• Ideas
  • Taiwan

The Chips That Make Taiwan the Center of the World

14 minute read
Miller is the author of Chip War: The Fight for the World's Most Critical Technology and the Jeane Kirkpatrick Visiting Fellow at the American Enterprise Institute

“Are your customers concerned,” one financial analyst asked Taiwan Semiconductor Manufacturing Company (TSMC) chairman Mark Liu last summer, when China from time to time threatens “a war against Taiwan?” CEOs are used to tough questions about capital expenditures and profit margins. Executives at the world’s largest producer of the semiconductors that power phones, computers, and data centers face more existential questions.

Making advanced chips requires using complex software, explosive chemicals, ultra-pure silicon, and machines costing hundreds of millions of dollars to pattern billions and billions of nanometer-sized transistors onto silicon wafers. For the past half-decade, TSMC has been the world’s leader, its engineers pioneering secret methods to pattern chips with unprecedented accuracy at unparalleled scale. TSMC has around 55% of the global market for contract chip fabrication, far above OPEC’s 40% market share for oil. And unlike the oil market, where each barrel is more or less the same, there are vast differences between types of chip. Taiwan produces almost all the most advanced processors, a market position that makes Saudi Arabia’s 12% share of global oil production look unimpressive.

Each year, nearly a third of the new computing power we rely on each is fabricated in Taiwan. This has made TSMC one of the most valuable companies in the world. It has also left the entire world’s digital infrastructure dependent on a small island that China considers a rogue province and that America has pledged to defend by force.

The more indispensable TSMC has become to the global economy, the more risk has risen. Even investors who for years chose to ignore the growing severity of the U.S.-China antagonism began looking nervously at the map of TSMC’s chip fabs, arrayed along the western coast of the Taiwan Strait. TSMC’s chairman insists that there is no reason for concern. “As to the invasion of China, let me tell you,” he declared in 2021, “everybody wants to have a peaceful Taiwan Strait.” Taipei-born, Berkeley-educated, and Bell Labs−trained, Liu has an impeccable chipmaking record. His skill in assessing the risk of war, however, has yet to be tested. Peace in the Taiwan Strait “is to every country’s benefit,” he argued, given the world’s reliance on “the semiconductor supply chain in Taiwan. No one wants to disrupt it.”

In the U.S., discussion of the semiconductor shortage has centered on the deficit of chips for autos that froze car factories for parts of 2021 and 2022. Yet the world’s chip firms actually produced more semiconductors over the course of the pandemic—8% more in 2020 and 20% more in 2021. The shortage resulted from higher demand, not from problems with supply.

And yet, it isn’t difficult to imagine ways in which the supply of semiconductors could collapse. In July 2021, the day after TSMC’s Liu predicted a “peaceful Taiwan Strait,” dozens of People’s Liberation Army Type 05 amphibious armored vehicles stormed off the Chinese coast into the ocean. Though they look like tanks, these vehicles are equally capable of driving on beaches as they are of speeding through the water like small boats. They’d be instrumental in any PLA amphibious assault. After motoring into the ocean, dozens of these vehicles approached landing ships stationed offshore, driving from the water up onto the ships, where they prepared for “a long-distance sea-crossing,” Chinese state media reported. The landing ships steamed toward their target. Upon arrival, wide doors in the ships’ bows swung open and amphibious vehicles streamed off into the water, making their way to the beach and firing their guns as they went.

This time, it was just an exercise. Over the next few days, the PLA launched other drills near the north and south entrances to the Taiwan Strait. “We must train hard under scenarios just like those in real battles, be combat-ready at all times and resolutely safeguard national sovereignty and territorial integrity,” China’s Global Times newspaper quoted one battalion commander as saying. When Nancy Pelosi visited Taiwan in August this year, China responded with a similar set of military exercises.

The Pentagon’s public reports on Chinese military power have identified multiple ways China could use force against Taiwan. The most straightforward—but most unlikely—is a D-Day style invasion, with hundreds of Chinese ships steaming across the Strait and landing thousands of PLA infantrymen on shore. The history of amphibious invasions is littered with disasters, however, and the Pentagon judges that such an operation would “strain” the PLA’s capabilities.

Other options would be easier for the PLA to implement. A partial air and maritime blockade would be impossible for Taiwan to defeat on its own. Even without a blockade, a Chinese air and missile campaign alone could defang Taiwan’s military and shut down the country’s economy without placing a single pair of Chinese boots on the ground. In a couple days, absent immediate U.S. and Japanese aid, Chinese air and missile forces could probably disarm key Taiwanese military assets—airfields, radar facilities, communications hubs, and the like—without destroying the island’s productive capacity.

