Both the two major economies of the world rely on Taiwan for the chip production and a war will stop the world as we know it.
It’s never easy to talk about China invasion of Taiwan and all its consequences, but the latest chinese military “show the force” around the island of Formosa has taken the debate to the forefront.
In this analysis it will be faced the deterrence that Taipei provides by itself having the world largest manufacturing of chips, or semicondctors, that are used for everyday purposes such as calling our friends with a smartphone o playing videogames online on a PC.
First of all, it is necessary to explain what a chip actually is, how many types are produced and for what purposes. Chips are nothing else than the most important component of many electorinc devices and systems. They are composed of specific types of metals called semiconductors, such as Silicon, Gallium and Germanium. The Semicondctor Industry Association defines the semiconductors as the essential component of electronic devices, enabling advances in communications, computing, healthcare, military systems, transportation, clean energy and countless other applications. For example, an analog chip is used for measuring temperatures, a logic chip acts as the brain of our smartphones and the memory chip stores all the pictures we take. Of course, PC, cars or smartphones are just a few examples of electronic products that rely on semiconductors.
Given a brief explanation of what a chip is, why do chips make Taiwan so special for the two majors powers of the international system? In the last decade Taiwan became the most important actor of the global supply chain for semiconductors, especially for the most advanced microchips with more than 90% of the global production capacity.
TSCM (Taiwan Semiconductor Manufacturing Company Limited) is one of the two companies that provides state-of-the-art microchips on a large scale. It is the “key customers” of the dutch company ASLM which disposes the EUV litography technology for printing microchips and has two factories based on Taiwan. So, the first one churns out microchips while the second provides the technology to do it.
Taiwan now is leading the production of semiconductor while the USA have decided to rely on a fabless system. From 1990 to 2010, the USA have reduced the production of semicunductor by 24%. According to a study, in 2021 the USA have imported from Taiwan about 44% of logic chips. This means that, in case of Taiwan production distruption, the price of logic chips is expected to increase about 59%. Considering that companies as Apple or NVIDIA totally depend on Taiwan, the disruption will be a catastrofy for them. R. Walters affirms that losing access to Taiwan’s industry would generate such an effect that will be worse than the financial crisis of 2008 and the COVID 19 pandemic. It is estimated a loss of 1.6 trillion dollars (About 8% of the US GDP).
Despite the good intention to bring the production of chips back home, as whished by the Chip and Science Act signed in August 2022, the USA will defend Taiwan at any cost. Infact, the effects of the law will be seen in the long term and Uncle Sam can’t afford to lose the island, especially if BAE System, one of the major defence companies in the world, depends on TSMC for the supply of chips to produce the multirole combat aircraft F-35 Lightning II. The USA strategy is based on making clear to the chinese that the invasion of Taiwan will not be permitted and trying to convince TSCM to invest in the USA, providing billions of dollars to support three fabrication plants in Ariziona. Definitely the USA will rely on Taiwan for decades.
On the other side of the Pacific, China has tried to catch up to Taiwan investing a lot of financial resorces, but the dragon cannot be competitive with its rebbelious province. China is trying to be indipendent from Taiwan but it still seems to be a long way to go. Beijing imports more than 400 billions dollars worth of semicunductors. Anyway, China is the largest producer of rare earth in the world and has already started its plan to obstruct the USA. Not only Beijing produces 60% of the rare earth, but it also process 90% of them, turning into a quasi-monopoly. The last year the chinese goverment decided to reduce the export of two rare earths , Gallium and Germanium, which are used for the production of microchips, rising awarness in the USA for its rare earth security, igniting the well-known “chip war”.
Will the chip war turns into the invasion of Taiwan? Taipei not only represent the global chip hub, but it is strategically important for Beijing as it is an island facing the ocean. There is also a moral question that we have to take into account in this complecated equation, because the chinese consider Taiwan as a rebbelious province that one day has to return to the ranks. Invading the island would mean distrupting chip production and a blowback for all the parties. Some could argue that China will invade Taiwan to solve its domestic problems. As stated above, the USA will face a massive economic crisis and so that all the western world, but at the same time China won’t be able to guarantee the same production capacity of Taiwan. Moreover, Taiwan depends on western technology, and the USA and its allies won’t provide it to the chinese to carry on chip production.
Others hold the opposite view. If China invades Taiwan, it won’t be because of the chip. Taiwan has built an incredible “Silicon Shield” that can deter China on invading the island. Furthermore, securing a good relation with the USA and its allies (Japan and Australia) will decrease the possibility that chinese government takes this tremendous decision.
Summing up, as soon as China is dependent from Tawain for the supply of chips, it will be very difficult that Taipei will be invaded in the short term.
