What to Do When Taiwan’s Silicon Shield Weakens?

This piece is part of a collaboration with the Ethical Culture Fieldston School. The author would like to thank Dr. Gerald Blaney for sharing his wisdom and guiding me through the writing process.

Taiwan’s semiconductor manufacturing industry has been dominant for quite some time. The industry has been coined Taiwan’s “silicon shield” because its economic importance simultaneously deters China from invading and keeps the United States involved in Taiwan’s defense. After the semiconductor shortage during the COVID-19 pandemic, however, politicians from around the world recognized the dangers of over-relying on Taiwan for semiconductors. As a result, legislation such as the United States’ CHIPs Act were passed to increase semiconductor production at home. On the surface, these new laws appear to threaten Taiwan’s semiconductor dominance and, by extension, Taiwan’s sovereignty. But the semiconductor shortage has also led to an increased understanding of Taiwan’s importance to the world, resulting in closer ties between the United States and Taiwan which will continue far beyond the current semiconductor crisis.

A severe semiconductor shortage began during the COVID-19 pandemic and harmed economies all around the world. The shortage hit the automotive industry the hardest, and it was estimated that car production fell by  7.7 million vehicles in 2021 due to the lack of semiconductors, amounting to US$210 billion in lost revenue. Many car manufacturers were forced to shut factories. It was difficult to buy a vehicle, new or used, and car prices shot through the roof. In Japan, home of Toyota and Nissan, total exports in September 2021 were 46% lower than the year before. The automotive industry’s struggle spread to other industries. Steel and plastic manufacturers, which sell many of their products to automotive companies, took a hit. Throughout the world, the lack of new trucks being produced made it difficult to transport products. Technology companies, such as Apple, that depend on semiconductors were forced to drastically cut back production. The effects of the shortage will be felt for years to come, and the Federal Reserve believes the shortage has played a role in the United States’ high levels of inflation.

The semiconductor shortage showed policymakers what many industry experts already knew: semiconductors are an integral part of our economy. In the United States, 25% of manufacturing sectors use semiconductors, accounting for 39% of total manufacturing value. The United States’ semiconductor industry, which mostly focuses on the research, development, and design of new semiconductors, directly employs over 250,000 people and supports nearly 1.8 million additional American jobs.

Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor producer, makes 54% of the world’s chips, more than every other semiconductor company combined. Even more impressive, TSMC fabricates 92% of the world’s advanced chips, which are used in many American products. Apple’s best phones and computers include Apple’s leading edge 5-nanometer processor, which is made by TSMC. Other major American companies, including Qualcomm, Nvidia, AMD, and Intel, also hire TSMC to make their advanced chips. The advanced chips are necessary for commercial and military artificial intelligence, and the United States military needs semiconductors for all its major defense systems and platforms. These chips, designed in America but manufactured in Taiwan, are also used for much of the military’s modern weaponry, autonomous vehicles, and military simulations.

The dependence on Taiwanese semiconductors makes Taiwan incredibly important to the United States. In an interview with CNBC, U.S. Secretary of Commerce Gina Raimondo said, “If you allow yourself to think about a scenario where the United States no longer had access to the chips currently being made in Taiwan, it’s a scary scenario. It’s a deep and immediate recession. It’s an inability to protect ourselves by making military equipment.”

China also depends on Taiwan and TSMC for semiconductors. Like the United States, China needs advanced chips for commercial purposes and for weapons. China’s booming technology industry relies on semiconductors, and a 2020 Congressional Research Service report found that China accounts for 60% of the world’s semiconductor demand, and 90% of these semiconductors are bought from foreign suppliers. In 2021, 36% of the US$430 billion in semiconductors China bought were from Taiwan.

