Big Three and Lockheed profit from perceived conflict with China

BlackRock Inc., and other firms are bracing for tighter oversight following a congressional probe over investments in Chinese companies deemed to be national security threats and an executive order curtailing specific investments there. More than 2,000 US mutual and exchange-traded funds — particularly those tracking indexes — have $294 billion invested across Chinese stocks and bonds. Multiple other funds have exposure to China. Data on U.S. open-end funds' Chinese holdings shows Vanguard has the largest exposure with $79.3 billion against Blackrock's $52.7 billion.

As China ramps up military activity along the Taiwan Strait, the United States recently announced US$345 million in military aid for Taiwan even as the total aid to the self-ruled island state is nearing U$20 billion. The United States in 2019 approved a US$8 billion sale of Lockheed Martin F-16 fighter jets to Taiwan, a deal that would take the island’s F-16 fleet to more than 200 jets, the largest in Asia.[1] Recent Lockheed sales to Taiwan include U$0.6billion for tracking radar and U$22million for F-16 aircraft technical support and another U$37million for other aircraft support.[2] This support for Taiwan flies in the face of restrictions to foreign US arms sales:

the Arms Export Control Act (AECA). The AECA prohibits the export of defence articles and defence services to countries that are considered to be a threat to the United States or its allies. China is one of the countries that is listed as a threat under the AECA.
the Export Administration Regulations (EAR). The EAR regulates the export of all goods and technology, including military hardware. The EAR prohibits the export of any goods or technology that could be used to develop or produce weapons of mass destruction. China is one of the countries that is subject to the EAR's restrictions on the export of weapons of mass destruction technology.
The US government also has a number of other laws and regulations that restrict the sale of military hardware to China. These laws are designed to ensure that China does not acquire sensitive military technology that could be used to threaten the United States or its allies.

Those restrictions are designed to supposedly avoid provoking China and to ensure that Taiwan does not acquire weapons that could be used to attack the mainland. One of the most important restrictions is that the US does not sell Taiwan weapons that are considered to be "offensive". This includes weapons such as aircraft carriers and long-range missiles. Despite these restrictions, the US has been a major supplier of military hardware to Taiwan for many years. This is because the US sees Taiwan as a key ally in the region and supposedly wants to help it to defend itself against China. As recently as March this year the United States has approved the potential sale of $619 million in new weapons to Taiwan including missiles for its F-16 fleet and includes 200 anti-aircraft Advanced Medium Range Air-to-Air Missiles (AMRAAM) and 100 AGM-88B HARM missiles that can take out land-based radar stations. In July the Biden administration announced another $345 million weapons package for Taiwan, the first tranche in a total of $1 billion the U.S. has allotted to be transferred directly from Pentagon stockpiles to the island this year. On 30 August 2023 the US for the first time approved the transfer of weapons to Taiwan under a program usually reserved for sovereign states. In the latest Taiwan package, the State Department approved as much as $80 million to purchase weapons for Taiwan as the island looks to bolster its defences against China.[3]

The extensive US arms sales to Taiwan since 1977 until then is listed here: https://en.wikipedia.org/wiki/List_of_US_arms_sales_to_Taiwan Other recent sales are detailed here: https://www.forumarmstrade.org/ustaiwan.html There appears to be no current signs that this trend is abating: “the new figures reveal the continuity between Republican and Democratic administrations. While Biden signalled early on that his arms sales policy would be based primarily on strategic and human rights considerations, not just economic interests, he broke from that policy not too long after entering office by approving weapons sales to Egypt, Saudi Arabia, and other authoritarian regimes.”

The chart below shows the exponential growth of U.S. arms sales in the last 7 years.

