Insight & Analysis

Taiwan tensions shine spotlight on semiconductors

Published: Apr 2023

Tensions in the Taiwan Strait have highlighted the vulnerabilities in the semiconductor supply chain and how the world’s dependence on a single company – the Taiwan Semiconductor Manufacturing Company (TSMC) – creates a potential geopolitical flashpoint.

Tensions between mainland China and Taiwan have flared up again, following Taiwan President’s Tsai Ing-wen’s visit to the United States and her meeting with the US House Speaker Kevin McCarthy in early April. China responded with military exercises and a demonstration of its military strength, a response similar to the situation in August 2022 when US House Speaker (which was Nancy Pelosi then) visited Taiwan. At that time, China said Taiwan’s engagement with the US was ‘extremely dangerous’, a comment that had some wondering whether it was time to think the unthinkable of China pursuing unification with Taiwan by force.

The situation puts the United States in a delicate situation. On the one hand it supports mainland China’s idea of ‘One China’ – that Taiwan is not an independent country – and does not have formal diplomatic relations with Taiwan. And on the other, the United States would defend Taiwan if China invaded.

A key bargaining chip – pardon the pun – is Taiwan’s semiconductor industry, and some commentators have argued this is a ‘silicon shield’ that protects Taiwan from being invaded. However, others don’t think that is the case, and many point to the vulnerabilities from a supply chain standpoint, as well as the geopolitical risk, in having so much of the world’s production focused in one place.

The semiconductor shortage that occurred off the back of the pandemic already wreaked havoc for many industries – particularly the auto sector – and exposed the weaknesses in supply chains. And now, semiconductors are a topic of conversation from a national security perspective.

The Taiwan Semiconductor Manufacturing Company (TSMC) produces 92% of the world’s high-end chips, which are ten nanometres or smaller and are critical to many industries; used in cars, smartphones, and high-tech weapons, for example.

In a recent report by RAND Corporation, a national security research institute in the US entitled ‘Supply Chain Interdependence and Geopolitical Vulnerability: The Case of Taiwan and High-End Semiconductors’, highlights the geopolitical considerations of the world’s dependence on TSMC.

The research institute conducted a tabletop experiment in which representatives from the legislative and executive branches of the US, as well as from various industries, thrashed out various scenarios and what the implications would be if China forced a situation where Taiwan is unable to continue to produce and/or distribute its semiconductors, or China attempts to block access to the market.

With so many industries reliant on Taiwan’s semiconductors, this situation would have serious implications from a supply chain and economic perspective. The RAND report noted there were only bad choices available to the policymakers and industry leaders in the US. In one scenario, the US companies could attempt to continue to do business with Taiwan while seeking alternatives. In another scenario, there could be serious supply chain disruption and economic turmoil, with the elimination of high-end semiconductor production.

Such a possibility exposes the vulnerability of so many industries which rely on TSMC. If China were to deny access to Taiwanese semiconductors, the RAND authors conclude there are three main choices available to policymakers in the United States.

The first choice is to yield to China’s will and accept its demands regarding the sovereignty and independence of Taiwan. The second choice is to build alternatives so the US is not relying solely on semiconductors produced in Taiwan. This would take many years and the economy would likely suffer while these alternatives are being built. And the third option is to engage in military conflict to protect Taiwan’s semiconductor industry – and its independence. None of these options are good, and the report concludes: “It could not be clearer that serious vulnerabilities exist in the interrelationships resulting from the concentration of the semiconductor industry in East Asia, and, in particular, Taiwan.”

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