The Erosion of the Silicon Shield: How Changes to International Semiconductor Production Threaten Taiwanese Security

The Taiwan Semiconductor Manufacturing Corporation (TSMC), which currently leads the world in computer chip production. Photo by Briáxis F. Mendes.

If there is any one industry that has demonstrated the fragility of international supply chains, it is that of semiconductors. Used in all kinds of computerized electronics, the shortage of semiconductors that began last year at the onset of the Covid-19 pandemic has wreaked havoc on industries and economies around the world. Since major suppliers such as Taiwan possess dominant shares of the semiconductor market, disruptions in their production of this high-tech commodity have massive repercussions against which little can be done by countries reliant on semiconductor imports from Taiwan.

The superconductor industry, where countries are heavily interdependent on connections of international trade, faces the potential for significant change in the coming years. Taiwan currently dominates the world’s semiconductor manufacturing, producing nearly two thirds of the world’s semiconductors. The Taiwan Semiconductor Manufacturing Company (TSMC) alone accounts for more than half of all semiconductor output. The rest of the world is reliant on this massive supply of Taiwanese semiconductors since they are integral components in computers, phones, cars, planes, and almost all other electronics that fuel modern economies. This interdependent relationship is tenuous, as seen in the havoc on international supply chains brought about by semiconductor droughts in Taiwan and pandemic-related shifts in demand. Countries around the world, most significantly the United States and China, are taking steps to decouple their economic security from foreign suppliers, as they seek to boost domestic semiconductor production and protect themselves from international disruptions. Taiwan’s national security policy will suffer from this as they lose the stabilizing effects of semiconductor interdependence, forcing the U.S. and Taiwan to cooperate more closely to ensure Taiwanese security by forging stronger diplomatic ties and deepening American military commitments.

If American and Chinese policies to fragment and localize semiconductor production are implemented, the resulting changes to the semiconductor industry will significantly affect Taiwan’s national security. As the long-time dominant producer of the world’s semiconductors, Taiwan has leveraged its market power as a deterrent against national security threats: were a foreign power such as China to encroach on Taiwanese security, the resulting disruptions to global semiconductor supplies would not only hurt the aggressor, but also draw other dependent countries, such as the U.S., to Taiwan’s defense. Taiwanese leaders, most recently the current Taiwanese President Tsai Ing-Wen, have referred to this so-called “silicon shield” of economic interdependence as a form of protection which enables Taiwan to protect itself from the disruptive actions of authoritarian regimes—a security concern that refers to mainland China first and foremost.

In recent years, China has begun to reframe its foreign policy with the objective of decoupling from disadvantageous interdependent relationships. Codified in the Chinese Communist Party’s fourteenth five-year plan, China endeavors to reach technological independence by fostering its own tech industries, semiconductors included. This policy predates the semiconductor supply chain disruptions that began last year and represents an assertive trend in recent Chinese foreign policy; the Chinese government seeks to become less dependent on foreign influences and more capable of conducting international trade and foreign policy on its own terms rather than those established by preexisting major powers such as the U.S.. This has been accelerated by a rise in tensions between the U.S. and China, during which the U.S. has sought to prevent China from developing industries that could facilitate its economic and political rise relative to the U.S, with American efforts to obstruct Chinese influence over 5G technology being just one example. China’s semiconductor industry is currently insignificant relative to TSMC and Taiwanese production, providing only 5% of global supply compared with Taiwan’s 65%, but the groundwork that Chinese industrial policy has laid to bolster it, including investments in many of the behind-the-scenes steps underpinning semiconductor production, might make it a major player in the long run. In doing so, China would insulate itself from disruptions in international trade, profit  from greater access to a market that Taiwan has long dominated, and gain more solid economic footing. China would also become less vulnerable to pressures from the U.S. and other actors through the interconnections of global trade, allowing the pursuit of a more assertive foreign policy aimed at Chinese interests in general and Taiwanese reunification in particular with less fear of being economically undercut by upsetting the flow of Taiwanese technology.