Semiconductors get geopolitical

The United States and China’s dependence on Taiwan’s semiconductors makes the industry a crucial component of Taiwan’s continued de facto independence. Taiwan’s semiconductor industry makes it difficult for China to economically justify an invasion of Taiwan. TSMC’s factories sit on and near the coastline closest to China, meaning China would likely damage or destroy them during an invasion. Even if the factories remained intact, it is possible China would not be capable of using them. In an interview with CNN, TSMC chairman Mark Liu declared, “Nobody can control TSMC by force. If you take a military force or invasion, you will render TSMC factories inoperable. Because this is such a sophisticated manufacturing facility, it depends on real-time connection with the outside world, with Europe, with Japan, with the U.S., from materials to chemicals to spare parts to engineering software and diagnosis.”

Taiwan’s semiconductor industry is also a major reason the United States must make its military presence felt in the Taiwan Strait and very possibly deter a Chinese invasion of Taiwan from occurring. If China invades Taiwan, the semiconductor industry would likely be destroyed in battle, significantly setting back the world’s economy in the process. And even if the foundries are not destroyed and China is able to properly manage them, Beijing would have an unprecedented amount of leverage in United States-China relations. China could do to the United States’ technology industry what the Trump administration did to Huawei in 2020, when it banned chip makers from selling to the Chinese company. As a result, Huawei had to stop production of its 5G phones and many of its other high end smartphones. China could also discontinue the supply of advanced chips to the United States military. A 2021 report to Congress by the National Security Commission on Artificial Intelligence warned, “If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off U.S. access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”

Taiwan is well aware of the importance of its semiconductor industry for its self defense. When referring to Taiwan’s semiconductor dominance in a 2021 interview with Reuters, Taiwan’s Economy Minister Wang Mei-hua said, “[Our semiconductor industry] isn’t just about our economic safety. It appears to be connected to our national security, too.” Fortunately for Taiwan, TSMC invests heavily to stay at the forefront of semiconductor production technology. In 2022 alone, TSMC plans to invest US$40-44 billion in capital expenditure. Taiwan also provides incentives for TSMC and other companies to continue researching new semiconductor technology through generous tax rebates, which the government plans on increasing by the end of the year

Bringing semiconductors homeAfter the semiconductor shortage, many countries realized that a Chinese invasion of Taiwan, or even any natural disasters in Taiwan, would significantly damage their economies. As a result, countries around the world are attempting to localize semiconductor production. South Korea, home to Samsung, has created incentives, invested in infrastructure, and funded research and development in an attempt to increase its semiconductor production and localize its supply chain. India has put $10 billion towards incentives for new semiconductor fabrication plants. The European Union’s EU Chips Act will provide $43 billion in subsidies for semiconductor fabrication plants and research in semiconductors. From 2014 to 2030, China intends to have invested US$150 billion in semiconductors.

The most notable attempt to localize semiconductor production is the United States’ CHIPS and Science Act, passed in August 2022. The Act includes US$52.7 billion in subsidies for semiconductor production and research, along with a 25% tax credit for American chip plants. The Act will spur new investments in American semiconductor production and help companies build foundries in the United States, including Intel’s new US$20 billion manufacturing plant in Ohio and US$20 billion expansion to its Arizona plant, as well as Samsung’s US$17 billion plant in Texas and TSMC’s US$12 billion plant in Arizona.

To many, the CHIPS Act poses a threat to Taiwan’s silicon shield. The Act means that the United States wants to stop relying on Taiwan for semiconductor chips and instead have foundries in America. When discussing the Act, President Biden stated, “[T]he future of the chip industry is going to be made in America.” Although other countries have enacted similar legislation, the scale of the subsidies and tax credits the United States offers make it most likely to accomplish this task. As a result, many wonder if the United States’ commitment to Taiwan will change if, or perhaps when, it is able to stop relying on Taiwan for semiconductors. There are, of course, many other factors to the United States’ defense of Taiwan, but Taiwan’s current dominance in semiconductor production is certainly an important part of its protection.

However, in reality, the CHIPS act is not a downgrading of the United States’ commitment to Taiwan’s defense, but rather a backup plan for a worst-case scenario. The act provides insurance that if Taiwan is invaded by China, the United States could lessen the economic, scientific, and military blow that would be felt from the destruction of TSMC and other Taiwanese semiconductor companies. But the CHIPS Act will not have much effect in the face of an imminent Chinese invasion.