This photo taken on March 25, 2021 shows a factory of Taiwanese semiconductors manufacturer TSMC at Central Taiwan Science Park in Taichung.Sam Yeh- AFP/Getty Images)

TSMC’s chairman is certainly right that no one wants to “disrupt” the semiconductor supply chains that crisscross the Taiwan Strait. But everyone would like to control them. The idea that China would simply destroy TSMC’s facilities out of spite doesn’t make sense, because China would suffer as much as anyone, especially since the U.S. and its friends would still have access to other advanced semiconductor manufacturing in the U.S., South Korea, and Europe.

Nor has it ever been realistic that Chinese forces could invade and straightforwardly seize TSMC’s facilities. They’d soon discover that crucial materials and software updates for irreplaceable tools must be acquired from the U.S., Japan, and other countries. Moreover, if China were to invade, it’s unlikely to capture all TSMC employees. If China did, it would only take a handful of angry engineers to sabotage the entire operation. The PLA’s proven it can seize Himalayan peaks from India on the two countries’ disputed border, but grabbing the world’s most complex factories, full of the world’s most precise machinery—that’s a different matter entirely.

However, it’s easy to imagine a way that an accident, like a collision in air or at sea, could spiral into a disastrous war that neither side wants. It’s also perfectly reasonable to think China might conclude that military pressure without a full-scale invasion could decisively undermine America’s implicit security guarantee and fatally demoralize Taiwan. Beijing knows that Taiwan’s defense strategy is to fight long enough for the U.S. and Japan to have time to arrive and help. The island is so small relative to the cross-strait superpower that there’s no realistic option besides counting on friends. Imagine if Beijing were to use its navy to impose customs checks on a fraction of the ships sailing in and out of Taipei. How would the U.S. respond? A blockade is an act of war, but no one would want to shoot first. If the U.S. did nothing, the impact on Taiwan’s will to fight could be devastating. If China then demanded that TSMC restart chip fabrication for Huawei and other Chinese companies, or even to transfer critical personnel and know-how to the mainland, would Taiwan be able to say no?

Such a series of moves would be risky for Beijing, but they wouldn’t be unthinkable. China’s ruling party repeatedly promises to assert control over Taiwan. The government has passed an “Anti-Secession Law” envisioning the potential use of what it calls “non-peaceful means” in the Taiwan Strait. It’s invested heavily in the type of military systems, like amphibious assault vehicles, needed for a cross-strait invasion. It exercises these capabilities regularly. Analysts uniformly agree that the military balance in the Strait has shifted decisively in China’s direction.

Read More: Can American Make Advanced Chips Again?

Long gone are the days, as during the 1996 Taiwan Strait crisis, that the U.S. could simply sail an entire aircraft carrier battlegroup through the Strait to force Beijing to stand down. Now such an operation would be fraught with risk for the U.S. warships. Today Chinese missiles threaten not only U.S. ships around Taiwan but bases as far away as Guam and Japan. The stronger the PLA gets, the less likely the U.S. is to risk war to defend Taiwan. If China were to try a campaign of limited military pressure on Taiwan, it’s more likely than ever that the U.S. might look at the correlation of forces and conclude that pushing back isn’t worth the risk.

If China were to succeed in pressuring Taiwan into giving Beijing equal access—or even preferential access—to TSMC’s fabs, the U.S. and Japan would surely respond by placing new limits on the export of advanced machinery and materials, which largely come from these two countries and their European allies. But it would take years to replicate Taiwan’s chipmaking capacity in other countries, and in the meantime we’d still depend on Taiwan. If so, we’d find ourselves not only reliant on China to assemble our iPhones. Beijing could conceivably gain influence or control of the only fabs with the technological capability and production capacity to churn out the chips we depend on.

Such a scenario would be disastrous for America’s economic and geopolitical position. It would be even worse if a war knocked out TSMC’s fabs. The world economy and the supply chains that crisscross Asia and the Taiwan Strait are predicated on this precarious peace. Every company that’s invested on either side of the Taiwan Strait, from Apple to Huawei to TSMC, is implicitly betting on peace. Trillions of dollars are invested in firms and facilities within easy missile shot of the Taiwan Strait, in Shenzhen and Hong Kong, Fujian and Taipei. The world’s chip industry, as well as the assembly of all the electronic goods chips enable, depends more on the Taiwan Strait and the South China coast than on any other chunk of the world’s territory except Silicon Valley.

