Tensions in semiconductors rattle cross-Strait relations

Author: Yvette To, CityU

US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan and President Joe Biden’s promise that the US would defend the island have heightened tensions in the Taiwan Strait. At the 20th National Congress of the Communist Party of China, President Xi Jinping stressed the importance of reunification with Taiwan.

The growing technological rivalry between the United States and China and the global shortage of chips make Taiwan’s role as the world’s leading supplier of semiconductors strategically and economically important for both powers.

The question is what will happen to global chip production in the event of a cross-strait military conflict. COVID-19 lockdowns have already disrupted the global supply of semiconductors. Since the world’s semiconductor production capacity is heavily concentrated in Asia, including Taiwan, South Korea and China, a cross-strait military conflict will undermine global semiconductor production. In a military confrontation, China could impose an embargo on Taiwanese exports of critical technologies.

Taiwan is home to several of the largest semiconductor foundries in the world. Together, they represent more than 63% of the global market share. The world is heavily dependent on the Taiwan Semiconductor Manufacturing Company (TSMC), which produces over 90% of the world’s most advanced semiconductors, including 5 nanometer chips.

Supply interruptions will directly impact Apple – TMSC’s biggest customer – Nvidia, Qualcomm and AMD. It will also disrupt major US tech companies specializing in the computer processors and chipsets that power modern devices, from consumer electronics and medical equipment to artificial intelligence and military technology.

With supplies from Taiwan cut in the event of a cross-strait conflict, companies may have to look to South Korea for replacement chips. Samsung is the world’s second-largest semiconductor foundry by revenue, accounting for about 17% of the global market, a share 35% lower than TSMC’s. But production capacity at South Korean smelters is unlikely to meet global demand, and Seoul could be drawn into the conflict if the United States gets involved.

Chinese foundries produce around 8% of the world’s semiconductors. But even if Chinese companies keep their semiconductor production in a cross-strait dispute, the chips they can mass-produce are mainly 28-nanometer and 14-nanometer chips. These are less sophisticated and less powerful than the 7 nanometers and 5 nanometers manufactured by TSMC and Samsung.

Although there were reports in August 2022 that China’s Semiconductor Manufacturing International Corporation had made a big leap in the successful development of 7-nanometer chips, the company’s mass production capability remains unknown. . Indeed, the global semiconductor supply chain is complex and involves different manufacturing steps requiring high, medium and low-skilled inputs. Any disruption will impact both upstream and downstream industries.

Southeast Asian countries are also involved in semiconductor manufacturing. Malaysia packages and tests newly manufactured semiconductors, which account for 13% of the global market share. Singapore operates manufacturing plants for US-based Micron and GlobalFoundries and several assembly and test facilities for Taiwanese companies.

Many industries depend on a stable supply of semiconductors, which exposes them to the effects of cross-Strait conflict. The automotive industry is still grappling with the global chip shortage that emerged in 2020. In recent years, automakers have been competing with other consumer electronics vendors on Asian-made chips. Some auto giants have already cut production, while others expect the chip crunch to last until 2024. A military dispute involving the world’s chip production hub will further strain industry, creating ripple effects on other parts of the automotive supply chain.

The effects of cross-strait conflict can be mitigated by building supply chain resilience. Some countries and companies have already started to diversify and secure their semiconductor supply chains. But diversification comes at a cost. The U.S. Chips and Science Act uses federal grants to incentivize tech companies — including American, Taiwanese, and South Korean companies — to invest in the development and manufacturing of cutting-edge chips in the United States. Companies are not allowed to build advanced chip manufacturing facilities in China for 10 years to receive these subsidies.

While incentives to relocate and relocate friends can help stabilize semiconductor supply, incentives move the world away from multilateral trade toward geopolitical trading blocs. The semiconductor industry is the first to experience this change, but it won’t be the last.

A cross-strait military conflict would be a lose-lose situation for the warring parties and the world. Given the high stakes, the leaders of the United States and China should maintain an ongoing dialogue to communicate their interests as well as their differences. The United States should refrain from actions that would arouse Beijing’s suspicions of American support for Taiwan independence.

Maintaining the status quo is essential to maintaining peace in the strait. To that end, the United States should continue to work with allies in the region, including Japan, South Korea, the Philippines, and Australia, to share intelligence and prepare militarily for any future conflict.

Yvette To is a postdoc in the Department of Public and International Affairs at the City University of Hong Kong.

About Thomas Brown

Check Also

WRAPUP 4-G20 reviews resolution condemning Russian invasion

(Updates with draft resolution details) * Most G20 members could strongly condemn the war in …