Flat White

Fighting over chips: why Taiwan matters

9 March 2021

4:00 AM

9 March 2021

4:00 AM

Throughout the course of human history, there have been wars over land, water, food, commodities and even pride. Unless there is a change of course, the next major war will be over silicon chips. 

With the increasing digitization of our lives, the importance of computer processors is rising exponentially. From our cars to our phones to our kitchens, computer processors are increasingly ubiquitous and integral. And at the heart and brain of computer processors are semi-conductors, otherwise known as silicon chips. 

The largest silicon chip manufacturer in the world is TSMCbased in Hsinchu Taiwan. It controls more than 50% of the global silicon chip market with the next largest market share held by South Korean Samsung Electronics at approximately 19%. No other manufacturer holds more than 8% of market share.   

In addition to TSMCTaiwan is home to more than 25 other silicon chip manufacturers making it the silicon island essential to global technological supply chains. This importance was evidenced last month when car production was halted at Volkwagen, Ford and Toyota, forcing manufacturing to sit idle because of a Taiwanese chip shortage. 

Sitting 180 km from the mainland coast, China considers Taiwan a breakaway province and seeks reunification. Snuffing out this democracy with Chinese characteristics serves China’s political and economic objectives. 

In September 2020, following a US Department of Commerce Directive, TSMC ceased supplying silicon chips to Huawei, the world’s largest telecommunications equipment maker. This was a major blow to Huawei and equally a major blow to China. Huawei is not just a Chinese national economic champion but is integral to China’s Belt and Road Initiative (BRI). Huawei is to provide the telecommunication and technological infrastructure for the Digital Silk Road, a key element of the BRI. 

Silicon chips are not just important for cars, computers and telecommunication systems. They are also essential for modern military hardware. Planes, submarines, drones, radar systems, naval ships, and smart missiles all demand advanced silicon chips. And China’s key geostrategic rival, the United States of America, does not currently have a notable domestic silicon chip manufacturing capability.   

This makes America’s military existentially reliant upon Taiwanese chip supply. Recognising this liability, America is working to rebuild this capability, but it will take many years. In the meantime, an independent Taiwan is a national security imperative for America.   

The risks of Chinese dominance over global silicon chip manufacturing is a geostrategic zero sum game. Were China to reunify with Taiwan, in one move, China’s position would be enhanced and America’s weakened.   

The consequences for Australia were China to seriously attempt to, or to actually reunify with Taiwan would be substantial. All roads would likely lead to kinetic conflict between America and China. Aside from the risk of escalation to a regional nuclear war, Australia would be pressured to participate, not only militarily, but also through a halting of iron ore, coalLNG and other commodities exports to China in exchange for continued access to America’s defence umbrella. 

Yet China’s belligerence towards Taiwan over the past weeks are a sign of strategic vulnerability. As Sun Tzu wrote in his Art of War, “appear weak when you are strong, and strong when you are weak”.

The Chinese Communist Party is struggling to concurrently manage several wicked problems. Demographically, China is expected to lose twenty per cent of its working-age population by 2050 and because of its one-child policy, has a significant gender misalignment.  Economically, even a small amount of post-Covid economic decoupling would have significant ramifications for an economy with a significant national debt challenge.   

China is also a significant exporter of human and financial capital. Despite all the challenges faced by America and western nations, China’s best minds and their savings seek to migrate out. Conversely, there are not many of the West’s best and brightest who seek to migrate to China. 

The Trump administration’s imposition of silicon chip export bans on Huawei have highlighted a significant Chinese vulnerability. No doubt the President Biden administration is reviewing this Trump policy and hence China’s current activities with a view to a policy change. 

China understands that, as Sun Tzu also wrote, “it is best to win without fighting”.  The battle China thinks it is best placed to win is the economic one and for the near term, this requires access to Taiwanese silicon chips.  China also understands that America is not seeking conflict but cannot permit Taiwan to reunify with China in the near term.   

An exit ramp for both nations is required, and this will likely take the form of a softening of American government bans on Taiwanese chip exports to China thus deferring the Taiwan issue to a later date. 

Dimitri Burshtein is a former government policy analyst who now works in Asian commodity financial markets. 

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