In early August, US House Speaker Nancy Pelosi landed in Taipei to reaffirm US support for Taiwan. In response to the controversial visit, the Chinese military, in an impressive show of force, started an aggressive military exercise that breached Taiwanese airspace and territorial waters. This comes amid a global shortage of semiconductors, essential to most modern technologies.
What are microchips? And why are they so important to everyone?
A microchip is a small component used in computers and other electronics mainly manufactured using silicon at a tiny scale. It requires an extremely precise process to be produced. The machinery and the expertise used to make microchips only exist in a few countries.
They are one of the main components of modern manufacturing; they are used in most modern technologies, from cars to smartphones and essential medical equipment.
Taiwan, an independent island off the coast of China, has around 63% of the market share of microchip production, mainly through the Taiwan Semiconductor Manufacturing Company (TSMC).
However, when the COVID-19 pandemic spread across the globe in early 2020, demand for cars and other goods that rely on these chips fell as lockdowns forced people to hunker down in their homes and manufacturers to reduce production.
But, when economies started to open up again, and consumer demand snowballed, microchip producers couldn’t readjust to previous production levels, causing significant disruptions in global supply chains.
As microchips are crucial for maintaining a steady supply flow in modern economies, Taiwan, the largest producer, finds itself in the middle of a geopolitical quarrel between the United States and China. Both are seeking to secure enough semiconductors to sustain their industries.
Supply chain issues push the United States and China to purse alternatives
In the United States, the Senate recently passed a new $280 Billion Industrial Policy bill to bolster America’s tech and manufacturing position. The CHIPS and Science Act, as it is officially named, received significant bipartisan support and aims to subsidies and incentivize locally produced microchips to reduce reliance on foreign manufacturers.
However, this industrial bill is not only created for simple science and manufacturing purposes but also has a foreign policy dimension, as reliance on a globalized semiconductor supply chain is deemed a national security risk. Even advanced military equipment requires this piece of technology to be built.
Still, convincing companies to switch manufacturing of these chips back to the United States is a challenging task, as labor costs in the country are far higher than in Taiwan or China. Even still, the US is trying to push TSMC, the largest manufacturer of microchips, to move some of its production to Japan and the United States to reduce its vulnerability to a Chinese attack on Taiwan.
On the other hand, being a manufacturing powerhouse itself, China is investing Billions in bolstering its microchip manufacturing. But since producers rely on American designs and Dutch machinery to make semiconductors, China has only been able to produce older chips that aren’t compatible with current and future electronics. The manufacturing giant still relies on Taiwan for its supply of high-tech microchips.
And as the US tries to choke China’s ability to produce or import chips, the country is resorting to military means to prevent its isolation. Just this month, as US House Speaker Nancy Pelosi was visiting the Island, the Chinese military conducted an aggressive military exercise that breached Taiwan’s airspace and territorial waters. China, however, does not consider that it has breached anyone’s sovereignty.
The Geopolitics of Microchips
The United States and China are pursuing ways to reduce their reliance on microchip imports and are instead encouraging local production of semiconductors to fill in the gaps. However, the United States has also pursued a strategy of containment.
The US has already implemented restrictions on microchip exports to Chinese tech companies, namely Huawei and SMIC. The Superpower has also pressured the Netherlands, the largest producer of essential microchip manufacturing equipment, to slow-down China’s attempt to develop high-tech microchip production facilities.
This strategy severely weakens China’s ability to reduce its dependence on Taiwanese manufacturing and makes it more difficult for the country to manufacture high-tech military equipment.
All of the factors play a significant role in the deterioration US-China relations and have caused the latter to react aggressively. For instance, China has intensified its military exercises around Taiwan and rhetoric against the island. US government officials are increasingly worried about a Chinese blockade of Taiwan, destabilizing the region and the global economy.
It is a common belief that economic interdependence between the United States and China would prevent a conflict; they rely on each other to sustain their respective economies.
However, as relations between the two countries sour, some officials in both countries push for more aggressive policies. Trying to bar China from accessing essential resources and hindering its capacity to trade and grow its industries threatens the ability of the two superpowers to find a peaceful or diplomatic solution.
Countries, especially those heavily dependent on commerce, respond very aggressively to any attempt to reduce their current or future commercial interest. With the United States intensifying its efforts to weaken China’s ability to develop its technology industries, the latter is bound to escalate the conflict.
On the other hand, Taiwan is stuck between increasingly aggressive rivals that use the island as an economic and geopolitical battleground. And as tensions escalate between the US and China, they will both seek to use Taiwan, and its manufacturing industry, as a pawn to weaken their enemies.