Pineapples.

Like many, I never realized that Taiwan produced lots of them. Then again looking at the map, you suddenly realize that this island state (?) is much more tropical than I first thought. Until recently, it sent many of these pineapples to mainland China. Not anymore. An excellent report on the SupChina site reveals that the CCP is now adding Taiwanese fruit to its growing list of items that don’t belong in China – time to break open that bottle of Oz wine that is also not allowed to be imported anymore. You can read the report here: https://supchina.com/2021/03/01/pineapple-becomes-new-symbol-of-prickly-taipei-beijing-relations-after-china-bans-imports/

The most interesting bit in this report was the fact that pineapples are politically pivotal in Taiwan: “Though “agriculture accounts for less than 2% of Taiwan’s $710 billion technology-dominated economy, farmers and related sectors remain an important constituency in Taiwanese politics, especially in the south,” Bloomberg reports. That constituency is generally DPP-aligned. Yesterday, Tsai made a Facebook post from a pineapple farm in Kaohsiung, a major city where she easily won over 60% of the vote in the 2016 and 2020 presidential elections.”

I think we can spot a pattern here. Punish your enemies by strangling their trade. It also presages what I suspect is the next phase of China’s Taiwan campaign. Phase 1 was rattle the military cage with lots of ‘incidents’. Phase two is then to make it painful for those in Taiwan who are obviously not on message. Phase three might consist of more strangulation tactics, designed to clearly show economic force. A few phases later, we might end up with the terminal phase – war.

That is the subject of a very worrying piece on the equally excellent geostrategic website War on the Rocks. You can read it here : https://warontherocks.com/2021/03/can-the-united-states-prevent-a-war-over-taiwan/

The report is entitled CAN THE UNITED STATES PREVENT A WAR OVER TAIWAN? and its written by two very knowledgeable Beltway insiders  ROBERT D. BLACKWILL AND PHILIP ZELIKOW

Here’s the key bits that resonated…”We think the current war danger is half understood, but downplayed due to the invariable human tendency to assume that whatever the commotion, tomorrow will be pretty much like yesterday. We are not arguing a war is imminent or even more likely than not to happen. But what little we can know has led us to the conclusion that the risk of a Chinese war against Taiwan is much higher than it has been in decades. …..China is doing what a country would do if it were moving into a prewar mode. Politically, it is preparing and conditioning its population for the possibility of an armed conflict. Militarily, it is engaging now in a tempo of exercises and military preparations that are both sharpening and widening the readiness of its armed forces across a range of different contingencies on sea, air, land, cyber, and in space. As was true of the Israeli reading of Egypt’s intentions in the period before the outbreak of the 1973 war, this level of operational activity also complicates the work of foreign intelligence agencies and makes it harder for them to distinguish ominous signals from the background noise.”

Yikes.

It strikes me that the single greatest known unknown for investors is Taiwan and the possibility that China will invade and snuff out this Pacific democracy.

Like many I had assumed that rationally, this action made no real sense, not least because a) it might not succeed, b) would drag in the rest of AsiaPac into a war with c) absolutely terrible economic consequences. I still think that is the case and that we are witnessing a very deliberate ratcheting up of strong-arm tactics to please a nationalist audience but I think the time has come for investors to upgrade our risk assessment. Many fund boards use what is called a risk matrix to list and analyse the risks to an investment strategy. It can become over complicated and a bit of a tick box exercise but it serves a valuable purpose because it does force boards to constantly re-engage with threat assessments. Is the currency risk for instance low, medium or high risk? Tick relevant box.

In this vein I think the risk of a war over Taiwan has until recently been in the low risk category but I feel that we are now complacent – it needs to be seen as medium risk with a constant watch about whether it needs to be seen as high risk. That forces us to think through our portfolio consequences. The impact on the tech outsourcers could be huge and it goes without saying that most Chinese equities would become radioactive overnight. But neighbours such as Vietnam and Japan, assuming they stayed out of said conflict, might be beneficiaries. As might India in supply chain dynamics. Big funds with big Chinese investments such as Scottish Mortgage might implode. The risk of a deep global depression would be very real and I presume gold prices would rocket. But all this assumes that the West and especially the US, the UK, the Asian Quad, and NATO does anything about the invasion. The cynic might counter that the risks to the global economy are so tremendous that we, the West, in effect, let it happen. We shout our outrage, we pass lost of resolutions, but in reality we let Taiwan hang. Again, I think the assumption is that we’d lose soldiers to fight for Taiwan but I’m not so sure that would be the case. I think the military retreat of the last few decades is so deeply ingrained that we would not be able to overcome the aversion to using force, especially for a country few of us have any meaningful links to. But ask yourself this one question – do we really want to leave China in charge of all the latest generation semiconductor fabs?