Chips Ahoy: How a China-Taiwan Conflict Threatens the World’s Supply of Semiconductors

Taiwan supplies over 90% of the world’s advanced semiconductors.

Tensions are high in the South China Sea. China appears to be ready to invade Taiwan and the U.S. appears ready to defend the country. Why would a superpower like the U.S. be ready to defend an island that is 10 thousand kilometers[i] from its mainland? Because kilometers are not as important as nanometers … 10 nanometers, to be precise. That’s the distance between transistors in the most advanced, most dense and least heat-producing semiconductors currently available. These are the chips in high demand for number-crunching supercomputers, high performance computing (HPC) clusters, AI servers in data centers, medical devices and equipment in hospitals, PCs and workstations in offices, and tablets, smartphones and consumer electronics and appliances in homes. Most of these advanced semiconductors are made in Taiwan.

East Asia and China make up about 75% of the wafer fabrication capacity; in particular, all of the advanced logic capacity  < 10nm is currently located in Taiwan and South Korea. (Sources: BCG analysis with data from SEMI fab database.)

East Asia and China make up about 75% of the wafer fabrication capacity; in particular, all of the advanced logic capacity < 10nm is currently located in Taiwan and South Korea. (Sources: BCG analysis with data from SEMI fab database.)

Over the last 25 years, Taiwanese companies have created chip foundries large enough to account for 20 percent of the world’s global supply of semiconductors manufactured today. Taiwan’s leading semiconductor maker, TSMC (Taiwan Semiconductor Manufacturing Company), is the largest contract manufacturer of advanced semiconductors in the world and, along with Intel and Korea’s Samsung, is able to produce semiconductors in advanced nodes (10 nanometers or less). TSMC is alone in producing chips with leading nodes (5 to 7 nanometers).

An extended geopolitical conflict could create a global shortage of semiconductors—a shortage that would dwarf the current chip shortage that has upended the automotive industry, which is estimated to have cost the industry $200 billion as production lines stopped and waited for delivery of semiconductors held up by supply chain issues from the pandemic. Imagine the disruption to multiple industries when the source of semiconductors is interrupted by a war that grinds on for months or even years.

A Little History

Why there is a conflict today might be explained with a little of Taiwan’s long and tortuous history.

The Strait of Taiwan. (Map by U.S. CIA from the University of Texas at Austin Libraries.)

The Strait of Taiwan. (Map by U.S. CIA from the University of Texas at Austin Libraries.)

The rugged and mountainous island of Taiwan pokes out from the bottom of the Pacific Ocean floor about a 100 miles from the coast of mainland China. Up until the 13th century, the island was inhabited by indigenous people who lived off the land and called their island “Taioan.” Then the Chinese sailed over. We know this from the first written record that survives today. The spice trade brought the seafaring Portuguese, who would name the island Formosa (“beautiful island”). It was the Dutch who colonized most of Formosa except for settlements to the North, which Spain colonized. In the late 1660s, the Dutch would lose the island to the Chinese, who were to lose it to the Japanese in the First Sino-Japanese War in 1895. The island served as a base of operations for the Japanese against China, Southeast Asia and the Pacific during World War II. Japan lost World War II and after the Communist Party gained control of China, the deposed Chinese ruler, Chaing Kai-shek, fled to Taiwan and took control of the island. The 1980s brought democratic reform to the country and the “Taiwan Miracle”—a time of rapid industrialization and economic growth that would give us the Taiwan we know today.

Will the Real China Please Stand Up?

Technically, Taiwan is called ROC, or the Republic of China, and is not to be confused with the PRC, the People’s Republic of China, commonly called mainland China, a land of over a billion people—and, more germane to this article, a military that is an order of magnitude larger than Taiwan, an island about half the size of Ireland.

The People’s Republic of China claims rights to the island of Taiwan and resents any Taiwanese claims of independence and political autonomy over the island, either by Taiwan or by other governments.

A Global Economic Crisis Brews

The military conflict, with raging naval battles and a Normandy-sized invasion, may be regional but the economic fallout would be global.

With the biggest trading partners of the U.S. and Europe out of the picture because of the China-Taiwan conflict, a global economic depression—the likes of which we have never seen—is sure to follow.

According to the RAND Corporation, the U.S. gross domestic product (GDP) would drop 5 percent and China’s GDP would fall by 25 to 30 percent.

Another superpower invasion, the Russian invasion of Ukraine, may help to calibrate the scale of a Chinese invasion of Taiwan. Although economic and military aid to Ukraine has been global, the warfare has remained regional, and to an extent, so has the economic fallout. The war in Ukraine has deprived Europe, Asia and Africa of agricultural imports (Ukraine is known as the “breadbasket of Europe”) and minerals. Taiwan, in contrast, exports technology products and is a major trading partner of the United States.

Taiwan’s other major trading partner is, ironically enough, the Peoples Republic of China. A quick capture of Taiwan would give China control of the advanced semiconductor industry—something the Western World cannot allow, says a special investigation by Reuters.

A Complicated Relationship

Does Taiwan officially exist as a sovereign nation, though? It depends on which government you ask.

U.S. President Richard Nixon traveled to Beijing in 1972, eager to thaw relations between the U.S. and China, but to make that happen, the U.S. had to agree to end the official recognition of Taiwan. This created a geopolitical absurdity, according to the Atlantic. Taiwan is a major trading partner with the U.S. and continues to consider the U.S. its most powerful and important ally.

The Taiwan Relations Act, passed 1979, states quite clearly that “the United States shall make available to Taiwan such defense articles and defense services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capacity as determined by the President and the Congress.” But subsequent administrations have maintained “strategic ambiguity” on the question of military intervention—until the Biden administration.