Business as usual is not nearly as fraught in California’s tech epicenter. Most of Silicon Valley’s knowledge could be easily relocated in case of war or earthquake. This was tested during the pandemic, when almost all the region’s workers were told to stay home. Big tech firms’ profits even went up. If Facebook’s fancy headquarters were to sink into the San Andreas Fault, the company might barely notice.

If TSMC’s fabs were to slip into the Chelungpu Fault, whose movement caused Taiwan’s last big earthquake in 1999, the reverberations would shake the global economy. It would only take a handful of explosions, deliberate or accidental, to cause vast damage.

The post-COVID semiconductor shortage was a reminder that chips aren’t only needed in phones and computers. Airplanes and autos, microwaves and manufacturing equipment—products of all types would face devastating delays. Around one-third of PC processor production, including chips designed by Apple and AMD, would be knocked offline until new fabs could be built elsewhere. Growth in data center capacity would slow dramatically, especially for servers focused on AI algorithms, which are more reliant on Taiwan-manufactured chips from companies like Nvidia and AMD. Other data infrastructure would be hit harder. New 5G radio units, for example, require chips from several different firms, many of which are made in Taiwan. There’d be an almost complete halt to the rollout of 5G networks.

It would make sense to halt cell phone network upgrades because it would be extremely difficult to buy a new phone, too. Most smartphone processors are fabricated in Taiwan, as are many of the dozen plus chips that go into a typical phone. Autos can require hundreds of chips to work, so we’d face delays far more severe than the shortages of 2021. Of course, if a war broke out, we’d need to think about a lot more than chips. China’s vast electronics assembly infrastructure could be cut off. We’d have to find other people to screw together whatever phones and computers we had components for.

Yet it would be far easier to find new assembly workers—as difficult as that would be—than to replicate Taiwan’s chipmaking facilities. The challenge wouldn’t simply be building new fabs. Those facilities would need trained personnel, unless somehow many TSMC staff could be exfiltrated from Taiwan. Even still, new fabs must be stocked with machinery, like tools from ASML and Applied Materials. During the 2021 chip shortage, ASML and Applied Materials both announced they were facing delays in producing machinery because they couldn’t acquire enough semiconductors. In case of a Taiwan crisis, they’d face delays in acquiring the chips their machinery requires.

After a disaster in Taiwan, the total costs of the semiconductor shortage would be measured in the trillions. Losing a third of our production of computing power each year could well be more costly than the COVID pandemic and its economically disastrous lockdowns. It would take at least half a decade to rebuild the lost chipmaking capacity. These days, when we look five years out we hope to be building 5G networks and metaverses, but if Taiwan were taken offline we might find ourselves struggling to acquire dishwashers.

Read More: How the U.S. Could Sleepwalk Into War with China

Taiwan’s President Tsai Ing-wen recently argued in Foreign Affairs that the island’s chip industry is a “‘silicon shield’ that allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains.” That’s a highly optimistic way of looking at the situation. The island’s chip industry certainly forces the U.S. to take Taiwan’s defense more seriously. However, the concentration of semiconductor production in Taiwan also puts the world economy at risk if the “silicon shield” doesn’t deter China. Looking at the role of semiconductors in the Russia-Ukraine War, one Chinese government analyst recently publicly argued that if tensions between the U.S. and China intensify, “we must seize TSMC.”

It’s now common to describe the U.S.-China antagonism as a second Cold War. Cold War I had its own standoffs over Taiwan, of course, in 1954 and again in 1958, after Mao Zedong’s military barraged Taiwanese-held islands with artillery. Today Taiwan is within range of far more destructive Chinese forces—not only an array of short- and medium-range missiles, but also aircraft from the Longtian and Huian airbases on the Chinese side of the Strait, from which it’s only a seven-minute flight to Taiwan. Not coincidentally, in 2021 these airbases were upgraded with new bunkers, runway extensions, and missile defenses.

A new Taiwan Strait crisis would be far more dangerous than the crises of the 1950s. There’d still be the risk of nuclear war, especially given China’s growing atomic arsenal. But rather than a standoff over an impoverished island, this time the battleground would be the beating heart of the digital world. What’s worse is that unlike in the 1950s, it’s not clear the People’s Liberation Army would eventually back down. This time, Beijing might wager that it could well win.

Adapted from Chris Miller’s new book, Chip War: The Fight for the World’s Most Critical Technology

More Must-Reads from TIME

Contact us at letters@time.com

TIME Ideas hosts the world's leading voices, providing commentary on events in news, society, and culture. We welcome outside contributions. Opinions expressed do not necessarily reflect the views of TIME editors.