Taiwan, Semiconductor Chip Production, and International Tensions

 The United States has accumulated many responsibilities across the globe requiring them to come to the aid of various countries should they be attacked.  The biggest commitment is to NATO to protect its member nations in case of a military assault.  The Russian invasion of Ukraine was deemed of sufficient threat to NATO countries that Ukraine is supported by NATO nations as it fights to maintain its existence.  This is a proxy war for the US, providing monetary and military resources, along with other nations, to keep Ukraine’s hopes alive.  Putin has already let Europe know that Ukraine is not its only target.  The US was also drawn into the Israeli conflict with Hamas, with Israel receiving military and economic aid, as well as occasional US battlefield assistance.  This activity is also seen as a proxy war between Iran and Israel (and Israel’s allies).  The US has a long-standing commitment to come to the aid of South Korea if the North decides to provoke military action.  North Korea is constantly reminding the world of its growing military capabilities.  The least understood commitment is the one the US has for the island nation of Taiwan.  The potential opponent related to that nation is China.  Interestingly, China, Russia, Iran, and North Korea act as if they have a formal alliance to wrest world domination from the US and its allied democracies.  They support each other militarily and economically.  Two of the four members have fomented serious military conflict in different parts of the globe.  Could there be a third coming…or a fourth?

When Chaing Kai-shek lost the civil war with the communists after World War II, he, his army, and supporters withdrew to the island of Formosa.  His hope was always to reconquer the mainland.  The US became involved when Mao threatened military action.  Eisenhower came to Chiang’s support because foiling the assault of a noncommunist country by a communist country is what the US did in that era.  Nixon and Kissinger, in the 1970s wanted to establish relations with China and signed documentation stating that there was only one China and that included Taiwan.  At the time Chaing was still alive and continued to believe that he deserved to be the leader of that one China.  The One China Policy became more convoluted when Taiwan, relieved finally from Chaing’s rule, became a democracy and began claiming its right to independence.

The US was in the position of needing to protect a noncommunist country from a communist country while still claiming it adhered to the One China Policy.  This awkward stance continued for some time as Mao’s successors seemed to have other things to worry about.  That changed when Xi Jinping came to power.  He made “unification” with Taiwan critical to his China and has threatened to use force to make it happen.  President Biden has also changed policy by claiming that the US would come to Taiwan’s aid if it was attacked. 

Why have China and the US both drastically altered their policies toward Taiwan?  Little Taiwan is big Taiwan when it comes to economic prowess.  It developed unmatched capabilities at producing advanced semiconductor chips.  It became China’s leading trading partner and has world economies trembling should its chip fabrication assets be threatened by anything.  Chris Miller provides a highly interesting history in his book Chip War: The Fight for the World’s Most Critical Technology, explaining how Taiwan attained such economic power.

The development of semiconductor chips that could replace bulky and power-hungry electrical circuits provided a turning point in human civilization.  At first, the defense industries jumped at the opportunity to combine explosive power with computing power great enough to provide guidance for more precise targeting.  The race was on to produce integrated circuits that could provide complex calculations with minimum space, weight, and power demands.  As these complex circuits became smaller and cheaper the market drivers became consumer products.

“…semiconductors are embedded in every device that requires computing power—and in the age of the Internet of Things, this means pretty much every device.  Even hundred-year-old products like automobiles now often include a thousand dollars worth of chips.  Most of the world’s GDP is produced with devices that rely on semiconductors.  For a product that didn’t exist seventy-five years ago, this is an extraordinary ascent.”

The desire for smaller and more powerful chips drove more complex and expensive technology development.  Early companies tried to control the entire process: designing chips and fabricating them.  Soon the expense of new developments became so great that only a few large companies could maintain this model, while others settled into niches that could continue to be profitable.  The extreme expense of technology development led to a necessary monopolization of capabilities.

“In the age of AI (artificial intelligence), it’s often said that data is the new oil.  Yet the real limitation we face isn’t the availability of data but of processing power.  There’s a finite number of semiconductors that can store and process data.  Producing them is mind-bogglingly complex and horrendously expensive.  Unlike oil, which can be bought from many countries, our production of computing power depends fundamentally on a series of choke points: tools, chemicals, and software that often are produced by a handful of companies—and sometimes only by one.  No other facet of the economy is so dependent on so few firms.  Chips from Taiwan provide 37 percent of the world’s new computing power each year.  Two Korean companies produce 44 percent of the world’s memory chips.  The Dutch company ASML builds 100 percent of the world’s extreme ultraviolet lithography machines, without which cutting-edge chips are simply impossible to make.  OPEC’s 40 percent share of world oil production looks unimpressive by comparison.”

A paucity of sources for cutting-edge products puts supply chains for major goods at risk.  Consider Apple and its iPhone suppliers and understand why Taiwan is so important to the global economy.

“For the past decade, each generation of iPhone has been powered by one of the world’s most advanced processor chips.  In total, it takes over a dozen semiconductors to make a smartphone work, with different chips managing the battery, Bluetooth, Wi-Fi, cellular network connections, audio, the camera, and more.”

“Apple makes precisely none of these chips.  It buys most off-the-shelf: memory chips from Japan’s Kioxia, radio frequency chips from California’s Skyworks, audio chips from Cirrus Logic, based in Austin, Texas.  Apple designs in-house the ultra-complex processors that run an iPhone’s operating system.  But the Cupertino, California’s colossus can’t manufacture these chips.  Nor can any company in the United States, Europe, Japan, or China.  Today, Apple’s most advanced processors—which are arguably the world’s most advanced semiconductors—can only be produced by a single company in a single building, the most expensive factory in human history…” 

“Today, no firm fabricates chips with more precision than the Taiwan Semiconductor Manufacturing Company, better known as TSMC.”

So, China is threatening an invasion of Taiwan.  Is that because it yearns for a single China or is it because it covets Taiwan’s assets?  Whatever the reason, it is unlikely that China would risk destroying TSMC’s facilities.

“After a disaster in Taiwan, in other words, the total costs would be measured in the trillions.  Losing 37 percent 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.”

Given its avowed goal of becoming the dominant economic power in the world, China would certainly wish to have control of Taiwan’s chip fabrication capabilities.  Meanwhile the US and other nations would be willing to take drastic steps to see that does not happen.

“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 chip making capacity in other countries, and in the meantime we’d still depend on Taiwan.  If so, we would find ourselves not only reliant on China to assemble our iPhones.  Beijing could conceivably gain influence over the only fabs with the technological capability and production capacity to churn out the chips we depend on.”

This discussion should provoke some thoughts about how far nations like the US should go in discouraging any attempt by China to control Taiwan.  The US and the world have an economic interest at stake.

The world’s dependence on Taiwan justifies the legislation passed by the US, “Chips for America.”  This is a collection of programs designed to move some of the chip fabrication capability of Samsung and TSMC to plants in the US.  It would also support Intel in competing with Samsung and TSMC as a foundry making the next generation of advanced chips for other users.  Let us thank good old Joe for that one.

To those with an interest in chip technology and the history of the industry, I heartily recommend “Chip War” by Chris Miller.  He has an exciting story to tell, and he tells it well.  I felt like I was reading downhill, faster and faster.

You can learn a little about a lot of things or you can learn a lot about a very few things. Guess which is the most fun.