Often referred to as the “Silicon Shield,” Taiwan produces a staggering 65 percent of the world’s semiconductors, and more than 90 percent of its highest-end chips. As such, no company is more singularly important to the global economy than Taiwan Semiconductor Manufacturing Co (TSMC).
TSMC’s advanced microchips are indispensable to iPhones, medical devices, missile launch platforms and many other technologies, and they are largely unrivaled. Countries and companies that cannot avail themselves of TSMC’s most advanced semiconductors simply cannot develop certain critical technologies. The company’s decisions thus bear directly on matters of global security.
With the outlook for Sino-American relations grim, TSMC announced plans to invest US$40 billion to build a second fabrication plant in Arizona, where it is to make 3-nanometer chips. The first plant, for 4-nanometer chips, is scheduled to be up and running in 2024.
The company’s decision to site more production in the US is understandable now that tensions over Taiwan have taken center stage.
Following US House of Representatives Speaker Nancy Pelosi’s visit to Taipei in August, China conducted unprecedentedly aggressive military exercises, launching missiles near the nation and simulating a blockade in the Taiwan Strait.
Then, in October, US President Joe Biden’s administration announced sweeping new export controls designed to cripple China’s ability to produce advanced chips and pursue other high-tech manufacturing.
Although China has invested massively in domestic chip production, the results have been disappointing. Now that Chinese President Xi Jinping (習近平) has secured a third term, his regime could retaliate by terminating US tech firms’ contracts to build data centers for Chinese provincial governments.
While TSMC has received a one-year exemption from the new US export controls, there could come a time when Washington might push it to cut off most of its business in China. The Biden administration worries that China is using TSMC chips in a new class of hypersonic missiles, and to pursue global dominance in artificial intelligence.
China’s dependence on Taiwanese chips has served as a form of deterrence and protection for Taiwan, because the Chinese government cannot seize its highly sensitive chip-manufacturing facilities by force.
While some observers worry that China might regard TSMC as a reason in itself to take Taiwan, TSMC chairman Mark Liu (劉德音) has said that a war would inevitably destroy TSMC’s fabs or render them inoperable.
Still, TSMC finds itself caught in the middle of a great-power competition, because it produces chips that both sides want and has operations on either side of the Taiwan Strait. While the Chinese market accounts for 10 to 12 percent of the company’s total revenue, the US is its largest customer base, and Taiwan is still its major center of production, research and development.
TSMC is diversifying its chip manufacturing capacities to avoid becoming entangled in geopolitical complexities. Beyond Arizona, it plans to open fabs in Japan, and it is in the process of evaluating sites in Europe.
However, there is a limit to how far TSMC’s diversification can go before it deprives Taiwan of its silicon shield.
China is almost certain to fall behind in the semiconductor race, because it lacks access to the lithography machines needed to manufacture the most advanced chips. Nonetheless, it is likely to dominate the market in legacy chips (those ranging from 28 to 44 nanometers), and it is working quickly to develop its own technology standards.
While the US has sought to reduce its own dependence on Taiwanese chips by enacting the CHIPS and Science Act, any increased federal support for domestic semiconductor producers would not resolve the issue entirely. TSMC is set to manufacture the most advanced chips for the foreseeable future, with much of the supply chain remaining in Taiwan.
Therefore, US policymakers must be prudent when it comes to export controls. Policies that succeed in cutting off China entirely from advanced chips could change the deterrence calculus and leave China with nothing to lose by invading.
As President Tsai Ing-wen (蔡英文) said in a recent speech, the superpowers’ shared dependence on Taiwanese chips must continue to be seen as “not a risk, but ... the key to the reorganization of the global semiconductor industry.”
As geopolitical tensions rise, maintaining deterrence in the Taiwan Strait is more important than ever. Xi’s address in October to the 20th National Congress of the Chinese Communist Party showed that he is serious about unifying Taiwan with China — by force, if necessary — although when remains unclear.
As the US and Taiwan head into their own presidential election cycles, politicians might feel increased domestic pressure to take decisive action.
That said, TSMC’s goal remains the same: to maintain its status as the unrivaled industry leader. To do so, it must play a smart long game. That means making necessary sacrifices in its Chinese business, pacing itself with new investments and diversification overseas, and ultimately keeping its most advanced chips in Taiwan.
China and the US are likely to see each other as strategic rivals for many years to come, and technology and national security are to remain at the center of their competition. Ensuring that Taiwan’s economy, trade and technology supply chains are resilient and less dependent on China is in the US’ vital interest.
Caught in the middle of the 21st century’s great-power competition, TSMC can only hope that US leaders continue to recognize this.
Jason Hsu is a senior research fellow at the Ash Center for Democratic Governance and Innovation at Harvard Kennedy School, and a former at-large member of the Legislative Yuan.
Copyright: Project Syndicate
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