The most useful thing about the past few weeks, explains the perpetually narrative-hungry head of one global fund, has been the evaporation of doubt. The US and China, he believes, are now in a cold war; the pressure to pick a side is irresistibly mounting in Japan and South Korea; the corporate world must ditch the notion that this will all soon resolve itself without too much fuss.
While his analysis still sits, for now, at the bleakest end of the scale, it does so with a growing stack of evidence that a two-bloc deglobalisation process is under way. On one reading of the abrupt sell-off in Chinese stocks since Monday, he is among a cohort of investors who do not need any more convincing that another notch of geopolitical discount is overdue.
The big picture stuff can look quite ominous. The US Chips and Science Act, along with a decisive throttle back on physical and intellectual exports of cutting-edge semiconductor technology, create the distinct contours of a cold war battlefield. Some may decide they provide a template for handling other technologies or products in the future. The choreography of China’s Communist party congress, meanwhile, did not assert the permanence just of Xi Jinping’s leadership, but also of the sort of bloc mentality that cold war protagonists necessarily build to prepare for escalation.
There are also more granular signs. On Wednesday, the huge chipmaker SK Hynix broke ranks among South Korean companies and admitted publicly that, despite the waivers in place for now, it might not always get away with the bloc-straddling game it and many other groups, particularly in South Korea and Japan, still hope to play. In a call with investors, the company’s chief marketing officer, Kevin Noh, said that it was making contingency plans for an “extreme situation” in which the restrictions enforced by Washington threatened the operation of Hynix’s huge memory-chip factory in China and obliged a reshoring back to Korea.
So if it is indeed a cold war and a forced retreat from the economics-trump-geopolitics calculus of globalisation, as Gavekal analyst Louis-Vincent Gave argues in a paper this week, the question that naturally follows is how a reversal of that might be priced in. Despite some bumps along the way, the peace dividend has been reliably paying out for some decades now: if its days are genuinely numbered the readjustments could prove remarkably painful.
In their early attempts to even begin to quantify that pain, at least in the comparatively narrow context of semiconductors, some investors have alighted on new research by Goldman Sachs. This estimates the total cost of ownership of a new, high-end semiconductor fab in the US versus its equivalent in Taiwan, South Korea or Singapore — this being the kind of relocation the chips act is intended to promote. Over 10 years, says Goldman in an assessment encompassing capital expenditure, labour, overheads and supply chain management comparisons, the cost would be 44 per cent higher in the US than in Taiwan.
The chips act, argues Goldman in light of that calculation, should primarily be viewed in the context of US geopolitical strategy: the inferior economics make it difficult for Asian companies to expand their manufacturing footprint in the US, but a cold war might make it a necessity. The prohibitions on companies that receive funding under the chips act expanding high-end chip capacity in China add an even greater burden to each company’s investment dilemma.
Still, this analysis is a long way from quantifying the risk. The premise of a cold war and of a swift progression into deglobalisation is not settled, and nor, for now, is the sense of any hard obligation on the corporate world to pick sides.
Even the SK Hynix comments, for all their brave acknowledgment of the worst-case implications, were those of a company whose base case is that it will work out a way to carry on as a US-China straddler for now. Japanese companies appear even more relaxed about their future ability to avoid picking sides. Corporate advisers at Japan’s four biggest law firms, along with many of their largest global counterparts, say they have spent the past month attempting to convince the relevant parts of corporate Japan that there may be some acutely painful decisions ahead of them. The responses from Japanese companies, said lawyers, had been minimal.
The problem, explains the Tokyo managing partner of one law firm, is that if you even whisper the phrase cold war, the companies have no choice but to hear that as the end of globalisation, in which they are far too invested.