Is Taiwan’s ‘silicon shield’ sturdy enough for investors?

The semiconductor supply chain spans the world but there is a key node in the form of Taiwan, home to the world’s largest operator of foundries, Taiwan Semiconductor Manufacturing Corp (TSMC). The company controls more than half the global market share via its plants mainly in Taiwan but also in China, US and Singapore.

Semiconductors are essential components without which smartphones, supercomputers, data centres and just about every other thing electronic cannot function. TSMC’s clients include giant tech names like Apple, Advanced Micro Devices and Qualcomm. Like it or not, Taiwan’s semiconductor industry has been intertwined with geopolitics.

In the lead up to Russia’s invasion of Ukraine on Feb 24, some observers were already making comparisons between the conflict between the two sides to cross-strait tensions between China and Taiwan. UK Prime Minister Boris Johnson said on Feb 20 at the Munich Security Conference that “if Ukraine is invaded, the shock will echo around the world, and those echoes will be heard in East Asia, they will be heard in Taiwan”.

The Biden administration, according to a Feb 12 report from Bloomberg, increasingly believes that China is gauging the US response to the Ukraine crisis as an example of how America would deal with Beijing if it uses military force against Taiwan, whose “reunification”, according to Chinese President Xi Jinping, “must be fulfilled”. While Taiwan sees itself as a sovereign state, Beijing sees the island as a breakaway province and has not renounced the use of force to bring it under its control.

More recently on April 6, Bloomberg also reported that US Treasury Secretary Janet Yellen said the Biden administration would be prepared to use all its sanctions tools against China if Beijing moved aggressively toward Taiwan.

“I believe we’ve shown we can impose significant pain on aggressive countries, as evidenced by sanctions against Russia”, Yellen told US lawmakers.

Last month, China warned the US against trying to build what it called “a Pacific version of Nato” while declaring that security disputes over Taiwan and Ukraine were “not comparable at all”.

As it has no mutual defence treaty with Taiwan, the US is not obligated to defend the island but the 1979 Taiwan Relations Act states that the US “will make available to Taiwan such defence articles and defence services in such quantity as may be necessary to enable Taiwan to maintain sufficient self-defence capabilities”.

Ironically, Taiwan’s semiconductor plants might just be the “silicon shield” that is both a deterrent against an invasion by China and a reason forcing the US to take the side of Taiwan if push comes to shove.

Over the years, the user base of Taiwan-made chips has spanned both sides of the Pacific, installing them in smartphones, data centres, home entertainment systems and even weapons.

“The dependency of the United States on semiconductor imports, particularly from Taiwan, creates a strategic vulnerability for both its economy and military to adverse foreign government action, natural disaster, and other events that can disrupt the supply chains for electronics,” wrote the US National Security Commission on Artificial Intelligence in a March 2021 report.

“If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off the US access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare,” the report adds.

Much is at stake for Beijing too. If the supply of chips from Taiwan is disrupted, the pain will be felt in China also, given how it accounts for 60% of world semiconductor demand, according to an October 2020 report from the Congressional Research Service. While China has been aggressively ramping up its chip-making capabilities and capacity, more than 90% of the chips used in China are still imported or manufactured locally by foreign suppliers, the report adds.

Speaking to The Edge Singapore, Chris Miller, assistant professor of international history at the Fletcher School at Tufts University, says if Taiwan is to be either cut off or a substantial portion of its industry base damaged, it would be very costly for China and Chinese firms. However, “next to this economic interdependence, there is a fair amount of clearly stated desire by the Communist Party leadership in China, to ‘reunify the island’,” he adds.

China has also passed legislation in the form of the Anti-Secession Law “that formally says they are planning to seek reunification by whatever means necessary. And so I think we ought to take them at their word, that they’re highly committed to establishing control of the island,” says Miller.

So, how likely is Chinese military action toward Taiwan and is the Taiwanese “silicon shield” enough to deter China from a military intervention?

Miller says an invasion of Taiwan is not likely, “soon or even in the longer term.” However, he adds that several factors protect Taiwan, other than its semiconductor industry. “I don’t think it’s the case that if there wasn’t the semiconductor industry, China would necessarily invade tomorrow,” he says.

Yet, the fact that Taiwan occupies a critical part in the semiconductor supply chain will have a global impact on any military intervention. Taiwan’s semiconductor industry, with TSMC in particular, makes the risk of a military escalation in the Taiwan Strait substantially higher for the rest of the world, reasons Miller.

“It guarantees that if something goes wrong in the Taiwan Strait, it will be immediately relevant and important for the rest of the world to deal with because it won’t simply be localised. In political or economic terms that will be a global issue,” he adds.

Military action

Bernard Loo, a senior fellow with the Military Studies Programme at the S Rajaratnam School of International Studies, points out that military action is most likely considered “necessary and unavoidable” by China in one scenario, namely, the declaration of Taiwanese independence, which is the “red line”, so to speak.

As Xi has said, China was “patient” and sought peaceful reunification with sincerity but “if Taiwanese independence separatist forces provoke or even break through the red line, we will have no alternative but to take drastic measures”.

Should Taiwan cross that line, its position in the semiconductor industry, critical it might be, would not necessarily be able to dissuade the Chinese military. “If Taiwan plays the independence card, whether or not Taiwan has the largest semiconductor [foundry] in the world, it becomes an irrelevant question, there will be no such thing as a silicon shield for Taiwan then because they’ve played the independence card,” says Loo.

Taiwan’s President Tsai Ing-Wen maintains that Taiwan “does not need to declare ourselves an independent state, we are [already] an independent country”.

“To China, as long as you don’t cross the red line, we can see how business can be done but the moment you cross that red line, it is done and dusted. China cannot leave it alone, and remain credible as a global power,” adds Loo.

However, should China head to war without the independence “red line” being crossed, the presence of the Taiwanese semiconductor industry is likely to be a “complicating factor” but not a deal-breaker.

He explains that if China decides that military action is necessary even though the “red line” has not been crossed, it is likely going to be because things are going on within China that makes the leadership think they have no other options left.

One way that this can happen, Loo thinks, is that domestic opinion pushes Chinese policymakers to take action. “At the end of the day, remember the Chinese policymakers answer to one community and that is their electorate. They don’t answer to Hewlett Packard or any other corporation around the world.”

While China may not be a democracy, it cannot ignore public opinion at home. If domestic public opinion is sufficiently riled up, China will be confounded with just two options: to go with it or say “no” to the people and risk losing domestic political credibility.

Despite the scenario he has painted, Loo also echoes Miller’s view that military action is unlikely, saying it is a “very difficult decision for policymakers” and that war is a “very iffy proposition”.

The decision to use military force is not something that responsible policymakers take lightly and it is something that they must feel as though they are being “pushed into it”, Loo points out.

Furthermore, the decision to go to war, despite being more powerful than one’s opponent, does not always result in a quick victory. This is shown in the current conflict in Ukraine as well as in history such as the Vietnam War and US withdrawal from Afghanistan in 2021.

“You can have the world’s largest military organisation, you can spend more than anybody else on defence and you can think that you’ve got it. The historical record, however, tells us that the most powerful military organisations in the world don’t always win,” says Loo.