Looking Ahead – War with China on the Horizon?

I am very concerned that in the near future China with forcibly take over Taiwan and the U.S. may go to war with China. If so, the U.S. is not ready.

A recent series in the Wall St. Journal detailed how China’s military capabilities in Asia far surpass that of the United States’ ability to stop them. Put that along with Chinese President Xi’s pronouncements that they will take over Taiwan by 2027, his hinting at “reunification” recently, and President Biden’s declaration that we would not allow such a takeover, and they combine to present a serious threat.

Let’s take them one at a time.

According to the Journal’s series last year, begun in March, an early war game simulation of war with China over control of the South China Sea “turned American combat aircraft and munitions into smoldering ruins in a matter of days.” When the Center for Strategic and International Studies ran a war game in 2022 that simulated a Chinese attack on Taiwan, the U.S. ran out of long-range anti-ship cruise missiles in less than a week. How are these possible?

According to the article, “The U.S. Is Not Yet Ready for the Era of ‘Great Power’ Conflict,” the U.S. has been preoccupied with the Middle East, the wars in Iraq and Afghanistan, and the continuing conflict in Ukraine, the urgency of the threat from China has been often underestimated, and there has been a lot of spending on big ticket items that didn’t work out and our equipment, especially missiles and naval equipment.

The wars in the Middle East were largely won due to air superiority. But in an armed conflict with China over the Island of Taiwan or the South China Sea, it is the Navy that will be most important, and there the U.S. is way, way behind and losing ground fast. Plus, in those areas, China would be the home team and the U.S. would be operating from several thousand miles away and with less equipment.

How bad is the equipment picture? While China has 355 ships to our 306, many of our ships are much older with old technology, but the bigger concern is China’s shipbuilding capacity. It is not just a little more than ours. Look at the leaked US Navy presentation slide here that shows China’s shipbuilding capacity compared to the U.S. China has 13 shipyards compared to 7 in the U.S. but while ours take decades to put out a new aircraft carrier about Congress gets done haggling and postponing, adding new requirements, China is turning out modern ships much faster. Take any Chinese shipyard of the 13 and its output exceeds all 7 of our shipyards combined.

In the South China Sea, which despite its name, is not off the coast of China but farther south, between the Philippines and Southeast Asia, China has been turning scores of reefs and artificial islands into military outposts, creating a gauntlet threatening any ship choosing to sail there against Chinese wishes.

Don’t forget that modern high-tech weaponry relies on semiconductors and microprocessors. As of 2022, China manufactured 22% of all semiconductor chips and Taiwan, which China is committed to taking over, has another 22%. The U.S. produces just 8% of semiconductors. You can picture how hard it would be to come up with parts for American systems in the event of a takeover of Taiwan by China. We can reach out to allies, but supply chains are set up for China and that is not a rapid changeover.

Another to look at it is to identify the top Outsourced Semiconductor Assembly and Testing (OSAT) firms, on other words, the third-party companies that assemble most semiconductor chips. Of the top 10, only one is not located in China or Taiwan.

It is not just a military issue. Our economy would be severely impacted by not being able to get chips from China or Taiwan. That vulnerability will take many years to correct and then there is the issue that China controls manufactures 60% of the world’s rare earth metals and processes 85% of them. Rare earths are needed to manufacture many technology products. The U.S. has exactly one mine, producing 3% of the world’s rare earth metals, a lithium mine. China has rare earth reserves of 44,000 metric tons. Russia has 21,000. The U.S. has 2,300. Not even remotely close to self-sufficiency.

The U.S. is working on new weapons systems and military technology but much of it will not be ready until the decade of the 2030s, and delays in U.S. systems, sometimes decades-long delays are common. That lag creates a window of opportunity for China. Perhaps that’s why Pres. Xi is on record as saying they would take back Taiwan by 2027 and why he recently emphasized in a speech the need for “Chinese reunification.”

With a weak president in the White House, China may want to move on Taiwan earlier unless its intelligence tells it that Pres. Biden will win reelection. Either way, war with China would be a Biden administration issue to deal with.

This issue, not inflation, not recession, not the stock market’s high current valuation, is the #1 threat to the stock market over the next four years. If it comes to pass, you could see a sizable drop in stocks. I think it is too big an operation to occur without advance rumblings, but still, I want to keep a sharp eye on the Far East.