HELLSCAPE -The defence of Taiwan

China’s President, Xi Jinping, recently said, “If war is what the US wants. Be it a tariff war, a trade war, or any other type of war, we’re ready to fight to the end.’

China has long made clear its refusal to recognise Taiwan’s independence. Xi Jinping has said he wants China’s military forces to be able to invade Taiwan by 2027. Will he be emboldened by Trump’s own ambitions regarding Canada and Greenland?

It was therefore, with some concern, that we read recently that the journal Naval News reported that five vast barges are under construction in Chinese shipyards. China said they are roll-on, roll-off ferries, but military analysts suggest they have unusually long ‘road bridges’ on their bows that would enable tanks to be unloaded on a beach. More compelling evidence, however, is China’s construction of Type 076 carriers, 40,000-tonne vessels designed to carry troops, aircraft, helicopters, and drones.

As we have written previously in Alpha Bites, Taiwan is vital to the global economy as it manufactures over two-thirds of the world’s semiconductors. Taiwan is also important geographically, as the Taiwan Strait is a key shipping route.

For years, the United States has been walking a diplomatic policy tightrope. A supporter of the One China policy that does not recognise or have official diplomatic relations with Taiwan, BUT where there is a ‘robust unofficial relationship’.

While the US has not signed an official guarantee to protect Taiwan from invasion, a military attack by China on Taiwan would be a huge risk. It is believed the US military codename for the defence of Taiwan is ‘HELLSCAPE.’ This would, in theory, see swarms of US drones and missiles fired at the flotilla of Chinese assault craft. Donald Trump has been quoted as suggesting that Taiwan should pay for US protection from China. In turn, does this bring into question Washington’s long-term support?

Hopefully, this nightmare scenario never happens. For now, China seems to be focused on ‘absorbing’ Taiwan through influencing campaigns and political infiltration. However, it is alarming that China is building assault ships and continues to increase fighter jet incursions into Taiwanese airspace. The simple fact is that Xi Jinping wants Taiwan. Another disturbing sign is that both America and China are rushing to build semiconductor chip manufacturing capacity, mindful of disruption to Taiwanese supply in the event of any future hostilities. Taiwan’s TSMC recently announced plans to build a new $100bn chip plant in the US. Is this to circumvent possible tariffs or an insurance policy should China become more hostile?

What have we been watching?

A week of turmoil for global equities, but particularly US equities, on fears of a ‘Trump-cession!’ Investors have been fretting over whether the US economy will experience a soft landing or recession. The concern arises from both Trump’s tariff threats and his policy flip-flopping, which appear to be hitting US market and business confidence as well as US consumers. Goldman Sachs cut its US economic growth outlook from 2.4% to 1.7%. The US market mood was not helped by fears of yet another potential US government shutdown, although this was averted at the 11th hour with a stop-gap funding bill passed in the Senate providing funding for another 6 months. Gold hit an all-time high, reflecting the increased risk aversion and global economic uncertainty.

In the past, Trump has claimed a rising US stock market as a gauge of his economic success, so he will not be pleased with the way US equities, particularly the NASDAQ, have performed recently, having not only given up all the post-election gains but also fallen beneath this. This fall has been particularly sharp in the Mag7 which have fallen over 20% from recent highs, and within this, Elon Musk’s Tesla has fallen by 50% so far this year! The ‘Trump trade’ appears to have gone phut!

The question now is, will the stock market correction force Trump to rethink his tariff strategy, or will he push ahead regardless to achieve his longer-term economic goals? The fact that he went ahead with the imposition of 25% tariffs on steel and aluminium imports from Canada, the EU, and the UK is alarming. The EU responded immediately with tariffs on €8bn of US goods, including bourbon whisky and Harley-Davidson motorcycles. The EU has outlined tariffs on a further €21bn of US goods, which may come into effect on 1st April. Meanwhile, Canada imposed a 25% tariff on $20bn of US goods but also on electricity supplied to the US. Trump then backed down on his threat to double tariffs on Canadian steel and aluminium to 50%. Canada’s new PM Mark Carney has said he is ready to negotiate a renewed trade deal with Trump if there is ‘respect for Canadian sovereignty.’ In the UK, PM Sir Keir Starmer is sitting on the fence in the hopes of a US trade deal before blanket tariffs come in – wishful thinking?

The next key tariff date is the 2nd of April, which is the new deadline for Trump’s deferred Canada and Mexico trade tariffs as well as the date for the imposition of global reciprocal tariffs. However, given Trump’s daily mood swings, expect more developments ahead of this date. For example, Trump has already threatened the EU with a 200% tariff on wine if the EU does not remove the tariff on Bourbon whisky!

Meanwhile, Trump has been devoting his energies to a Ukraine peace deal. Ukraine has accepted a US proposal for a 30-day ceasefire, and US military support has been resumed. A Putin aide dismissed the short-term ceasefire by calling it a ‘respite for Ukraine.’ Trump has threatened more sanctions to ‘devastate’ the Russian economy if Putin does not. Trump is scheduled to speak to Putin on Tuesday. Putin appears to want cast-iron guarantees that Ukraine will not join NATO and that no NATO peacekeepers will be deployed.

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In the UK, the key date for investors is the 26th March OBR ‘fiscal watchdog’ report and the credibility of Chancellor Rachel Reeves self-imposed fiscal rules. Expect more press leaks ahead of this date, but she already appears to be facing pressure from Labour MPs to water down the planned cuts to the welfare system to avoid a repeat of the winter fuel controversy. Meanwhile, the Budget pain is starting to be felt with the UK economy contracting by 0.1% in January with weak manufacturing and construction. The 10-year Gilt yield is still over 4.7% although Sterling has continued to strengthen and is now above $1.29.

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In the US, CPI inflation softened very slightly in February from 2.9% to 2.8%, which was better than expected. Good news for the Federal Reserve (Fed) but are the numbers somewhat irrelevant given Trump’s inflationary tariff mayhem? Nonetheless, markets are pricing in a 0.25% rate cut by the Fed in June.

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Brent oil held around $71 as traders continued to digest the latest tariff news and likely impact on the global economy.

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Finally, wind and wave energy assets are to be included in calculations of the size of the UK economy from 2030 as part of changes approved by the United Nations. However, this could create a future spending headache for the government, which wants to lift defence spending to 2.5% of GDP. This is because the new GDP calculation is an accounting change and won’t increase tax revenue, meaning Chancellor Rachel Reeves might have to find an additional £2bn for defence on top of what is already being proposed.

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Read Last Week’s Alpha Bites – Is carbon capture really the answer?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.