“No Blood for Chips!”

• The most controversial issue… ever? 
• Worst political slur of 2020 (Trump vs. Biden)
• How chips are the new oil 
• “A foolish [nuclear] gamble”… The beltway set pokes Beijing… Sobering parallels to Ukraine… And more! 

The titans of business and finance are getting twitchy about a war over Taiwan.

“I think there’s a certain — there’s some inevitability to the situation,” Elon Musk tells CNBC.

Ray Dalio, founder of the giant hedge fund Bridgewater Associates, writes on LinkedIn that the United States and China are on the “brink of war” — although he allows it might not be an all-out shooting war.

Warren Buffett’s Berkshire Hathaway has ditched a multibillion-dollar stake in Taiwan Semiconductor Manufacturing Co. — not long after acquiring it.

Fair warning: This edition of The 5 — one of our occasional single-topic affairs — will veer off in an unexpected direction before it’s all over today. It might be the most controversial issue we’ve ever published.

But we daresay we bring some credibility to these musings: A few months after Donald Trump launched his trade war against China in 2018, we ventured that the conflict could drag on long past his presidency.

By 2019, it was apparent to us the trade war was morphing into a new cold war. The esteemed Carnegie Endowment for International Peace couldn’t bring itself to say the same for another two years.

Our outlook was affirmed in the spring of 2020: While COVID consumed most of the headlines, we noticed Trump and Joe Biden accusing each other of being “soft on China.”

Now in May 2023, China is an all-purpose boogeyman for politicians of both parties: Democrats are citing China as a reason why Republicans should cave to them on the debt ceiling. Republicans blame “the Chinese Communist Party” for the fact foreigners everywhere are fleeing the U.S. dollar.

Back to Taiwan and the titans of finance: Six months ago, Citadel hedge fund chief Ken Griffin warned that a war over Taiwan would lead to an “immediate great depression.”

He had a point: "The United States has no ability to produce anywhere near the number of semiconductors it needs to run its economy. We are utterly and totally dependent upon the Taiwanese for modern semiconductors in America,” he said at a Bloomberg conference.

“If we lose access to Taiwanese semiconductors, the hit to U.S. GDP is probably on an order of magnitude of 5–10%.”

It’s become trendy to say “chips are the new oil” — in the sense that they’re central to modern economies. Intel CEO Pat Gelsinger told Fox Business in April that chips are “critical to every aspect of human existence.”

In addition, chips are the new oil in this sense: They’re precious resources that drive nations to wage war.

Remember the slogan “No blood for oil!” at the outset of the Iraq War 20 years ago? American opponents of the war thought it obscene that their government would wage war for control of another country’s bountiful oil fields.

Keep that in the back of your mind as we relate the following: Last month, Rep. Michael McCaul (R-Texas) — the chair of the House Foreign Affairs Committee — was on NBC’s Meet the Press.

There was a highly revealing segment of the interview left on the cutting-room floor, distributed only online.

“Make the basic case,” implored host Chuck Todd, “for why Americans not only should care about what happens in Taiwan but should be willing to spill American blood and treasure to defend Taiwan.”

After the obligatory disclaimer that “no one wants that,” McCaul quickly pointed out “that TSMC manufactures 90% of the global supply of advanced semiconductor chips. If China invades and either owns or breaks up, we're in a world of hurt globally.”

Todd realized McCaul had made a faux pas and invited him to walk it back: “Congressman, that almost sounds like the case that would be made in the ’60s, ’70s and ’80s for why America was spending so much money and military resources in the Middle East. Oil was so important for the economy. Is this sort of the 21st-century version of that?”

McCaul, recognizing he’d made a faux pas, immediately grabbed the lifeline Todd threw his way: “You know, I personally think it is about democracy and freedom.”

But if McCaul wants to hide behind the democracy-and-freedom fig leaf, others within the American foreign policy “blob” are more blunt — alarmingly so.

They’re saying, loud and proud, that in the event of war, the United States should preemptively bomb the Taiwanese chip factories.

The “United States and its allies are never going to let those factories fall into Chinese hands,” says Trump’s national security adviser Robert O’Brien to the Semafor website.

“If you invade Taiwan,” says Rep. Seth Moulton (D-Massachusetts), “we’re going to blow up TSMC.

“Of course,” he added, ”the Taiwanese really don’t like this idea.”

But since when did the opinions of other peoples count in the estimation of American leaders?

