The Messenger

Losing Taiwan’s Semiconductors Would Devastate the US Economy

Engineer holds semiconductor chip. (Getty Images)

A battle for semiconductor manufacturing is happening across the Pacific. For years, Beijing has been pumping hundreds of billions of dollars into its domestic industry in an effort to cut foreign-made products out of China’s market. Meanwhile, Washington and its partners have been working to make sure that the means and know-how to make the most advanced versions of these microchips don’t find their way into China.

Just recently, the Dutch government announced new export restrictions on semiconductor manufacturing machines coming out of the Netherlands. And China since has announced export restrictions on certain minerals used in the semiconductor manufacturing process.

The process to make semiconductors is long and complex. By some measures, a chip product could cross up to 70 borders before ever finding its way to a consumer. While American companies have developed some of the most advanced methods for designing semiconductors, the most advanced manufacturing capabilities right now exist in Taiwan and South Korea — with most chips coming out of Taiwan. If the U.S. were no longer able to access Taiwan’s semiconductor industry, it would have a devastating impact on the U.S. economy.

According to a new study, losing access to Taiwan’s semiconductor industry would have a negative impact on the U.S. economy greater than either the global financial crisis of 2008 or the COVID lockdown of 2020. A significant disruption to Taiwan’s semiconductor industry could affect as much as $1.6 trillion, or roughly 8%, of America’s annual gross domestic product — hurting industries like personal electronics, automotives and telecommunications. And even this estimate may be low, considering how our lives, from farming to health care, are increasingly reliant on new technologies that require more advanced chips.

Nearly one in five semiconductors used for exports comes out of Taiwan. Taiwanese companies account for nearly 75% of manufacturing of the most advanced chips in the world. As the pandemic lockdown showed us, if there’s a disruption to the industries that rely on a continuous flow of semiconductors, large swaths of the economy can suffer from a domino effect of delays, loss of sales, and factory shutdowns.

Supply chain disruptions can come from anywhere. Taiwan’s location in the Indo-Pacific makes it prone to earthquakes and typhoons. Semiconductor manufacturers are no stranger to industrial fires, either. But the one event that worries Washington, and which could cause such a significant disruption, is a potential invasion of the island by China’s army.  

As the conflict in Ukraine reminds us, war is devastating in its own respect, and a significant disruption to Taiwan’s semiconductor industry wouldn’t be limited to just the United States. Most of the chips America gets from Taiwan come after they’ve been shipped to and assembled with other electronic products in China and other parts of Asia.

Whether it’s research and development, minerals, chemicals, machine tools, or their final products, the global semiconductor industry is connected through Taiwan. Asian countries such as China, Japan, Vietnam and Malaysia would see similar devastation to their economies if there were a significant disruption.

Semiconductor manufacturing is one of the most capital-intensive industries; some of the newest facilities cost billions of dollars to build. Even then, new facilities can’t be brought online overnight because construction takes years. The high costs and time to build are just two reasons that Taiwan’s mature semiconductor industry isn’t something that’s easily replaceable — especially during a global disruption.

Over the past few years, more nations have looked inward for their semiconductor manufacturing needs. The Japanese government has been subsidizing new manufacturing. The European Union also plans to spend billions on new manufacturing.  

Washington has been working with domestic and foreign firms to build more semiconductor manufacturing in the United States. It’s an effort by the Congress and the Biden administration to reduce the need for foreign-made products in America. One firm in particular, Taiwan Semiconductor Manufacturing Company, is nearly finished building its first state-of-the-art facility in Phoenix — with another planned in just a few years. Other leading companies, such as Intel and Samsung, and those throughout the semiconductor supply chain, are all building new capacity in the U.S. as well.

While these efforts will help mitigate some of the small shocks to the semiconductor supply chain in the future — like disruptions caused by the occasional earthquake, fires, or port delays — it will do little in the face of a significant disruption like another global pandemic or a war involving Taiwan.

Whether Washington likes it or not, the world’s reliance on Taiwan as a semiconductor manufacturer isn’t something the U.S. or others can replicate. New facilities cost billions of dollars, take years to build, and require a strong demand signal from the market that Washington can’t just hope comes to fruition.

While the U.S.-Taiwan Business Council report highlights the cost to the U.S. economy if it were to lose access to Taiwan’s semiconductor industry, it also details many of the collaborative efforts between American and Taiwanese companies. The past several decades of Taiwan’s success in building itself as a leader in semiconductor manufacturing is also a success story of American ingenuity. Taiwan’s semiconductor industry would not be where it is today without its close partnership with American industry.

As the world comes to rely more on new technologies, including the need for data storage and the growing use of artificial intelligence, so too will we continue to rely on Taiwan’s semiconductor industry. As much as Washington, Tokyo and Brussels want to build more manufacturing at home, Taiwan’s role will remain irreplaceable. We should look to support such an important partner in Asia, to help mitigate any significant disruptions. 

Read in The Messenger.