Meanwhile, the U.S. has begun to adopt similar policies promoting domestic semiconductor production. In February, President Biden signed Executive Order 14017, initiating a broad governmental response to pandemic-era supply chain disruptions. Pursuant to this order, the Department of Commerce has proposed various legislative and executive actions to promote American semiconductor production by partnering with the American tech industry, supporting research and development of solutions to semiconductor shortages based in the U.S., and directing elements of the national defense budget to develop new domestic semiconductor infrastructure. All of these efforts are aimed at reducing American dependence on international supply chains, mirroring China’s tech industry strategy by insulating the U.S. from trade disruptions, with the important caveat that while the U.S. generally seeks to maintain the international status quo and does not desire significant shifts in relations across the Taiwan Strait, American semiconductor production would still serve to erode Taiwan’s “silicon shield.”

China and the U.S. are the two countries best positioned to disrupt the Taiwan-dominated semiconductor production industry. China is already the world’s third largest semiconductor producer, and the intensity of the central government’s focus on technological independence means that position will only strengthen. The U.S. is not as large of a producer of semiconductors, but it has an edge on other competitors given that American companies own a large portion of global chip production, and the technology behind semiconductors was originally developed in the U.S. However, the development of domestic semiconductor production is not a simple task; it is an industry with extraordinary barriers to entry, which is a large part of how Taiwan has been able to maintain its supremacy in the industry. In China, despite years of effort to promote semiconductor production, results have been slow, obstructed by factors such as the need for a large, new base of skilled workers, including an estimated need for 300,000 new engineers. Should the U.S. and China remain committed to their plans to boost production, the scale of their investments—though slow to bear fruit—would mean that their presence in the industry will be persistent. The slow pace of change inherent to the semiconductor industry still grants Taiwan time to adapt to changing circumstances. President Tsai Ing-wen has emphasized Taiwan’s efforts to expand into other high-tech industries such as 5G, artificial intelligence, and biotechnology to supplement Taiwan’s economic prowess. However, these industries are not areas over which Taiwan has enjoyed the same level of historical dominance, and it is doubtful that Taiwanese competition in additional, fractured high-tech industries would be able to effectively replace the economic security provided by sitting atop the semiconductor market.

Taken together, these strategic shifts by the world’s two largest economies present a major challenge for the future. If the policies of the U.S. and China proceed, they will erode the relative strength of Taiwanese semiconductor manufacturing, reducing the leverage that Taiwan’s economic strength grants it when dealing with an adversary. The fact that the countries in question are the U.S. and China is especially important since they are the two powers most involved in Taiwanese security affairs. China, of course, views Taiwan as a renegade province and has officially sought reintegration for decades. Since the end of the Chinese Civil War and the escape of Chiang Kai-shek’s Nationalist forces to Taiwan, the U.S. has acted as a mediator in the conflict over Taiwanese statehood and the mainland’s desire for reintegration. Motivated by the political, ideological, and economic factors at play in cross-strait relations, American diplomatic and military efforts have long been the force backing up Taiwanese independence, from the deployment of U.S. military forces in the Taiwan Straits Crises in the 1950’s, which deterred attacks by China on Taiwanese territory, to the enactment of the Taiwan Relations Act in 1979, which commits the U.S. to defend Taiwan against foreign aggression and provide Taiwan with the military means to maintain the status quo. Taiwan’s security, derived from economic interdependence, has continuously built upon this foundation of American support.

If the U.S. and China diminish their reliance on Taiwanese semiconductors, it would allow both countries to take a major step away from the status quo: enabling China to act more assertively toward Taiwan with less fear of economic repercussions while the U.S. would be less materially committed to maintaining Taiwanese security after having less at stake in the conflict over Taiwan’s status. Fortunately for Taiwan, the U.S. and China face a long road in attempting to build their own industries, and it will be quite some time before either is able to escape Taiwan’s semiconductor dominance. Once the ball is rolling, though, the scale of investments being made in semiconductor decoupling will make it hard to stop. As Taiwan’s “silicon shield” steadily weakens, Taiwanese security will need to be supplemented by other means and, given the history of cross-strait relations, strengthening American diplomatic and military commitments to Taiwan, regardless of long-term American economic interests, will be the best way of achieving this objective and preserving peace between China and Taiwan. 

David Eckl (CC’23) is a staff writer at CPR studying political science and East Asian studies. When not working on Chinese or reading about international relations in a library, he can be found cooking and listening to Giorgio Moroder late at night.