China and Japan are once again on a collision course, this time over the highly strategic semiconductor industry.
Beijing has threatened Tokyo with severe economic consequences if it continues to restrict sales of semiconductor equipment to China. Japan, for its part, is acutely aware that China could retaliate by cutting off its access to rare earth metals. These metals are crucial for Japan’s automotive and semiconductor sectors, two pillars of its economy.
We’ve seen this play before: in 2010, a maritime dispute led to a temporary suspension of rare earth exports to Japan. China’s move last year to impose export restrictions on gallium, germanium, and graphite served as a stark reminder of how geopolitical tensions can disrupt global supply chains.
While the economic tug-of-war between China and Japan unfolds, the Middle East is simmering with its own set of conflicts. The tension between Iran and Israel is reaching a boiling point, with Hezbollah emerging as a more formidable threat to Israel than Hamas. Recent escalations have seen precision strikes and warnings of a devastating war. Meanwhile, the Houthis continue to obstruct maritime traffic in the Red Sea and have launched drone attacks on Israel.
Do old rules still apply?
Then there’s Ukraine’s surprising invasion of Russia, a bold move against a nuclear superpower that defies decades of strategic doctrine. For years, the deterrent effect of nuclear arsenals kept direct confrontations at bay, but recent conflicts—be it the Ukraine war, border tensions between India and China, or the October 7 attack by Hamas—suggest that the old rules may no longer apply.
Despite the heightened geopolitical risks, financial markets appear remarkably indifferent. History suggests that most geopolitical flare-ups end without significant market disruptions. Even when tensions escalate, market impacts tend to be temporary, driven more by speculation than by lasting changes in fundamentals. One-off events, even when dramatic, often have limited impact on the future cash flows that stock prices reflect.
However, the one exception to this rule has always been oil. When geopolitical tensions threaten oil supplies, prices can spike sharply, affecting economies worldwide. The oil shocks of the 1970s were a testament to how energy disruptions can push the global economy into recession. Today, while the world is less dependent on oil than it was in the 1970s, a sharp increase in oil prices could still trigger economic turmoil. Yet, despite escalating tensions, oil prices have remained surprisingly stable, thanks in part to increased production from the U.S. and spare capacity from OPEC nations like Saudi Arabia and the UAE.
Shifting power dynamics
The focus on semiconductors, however, represents a shift in how global power dynamics are playing out. China’s dependence on imported semiconductor equipment, particularly from Japan, has become a new front in the economic rivalry between these two Asian giants. This dependency has been a driving force behind China’s ambitious “Made in China 2025” initiative, which aims to reduce reliance on foreign technology. Meanwhile, Japan’s compliance with U.S. efforts to limit China’s access to advanced technologies has made it a key player in this tech-centric standoff.
And let’s not forget the Netherlands, whose semiconductor manufacturing equipment, particularly from ASML, is now central to global tech production. The machines produced by ASML are critical for creating advanced chips, essential for everything from consumer electronics to military hardware. As geopolitical tensions heighten, countries with control over such crucial technologies gain disproportionate influence, and the Netherlands has found itself at the crossroads of U.S.-China rivalry.
A case for neutrality
In navigating these geopolitical tensions, there’s a lesson to be learned from history: countries that remain neutral often stand to gain economically from global conflicts. The Netherlands could leverage its unique position in the semiconductor industry to benefit economically, regardless of how these global power plays unfold.
As these geopolitical chess games continue, investors should remain vigilant. While markets may appear calm now, history has shown that the unexpected can always shake things up. And in today’s interconnected world, the ripple effects of any conflict—whether over semiconductors or oil—are felt far beyond the immediate players.
Han Dieperink is chief investment officer at Auréus Vermogensbeheer and has previously served as chief investment officer at Rabobank and Schretlen & Co.