Tensions between China and Taiwan boiled over last week after US House Speaker Nancy Pelosi ignored Beijing’s warnings and visited Taipei. Beijing reacted by launching large-scale military exercises, which disrupted global supply chains, as the foreign ministry warned that Taiwan’s reunification with China was historically inevitable.
The US does not officially recognize Taiwan’s independence, and supposedly embraces a "One China" policy, but Washington’s diplomatic relations and arms sales to the island have been condemned by Beijing for years. US lawmakers, adding fuel to the fire ignited by Pelosi, have been working on legislation that would provide Taiwan with $4.5 billion in security aid in addition to granting the island non-NATO ally status.
Four days before Pelosi’s trip, Chinese leader Xi Jinping in a phone call warned President Joe Biden that the US was "playing with fire," and now was not the time for a full-blown crisis over Taiwan.
In light of the current over-reliance on Taiwan, many companies within several sectors of the US economy would likely agree with Xi.
In a bid to reduce dependence on the island, the US government will be investing billions on projects to develop domestic semiconductor capabilities. However, former senior US diplomat Chas Freeman believes China may be better positioned in the long run to penetrate this highly-concentrated market in the race for microchip self-sufficiency.
"The United States still has the capacity and resources to out-compete China but it still has not done so," Freeman, who was President Richard Nixon’s translator during his 1972 visit to Beijing, told Sputnik. "On the contrary, 19 of the world’s 20th fastest growing semiconductor companies are now in mainland China and none are in the United States."
US Vulnerabilities Run Abroad and Deep
Last year, the US economy lost $240 billion due to the global microchip shortage, and a war over Taiwan would be even more devastating for the United States due to its dependence on one single supplier: Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip foundry.
TSMC accounted for more than half of the $100 billion semiconductor manufacturing market in 2021, and makes more than 90% of the world’s most advanced microchips, according to the Capital Economics research group. And the company’s market share is only likely to expand. TSMC executives in a July earnings call projected 30% growth this year, which would put total annual revenue well over $70 billion.
American tech giants like Apple, Intel, NVIDIA, Qualcomm, AMD, and Broadcom, all rely on TSMC, while the US government depends on the Taiwanese supplier for some of the most critical and complex systems.
The Energy Department’s Argonne National Laboratory, a byproduct of the Manhattan project, for example, is building a national security supercomputer using TSMC because Intel was forced to delay production.
Moreover, TSMC makes semiconductors for high-end weapons systems and a wide range of military-grade devices, a major factor in the US pressuring TSMC to move production to America’s shores, the Center for Strategic and International Studies (CSIS) said in a June report.
The Biden administration in a supply chain review last summer even conceded that the United States is too heavily dependent on TSMC for producing America’s leading-edge semiconductors - a reality that led to the recently-passed CHIPS Act, signed by Biden on Monday, which provides more than $52 billion in subsidies for domestic manufacturers.
In July, former director of cybersecurity for the White House National Security Council, Zach Nunn, described the semiconductor shortage and lack of capacity as a "direct threat to America’s economy and national security."
Although Biden failed to prevent Pelosi's visit, he is apparently well aware of America’s vulnerabilities. The president stopped short of opposing the House Speaker publicly, but behind the scenes senior White House officials were dispatched to dissuade Pelosi from going, Bloomberg reported, and to halt the new bill that would provide billions in military aid to Taiwan.
Chip Race With China
Some experts have suggested China has shown restraint in punishing Taiwan economically because it could backfire. TSMC Chairman Mark Liu, who met Pelosi during her visit, told CNN Beijing will "think twice" about invading because China’s most advanced systems rely on his firm’s semiconductors. An invasion, Liu added, would render his company "not operable."
Part of the reason TSMC has an advantage is a near monopoly on the skill set needed to develop certain advanced microchips. This has been exacerbated by a global high-tech talent shortage amid soaring demand for software skills needed to program and integrate chips into fast-growing markets such as electric vehicles and robotics, according to a 2022 Deloitte industry outlook.
The US Chips Act allocates funding to develop these types of skills while Beijing has focused on enhancing such capabilities as part of the $1.4 trillion high tech investment plan it unveiled in 2020.
Although China today accounts for only 15% of global manufacturing in semiconductors, its chip companies are rapidly growing. Meanwhile, the US share of the market has dropped from 37% to 12%.
Freeman, who chairs an international business development firm, said Beijing’s aspirations go beyond simply developing manufacturing capabilities.
"The US still leads in chip design but China is also closing that gap rapidly and is already only a year or two behind us," Freeman said.
China, which currently produces one-third of global manufacturing, Freeman added, has the talent and skills to eventually take the lead in many technology and science-related sectors.
Freeman pointed out that Chinese universities produce four times as many students as the United States in science, technology, engineering, and math (STEM) - and the gap is widening.
"Many examples from history refute the complacent American assumption that only private companies in liberal democracies with free speech on political matters can be inventive," Freeman said. "History proves that myth is wrong. China is proving it is wrong again today."