Taiwanese chip maker TSMC is in the perilous middle of the US-China tech war. Image: Facebook

US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan and President Joe Biden’s pledge that the United States would defend the island have escalated tensions in the Taiwan Strait. At the 20th National Congress of the Chinese Communist Party, President Xi Jinping stressed the importance of reunifying with Taiwan.

The escalating US-China technology rivalry and global chip shortage make Taiwan’s role as a leading global supplier of semiconductors strategically and economically important to 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 global semiconductor supplies.

Since global semiconductor production capacity is highly concentrated in Asia, including in Taiwan, South Korea and China, a cross-Strait military conflict will crimp the global production of semiconductors. In a military confrontation, China might impose an embargo on Taiwan’s exports of critical technologies.

Taiwan is home to several of the world’s largest semiconductor foundries. 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 more than 90% of the world’s most advanced semiconductors, including 5-nanometer chips.

Supply disruptions will directly impact Apple — TMSC’s largest customer — Nvidia, Qualcomm and AMD. It will also disrupt leading US technology companies specialized in computer processors and chipsets that power modern devices, from consumer electronics and medical equipment to artificial intelligence and military technologies.

With supplies from Taiwan crimped 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 approximately 17% of the global market — a 35% smaller share than TSMC.

South Korea’s Samsung is caught in the middle of the US-China tech war. Image: AFP

But the production capacity of South Korean foundries is unlikely to meet global demand and Seoul could be drawn into the conflict should the United States get involved.

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

While there were reports in August 2022 that China’s Semiconductor Manufacturing International Corporation (SMIC) had made a great leap in successfully developing 7-nanometer chips, the company’s mass production capacity remains unknown.

Indeed, the global semiconductor supply chain is complex and involves different stages of manufacturing demanding high-, medium- and low-skilled inputs. Any disruption will have knock-on effects on upstream and downstream industries.

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

Many industries rely on a stable supply of semiconductors, exposing them to the effects of a cross-Strait conflict. The automotive industry is still battling the global chip shortage that emerged in 2020. Over the past few years, automakers have competed with other consumer electronics providers over chips made in Asia.

Some automotive giants have already cut production, while others expect the chip crunch to last into 2024. A military conflict involving the global hub of chip production will further strain the industry, creating knock-on effects on other parts of the automotive supply chain.

The effects of a cross-Strait conflict can be mitigated by strengthening supply chain resiliency. Some countries and companies have already started diversifying and securing their semiconductor supply chains. But diversification comes with a cost.

The US CHIPS and Science Act uses federal subsidies to lure technology firms — including US, Taiwanese and South Korean companies — to invest in cutting-edge chip development and manufacturing in the United States. Companies are not allowed to build advanced chipmaking facilities in China for 10 years to receive these subsidies.

US President Joe Biden wants more advanced semiconductors produced in America. Image: Twitter

While reshoring and friend-shoring incentives may help stabilize the supply of semiconductors, the incentives push the world further away from multilateral trade toward geopolitical trade blocs. The semiconductor sector is the first to experience this shift, but it will not 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, leaders in the United States and China should maintain continuous dialogue to communicate their interests as well as differences. The United States should refrain from acts that would provoke Beijing’s suspicion of US support for Taiwanese independence.

Maintaining the status quo is key to keeping the peace across 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 militarily prepare for any future conflict.

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

This article, republished with permission, was first published by East Asia Forum, which is based out of the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University.