A shift in U.S. trade is underway, with more imports from Canada and Mexico than China for the first time in a decade, excluding the pandemic lockdowns. We believe this is a cyclical downturn that offers a possible glimpse into future trade patterns, and that a recovery in the electronics market will likely boost US imports from China. However, we expect the long-term trend of migrating supply chains to LATAM and ASEAN countries to continue.
Pacific Tensions Rise: The Pacific region is brimming with geopolitical tension. China's actions in the Pacific serve both military and strategic economic interests. While economic challenges might hinder China's long-term influence, the immediate risk of conflict is palpable. A series of aggressive moves and preparations by China indicate its preparing its military and economy for war. While China has the military capability to put Taiwanese sovereignty at risk, the real determinant is the economic fortitude to withstand potential backlash. As tensions rise, investors must ponder China's true preparedness, the realistic support the U.S. can offer Taiwan, the feasibility and duration of a potential U.S. blockade against China, and the global stance towards such a blockade.