Politics and supply chains

George Kessarios
Chief Economist & Fund Manager

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While markets in the short term rarely respond to politics, nevertheless politics do affect markets and economies long term. Case in point being the recent visit to Taiwan by House Speaker Nancy Pelosi. For all the huffing and puffing from the Chinese leadership, markets took the visit with a yawn.

And while we have been hearing for a while now that the Biden administration might reverse some of the trade policies imposed on China by the Trump administration, there is a new flareup in US-Chinese relations that might cause more supply disturbances in the future.

The US is considering limiting shipments of US chipmaking equipment to memory chip producers in China. While the move is aimed at restricting Chinese technology advances that might threaten the dominance of the US, it might have unintended consequences.

Samsung and Hynix control about 50% of the global NAND flash production, with Samsung’s China production consisting 15% of global production. As such, any restrictions imposed by the US might make it more difficult to produce and source such memory chips, and at the very minimum prices will rise. Please note that these memory chips are used by almost every known high-tech company globally.

Also note that tariffs, export restrictions, and technology transfer restrictions, are by default inflationary. And you guessed it, central bank policies have no effect on such inflationary pressures, because they are not a product of central bank policies.

The bottom line is that while politics matter very little to markets in the short-term, long-term political decisions establish trends, disrupt industries and yes, can cause supply side problems. As such, it is worth keeping an eye on US-China relations for the long-term, but in the short-term political rumblings matter very little to markets.

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