Dear Mr. Market:
What If Tariffs Are Just the Beginning?
The tariff headlines are back, and as usual, they make for great cable news debates and political talking points. But beneath the surface, there are far more serious considerations. Recent commentary has raised three key concerns about the escalating tensions between the U.S. and China—and none of them are as simple as price hikes at Walmart.
Let’s break them down:
Read more: Tariffs Are the Headline—But These 3 China Risks Are the Real Market Threat
1. China Controls the Majority of Rare Earth Minerals
These aren’t just exotic rocks—they’re critical for everything from electric vehicles and smartphones to military-grade hardware and advanced AI systems. China dominates this space, controlling an estimated 60% of global production and refining capacity. If trade tensions escalate, China doesn’t need to raise tariffs—they can simply squeeze the supply chain where it hurts most. For investors, this means potential volatility in tech, energy, and defense sectors.
China currently controls roughly 70% of global rare earth mineral production — materials that are essential to nearly every modern technology. From smartphones and electric vehicles to advanced weaponry, renewable energy systems, and even basic consumer electronics, these minerals are the invisible backbone of innovation and national security. Neodymium powers the magnets in EV motors. Lanthanum and cerium are critical in refining petroleum and manufacturing batteries. Europium and terbium are used in fluorescent lighting and screens. In short, if it plugs in, drives forward, or lights up — chances are, it relies on rare earths.
Should China choose to limit exports (as it has threatened and even done in the past), it could cause severe supply chain disruptions, spiking costs across sectors and stalling technological progress. It’s a form of economic leverage not often discussed in the mainstream — but one that’s quietly powerful.
2. China Holds Over $1 Trillion in U.S. Treasuries
This isn’t new, but it’s easy to overlook. China is one of the largest foreign holders of U.S. debt. China currently holds approximately $775 billion in U.S. Treasuries — down from over $1.3 trillion a decade ago, but still a massive position. Should tensions with the U.S. escalate further, one of the most disruptive levers China could pull is to rapidly sell off its Treasury holdings.
3. A Potential Blockade or Invasion of Taiwan
This is the nuclear scenario, both figuratively and perhaps literally. Taiwan is not only a geopolitical flashpoint—it’s also home to Taiwan Semiconductor Manufacturing Company (TSM), which manufactures the overwhelming majority of the world’s most advanced semiconductors. These chips power everything from smartphones and electric vehicles to missile defense systems and AI servers. In short, our modern economy doesn’t function without them. An invasion or blockade would send global supply chains into disarray overnight. Markets wouldn’t just correct—they’d convulse. It’s an uncomfortable reality, but one we must at least consider.
While tariffs and Treasury threats carry significant economic consequences, Taiwan represents the true geopolitical powder keg. It’s not just about regional dominance—it’s about the global economy’s lifeblood: semiconductors. The U.S., Europe, and much of the tech industry depend heavily on Taiwan’s chip output—and it’s not easily replaceable.
If China were to invade or blockade Taiwan, we’re not just talking about a military confrontation; we’re talking about an economic earthquake. The global supply chain could seize up almost overnight. The U.S. and its allies would face critical shortages in tech hardware, defense systems, and virtually every sector reliant on computing power.
Markets wouldn’t wait for shots to be fired. Equities could plunge, particularly in tech, as investors price in supply disruptions, inflation spikes, and the real potential for a hot war between nuclear powers. Treasury markets might rally in a flight to safety—or panic if paired with a Chinese debt dump. Oil prices could surge. And consumer confidence? Likely to crater.
Meanwhile, the military and economic response from the U.S. would be swift—and costly. Whether through sanctions, defense spending, or an actual naval presence in the Taiwan Strait, it would mark a dangerous shift from trade wars to real wars. The stakes are massive, and the room for miscalculation is terrifyingly small.
Let’s be honest—China hasn’t exactly played by the rules.
From IP theft and trade imbalances to their treatment of Hong Kong and surveillance of their own people, China’s role as a global economic partner comes with heavy baggage. Investors would be naïve to treat them like a typical trading partner. This isn’t just about politics—it’s risk management. And if China escalates in these other ways, it won’t just be a trade war—it could be a market war. They’re a geopolitical wildcard and, increasingly, a bad actor on the world stage.
So what should investors do?
We’re not reacting to headlines—we’re staying focused on risks that actually move markets: supply chain chokepoints, technological dependencies, and the shifting balance of global power. That means taking deliberate, forward-thinking steps in portfolios:
- Adjusting global exposure: We’re reducing reliance on regions with heightened geopolitical risk, including China, and allocating more toward countries with stable trade relationships and favorable demographics—places like India, Vietnam, and Mexico. We’re also leaning into reshoring trends here at home.
- Allocating to critical tech and domestic chipmakers: Taiwan may be the heart of global semiconductor production, but it’s not the only game in town. We’re increasing exposure to U.S.-based and allied-nation producers—companies building resilient supply chains for AI, defense, and next-gen computing.
- Maintaining quality in fixed income: Even if China were to weaponize its Treasury holdings, we believe the Fed and other institutions would absorb the shock. In the meantime, we’re favoring high-quality, shorter-duration bonds that give us flexibility and protection in a volatile rate environment.
- Keeping some dry powder: We’re not trying to predict geopolitical shocks—but we are preparing for them. That means holding a little more cash than usual in some cases, so we can take advantage of opportunities when others are forced to sell.
- Positioning for policy response, not just crisis: Any escalation—especially around Taiwan—could unleash massive defense spending and industrial investment. We’re already leaning into themes like cybersecurity, energy infrastructure, and national defense, not as a bet on war, but as a recognition of where the capital is likely to flow.
This isn’t about fear—it’s about awareness. Global diversification, exposure to key technologies, and a clear understanding of supply chain vulnerabilities are just a few of the steps we’re taking. Tariffs may be in the headlines today, but the real test will come if any of these three dominoes start to fall.
And remember: Mr. Market always overreacts—but sometimes, he’s not overreacting enough.
