Military helicopters carrying large Taiwan flags conduct a flyby rehearsal
Military helicopters flying the Taiwanese flag over Taiwan, which China claims as its own. Escalating rhetoric between China and the US over Taiwan is sparking concern over the world's largest semiconductor company.Ceng Shou Yi/NurPhoto via Getty Images
  • The fate of the global economy may rest on the shoulders of one company: TSMC. 
  • TSMC is the world's biggest chipmaker — its chips power everything from cars to iPhones. 
  • But US-China tensions, and China's standoff with Taiwan, could cost the global economy trillions.

On a tiny island off the coast of China, one company manufactures a product used across the globe for countless household products as varied as PCs and washing machines.

And as that island — Taiwan — worries about the threat of a standoff between the US and China, the world's economy holds its breath. That's because there could be trillions of dollars' worth of economic activity tied to that one company: Taiwan Semiconductor Manufacturing Company, the world's biggest chipmaker.

Industry watchers say an escalating dispute between the US and China over Taiwan could drag down the global economy, given the fact that no other company makes such advanced chips at such a high volume. If TSMC goes offline, they say, the production of everything from cars to iPhones could screech to a halt.

"If China would invade Taiwan, that would be the biggest impact we've seen to the global economy — possibly ever," Glenn O'Donnell, the vice president and research director at Forrester, told Insider. "This could be bigger than 1929."

What is TSMC?

Aerial view of Taiwan Semiconductor Manufacturing Company in in Nanjing, Jiangsu Province of China
TSMC's factory in Nanjing, in China's Jiangsu province.VCG/VCG via Getty Images

While TSMC may not be a household name, you almost certainly own something that's powered by its chips.

TSMC is in the foundry business, meaning it doesn't design its own chips but instead produces them at fabrication plants for other companies. The company accounts for over half of the global semiconductor market, and when it comes to advanced processors that number is, by some estimates, as high as 90%. In fact, even the best chip from China's top semiconductor manufacturer, SMIC, has been said to be about five years behind TSMC's.

TSMC counts Apple as its biggest customer, supplying the California tech giant with the chips that power iPhones. In fact, most of the world's roughly 1.4 billion smartphone processors are produced by TSMC, as are about 60% of the chips used by automakers, according to The Wall Street Journal.

TSMC semiconductors are also used in high-performance computing: They can quickly process reams of data and guide missiles, making the company highly valuable in the eyes of government entities.

As TSMC has grown to dominate the industry, it has automatically become an oligopoly, according to William Alan Reinsch, a senior advisor at the Center for Strategic and International Studies, a national security think tank.

"When you have a very complex, very sophisticated, and very expensive technology where barriers to entry are very high — I mean, building a fab plant is in the billions — you can't just decide tomorrow, 'Well, I'm going to go into that business,'" he said. "It's not like making tea."

How did we become so reliant on chips made in Taiwan?

Hand holds a tiny chip being tested in a lab
A chip being tested in a lab in Taiwan.Ann Wang/Reuters

The semiconductor industry has its roots in the US, as much of the research and development is done on US soil. Companies in other countries license the US-made technology.

Dylan Patel, a chief analyst at the semiconductor research and consulting firm SemiAnalysis, pointed to the Dutch company ASML as an example: ASML produces high-end chipmaking equipment, but one of the technologies for which it's best known was invented in the US National Laboratories.

Over the past 30 years or so, manufacturers in developed countries concluded it was in their best interest to outsource the manufacturing of the chips, according to Reinsch.

"You build a big factory and you crank these things out by the thousands, and you do it in a low-wage, nonunion country that probably doesn't have environmental requirements," he said. "You keep all the design and IP at home and you do all your sales, marketing, and service at home, and that's where you make the money."

It's this approach that has directly led to the growth of chip foundries like TSMC and reduced production on American soil, Reinsch said.

According to a 2021 report from the Semiconductor Industry Association, in 1990 the US produced 37% of the world's chip supply. These days, the US is responsible for only 12% of global chip production.

Why is this a problem now?

port of la congestion ships
Container ships waiting off the coast of the congested ports of Los Angeles and Long Beach, in California, on September 29, 2021.Mike Blake/REUTERS

As the coronavirus pandemic and the war in Ukraine have illustrated, having too much reliance on certain countries can upend supply chains when disruptions arise. It's for this reason that many US corporations are exploring "onshoring" — moving some of their manufacturing to the US — to make their supply chains more resilient.

The US's access to TSMC chips, however, is especially vulnerable, because though Taiwan is self-governing, China claims the island as its own and has threatened to invade. Controlling Taiwan is central to Chinese President Xi Jinping's goal of achieving a "great rejuvenation of the Chinese nation" by 2049, the 100th anniversary of the People's Republic of China.

