A Chip on the World’s Shoulders: Navigating China-Taiwan Tensions and its Implications on the Global Dependence of Taiwan’s ‘Silicon Shield’

Amirah Hamita is a Third year English Literature student. She worked as a digital consultant at IDEAS Globally, an advisory firm with social entrepreneurial projects in China, Myanmar, and Nepal. (dwh.mira12@gmail.com)

Introduction

Where there is a looming uncertainty that Ukraine and the Middle East pose on the global oil and gas trade in the past few decades, it is Taiwan’s chip industry that is likely to result in a potentially disastrous conflict that could prove to be unprecedented on a global scale. China’s assertion of its sovereignty claims over Taiwan, alongside Taiwan’s critical role as the monopoly of the global semiconductor industry, means that the invasion of the island poses a potential threat to the world’s economy. With the escalating tensions between Beijing and Washington, Taiwan is caught in the middle of trying to mitigate invasion risks while sustaining its absolute global advantage of its ‘Silicon Shield’.

Why are semiconductors so important?

Initially, chips were used for defence purposes and strategic technologies, from providing technology which fueled the Cold War to the usage of chips in guidance computers on the LGM-30 Minuteman nuclear missile and the Apollo spacecraft. Despite this, 98% of semiconductors are not used for defence [2]. Instead, they are used for civilian applications, i.e. cars, phones, computers, and data centres. This elevates the importance of the industry as more devices incorporate more chips. The economy’s increasing reliance on chips creates more vulnerabilities in the global supply chain. For instance, the automotive industry faced an estimated 210 billion dollars of lost sales due to chip shortages [3]. 

Although semiconductors are mostly used for everyday devices, it is the key to the future balance of global military power. The crucial trend in modern warfare relies not on weapons or natural resources but rather on the application of artificial intelligence. This notion is widely accepted amongst most defence and intelligence circles. Semiconductor chips are now called “a new oil” due to their critical role in global industrial development. It is essential to the fields of Artificial Intelligence (AI), quantum computing, and wireless networks, e.g. 5G. The application of chips across a plethora of industries means that the U.S. economy, and subsequently the global supply chain network, would be severely impacted if there is any production disruption in Asia. 

What is Taiwan’s ‘Silicon Shield’? And why are they so crucial to the industry? 

Taiwan Semiconductor Manufacturing Co. (TSMC) is estimated to produce 90% of the most advanced processor chips, and almost 70% of all semiconductors in the world are manufactured in Taiwan [4]. In contrast, only 11% of chip manufacturing is done in the United States [5]. The semiconductor industry is defined by a relatively small number of firms due to the nature of chip manufacturing. The specialised nature of chip making, enormous economies of scale, and increasing resource intensity of chip fabrication are all important factors that contributed to TSMC and Samsung’s sectoral dominance. The number of worldwide firms in operation fell from 20 in the late 1990s to only two today.

Another reason for Taiwan’s monopoly in the industry is that the government strategically invested in it in the 1980s [6]. When TSMC was founded in 1987, it was the first firm to dedicate itself to chip manufacturing rather than design. Overseas firms like those in the U.S. would then invest heavily in chip research and design while they would let contractors such as TSMC handle the actual manufacturing. This business model has led to a drastic decrease in American semiconductor manufacturing capacity, from having 40% of the global market share in 1990 to 12% in 2020 [5].

Besides the United States’ dependency on Taiwan, China is also heavily dependent on Taiwanese chips. The Ministry of Finance reported that 54.2% of Taiwan’s integrated circuits, worth 90.4 billion dollars, were exported to China in 2023 [6]. For this reason, China, being the ‘factory of the world’, has a vested interest in the ‘reunification of the motherland’ as reiterated by Chinese Leader Xi [7]. For now, China “achieving complete self-sufficiency in the sector would be unprecedented; even getting close to that may prove impossible” [8]. China’s heavy reliance on Taiwan for their manufacturing proves to be a bane for Xi. Even when they invested and poured money into chip subsidies in 2014 and launched a National Integrated Circuit Industry Investment Fund, they have still not caught up to the advancements of the Taiwanese. 

This is where the ‘silicon shield’ theory takes place because there is the belief that the industry acts as a significant enough deterrent against China’s intentions to invade Taiwan. Even Taiwan’s Economic Affairs Minister Mei-Hua asserts that TSMC’s “complete supply chain in Taiwan” is difficult to replicate [9] and, therefore, would prove to be enough to stop China from forcefully invading. However, in recent years, China has demonstrated their willingness to utilise military exercises to signal its ability to blockade Taiwan and cut it off from international trade. Imports account for 98% of Taiwan’s energy and 65% of its food, signalling that China is determined to use economic sanctions to secure the industry for itself [10]. This leaves Taiwan in an unbelievably vulnerable position.

The likelihood of China’s invasion and its inevitable impact on the semiconductor industry and global supply chain

If China were to take over Taiwan to seize TSMC’s production by force, the consequences would not only impact the supply chain network for chips. This would also prove disastrous for the global financial market as a whole because TSMC is the biggest Taiwanese company in terms of market capitalisation. Overseas institutions and individuals account for nearly 80% of TSMC’s shares [11].

A U.S. intervention on Taiwan’s behalf would have the power to grind the global economy to a halt. An invasion of the Taiwan Strait would also pose a risk to the world’s busiest shipping lanes, shaving trillions of dollars off global GDP and plunging the globe into an economic depression. As a result, TSMC’s dominance in the semiconductor industry has catapulted Taiwan’s visibility to unprecedented heights amidst the growing US-China geopolitical tensions. 

Putting the substantial value that the semiconductor industry has on China’s economy aside, Chinese Nationals have been indoctrinated that Taiwan’s reunification is critical to the country. The encouragement of Taiwan’s invasion could be the salient fuel for popular nationalism. Xi Jinping has stated that Taiwan is the “essence” of the country’s “rejuvenation”, which he intends to achieve by 2049 (the 100th anniversary of the PRC) [12]. It is clear from Xi’s stance and recent actions that Beijing will not hesitate to obtain Taiwan using force.

Reshaping the global supply chain and avoiding war

Most governments are attempting to reshape the supply chain to reduce the monopoly that TSMC and Taiwan have, or at the very least, ensure that manufacturing also occurs in friendly countries. Governments in the Asia-Pacific region acknowledge that they are in an arms race as they try to secure the supply chain for semiconductor manufacturing before the looming and possible - but not inevitable - invasion of Taiwan occurs. 

For instance, the U.S. and EU have launched the ‘Chips Act’ to provide tens of billions of dollars in funding to attract more investment into the industry. Even Taiwan and Korea have also taken drastic measures to stop the brain drain of semiconductor expertise to China by preventing certain employees from leaving to work at Chinese firms. Japan has also encouraged and offered funding for foreign firms such as TSMC and Micron to build new facilities or upgrade existing facilities to alleviate the threat of a Chinese invasion. There is a symbiotic relationship between all the U.S. allies and partners when it comes to protecting the global supply chain and, as a result, protecting the peace and stability in the Asia-Pacific region.

Unlike the punitive economic measures that we are currently seeing being directed at Russia, the U.S. would have to carefully maintain a balancing act. Recreating the same advanced chip manufacturing capacity that Taiwan has in the United States is a long-term solution that would take decades. In the short and medium term, the U.S. has to finesse the geopolitical tensions in such a way that China does not feel the urgent need to forcefully invade Taiwan. Furthermore, Taiwan must feel that it can maintain its advantage in the semiconductor industry as well as deter the possibility of a Chinese reunification to protect its national interests.