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#studentviews: What do China-Taiwan tensions mean for global supply chains?

China’s attitude towards Taiwan’s national sovereignty is raising concerns about Western countries’ over-reliance on Taiwanese companies for essential computer chips. More needs to be done to prepare for further disruptions to global supply chains and a possible shortage of advanced semiconductors.

In reading this, you are relying on billions of semiconductors. These microscopic components form the basis of computer chips and making them is a highly sophisticated process. Taiwan makes up to 65% of total production, around nine times the volume made in China. Concerns have been raised after a statement from TSMC (Taiwan Semiconductor Manufacturing Company) – by far the largest global producer. In response to comments from China, Chairman Mark Liu stated that a Chinese invasion of Taiwan would render their factories ‘inoperable’.

The threat of war to widely traded export goods has been demonstrated by recent grain shortages in Ukraine, when Russian-captured ports were shut down, causing grain prices to rise by 20% globally. In Lebanon, a country dependent on Ukrainian wheat, bakers raised the price of bread with a $3.50 baguette going up to $5.

Crucially, grain has substitutes, while TSMC specialises in making advanced semiconductors. In the short run, it would be impossible for any company to fill in reduced supply entirely. This view is supported by changes in the prices of GPU chips last year. Devices selling at retail for $500 were instantly being bought and resold for over $1,200 on websites such as eBay. Although demand for GPU chips has gone down since 2021, a fall in global chip supply would have the same effect on a broader range of products.

It would not only be high-tech purchases that would be more expensive following a semiconductor shortage. Just as grain shortages increased the price of everyday products such as bread and sunflower oil, electronics reliant on advanced circuitry would see an increase in production costs, which would inevitably be passed onto consumers through higher prices.

The Apple iPhone relies on TSMC to produce chips at a cost of $17 billion annually. Thousands of essential devices would cost more, including smart cars, washing machines and lifesaving medical equipment. Services such as airlines using smart devices would also push through costs onto consumers.

Taiwan’s position as the top producer of semiconductors has come from a concerted effort. Since as early as 1974, the firm has invested substantially in factories. TSMC alone supplies 92% of the world’s most advanced semiconductors. Approximately ten atoms wide and used in the newest Apple products and military technology, the United States and Europe currently manufacture none of these vital components. Long-term investments have allowed TSMC to form a strong internal supply chain, which means that it is cheaper for the firm to research, develop, test and market its products independently.

Currently, it would be impossible for a single country (let alone a corporation) to match these production or innovation capabilities in the event of an invasion. But there is little incentive to invest now and compete against the current industry leaders. Doing so would be betting on the occurrence of a China-Taiwan war.

But the country working hardest to upscale high-tech semiconductor production is China.  If an invasion were to occur, Chinese companies would face trade embargos from Taiwan’s backers. The UK and its allies would have to rely on themselves or other East Asian countries such as South Korea to access the semiconductors needed for their domestic industries.

Further issues are caused by China’s disregard for intellectual property regulation: it is a deterrence for Western companies to invest in research and development (R&D) when they suspect that any technological edge they gain can be mimicked by Chinese competitors. Consequently, most European and American semiconductor firms have remained small.

These concerns are beginning to be addressed by Western leaders. In August 2022, US president Joe Biden signed the CHIPS and Science Act bill, which aims to ‘strengthen American supply chains and national security’. Cautious about the risk of Chinese trade disputes, the legislation stipulates that the subsidies it offers cannot be used in China or other countries of concern. But is the $50 billion pledged enough? While by no means a small amount, it is estimated to cost nearly $20 billion to build a single factory. Examining assets, the cost to replace TSMC alone would be $340 billion.

Broadening the issue to a potential shutdown of all Taiwanese firms, and inability to trade with China, it is clear that not enough is being done to prepare. Policy-makers – in the UK, the United States and elsewhere – need to encourage investment, especially within Europe. Doing so would allow companies to benefit from economies of scale, much like TSMC’s internal supply chain does.

It is imperative that this money goes not only towards manufacturing capabilities but also to R&D. While it may not be profitable currently to scale to TSMC’s size, companies as well as national governments need to be ready at a moment’s notice to replace the advanced chips on which the modern world depends so dearly.

Author: Tom Joshi
Editor’s note: This article is from the University of Bristol’s communicating economics class of 2022-23.
Picture by SweetBunFactory on iStock
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