News

Military exercises scaled back: South Korea and the United States are reducing the scope of their joint drills as the Western Pacific becomes the geopolitical epicentre of global tensions. Strategic competition between Washington and Beijing is intensifying. “The South China Sea poses an underestimated risk of escalation,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. For investors, he argues, the geographical and geopolitical diversification of investments is therefore becoming increasingly important.

Strategic competition between the United States and China is shaping the global landscape – and is increasingly being played out in the Western Pacific. For Beijing, the objective is regional supremacy; for Washington, it is to safeguard open trade routes and access to Asia while at the same time preventing Chinese dominance.

Taiwan remains the most dangerous flashpoint. China is steadily increasing military and political pressure on the island. Missile exercises, naval operations and a stronger presence of Chinese aircraft and vessels are intended to demonstrate that Beijing could, if necessary, enforce its claims militarily. But other countries are also part of the escalation risk. “Regular confrontations between China and the Philippines over disputed areas increase the risk of an incident,” Fischer says. Particularly significant is the fact that the Philippines is a formal US ally. A regional confrontation could therefore quickly develop into a US-China crisis.

Japan, too, is moving from the sidelines to become a major security player. The government in Tokyo is increasing defence spending to more than two per cent of GDP, strengthening strategically important islands and deepening military cooperation with the Philippines and other partners. Together with Australia, this is gradually creating a denser security network around China.

Against this backdrop, South Korea is now becoming a source of uncertainty within the US alliance network. The country plays a key role in containing China and North Korea, yet the alliance itself is coming under pressure. The United States and South Korea are shortening their military exercise designed to prepare for a possible North Korean attack. US President Trump had previously ordered on his online platform that American participation be significantly reduced. He cited his good relations with North Korean leader Kim Jong Un and South Korea’s refusal to participate in the US war against Iran. “This raises questions in Seoul about the reliability of the US security guarantee,” Fischer says, “and shows that Washington’s challenge in the Western Pacific is not only one of military strength, but also of maintaining cohesion among its allies.”

The West therefore faces a resource problem. The United States must simultaneously provide security commitments in Europe, the Middle East and the Indo-Pacific. Delayed arms deliveries to Taiwan and insufficient production capacity for lower-cost, mass-produced systems such as drones show that military deterrence is not merely a question of budgets, but increasingly one of industrial capacity as well.

Asia also lacks a NATO-style security structure. “There is no binding security architecture comparable to that in Europe,” Fischer explains. The current tensions between Washington and Seoul in particular demonstrate how quickly political decisions by individual governments could weaken collective deterrence.

What does this mean for investors? The Western Pacific is not only a military flashpoint but also an economically critical region. Taiwan and South Korea are key centres of the global semiconductor industry, while major trade and shipping routes also run through the region. “An escalation could therefore hit technology stocks, supply chains, global trade and Asian markets simultaneously,” Fischer warns. For investors, this highlights the importance of geographical diversification and makes defence, cybersecurity and more resilient supply chains relevant long-term investment themes.