Although the United States has invested billions in semiconductor manufacturing and companies have begun building fabrication plants, building a semiconductor manufacturing sector to mirror that of Taiwan’s is a long and arduous process. Firstly, American companies are far behind in terms of new semiconductor manufacturing technology. The most advanced American company, Intel, is expecting to make 3-nanometer chips in 2025, two or three years after both TSMC and Samsung will likely begin production. Even after developing its technology, constructing a cutting-edge semiconductor foundry is a difficult feat, and in the United States can take more than three years to complete. Companies are finding it more difficult to construct foundries in the United States than overseas, where foundries can be completed in two years or less. TSMC’s Arizona foundry, for instance, is already 3 to 6 months behind schedule, largely due to struggles finding workers with the necessary know-how. And even after the new American foundries are completed, they depend on a vast network of suppliers. Much of the semiconductor supply chain is in Asia, which makes it difficult to obtain the materials needed for semiconductor production at a cost that rivals Asian foundries. The United States will have to localize other parts of the supply chain to compete financially and ensure that critical components remain available in the event of a Chinese assault on Taiwan. Ultimately, the United States’ semiconductor industry will take years to become self-sufficient.

US commitment to Taiwan

Interestingly, the United States has begun strengthening its economic and political ties with Taiwan at the same time. The United States announced it will begin formal trade talks with Taiwan in the fall of 2022, and is working to create a “Chip 4” alliance between itself, Taiwan, Japan, and South Korea in an effort to prevent Chinese advancements in semiconductor manufacturing. These new trade agreements and alliances with Taiwan will last long into the future and tie the two economies closer together.

The United States has also hardened its stance against China. In the middle of increased military threats from China, Speaker of the House Nancy Pelosi took a trip to Taiwan, followed by trips from congressional delegations led by Senator Ed Markey and Representative Stephanie Murphy. These trips demonstrated the United States’ promise to protect Taiwan. During her visit, Pelosi stated that the United States would protect Taiwan’s democracy, saying that “America’s determination to preserve democracy here in Taiwan remains ironclad.” Pelosi also met with TSMC Chairman Mark Liu, a reminder of the importance of TSMC for the United States and a sign that the United States wishes to strengthen its ties with TSMC in the future.

Many politicians have also hinted at a desire to change the United States’ long standing policy of strategic ambiguity. During a press conference in May, PresidentBiden stated that the United States would defend Taiwan militarily. Although the State Department quickly walked back Biden’s statement, the comments were viewed as a warning to China, and perhaps even a step away from the United States’ strategic ambiguity in regard to Taiwan. Many politicians, including Representative Claudia Tenney who visited Taiwan as part of Representative Murphy’s delegation, are lobbying for the United States to be more open regarding its stance towards Taiwan. Representative Tenney stated, “Our policy has always been strategic ambiguity, instead of strategic clarity. But that was many, many years ago, 40 years ago, almost. And what we need to look at is, China has changed dramatically in that period of time. They were not nearly the significant military or economic power that they are today.” Along with Representative Tenney’s views, there is broad support in the US Congress for the Taiwan Policy Act of 2022, a bill that would help Taiwan participate in international organizations, along with providing Taiwan with US$4.5 billion in security assistance. The bill passed through the Senate Foreign Relations Committee and is now making its way through Congress.

In the future, it seems inevitable that Taiwan’s “silicon shield” will weaken. The United States’ semiconductor manufacturing industry will continue to develop and eventually be able to produce advanced chips in substantial quantities. But that will certainly not appear overnight, which means Taiwan’s current semiconductor manufacturing dominance puts it in a valuable position. Along with Taiwan’s strategic geographical value to the United States, its technological value strengthens its appeal as a crucial ally for Washington. Taiwanese policymakers must work to finalize agreements and alliances that strengthen economic ties between the two countries, and create other initiatives that integrate Taiwan’s semiconductor industry intimately into the United States’ developing program. If Taiwan can use the current attention being brought to its semiconductor industry as a way to kickstart closer relations between itself and the United States, the weakening of Taiwan’s silicon shield will be insignificant.