US–China–Taiwan
The technology cold war, Taiwan Strait tensions, and the decoupling of the world's two largest economies.
Current Situation
Last updated: July 25, 2026
Military provocations have intensified as China launched two days of live-fire exercises in the Taiwan Strait and conducted naval drills within Japan's Exclusive Economic Zone. Beijing has increased aggression toward the Philippines, engaging in three South China Sea clashes this week, including the use of water cannons and a physical assault on a Philippine sailor. In response, Taiwan is accelerating civil defense readiness, simulating mobile internet disruptions and initiating domestic production of RDX explosives after alleged Chinese interference disrupted overseas procurement.
Diplomatic channels remain open but are strained by targeted economic and technological warfare. Secretary of State Marco Rubio and Foreign Minister Wang Yi held "constructive" talks to prepare for President Xi Jinping's upcoming U.S. visit, even as the U.S. Senate Commerce Committee approved legislation to effectively ban Chinese vehicles and connected-car hardware from the American market. Simultaneously, the U.S. is increasing pressure on China's AI sector, with Trade Representative Greer identifying the distillation of AI models as intellectual property theft.
Investment implications center on escalating trade barriers and retaliatory economic measures. China has imposed export controls on 14 European companies, including Rheinmetall, and is seeking opinions on $30 billion in planned tariff cuts with the U.S. to manage trade tensions. The U.S. is further narrowing China's institutional reach by designating Fudan University and Shanghai Jiao Tong University as threats to national interests, while Sweden has declared mining a national security interest to reduce dependence on Chinese supply chains.
Key variable to watch: Whether the upcoming visit by President Xi and scheduled AI safety talks can offset the impact of the U.S. vehicle ban and ongoing maritime escalations.
Background
Origins
The US-China rivalry is the defining geopolitical contest of the 21st century — a competition between the incumbent global hegemon and the most serious challenger in the modern era. It is simultaneously a technological, military, economic, ideological, and geographic contest. The Taiwan question sits at its most dangerous intersection: a democratic island of 23 million people that China considers a renegade province and the US has pledged — with deliberate ambiguity — to defend.
The conflict's modern roots lie in the Chinese Communist Party's 1949 victory in the civil war, which pushed the Republic of China government to Taiwan. Both governments claimed to be the legitimate government of all China for decades. The US maintained formal recognition of the Republic of China until 1979, when it switched to recognising the People's Republic and adopted its current policy of "strategic ambiguity" — officially acknowledging Beijing's position that there is "one China" while maintaining unofficial relations with Taipei and selling it arms for self-defence.
The current acute phase began around 2012–2015, when Xi Jinping consolidated power, ended the post-Tiananmen policy of keeping a low geopolitical profile ("hide your strength, bide your time"), and began an assertive expansion of Chinese military capability and territorial claims in the South China Sea. The trade war launched by the Trump administration in 2018 marked the explicit end of the US engagement strategy — the bipartisan consensus that economic integration would produce political liberalisation — and the beginning of a decoupling era.
Taiwan became the focal point because of semiconductors. TSMC produces approximately 90% of the world's most advanced chips (below 7nm). Every leading AI accelerator, every modern smartphone, every advanced military system runs on TSMC silicon. Control over, or denial of access to, TSMC's fabrication capacity would be the single most powerful economic weapon in any great power conflict. Taiwan is not just a geopolitical flashpoint — it is the central node of the global technology economy.
Key Actors
Xi Jinping: China's paramount leader since 2012, who has consolidated power to a degree not seen since Mao. Xi has made Taiwan "reunification" a core element of his "China Dream" narrative and has set implicit timelines — the 2049 centenary of the PRC's founding is often cited, with some analysts believing the window of military advantage over the US may be narrower, pushing the timeline toward 2027–35. Xi is not a risk-taker by nature, but he has consistently defied Western predictions that economic costs would moderate Chinese assertiveness.
Taiwan / President Lai Ching-te: Taiwan's current president from the Democratic Progressive Party (DPP), which is associated with a stronger Taiwanese identity and scepticism of close engagement with Beijing. Lai's election in January 2024 was followed by intensified Chinese military pressure. Taiwan has been increasing defence spending and extending conscription, though its defence posture remains heavily dependent on the US security commitment.
TSMC / Morris Chang: Taiwan Semiconductor Manufacturing Company is not just a corporation — it is a geopolitical actor. TSMC's deliberate strategy of concentrating advanced manufacturing in Taiwan (the "silicon shield" theory) makes the island too valuable to blockade or invade without catastrophic global economic consequences. TSMC's expansion to Arizona, Japan, and Germany is partly a hedge against this concentration risk.