An Unofficial Customer and Seller

Taiwan’s military is a huge customer of U.S. weaponry. The Republic of China Air Force (ROCAF) prides itself on its squadrons of General Dynamics F-16s, perhaps the most successful fighter export ever and arguably the most bang for the buck of any fighter in modern aviation. Taiwan will upgrade its fleet of F-16A/B Block 20 fighters to match the capability of F-16V for $3.8 billion by 2023. In 2019, Taiwan was approved to buy up to 66 new F-16 Block 70s worth up to $8 billion. After the delivery all the F-16s, the ROCAF will have one of the largest fleets of F-16s in the region, with over 200 F-16 fighters in operation, according to the Taiwan -Country Commercial Guide.

As expected, Beijing has expressed it opposition to Taiwan’s F-16 modernizations as it has for any arming of the country. China’s protests have thwarted sales to Taiwan of the Lockheed-Martin F-35 Lightning II, the latest generation of air superiority fighters.

The Biden administration is pushing Taiwan to order missiles and smaller arms, according to the New York Times, for “asymmetric warfare has gained urgency since Russia’s invasion of Ukraine.”

Will China Invade Taiwan?

The warships of China and the U.S. have been playing chicken in the waters around Taiwan for years. At first this was to guard fishing and territorial rights in the contested South China Sea, but visits by high-ranking U.S. government officials mark an escalation for both countries.

Relations between China and the U.S., strained by ideological differences since the post-World War II years when the Communist Party took control of China, have suffered since from trade wars, human rights issues, cyberattacks, disregard for intellectual property and allegations of industrial espionage. Relations reached a new low a few weeks ago when U.S. House Speaker Nancy Pelosi paid a visit to Taiwan. In a reversal of previous administrations’ ambiguity, both President Biden and House Speaker Pelosi stated that they will defend Taiwan. More visits by U.S. lawmakers are taking place as I write this.

China retaliated with a week of naval maneuvers around the island with live-fire shells and missiles. It was a show of force without precedent in the region and provided China with an opportunity to show off  its new navy, which now has more ships in service than the U.S. Navy. For a week, no civilian ship dared to cross the ring of military activity and Taiwan was left isolated.

The Blockade

China’s invasion of Taiwan will occur within the next 18 months, says one military intelligence source quoted in “The Coming War Over Taiwan” in next weekend’s Wall Street Journal review section.

The ensuing Chinese encirclement of Taiwan was quite a show of force and firepower. China has been building up its navy over the last few years and now has a bigger navy, in number if not tonnage, than the U.S.

Four U.S. Navy ships stood back and watched. The USS Ronald Reagan, a nuclear-powered aircraft, had sailed a safe distance away to the Philippine Sea. These were “normal routine deployments,” according to an unnamed U.S. Navy source.

The biggest ports for the U.S. Navy in the Pacific will be targets in the upcoming war, predicts the Wall Street Journal—much like Pearl Harbor in World War II. We wonder if Americans care as much about far-off islands that aren’t states or vacation destinations.

One might dismiss the mounting rhetoric and the saber clashes, were it not for Chinese leader Xi Jinping repeatedly stating that the task of “liberating” Taiwan is not to be passed down to the next generation.

How the War Will Be Won

China is expected by some experts to invade Taiwan within the next 18 months.

Will it succeed? On this, the authors Hal Brand and Michael Beckley are not sure. China’s vast naval fleet could overwhelm Taiwan’s defenses. A quick capture of Taipei could force Taiwan’s government to a quick capitulation. But isn’t that what the Russians thought would occur when they invaded Ukraine and were repulsed in Kyiv? Also, China has not fought a major conflict since 1979 when it was involved in the Vietnam War.

You could take the writings of authors from a financial publication with a grain of salt for their views on how to wage war—except that Mr. Brand is a Henry Kissinger Distinguished Professor of Global Affairs at the Johns Hopkins School of Advanced International Studies and Mr. Beckley is an associate professor of political science at Tufts University and a nonresident senior fellow at the American Enterprise Institute. The two have adapted the article from their larger work, a book called Danger Zone: The Coming Conflict with China.

The authors analyze China’s motive to invade Taiwan as a move to reestablish itself at a time when the country feels as if its power is on the wane. China has suffered more than other economies recently—battered by the COVID-19 pandemic as well as international shaming for the country’s draconian measures in clamping down on whole cities in response to outbreaks, creating a “surveillance state,” violently quelling demonstrations in Hong Kong, and  subjugating entire ethnic groups.[ii]

What should we be doing to prepare Taiwan’s militarily? The authors recommend not sailing into the fray with its fleets led by the U.S. Navy’s pride—massive nuclear-powered aircraft carriers—which will be giant targets and, if sunk, a giant embarrassment. Instead, they advise  making the likely route of attack—the straits between China and Taiwan—into a “virtual minefield,” equipping everything that floats with missiles and electronics, a largely dispersed target that would be too numerous to attack.

“The Pentagon can turn the Taiwan Strait into a death trap for attacking forces by stocking up on tools that are ready or nearly ready today. This means positioning hordes of missile launchers, armed drones, electron jammers and sensors at sea and on allied territories near the strait. Instead of waiting for a Chinese assault to start and then surging missile-magnet aircraft carriers into the region, the Pentagon could use what is, in essence, a high-tech minefield to decimate China’s invasion forces and cut their communications links. These diffuse networks of munitions and jammers would be difficult for China to eliminate without staring a regionwide war. They could be installed on virtually anything that floats or flies, including cargo ships, barges and aircraft.”

[i] Air miles from San Francisco International Airport (SFO) to Taipei (TPE).

[ii] International condemnation for incarcerating the Uyghur population, which some suggest is genocide.