While the consequences of an invasion could be significant, many experts say it's just a matter of time before it happens, whether it's by 2030, 2025, or even by the end of next year. On Monday, US Secretary of State Antony Blinken predicted China would take steps to annex Taiwan on a "much faster timeline" than previously thought, signaling that it could be sooner rather than later. The US government is already playing out war-game scenarios to prepare for this, and in the event of a full invasion it would reportedly consider evacuating the skilled chipmaker engineers on which it's become so reliant.

The spotlight has focused increasingly on Taiwan and the semiconductor industry as a whole in recent weeks following the export regulations the US government slapped on China. Those regulations limit sales of semiconductors made using US technology and are meant to curb China's ability to develop advanced technology.

The US and China are now locked in what Patel described as "a full-scale bilateral economic cold war," one that's likely to have severe financial repercussions, especially given how intertwined the semiconductor supply chain is.

What would happen if China invaded Taiwan?

Chinese soldiers march with Chinese flag in foreground during a military parade
A Chinese military parade in June 2020.Alexander Vilf – Host Photo Agency via Getty Images

Taiwan hopes its semiconductor business will protect it from Chinese aggression — government leaders have called the industry a "silicon shield" against invasion.

But if China did invade, disrupting the world's access to chips, "the entire global economy comes to a screeching halt," O'Donnell from Forrester said. "Semiconductors have become almost like the oxygen of the global economy," he said. "Without the chips, you can't breathe."

The effects of such a halt would be "economically devastating," says Martijn Rasser, a former senior intelligence officer at the CIA who is now a security and technology expert at the Center for a New American Security, a left-leaning think tank.

"You'd be looking at trillions of dollars in economic losses," he told Insider.

The US National Security Council agrees, and in July the US commerce secretary said the US would face a "deep and immediate recession" if American businesses no longer had access to these chips.

Some experts have speculated that, in the event of an invasion, the chip-manufacturing facilities would be intentionally destroyed so China couldn't access them. In a US Army journal article published in December, the academic Jared McKinney described this strategy as the "broken nest" — another way to put it is mutually assured destruction.

The destruction of those facilities, or an inability to access their chips, could have major national security implications, Rasser said.

"Every military system that we rely on has a ton of semiconductors in them," he said. "It would start impacting our ability to maintain existing weapon systems, upgrade ones, build new ones."

Considering that the US has committed to defending Taiwan in the event of a Chinese invasion, these hits to the US's defense capabilities could be especially significant.

But while a Chinese invasion of Taiwan would produce the most serious disruption, Rasser says it wouldn't necessarily take an invasion for the world's chip access to be blocked. As well as making investments in Taiwanese firms and poaching their workers, China could institute a blockade on the island that could cut off the world from semiconductor supplies.

What's the solution?

President Joe Biden holds up the signed CHIPS Act while surrounded by onlookers
President Joe Biden holding the signed CHIPs Act in August.SAUL LOEB/AFP via Getty Images

The US is taking some steps to make itself less reliant on Taiwan. In July, for instance, Congress passed the CHIPS Act, which includes nearly $53 billion in subsidies and tax breaks in an effort to bolster chip manufacturing in the US.

Some companies have already begun adding US facilities: Intel is building two $20 billion factories in Ohio, Micron has pledged to spend up to $100 billion on a massive chip factory in upstate New York, Samsung is building a $17 billion factory in Texas, and TSMC is constructing a $12 billion plant in Arizona.

TSMC is also building a new facility in Japan, one that will produce the less advanced chips needed in the auto industry. The Wall Street Journal reported that Japanese officials had signaled they'd like TSMC to expand its presence there by adding capacity for advanced chips as well, another sign global powers are growing wary of the geopolitical risk to Taiwan.

But O'Donnell warned it would be premature to celebrate an end to the chip shortage or to the US's reliance on Taiwanese chips. The factories themselves require equipment that's in short supply because of — ironically enough — the chip shortage. And besides, those plants take years to build and get online.

"Once you stick a shovel in the ground, you're not going to get chips for at least three years," he said.

Plus, there remain obstacles to substantially decreasing the country's reliance on TSMC. While the subsidies and tax breaks will help, Taiwan may continue to remain the cheaper option for businesses. And, for the time being at least, TSMC's chips are likely to be higher quality as well. Given that TSMC is "really at the cutting edge," Rasser said, the chips produced in the US by Intel, for instance, "wouldn't be as sophisticated" as those made in Taiwan.

While producing even these lower-quality chips would go some way to reduce the US's reliance on Taiwan, the US has a shortfall of the skilled workforce needed to ramp up production, a problem companies in this industry are facing across the globe. Rasser says enhanced training and education will be necessary to fill this gap.

It's for these reasons that it could be "years and potentially decades" before the US will be able to declare independence on the chipmaking front.

"The CHIPS Act, it's a good step in the right direction, but it's just a little more than scratching the surface," Rasser said.

In the meantime, the US may have to cross its fingers that an economy-shaking disruption doesn't come to pass.

Read the original article on Business Insider