There is a global shortage of semiconductors or chips, which is being felt by the producers of everything from smartphones and electric vehicles (EVs) to washing machines and toasters. Although it is not obvious to see how the fate of the lowly toaster can have geopolitical consequences, the chip shortage is having an impact, especially as it ties into what is emerging as a new Cold War between the United States and China. Part of the reason for this is the role of Taiwan, home to one of the world’s leading chip-markers, Taiwan Semiconductor Manufacturing Company (TSMC). China regards the island as a breakaway province. For its part, most Taiwanese think of themselves as a separate nation, with a democratic and market-oriented development path. Beijing’s crushing of Hong Kong’s democracy movement over the last two years has only reinforced that sentiment.  Considering the centrality of chips to the modern global economy, control over chip production has become a major geo-economic factor and raises political risk from China. Any Chinese move to “reunify” Taiwan with the mainland would have implications well beyond the structure of East Asian geopolitics; it also points a gun directly into the guts of the global economy and involves the United States.   

Semiconductors or chips have become a core component in the global economy and the key to the production of phones, tablets, computers and automobiles.  Companies impacted by the current chip shortage include Apple, Microsoft, Ford, General Motors, and Volkswagen. As supplies are lagging in demand, the lead times for new orders have grown longer through 2020 and 2021.    

While U.S. companies like Intel, Qualcomm and Texas Instruments are still active in producing chips, the two dominant producers of high-end chips are TMSC and South Korea’s Samsung Electronics. If you add South Korean company SK Hynix to the mix, Asian production weighs heavily on global production. U.S. production, once the dominant force, has seen its share of the market plunge from 37 percent in 1990 to 12 percent today, according to Bloomberg.

The current shortage of chips has been caused by a combination of factors. These include the coronavirus, which resulted in a surge in “stay-at-home” activities, which helped boost the sale of laptops (which in 2020 saw a decade high in sales), webcams and game systems. Another factor was the bounce-back in auto sales: most automakers failed to anticipate how rapidly the consumer would return (partially due to an aversion to public transport). When automakers sought to increase their orders to the chip makers they found themselves behind the curve having been beaten by the likes of Apple and Microsoft (themselves stretched to meet the demand for computers and smartphones). 

Another factor was natural disasters—a February 2021 cold snap in Texas led to power outages that hit U.S. chip production (built up around Austin); in March 2021 in Japan a fire knocked out a plant run by Renesas Electronics (an important maker of chips for the automotive sector), and a bad drought in Taiwan (in 2020 rainfall declined by between 20 percent and 60 percent of the historical average), which raised questions about its impact on manufacturing. 

One last factor which weighed heavily on chip supplies was the new Cold War that developed between the United States and China. When Washington restricted Huawei’s access to critical U.S. technology (like chips) in early 2020, the company stockpiled as many supplies as possible. Other Chinese companies, looking at the same geopolitical landscape did the same, which put pressure on supply.  

With major chip manufacturers already running at full capacity, supply is expected to remain tight. According to TMSC, the chip shortage is likely to last through 2022. The current crisis also signals that as the global economy becomes more digitized, demand is likely to continue to outstrip production. What could interrupt this would be another major economic dislocation or any pull-back in consumer demand for a wide range of products, such as laptops, monitors and EVs. Considering the push to go green it is expected that digitalization will continue (despite the high energy use of chip makers). In the long term, the industry could face other challenges such as over-production as countries opt to build more advanced factories to achieve self-reliance.  

Taiwan has assumed considerable geoeconomic importance because of its chip industry. The decision was made in the 1970s to promote the island’s electronics industry, which allowed it to tap its main resource of well-educated people and overcome a lack of natural resources. This policy was helped by a technology transfer deal with RCA, the U.S. electronic company, as well as the trend in the West to outsource. In the 1980s TSMC pioneered the foundry business, which is the manufacturing of logic chips for other companies. In the 2020s, TSM produced the most sophisticated chips, which has given the company a competitive advantage over many of its rivals. It has also made Taiwan a tech center.  

During the Trump administration policy toward China hardened considerably, with the two nations ending up in a painful trade war. For China, the United States seeks to contain its rise as the world’s leading power. This has been evident in the Trans-Pacific Partnership (TPP), which was a creation by the Obama administration and sought to contain the Asian power. At the same time, the Obama administration’s “pivot to Asia” (and effort to escape the Middle East) was seen as part of the same mix of policies. The arrival of the Trump administration only deepened tensions between the United States and China.  

Although President Trump refused to sign the TPP agreement, he did pursue an aggressive policy of decoupling the two economies and forcing a restructuring of global supply chains. At the same time, pressure was brought to bear on China’s expansion into the South China Sea; its penetration of developing world economies; and its destruction of Hong Kong’s separate quasi-democratic political system. In this mix, Taiwan played an important role, especially as it is a sore point for China, being the last territory claimed by Beijing to have not been “liberated” and united with the mainland. The Trump administration’s willingness to upgrade relations with Taiwan, team up with it on the diplomatic front (especially in the Caribbean and Central America where most of its remaining diplomatic relationships exist) and sell arms to Taiwan rankled the Xi government.   

China has no intention of walking away from its claims on Taiwan. The election of pro-independence Tsai Ing-wen as Taiwan’s president in 2016 and her re-election in 2020 has only added another element of hostility from China. Indeed, Beijing has stepped up its pressure on Taiwan in 2021.  The country “has significantly increased its operations against Taiwan, which Tobias Burgers and Scott Romaniuk noted in an op-ed published by The Diplomat. It has sent its People’s Liberation Army Air Force (PLAAF) past the long-mutually-respected median line in the Taiwan Strait and has escalated the situation further by intruding into Taiwan’s air defense identification zone (ADIZ) with ever-increasing numbers of military aircraft. In addition, China deployed its carrier force to the eastern waters of Taiwan to conduct drills, while casually remarking that such entrancement-and-encirclement operations would become the norm in its foreign relations and interactions with other, principally neighboring, states,” according to Burgers and Romaniuk.

The new Cold War is likely to deepen. Although the Biden administration seeks to avoid using that term, it is largely following the previous administration’s China policy. This has translated into maintaining protectionist trade policies, including tariffs and taking aim at Chinese actions in Hong Kong and with the Uighurs in Xinjiang.  President Joe Biden has also staked out the ideological differences between the United States and China. He has noted that “this is a battle between the utility of democracies in the twenty-first century and autocracies.” Simply stated, Biden has cast the United States, standing for democracy and more market-oriented economics, as being engaged in a global struggle with the Chinese model (authoritarian politics and mercantilist economic policies).  

Where does Taiwan fit in this mix of new Cold War geopolitics and chip production? An increasing number of analysts believe that China plans to invade Taiwan in the upcoming decade.  According to Admiral Phil Davidson, the former commander of the U.S. Indo-Pacific Command: “Taiwan is clearly one of their (China’s) ambitions before then (2050). And I think the threat is manifest during this decade, in fact in the next six years.” 

If China were to successfully conquer Taiwan, it would gain a major advantage in the manufacturing of chips, something that would help its drive to be the world’s largest economy. It would also give Beijing a major geo-economic advantage with which weapon to threaten its rivals with chip shortages. It has already done this with rare earth metals. A squeeze in chip prices would add inflationary pressure as manufacturing and tech companies would most likely pass the cost increases on to their customers. In this latest round of chip increases, some people have already observed the average transaction price for new vehicles in March 2021 was estimated to be $40,563, compared to $38,601 a year prior. Price increases are filtering into sectors of the economy as well.