OK, time to pause and take a breath: How the hell did we get here, anyway?

Since 1979, Washington’s position toward Taiwan has been one of “strategic ambiguity.” Officially, there’s only one government responsible for both the mainland and Taiwan, and that government’s capital is in Beijing. Unofficially, however, Washington sells Taiwan scads of weaponry — presumably to help fend off an attack by Beijing.

For its part, Taiwan has kept up the “one China” pretense, never declaring independence from the mainland. Should it take that step — and there are powerful factions on the island pushing for just that — Beijing would almost surely intervene to stop it.

“Strategic ambiguity” kept the peace in the Taiwan Strait for over 40 years — and it’s all but dead and buried now.

On a visit to Japan a year ago, a reporter asked Joe Biden whether he’s willing to “get involved militarily to defend Taiwan.” His reply: “That’s the commitment we made.”

Not under the strategic-ambiguity doctrine, it’s not.

Four times over the last two years — more times than you can chalk up to incipient dementia — Biden has uttered words more or less repudiating the One-China policy.

During a congressional hearing in March, the administration made the new policy more or less official…

Let’s get back to fundamentals here…

“If China uses force to compel Taiwan to repudiate any right to independence, are we prepared to fight a war with a nuclear-armed China over the island's political status and orientation?”

So asked Pat Buchanan in 2021, before he retired from writing his syndicated column.

A year earlier, he asked, “Before we plunged into our half dozen Middle East wars, we didn’t think through where those would end. Have we considered where all our belated bellicosity toward Beijing must invariably lead, and how this all ends?”

It ends in a very bad place, said retired Lt. Col. Daniel L. Davis from the Defense Priorities think tank: “If we eventually choose war with China over Taiwan, we will at best suffer egregious losses in ships, aircraft and troops; in a worst case, the war could deteriorate into a nuclear exchange in which American cities are turned into nuclear wastelands, killing millions.

“America should never take such risks unless our security and freedom are directly threatened,” Davis wrote for Business Insider. “Fighting China for any reason short of that would be a foolish gamble of the highest order.”

Word. No way is it worth sacrificing Tampa or Toledo or Tulsa for the sake of saving Taipei.

But why would China want to attack Taiwan and risk war with the United States anyway?

“Over the last decade Taiwan invested $188.5 billion in China, more than China’s investment in the United States,” wrote retired U.S. diplomat Peter van Buren in 2021. “In 2019 the value of cross-strait trade was $149.2 billion…

“China is Taiwan’s largest trading partner. ‘One country, two systems’ has not only kept the peace for decades, it has proven damn profitable. Why bomb one of your best customers?”

Taiwan, meanwhile, was China’s No. 5 trading partner in 2022 — not far behind Japan and South Korea.

As for America, “Why would China consider a war that would provoke the U.S.?” van Buren continued in an article for the Responsible Statecraft site. “Total Chinese investment in the U.S. is $145 billion. U.S. investment in China passed $1 trillion. The Chinese are literally betting the house on America’s success.”

The answer to those questions is that Beijing will react if Washington pokes the dragon too hard and too many times.

A turning point came last August, when Nancy Pelosi — still House speaker at the time — paid a visit to Taiwan. Beijing viewed the visit as a huge affront to the One-China policy, every bit as provocative as shipping F-16 fighter jets to Taiwan.

From 1954 until the time of Pelosi’s visit, China’s air force flew a total of 27 sorties across the median line in the Taiwan Strait. The month Pelosi came calling on Taipei, there were 302, according to The Japan Times.

Meanwhile, the annual defense bill signed by Joe Biden last December beefed up U.S. military aid for Taiwan; Beijing launched major drills around Taiwan, which it described as a "resolute response to the escalating collusion and provocation by the United States and Taiwan."

Here’s where we get to the controversial part of this edition of The 5: If war with China comes, it will not be a case of “naked” Chinese aggression: It will have been provoked by petulant American leaders.

See, it’s become fashionable over the last five years for American intelligentsia to say that engagement with China didn’t “work.” That is, China has not become more democratic or more free.

When they decided in the 1990s to embrace China, they did so on the assumption that more economic freedom would inevitably lead to more political freedom.

You heard the argument over and over again in 2000 as Congress debated “most-favored nation” trade status for China — which greased the way for China’s entry into the World Trade Organization.

President Bill Clinton: “When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.”

