When a delegation of US lawmakers landed in Taiwan this week, following a highly controversial visit by House Speaker Nancy Pelosi, one of their most important meetings was not with government or military officials but with representatives of the Taiwan Semiconductor Manufacturing Company. TSMC is the world’s leading producer of semiconductors – tiny components that power microchips in smartphones, electronic devices, vehicles and even fighter jets. When it comes to the most advanced semiconductors, TSMC controls a whopping 92 percent of the global market. This de facto monopoly has earned TSMC billions of dollars, but it has also raised concerns about the possibility of disruptions to the supply of this vital technology as political and military tensions in the region continue to rise. Since Ms. Pelosi’s visit, China has conducted large-scale military exercises in and around the Taiwan Strait. Semiconductor stocks under pressure as tensions in Taiwan rise with Pelosi’s visit Beijing considers Taiwan part of its sovereign territory, and although China is nominally committed to “peaceful unification”, it has not ruled out taking the island by force. While an invasion is by no means imminent, the vanishing prospect of Beijing achieving its goal peacefully – Taiwanese public opinion is staunchly against submission to Communist Party rule – suggests that war seems inevitable at some point. Any conflict over Taiwan would be disastrous for the Taiwanese people and the rest of East Asia – but also for the global economy, not least because of the island’s stranglehold on semiconductor manufacturing. And China would be among the worst hit. It is the largest consumer of semiconductors, accounting for about 60 percent of global demand, and imports most of its supply from Taiwan. In recent years, Beijing has pumped billions of dollars into developing domestic semiconductor manufacturing, but China still lags far behind Taiwan, and its reliance on Taiwanese chips has been seen as a deterrent against invasion, a theory known as “Silicon Shield”. Speaking to CNN this month, TSMC chairman Mark Liu said any intrusion would render the company’s factories “inoperable.” “This is such a sophisticated production facility,” he said. “It depends on real-time connections to the outside world – to Europe, to Japan, to the US – from materials to chemicals to spare parts to engineering software diagnostics” – all of which would be disrupted during a military conflict. But while this hypothetical deterrence advantage benefits Taiwan, it doesn’t sit well with the many other countries that would be affected by an invasion, especially since there’s no guarantee that it would actually prevent a war – after all, it didn’t make economic sense for Russia to invade and in Ukraine. The pandemic has highlighted how dependent the world is on Taiwan’s semiconductors. Supply chain disruptions caused a 20 percent drop in global inventories by 2021, which Goldman Sachs said affected more than 169 industries in the U.S. alone and cost up to 1 percent of the country’s GDP. A war would be far more disruptive, potentially costing the global economy hundreds of billions of dollars and hampering technological innovation for years. In the past year, both the US and Japan have struck deals with TSMC to build foundries – as semiconductor factories are called – in those countries, and the Taiwanese company is in the process of building a $12 billion plant in Arizona. Sen. Ed Markey of Massachusetts, who led the US delegation this week, said Monday that lawmakers met with TSMC representatives to “discuss partnerships to improve semiconductor supply chains and investment in the United States.” During Ms. Pelosi’s visit, she also met with Mr. Liu and company founder Morris Chang. In addition to encouraging TSMC to export some of its production, the US is providing $52 billion to develop a domestic semiconductor industry while imposing new restrictions on exports of certain technologies to China, hampering Beijing’s continued efforts. Canada is also committing $150 million to “make targeted investments to leverage Canada’s domestic strengths related to semiconductor development and procurement,” said Innovation Minister François-Philippe Champagne, adding that Ottawa wants Canada “to be a strategic global leader in the semiconductor industry.” However, such investments will take years to pay off, so for the foreseeable future Taiwan will remain a choke point in the semiconductor supply chain. This could prevent a conflict – or it could just make the consequences of a war even more dire for the whole world. The Morning Update and Afternoon Update newsletters are written by Globe editors, giving you a concise summary of the day’s most important headlines. Sign up today.