Taiwan has a strong trading tradition. Foreign trade has been the engine of Taiwan’s economic growth during the past few decades. In 2022, Taiwan denoted a merchandise trade surplus of about 52.1 billion U.S. dollars. Among its main trade partners are mainland China, Hong Kong, and the United States. Taiwan positions itself as a gateway to mainland China and Asia Pacific. Geographically, it finds itself between the world’s second largest economy, China, and the third largest, Japan. Taiwan attracts a wide range of U.S. investors, including in advanced technology, traditional manufacturing, and services sectors. The United States is Taiwan’s second-largest single source of direct foreign investment (FDI) after the Netherlands, through which some U.S. firms also choose to invest. In 2021, according to the U.S. Department of Commerce data, the total stock of U.S. FDI in Taiwan reached US $16.8 billion. U.S. services exports to Taiwan totalled US $10 billion in 2021.

Taiwan is at the centre of global and regional high-technology supply chains due to its robust manufacturing industries of semiconductors, 5G telecommunications, AI, and the Internet of Things (IoT). Taiwan is known as a major producer of information technology. The Big Three (BlackRock, Vanguard & State Street) owns the majority of stocks in Alphabet, Amazon, Apple, Broadcom, Google, Microsoft, IBM, Facebook, Nvidia, and AT&T. Nvidia and Broadcom happen to be America's two largest semiconductor companies. Taiwan’s semiconductor manufacturing capabilities are crucial to global supply chains, with “megacap” (a designation for the largest companies in the investment universe as measured by market capitalization) companies like Apple, Nvidia and Qualcomm heavily dependent on Taiwan’s exports. Taiwan accounts for some 60 percent of global semiconductor foundry revenue, according to media reports. Access to cutting-edge semiconductor technologies is a key driver for the weaponry that the U.S. military needs for its defensive and offensive capabilities. Currently, Taiwan and South Korea account for 100% of installed capacity to mass produce high-end semiconductors at technologies below 7 nanometres (nm), which leaves the supply to the U.S. military vulnerable. China's internet giants are currently rushing (ahead of US bans on exports of sensitive technologies to China) to acquire high-performance Nvidia (NVDA.O) chips vital for building generative artificial intelligence systems, making orders worth $5 billion as of August 2023. The Chinese groups concerned had also purchased a further $4 billion worth of graphics processing units to be delivered in 2024.[5]

In addition, semiconductors serve as crucial components in the communications networks and transportation systems, among others, that underpin U.S. critical national infrastructure. Clearly, then, the Big Three’s investments in tech companies – and military companies such as Lockheed Martin - are influenced by the maintenance of Taiwan’s supply. For example, Lockheed Martin's Javelin missiles each contain over 200 semiconductors, and Taiwanese company TSMC manufactures some chips for the Javelin system. A disruption to the supply chain involving Taiwan is therefore also likely to have severe repercussions for U.S. national security, given that semiconductors play such a key role in the advanced weaponry that the U.S. military relies upon for its defensive and offensive capabilities. [6]

But the supply chain issue is not confined to relationships with Taiwan. The U.S. Department of Defense’s 2018 analysis of supplier risk states: ‘China is the single or sole supplier for a number of [components] … used in munitions and missiles … A sudden and catastrophic loss of supply would disrupt DOD missile, satellite, space launch, and other defense manufacturing programs. In many cases, there are no substitutes readily available.'[7]

Taiwan was Australia's seventh largest two-way merchandise trading partner in 2021-22, with trade worth $32.6 billion. Taiwan was Australia’s fifth largest merchandise export market in 2021‑22, worth $23.1 billion.[8] Australia is the largest LNG supplier to Taiwan (accounting for 37 percent of Taiwan’s imports of LNG). Australia is also the largest LNG supplier to China (accounting for 35 percent of the China’s imports)[9]

China, the South China Sea and the South Pacific

China's expanding presence in the South Pacific can be seen as a way to achieve a number of its strategic goals. These goals include:

Economic: China is the world's second-largest economy and is looking for new markets and resources. The South Pacific region is rich in natural resources, such as fish, timber, and minerals. China is also interested in expanding its trade and investment in the region.
Security: China is concerned about the rise of the United States and its allies in the region. By expanding its presence in the South Pacific, China can counter the influence of the United States and its allies.
Geopolitical: China is also seeking to increase its influence in the South Pacific region. The South Pacific is located in a strategically important area, and China is looking to secure its interests in the region.

