Taiwan invasion would trigger global chip chaos

Economies worldwide risk imploding if China shatters the ‘silicon shield’ and takes the island by force

A conflict between the United States and China over computer chips has been rapidly escalating. In particular, Washington has taken steps to limit Beijing’s access to advanced semiconductor technology amid heightened international competition in the area.

The US recently tightened export controls to undercut China’s access to high-end chip manufacturing equipment and has banned top talent from working for Chinese semiconductor firms.

Beijing retaliated by banning American chip maker Micron from operating in China.

Taiwan plays a critical role in this struggle. It has a huge share of the global chip industry but is also the focus of tensions between Beijing and Washington over its political status.

For all practical purposes, democratic Taiwan has been independent since 1949 but Beijing believes it should be reunited with the rest of China – possibly by force. In April, it conducted extensive military drills, simulating an encirclement of the island.

So, what might happen to the chip industry if China invaded Taiwan?

Economic security

A US act passed in 1979 requires Washington to help defend the island. It fits into the wider US objectives of technology and economic security. US politicians have not minced their words in affirming that a Chinese invasion would be met with a swift military response.

Seth Moulton, a Democratic congressman from Massachusetts, quipped that if China invades “we’re going to blow up TSMC” – the acronym for Taiwan Semiconductor Manufacturing Company, the world’s most valuable chip firm.

Moulton later clarified that he had been discussing several options for conveying the enormous costs to Beijing if it moved against Taiwan.

China’s Navy has conducted ‘live-fire’ drills near Taiwan. Photo: PLA Daily

Because of the island’s dominant position in the chip industry, its economy has been described as the “most indispensable” in the world. And TSMC is the cornerstone of what’s been described as Taiwan’s “silicon shield.”

The idea behind this is simple. Since the world relies on Taiwan’s microchips, this protects it from an invasion by China.

Author Chris Miller tells the story of how the island reached this dominant position in Chip War. It turns out to have been largely the result of strategic geopolitics and the individual leadership of several semiconductor “godfathers”, including TSMC founder Morris Chang.

Chips are produced by a remarkably global supply chain, with design often stemming from US, Japanese or European firms, and manufacturing taking place in Taiwan and South Korea.

Silicon shield

But Taiwan alone produces more than 60% of the world’s semiconductors – and crucially, 90% of the most advanced ones.

Still, there are fears the “silicon shield” might not hold forever, and an invasion by China would threaten the global economy with implosion.

Yet, if TSMC were to build new manufacturing facilities elsewhere, it would reduce the world’s reliance on Taiwan for chip production.

A practice called “friend-shoring” could concentrate manufacturing and the sourcing of materials outside Taiwan in countries friendly to the US. This would reduce risks to Washington and its partners if China staged an invasion of the island.

Chip production was hit by the Covid-19 pandemic. Photo: Courtesy China Daily

But such a shift would take years to complete and would be challenging to implement. In 2021, TSMC announced its plan to build a multi-billion-dollar facility in Arizona.

The plant will only be ready from 2025 at the earliest, and will probably not be capable of producing chips at what will by then be the technological frontier in terms of scale.

Generally speaking, the smaller the chip, the more transistors can fit on it. This enables the development of faster, more powerful electronic devices.

The Arizona facility is expected to produce chips at the 5-nanometre scale, and, at some stage, 3nm. This would not undermine Taiwan’s leadership, however, because TSMC is already working at 3nm and is likely to be further advanced by 2025.

TSMC may also face a challenge in attracting skilled employees to run its US operation.

Export controls

There is already a shortage of microchips, which began with the onset of Covid-19 in 2020 and has affected many industries and products. In 2021, global car production slumped 26% and consumer electronic product launches have been delayed largely as a result.

In a bid to boost chip supplies, the Biden administration and the European Union tried to improve supply chain resilience by incentivizing production closer to home.

The 2022 CHIPS and Science Act, for instance, offers more than US$50 billion for microchip research and development, manufacturing, and boosting the workforce in the US.

Yet, these policies run counter to trade war tactics. Export controls and other downward pressures on global “friends” working with Chinese firms have meant that even when TSMC is at capacity, additional supply cannot come from Chinese manufacturers.

China’s high-tech car production relies on cutting-edge chips. Photo: File

Under current chip war conditions, low supply is likely to continue, which means price increases and product delays.

The military response to an invasion of Taiwan could see the manufacturing of semiconductors on the island halted overnight. This would place huge pressure on the price of the chips manufactured outside the island.

The increase would unleash massive inflation on a range of products and services, including cars, phones, and healthcare equipment such as ultrasounds and vital sign monitors.

The reduction in semiconductor supply would also affect the very national security context that is shaping the contours of its production. A Taiwanese invasion would mean a halt to the availability of the advanced chips used in satellites, stealth jets, and supercomputers.

Advanced semiconductors

China’s ambition of having a “fully modern” military by 2027, and its Made in China 2025 plan, to boost manufacturing, both hold semiconductor capabilities at the core.

Having access to TSMC know-how and supplies would be pivotal for delivering on these goals. But the US commitment to defending Taiwan – if it holds – would mean the destruction of TSMC facilities on the island.

The world’s cutting-edge plants for advanced semiconductors would be decimated.

We should all care about a Chinese invasion of Taiwan. The global chip industry would freeze. Inflation would spiral further upwards and the post-Covid recovery would be reversed.

So many of the tools we rely on would disappear from our shops for years. It would wreak enormous damage on us all – with the Taiwanese people bearing the greatest cost.

Robyn Klingler-Vidra is an Associate Dean of Global Engagement and Associate Professor in Entrepreneurship and Sustainability at King’s College London.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.