The Next Conflict: China and Taiwan

Last year, not many asked the question: What would happen to their portfolio if oil prices rose from a historically low base?

Of course, no one could have predicted the doomsday situation that manifested in early 2026 with the closure of the Strait of Hormuz.

For Japan, Korea, Australia, and many other countries that rely on Middle Eastern oil, this was an outlandish scenario. Not possible and not worth planning for.

And then it happened.

While we can all take a collective sigh of relief that the crisis appears to be winding down, geopolitical tensions across the globe aren’t about to stop.

Which is why I’m trying to wrap my head around this question: What could happen next?

Will the Hormuz flare up again, or will an entirely new conflict emerge in this era of global instability?

Plan for contingencies
BEFORE they happen.

I’m going to tackle a difficult question today… Does China still have strong ambitions to unify Taiwan?

Now, before you dismiss this as geopolitical scaremongering, hear me out!

I’m not at all predicting or hoping a conflict in the South China Sea, but given what’s happened in recent months, burying your head in the sand and wishing for the best doesn’t often lead to strong outcomes.

So, today, I thought we’d stress test this idea, similar to how we looked at the oil market over much of 2025.

Specifically, what happens to Australia’s economy if China starts a conflict against Taiwan?

To put it bluntly, it doesn’t look good! I used AI to generate some potential outcomes.

So here goes…

In 2024, China accounted for somewhere between a third and a half of Australia’s total export revenue. And a large part of that sits within iron ore. Australia exports roughly 800 million tonnes of iron ore a year, and the lion’s share of that goes to Chinese steel mills.

And as much as we’d like to think otherwise, in the event of a Taiwan-China conflict, Australia would almost certainly suspend all commodity exports to its most important trading partner.

The Western Australian government budget, which has been running on iron ore surpluses for years, would face an immediate structural hole as royalties from the Pilbara suddenly dry up.

Then comes the LNG problem…

Australia is one of the world’s largest liquefied natural gas exporters, and a chunk of those long-term contracts runs through Japanese and Korean buyers who are themselves deeply intertwined in a Taiwan conflict.

Supply routes through the South China Sea will become contested, and that could shut down shipping movements in a manner not unlike what’s happened in Hormuz.

Insurance premiums for shipping will go vertical, again similar to Hormuz.

Net result: Australia would be staring down the barrel of an economic disaster!

The Aussie dollar would collapse.

While commentators accept the very real possibility of a China-Taiwan conflict, few are willing to go further than that… Specifically trying to understand the economic and financial fallout.

It’s that lack of forward thinking and the inability to implement contingencies that caught so many out during the Hormuz Strait closure.

But what about the
‘too important to fail’ idea?

Assessing a potential closure of the Strait of Hormuz went as follows: the Strait is so critical to global energy supply that such a closure was beyond the realm of possibility.

There was no point in implementing contingencies because the outcome would be so dire that it simply would not happen.

But then, in 2026, it did happen.

That’s how I view the situation between China and Taiwan.

Australia’s political class has convinced itself that economic integration with China provides a buffer against conflict. The theory being: the trade relationship is too valuable for either side to sacrifice.

It’s a comforting idea. But history shows that it doesn’t always work. We only have to look back three years to see how this idea breaks down…

Russia, the commodity powerhouse, exported enormous volumes of gas to Europe right up until February 2022, before war broke out in Ukraine.

The economic interdependence didn’t prevent the invasion. It just fragmented Europe’s energy supply and dented Russia’s exports until new markets emerged.

So, whether it happens or not,
it pays to think about contingencies

In the second half of 2025, my key focus was on recommending oil and gas stocks.

I didn’t know what would happen, but given the asset’s extreme value and potential to be wrapped up in a future geopolitical storm, the asset class made sense in terms of diversifying our commodity exposure.

As I said to readers at the time, these recommendations were more about hedging our portfolio against our metals and mining positions than about seeking profits.

They played their role, and we took some profits. But with one geopolitical storm winding down, it’s time to start thinking about the next risk…

Could it be China and Taiwan? Maybe.

Either way, it pays to think about mitigating the risks well before this next ‘impossible’ event takes place. You can find out what I’m recommending for my paid readership group, here.

Until next time.