By: Gregory Arcuri and Samantha Lu
Russia’s war in Ukraine has generated
considerable concern around the world about the prospects of a Chinese invasion of Taiwan. Even as ongoing hostilities wreak havoc on international commodity markets, Taiwan’s status as a critical node in the global semiconductor supply chain means a Chinese invasion would have unparalleled consequences for the global economy, which heavily relies on Taiwanese-made semiconductors to function. So, what events have led to Taiwan’s dominance in the global semiconductor market, and why is its continued security under threat?
Taiwan’s Critical Role in the Global Semiconductor Supply Chain
Taiwan’s path towards dominance in the manufacturing side of the international semiconductor market began in the 1980s. In those days, the world’s leading semiconductor firms like Intel and Texas Instruments had in-house production facilities and would handle the manufacturing of their own chips on U.S. soil. However, as chips became increasingly complex, manufacturing became an extremely costly endeavor.
In 1987, Morris Chang
founded Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s first “contract manufacturer”: a firm dedicated entirely to chip manufacturing rather than design. With this supply chain innovation, semiconductor engineering firms were no longer limited by their own fabrication capacity and could rely on TSMC to manufacture any chip they designed, regardless of its complexity or size. The business model was extremely successful and contributed to the emergence of a “fabless model” in the United States. Firms operating under this model invest heavily in chip research and design while licensing their manufacturing to contractors like TSMC, who then produce the actual chips. This trend has led to the
erosion of American semiconductor manufacturing capacity, which has fallen from roughly 40 percent of global market share in 1990 to around 12 percent in 2020.
In its place, Taiwan and TSMC became a critical node along the semiconductor supply chain, with market dominance that is difficult to overstate. In 2020, TSMC alone accounted for
54 percent of global foundry revenue. For comparison, the largest U.S.-based manufacturing company, Global Foundries, accounted for only 7 percent. Some of America’s largest tech firms, including Apple, Amazon, Google, Nvidia, and Qualcomm rely on Taiwan-based contract manufacturers for
nearly 90 percent of their chips. Taiwan’s success spawned similar firms in Japan and South Korea, with the three countries now accounting for around
80 percent of global fabrication capacity. Taiwan has also become a qualitative leader in the foundry market, as TSMC is one of only two companies in the world (along with South Korea’s Samsung) that can manufacture the most advanced 5-nanometer semiconductors.
Cross-Strait Tensions and the Threat of Invasion
While Taiwan’s semiconductor dominance has continued to grow over the years, tensions with mainland China have also grown, especially since the election of current Taiwanese President Tsai Ing-wen in 2016. President Tsai has taken a tougher stance on China’s ambitions in cross-strait relations, emphasizing that Taiwan will never accept forceful unification and reiterating Taiwan’s determination to maintain its democracy. Tsai has
asserted that “a fundamental part of this embrace of democracy is a firm belief that the future of Taiwan is to be decided by the Taiwanese through democratic means.”
Meanwhile, China has not abandoned its desire for Taiwan’s unification with the mainland, an event it views as inevitable and necessary for
national rejuvenation. In his new year speech in 2019, President Xi Jinping urged Taiwan to recognize that it “must and will” be reunited with China, warning that the use of military force is not completely out of the question.
An attempted military unification (武统) (
wu tong) appears increasingly
plausible as China continues to ramp up military exercises near the Taiwan Strait. In 2021, China conducted 950 sorties over Taiwan’s air defense identification zone, nearly
doubling its 2020 tally and recording 56 sorties in a single day on October 4, 2021. On March 18, just hours before U.S. President Biden’s call with President Xi Jinping to discuss the Russian invasion of Ukraine, the Chinese navy sailed its
most advanced aircraft carrier,
Shandong, through the Taiwan Strait in what may have been a demonstration of force. As the war in Ukraine drags on,
debates have swirled about the potential lessons the Chinese leadership is drawing from the conflict and what it means for Chinese military considerations vis a vis Taiwan.
Some believe that Taiwan’s dominance in the semiconductor industry provides it a ‘
silicon shield,’ a theory which asserts that if China were to take military action, countries would be inclined to support Taiwan militarily, economically, or diplomatically on account of global dependence on Taiwanese chips. China has attempted to end its reliance on advanced foreign chips by expanding its domestic manufacturing capacity, but these efforts
have faced significant obstacles.
Growing concern in Europe and the United States over the potential for such a military action has generated legislative efforts to cushion Western markets. In Europe, the European Commission has
drafted legislation to mobilize over €43 billion in public and private funds to double its share of the global semiconductor manufacturing market by 2030. Meanwhile, in the United States, lawmakers continue to debate the
CHIPS for America Act and the
FABS Act, which would provide lump-sum and tax-based incentives for chip manufacturers to “onshore” their operations. A recent report by Boston Consulting Group, however, suggests that the complete indigenization of chip supply chains is an unattractive goal when considering the massive investment required and the
sharp increase in prices for end-users that it would cause.
The Consequences of Conflict-Driven Disruption
Before the outbreak of hostilities in Ukraine, a handful of Ukrainian firms supplied 90 percent of the
semiconductor-grade purified neon gas used by the U.S. chip industry, prompting a scramble among chipmakers to secure alternative sources once the invasion began. However, the world’s largest semiconductor manufacturers had been preparing for such a disruption since Russia’s invasion in 2014, successfully diversifying their supply and bolstering stockpiles. Despite efforts to increase chip self-sufficiency, no such preparations could adequately insulate the global economy from the consequences of a Chinese invasion of Taiwan and the cessation of its chip production given the level of Taiwan’s market dominance.
While the U.S. has maintained a degree of self-reliance on semiconductors for use in military technologies, many U.S. defense systems, including advanced fighter jets, radars, and missile-defense systems still rely on
commercial chips sourced from Taiwan. Disruptions in Taiwanese manufacturing facilities during conflict with China could cause catastrophic bottlenecks in U.S. military-industrial capacity, severely weakening its national security and the combat effectiveness of its armed forces.
The consequences for the global civilian economy would dwarf military-technological considerations. There is a
TSMC-made chip in every new Apple iPhone. In every modern automobile, there are anywhere from
1,000-3,500 semiconductors, many of which are produced in Taiwan. Similarly, the rollout of 5G and Internet of Things (IoT) infrastructure is heavily reliant on the availability of
cutting-edge microprocessors which only a handful of firms, including TSMC, have the capacity to manufacture. These are just a few of many essential technologies and industries which would be dramatically impacted by disruptions to Taiwanese chip manufacturing.
Beyond the humanitarian and geopolitical upheaval that would follow a Chinese invasion of Taiwan, the economic devastation it would unleash is impossible to quantify. As U.S. and allied policy makers look for ways to shelter their economies from the fallout of this potential conflict, there is a need to cooperate on issues of strategic resiliency in supply chains in an increasingly uncertain international security environment.
Gregory Arcuri is a research intern with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.
Samantha Lu is a research intern with the China Power Project at the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