United States Military / Indo-Pacific Command: INDOPACOM is the US military's largest geographic command. The US maintains a network of bases and alliances across the Pacific — Japan, South Korea, Guam, the Philippines — designed to deter Chinese military action. The US has the most capable military in the world but faces a "home field advantage" problem: China can mass more forces closer to Taiwan than the US can project across the Pacific within a given timeframe.
Japan / South Korea / Australia: The primary US allies whose cooperation is essential for any Taiwan defence scenario. Japan is most exposed — the Ryukyu Islands chain that includes Okinawa sits adjacent to Taiwan's strait. Japan has dramatically increased defence spending and has engaged in unprecedented strategic alignment with the US on Taiwan contingencies. South Korea is more conflicted due to its deep economic dependence on China.
ASML / Nvidia / US Chip Industry: The technology sector has become a primary battlefield. ASML's extreme ultraviolet (EUV) lithography machines are essential for advanced chip production and are Dutch; the US has pressured the Netherlands to restrict their export to China. NVIDIA's data centre GPUs — essential for AI training — have been progressively restricted from export to China. The chip war is the economic front of the broader rivalry.
Historical Context
1949–1979 — Two Chinas: US recognised the Republic of China (Taiwan) as the legitimate government of China. The PRC was excluded from the United Nations until 1971. The Korean War (1950–53) cemented US military positioning in East Asia.
1958 — First and Second Taiwan Strait Crises: PRC bombarded Quemoy and Matsu islands held by the ROC. The US committed to Taiwan's defence. These crises established the basic pattern of Chinese coercive pressure and US deterrence that persists to today.
1979 — Taiwan Relations Act: The US switched diplomatic recognition from Taipei to Beijing. The Taiwan Relations Act committed the US to provide Taiwan with "defensive arms" and treat any forceful attempt to alter Taiwan's status as a matter of "grave concern." The deliberate ambiguity about whether the US would militarily defend Taiwan has been maintained since.
1995–96 — Third Taiwan Strait Crisis: China conducted missile tests near Taiwan during Taiwan's first direct presidential election, attempting to intimidate voters. The Clinton administration deployed two carrier strike groups to the strait — the largest US naval deployment in Asia since Vietnam. China backed down but drew the lesson that it needed to develop capabilities to prevent US carrier access.
2001–2010 — WTO Accession and Engagement Era: China's 2001 WTO accession supercharged economic integration. Western businesses and governments invested in a theory that Chinese economic development would produce political liberalisation. Trade volumes grew from $121B to $457B (US-China, 2001–2010). The theory proved wrong.
2012–present — Xi Era / Assertiveness: Xi's consolidation of power, the South China Sea island-building programme, the Belt and Road Initiative, the Xinjiang internment camps, the Hong Kong crackdown, and the military buildup targeting Taiwan denial capabilities have all accelerated under Xi. The 2022 Pelosi Taiwan visit triggered China's most significant military exercises since 1996.
2018–present — Technology Cold War: Trump's trade war (2018), Huawei bans (2019), chip export controls (2022, 2023, 2024), and TSMC Arizona (2022–). The technology war is more consequential than the trade war — it targets the foundation of future economic and military power.
Market Exposure
Semiconductors: The most direct and significant market exposure. TSMC (TSM) carries Taiwan geopolitical risk as an inherent discount. NVIDIA, AMD, and Qualcomm have material China revenue exposure to export controls. ASML has China sales that are progressively being restricted. SMIC (Chinese domestic foundry) is the "national champion" bet on Chinese chip independence but is multiple generations behind TSMC. The semiconductor sector is the primary investment expression of the US-China rivalry.
China-exposed US multinationals: Apple generates ~18% of revenue in China and manufactures ~90% of iPhones there. Starbucks, Nike, GM, and hundreds of other US brands have significant China exposure. Any escalation in trade tensions or a Taiwan scenario creates material downside for these names.
Chinese equities: Hong Kong-listed Chinese tech (Alibaba, Tencent, JD, Meituan) and domestic A-shares carry a "China discount" reflecting regulatory risk, geopolitical risk, and the structural question of whether Western investors can trust returns from Chinese-listed companies.
US Defence: Any Taiwan escalation scenario is strongly positive for US defence contractors — Lockheed, Raytheon, Northrop, L3Harris all have Taiwan-relevant product lines (F-35, PAC-3, submarines, electronic warfare).
Rare Earths / Critical Minerals: China controls 60% of rare earth production and 85% of rare earth processing. It has already used export restrictions on gallium, germanium, and antimony as counter-weapons in the technology war. A full decoupling scenario would cause severe disruption to EV, wind turbine, and defence manufacturing that depends on Chinese rare earth processing.