Here are some specific benefits that China could gain from expanding its presence in the South Pacific:

Access to natural resources: The South Pacific region is rich in natural resources, such as fish, timber, and minerals. China is a major importer of these resources, and expanding its presence in the South Pacific could give it greater access to these resources.
New markets: The South Pacific region is also a growing market for Chinese goods and services. China is looking to expand its exports to the region, and expanding its presence in the South Pacific could help it achieve this goal.
Military bases: China could build military bases in the South Pacific, which would give it a strategic advantage in the region. This could deter potential adversaries, such as the United States, from taking military action against China.
Political influence: China could gain political influence in the South Pacific by providing aid and investment to the region. This could help China to counter the influence of the United States and its allies in the region.

However, there are also some risks associated with China's expanding presence in the South Pacific. These risks include:

Increased tensions with the United States: The United States is concerned about China's growing influence in the South Pacific. If China were to build military bases in the region, it could lead to increased tensions between the United States and China.
Resentment from local populations: China's expanding presence in the South Pacific could be met with resentment from local populations. This could lead to instability in the region and make it more difficult for China to achieve its goals.
Environmental damage: China's economic activities in the South Pacific could damage the environment. This could lead to protests and opposition from local populations.

It does not make sense for China to disrupt shipping to Australia via the South China Sea.[10] Here are the reasons why:

Economic interdependence. China is Australia's biggest trading partner, and Australia exports significantly to China. Disrupting shipping to Australia would damage the economies of both countries.
Political backlash. Disrupting shipping to Australia would likely lead to a political backlash from Australia and its allies. This could damage China's reputation and make it more difficult for China to achieve its goals in the region.
Military response. Australia is a close ally of the United States, and the United States has a strong military presence in the region. If China were to disrupt shipping to Australia, the United States could respond militarily. This could lead to a conflict between China and the United States, which would be costly for both countries.

Overall, it is clear that disrupting shipping to Australia via the South China Sea would be a counterproductive move for China. It would damage the economies of both countries, damage China's reputation, and risk a military conflict with the United States. As one author[11] points out:

“The mutual sabre-rattling associated with South China Sea mythology is beneficial to a variety of actors in the United States, China and elsewhere. The military-industrial complex, against which President Eisenhower warned 60 years ago, is powerful in every country, and always seeks to promote preparation for large-scale war as well as the routine use of military power for political and commercial ends.”

“Chinese commercial shipping blockade of this scale that affects so many of China's most important trading partners would impose colossal economic costs on China itself. That fact alone makes it highly unlikely that China would ever pursue such a strategy.”[12]

Here are some other factors that could influence China's decision to disrupt shipping to Australia:

The level of tension between China and Australia. If tensions between China and Australia were to increase, China might be more likely to disrupt shipping to Australia as a way to punish Australia.
The actions of other countries in the region. If other countries in the region, such as the United States, were to support Australia, China might be less likely to disrupt shipping to Australia.
The domestic political situation in China. If China is facing domestic economic and political challenges, it might be less willing to take risks, such as disrupting shipping to Australia.

Notwithstanding China’s efforts to negotiate an increased “security” presence in the South Pacific, it appears that many of their efforts have been rebuked, except in the case of the Solomon Islands. However, in that latter case, PM Sogavare has somewhat relented and promised Australia that there would be no permanent Chinese military presence in his country. [13] The situation remains vexed with a recent vote of no confidence against Vanuatu’s Prime Minister over his signing of a security pact with Australia in December 2022 partly based on an assertion that it “compromises Vanuatu's ‘neutral’ status and could risk development assistance from other partners” in essence meaning it could upset China, a major infrastructure lender.[14] There is a current prevailing opinion in the South Pacific nations that neutrality (a.k.a. sovereignty) should prevail to keep the region “a region of peace and neutrality”.[15]