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A Taiwan Semiconductor Manufacturing Company (TSMC) factory in Nanjing, in China's eastern Jiangsu province, on Aug. 10.STR/AFP/Getty Images

When a delegation of U.S. lawmakers landed in Taiwan this week, after a hugely controversial visit by House of Representatives 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 – minute 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 per cent of the global market.

This de facto monopoly has made TSMC billions of dollars but has also raised concerns about the potential for disruption in 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 drills in and around the Taiwan Strait.

Semiconductor stocks under pressure as Taiwan tensions mount with Pelosi visit

Beijing considers Taiwan part of its sovereign territory, and though China is nominally committed to “peaceful unification,” it has not ruled out seizing 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 vehemently against submitting to Communist Party rule – suggests war seems inevitable at some point.

Any conflict over Taiwan would be devastating 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 affected. It is the largest consumer of semiconductors, accounting for about 60 per cent of global demand, and imports most of its supply from Taiwan. In recent years, Beijing has pumped billions of dollars into building up domestic semiconductor manufacturing, but China still lags far behind Taiwan, and its dependence on Taiwanese chips has been seen as a deterrent against invasion, a theory known as the “Silicon Shield.”

Speaking to CNN this month, TSMC chairman Mark Liu said any invasion would render the company’s factories “non-operable.”

“This is such a sophisticated manufacturing facility,” he said. “It depends on real-time connections with the outside world – with Europe, with Japan, with the U.S. – from materials to chemicals to spare parts to engineering software diagnosis” – all of which would be cut off during a military conflict.

But while this hypothetical deterrent benefits Taiwan, it does not sit well with the many other countries that would be affected by an invasion, especially as there is no guarantee it would actually prevent a war – after all, it didn’t make economic sense for Russia to invade Ukraine either.

The pandemic has underlined how dependent the world is on Taiwanese semiconductors. Supply chain disruptions caused a 20-per-cent drop in global inventories in 2021, which Goldman Sachs said affected more than 169 industries in the U.S. alone and cost as much as 1 per cent of that country’s GDP. A war would be vastly more disruptive, potentially costing the global economy hundreds of billions of dollars and hampering technological innovation for years.

In the past year, both the U.S. and Japan have struck deals with TSMC to build foundries – as semiconductor factories are called – in those countries, and the Taiwanese firm is in the process of constructing a US$12-billion plant in Arizona.

Senator Ed Markey of Massachusetts, who led the U.S. delegation this week, said Monday that lawmakers had 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.

As well as encouraging TSMC to offshore some of its manufacturing, the U.S. is allocating US$52-billion to develop a domestic semiconductor manufacturing industry, while also imposing new restrictions on the export of certain technologies to China, thus hampering Beijing’s continuing efforts.

Canada, too, is putting aside $150-million to “make targeted investments to build on Canada’s domestic strengths associated with the development and supply of semiconductors,” said Innovation Minister François‑Philippe Champagne, adding that Ottawa wants Canada “to be a strategic global leader in the semiconductor industry.”

Such investments will take years to pay off, however, so for the foreseeable future Taiwan will remain a choke point in the semiconductor supply chain.

This could stave off a conflict – or may just make the ramifications of a war even more dire for the entire world.

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