Escalating U.S.-Taiwan Defense Ties and Their Impact on Regional Security Stocks

The intensifying U.S.-Taiwan defense relationship, coupled with China’s aggressive posturing in the Taiwan Strait, has become a defining feature of the 2023–2025 geopolitical landscape. As Washington deepens its security and economic commitments to Taipei, investors are recalibrating portfolios to account for the cascading effects on defense contractors, semiconductor firms, and regional ETFs. This analysis examines the investment implications of these dynamics, drawing on recent strategic shifts and market trends.

Geopolitical Context: A New Era of U.S.-Taiwan Cooperation

The U.S. has significantly bolstered its defense ties with Taiwan, allocating an additional $6 billion in security commitments since 2023 to enhance Taipei’s asymmetric defense capabilities [1]. These efforts align with broader U.S. strategies to counter China’s military expansion, including the 2025 defense budget of approximately $1 trillion, which reflects heightened preparedness against advanced Chinese hypersonic missile systems [2]. Meanwhile, China has accelerated its "forceful reunification" preparations, expanding amphibious operations and civilian-military infrastructure to project power across the strait [3].

Taiwan, for its part, has prioritized supply chain resilience and technological self-reliance, particularly in semiconductors, which are critical to both economic and military security [4]. The island’s semiconductor industry, which produces 90% of advanced chips globally, has become a focal point of U.S.-China competition, with Washington imposing stringent export controls to restrict China’s access to cutting-edge technologies [5].

Defense Contractors: Beneficiaries of Escalating Tensions

The U.S. defense industrial base has seen renewed demand for advanced systems, with companies like Lockheed Martin and Raytheon securing contracts to supply precision-guided weapons, fighter jets, and artillery systems to Taiwan [6]. However, chronic delivery delays—exacerbated by U.S. defense supply chain bottlenecks—have raised concerns about operational readiness [7]. China’s retaliatory measures, including asset freezes on 13 U.S. defense firms, have further complicated operations, adding geopolitical risk premiums to defense stock valuations [8].

According to a report by the Center for Strategic and International Studies (CSIS), the U.S. industrial base lacks surge capacity to sustain a prolonged conflict in the Taiwan Strait, underscoring the need for sustained investment in defense contractors capable of scaling production [9].

Semiconductor Sector: A Strategic Battleground

Taiwan Semiconductor Manufacturing Company (TSMC) remains central to the global semiconductor supply chain, producing 60% of the world’s chips and 92% of advanced nodes [10]. The U.S. CHIPS Act has incentivized TSMC to expand production in the U.S., with $102.6 billion in capital investments between October 2024 and April 2025 [11]. While this diversification reduces reliance on Taiwan, it also increases costs and delays innovation cycles, posing challenges for the company’s long-term margins.

Chinese firms like Semiconductor Manufacturing International Corporation (SMIC) are capitalizing on U.S. export restrictions, gaining ground in legacy chip markets and accelerating domestic R&D [12]. Meanwhile, U.S. firms such as Intel and AMD face revenue declines due to restricted access to Chinese markets, though they benefit from domestic subsidies and AI-driven demand [13].

Regional ETFs and Market Trends

Geopolitical tensions have driven inflows into regional defense and semiconductor ETFs. The iShares Global Aerospace & Defense ETF (IX) and the XLB Semiconductor Industry ETF have outperformed broader indices, reflecting investor appetite for sectors tied to U.S. Indo-Pacific strategies [14]. Conversely, Chinese tech ETFs face outflows amid regulatory risks and export bans on critical materials like gallium and germanium [15].

The MSCI World Semiconductor Index surged 90% in 2024, outpacing the MSCI World’s 24% gain, as demand for AI chips and advanced packaging technologies drove growth [16]. However, cyclical risks persist, with underutilized wafer capacity and high R&D costs creating volatility.

