Investing.com - At its annual National People’s Congress earlier this month, Chinese officials backed a plan to "firmly advance the cause of reunification" with Taiwan and lift defense spending by 7.2%.
The remarks came before the 20th anniversary of a law that permits the use of military force should Taiwan decide to declare independence or if a peace agreement to bring about "reunification" proves impossible to secure.
On Monday, China conducted military drills near Taiwan, arguing that Taiwanese President Lai Ching-te was promoting "separatism." Taiwan later called China a troublemaker.
A potential invasion of Taiwan, an island country located east of China, by Beijing has long been a point of global security concerns, according to Ed Yardeni, President of Yardeni Research. The prospect of U.S. involvement on behalf of Taiwan has particularly raised the spectre of a regional conflict ballooning into a global war.
In a note to clients, Yardeni noted that a move by the U.S. State Department in February to remove language from its website stating that the U.S. does not support Taiwan’s independence has "stoked fresh flames." Responding to the decision, China accused Washington of "serious regression" in its position.
"Is a global war, potentially triggered by Taiwan, a ’when, not if’ inevitability? The jury is still out, but the scenario is worth watching closely," Yardeni said.
One element worth keeping a close eye on is the economic relationship between the U.S. and Taiwan, especially in the crucial field of chip manufacturing. Taiwan is notably home to Taiwan Semiconductor Manufacturing Co., the largest contract chipmaker in the world and a keep supplier to artificial intelligence-darling Nvidia (NASDAQ:NVDA).
With China indicating its willingness to make shows of strength in its claim to Taiwan, worries have grown that the U.S. may be too reliant on the island and its companies to provide crucial chips that power everything from mobile phones to fighter jets.
As part of an ongoing bid by Washington to secure its position in an intensifying AI arms race with China, President Donald Trump recently brokered a deal with TSMC to establish chip factories in the U.S. state of Arizona. The agreement, announced earlier this month, will see TSMC invest a fresh $100 billion into the U.S., a move that Trump said will help the country "build the chips and semiconductors that we need right here."
The TSMC investment can be viewed as a sign of "economic interests" surpassing "moralistic or precedential boundaries" during Trump’s second term in the White House, Yardeni argued. He noted Trump’s call for Ukraine to give the U.S. some of its rare-earth mineral wealth in return for ongoing support in its fight against Russia was a "display" of this ethos.
"Considering the business linkages between Taiwan and the U.S., we believe the status quo is likely to continue in the Taiwan Strait," Yardeni said.