Candidate George W. Bush: “Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy.”

Thing is, no one ever articulated why this should be the case.

Sure, it sounded plausible. Comforting, too. But it’s not as if there was much in the way of historical precedent, right?

In fact, from the limited data set available, the notion was laughable…

• Singapore has a very free-market economy, often tuning up as No. 1 on lists of global economic freedom. But the ruling party exerts strong control over elections, and civil liberties are strictly curbed. (As it happens, Singapore’s model was an inspiration to Deng Xiaoping, the Chinese leader who opened up China’s economy after 1978)

• Chile, after the CIA overthrew Salvador Allende in 1973, adopted economist Milton Friedman’s free-market playbook — even as a military junta ruled until 1990. God help anyone who said a cross word about the leader, Gen. Pinochet; he or she might get thrown from a helicopter.

So one can only chalk up the theory to the “end of history” hubris that infected American elites during the decade after the Cold War ended. Why, of course, everyone was destined to adopt the Western model of parliamentary democracy, market economy, rule of law. How could it be otherwise?

Underlying this elite assumption was another one. No one stated it publicly. It was something that government and business leaders just understood.

The expectation was that over time, China would become a pliant second-tier power under Washington’s thumb — sort of like Boris Yeltsin’s Russia in the 1990s, but far more lucrative for American multinationals with access to a market of 1.3 billion people.

The lucrative part worked out. The lackey part, not so much. Not only did Beijing cling to authoritarianism, it increasingly furnished an alternative model of governance for dozens of other developing countries across the Global South — especially for those countries that had bad experiences with America’s “economic hit men” at the World Bank and International Monetary Fund.

So we’re at a very dangerous juncture: China’s Xi Jinping has shown up American elites, made them look like fools. And their prime motivation now is payback.

That’s especially the case among the boomer generation — as we said last year during Pelosi’s Taiwan visit.

We drew on the insights of demographers William Strauss and Neil Howe, authors of The Fourth Turning. In their taxonomy, the baby boomers are a “prophet” generation; the most recent analogue in history is Franklin D. Roosevelt and his cohorts.

In their advancing age, Beltway boomers are looking around and feeling bereft of anything that gives them a glorious purpose of the sort that FDR & co. had — sending millions of young men into battle against Nazi Germany and Imperial Japan.

And make no mistake, WWII looms large in the recesses of the boomers’ limbic systems.

Richard Maybury, one of the greybeards of the newsletter biz, has written about how the boomers’ conception of WWII was formed at a young age by the 1950s TV documentary series Victory at Sea.

Victory at Sea was first-rate propaganda for its day; reruns aired well into the 1960s.

Victory at Sea, lavishly produced for its era — including a stirring original score by Broadway composer Richard Rodgers

So there you go: In their dotage, Beltway boomers hope to find their redemption with a big-ass naval war in the Pacific.

The parallels to the situation in Ukraine are sobering. As are the risks.

Back to Lt. Col. Davis, in a passage we cited last year: “There is nothing in the conflict between Russia and Ukraine that is worth the loss of one NATO or American city to a nuclear blast. Period. Full stop.”

“This reality should immediately inform a reevaluation of Washington’s policies and the adoption of new objectives. The Constitution places no higher obligation on Congress and the president than to defend our country and protect our ability to prosper as a nation. Courting an avoidable nuclear disaster — especially when our security is not threatened — should never be on the table.”

Substitute “China and Taiwan” for “Russia and Ukraine” and the principle is the same.

Something to remember the next time you see someone in the power elite talking cavalierly about war and Taiwanese semiconductors.

Here, we draw the line: No blood for chips.

And absolutely no blood for the wounded pride of narcissistic American leaders.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. The markets you ask? The 4,200 level is turning out to be powerful resistance for the S&P 500.

At last check, the index is down nearly 1% to 4,152. The Dow is holding up better, the Nasdaq a little worse.

Gold got whacked again after we hit “send” on yesterday’s issue… but now it’s recovered most of those losses, the bid at $1,975. Crude is rallying, back near $73.

The big economic number of the day is the “flash PMI” reading for May: Manufacturing came in much worse than expected at 48.5, while services came in much better than expected at 55.1. As a reminder, 50 is the dividing line between growth and contraction.

Thanks for indulging us one of our single-topic editions today. Feedback is welcome here: feedback@5minforecast.com. Back to regularly scheduled programming tomorrow.