Investment Implications and Strategies

For investors, the U.S.-Taiwan-China triangle presents both opportunities and risks. Defense contractors with diversified production capabilities and strong U.S. government ties are well-positioned to benefit from sustained spending. Similarly, semiconductor firms that balance U.S. onshoring incentives with Asian supply chain resilience may outperform.

However, exposure to China’s retaliatory measures and supply chain disruptions necessitates hedging. ETFs focused on U.S. and Japanese semiconductor firms, or those with low China exposure, offer diversified pathways. Conversely, speculative bets on "Taiwan invasion funds" (e.g., concentrated positions in TSMC and defense stocks) carry high volatility and should be approached cautiously [17].

Conclusion

The U.S.-Taiwan defense relationship is no longer a peripheral issue but a cornerstone of Indo-Pacific stability. As China’s military modernization and U.S. strategic rebalancing converge, investors must navigate a landscape where geopolitical risks and technological competition drive market outcomes. By prioritizing firms and funds aligned with U.S. security and industrial policies, while mitigating exposure to China’s retaliatory measures, portfolios can better withstand the turbulence ahead.

Source:
[1] U.S.-Taiwan Trade and Economic Relations [https://www.congress.gov/crs-product/IF10256]
[2] US-China Trade War: Global Economic Power Struggle [https://discoveryalert.com.au/news/us-china-trade-war-geopolitical-economic-impact-2025/]
[3] Forceful Taiwan Reunification: China's Targeted Military and Civilian-Military Measures [https://www.fpri.org/article/2025/03/forceful-taiwan-reunification-chinas-targeted-military-and-civilian-military-measures/]
[4] Taiwan's Security Uncertainty and Response Strategy [https://online.ucpress.edu/as/article/65/4-5/555/212310/Taiwan-s-Security-Uncertainty-and-Response]
[5] U.S.-China Trade Tensions and Taiwan's Semiconductor Nexus [https://www.francescatabor.com/articles/2025/5/4/us-china-trade-tensions-and-taiwans-semiconductor-nexus]
[6] Taiwan's Biggest Limitation in Defense Isn't Spending, It's [https://warontherocks.com/2025/03/taiwans-biggest-limitation-in-defense-isnt-spending-its-late-deliveries-from-u-s-defense-companies/]
[7] The U.S. Industrial Base Is Not Prepared for a Possible [https://features.csis.org/preparing-the-US-industrial-base-to-deter-conflict-with-China/]
[8] US-China Relations in the Biden-Era: A Timeline [https://www.china-briefing.com/news/us-china-relations-in-the-biden-era-a-timeline/]
[9] Preparing the U.S. Industrial Base to Deter Conflict with China [https://features.csis.org/preparing-the-US-industrial-base-to-deter-conflict-with-China/]
[10] How Taiwan's Chip Industry Navigates U.S. Industrial Policy and Export Controls [https://globaltaiwan.org/2025/03/how-taiwans-chip-industry-navigates-us-industrial-policy-and-export-controls/]
[11] Restructuring the Global Semiconductor Supply Chain [https://www.jusdaglobal.com/en/article/global-semiconductor-supply-chain-trends-challenges-opportunities/]
[12] The Escalating Chip War Between China and the West [https://www.gisreportsonline.com/r/escalating-chip-war/]
[13] 2025 Global Semiconductor Industry Outlook [https://www.deloitte.com/us/en/insights/industry/technology/technology-media-telecom-outlooks/semiconductor-industry-outlook.html]
[14] Analysis of the International Stock Market Situation (2025) [https://isdo.ch/analysis-of-the-international-stock-market-situation-summer-2025/]
[15] China's Possible Invasion of Taiwan – Part II: 2025, 2030s... [https://globaltaiwan.org/2019/04/chinas-possible-invasion-of-taiwan-part-ii-2025-2030s-2049-or-2050/]
[16] Opportunities in Semiconductors [https://guinnessgi.com/insights/opportunities-in-semiconductors]
[17] My Current Taiwan Invasion Fund [https://www.reddit.com/r/wallstreetbets/comments/16h8voz/my_current_taiwan_invasion_fund/]