Why a Chinese Invasion of Taiwan could destroy the world economy

Chinese Invasion of Taiwan could destroy the world economy

“A war over Taiwan would destroy the island and the world economy because of the chips made there.” That warning was made months ago by former US Secretary of State Henry Kissinger (1973–1977), one of the most authoritative voices to explain the tense relations between the United States and China.

It is that while much of the world pays attention to what is happening in Ukraine due to the Russian invasion, on the island of Taiwan the fear of a possible military incursion by China is growing.

The latest military maneuvers carried out by the Chinese Army around Taiwan, added to the visits to Taipei by senior US officials, have strained the already difficult relations between Beijing and Washington like never before.

But why does Kissinger speak of the destruction of the world economy in the event of a war in East Asia?

In the 1960s, Taiwan began an industrialization process reinforced by its close ties to the United States. In 1973 the Institute for Industrial Research and Technology was created with the clear objective of making a strong commitment to innovation in the future. This led the country, for example, to achieve an average annual growth of 8.8% between 1951 and 1987.

In 1987, the multinational Taiwan Semiconductor Manufacturing Corporation (TSMC) was founded, dedicated to contract semiconductor manufacturing and design. In these almost four decades it became the most valuable semiconductor company in the world. Currently, the company has more than 56% of the global market share of the semiconductor industry. ICs made by TSMC are used by almost all of the world’s leading semiconductor companies, including AMD, Apple, ARM, Broadcom, Marvell, MediaTek, and Nvidia.

As well as TSMC, Taiwan has other world-leading companies in the technology industry, such as ASE Technology Holding Co, United Microelectronics Corp, Chunghwa Telecom Co, and Himax Technologies Inc., among others.

In addition to making cutting-edge semiconductors, Taiwan is also renowned for its companies that develop other crucial components, ranging from printed circuit boards to advanced camera lenses, and run huge device assembly operations in China.

Beyond the significant progress this has meant for the island’s economy, it has also created a triangle of critical interdependence between Taiwan, China, and the United States.

One of the most representative cases is that of Apple. Many Taiwanese and American suppliers serve the apple company from hundreds of facilities in mainland China. This further complicates the picture in full tension.

With nearly 2.4 billion units sold since its launch in 2007 and more than $1 trillion in revenue for Apple in 15 years, the iPhone became one of the most successful consumer devices of all time. That success is built on an extensive supply chain that produces chips, displays, speakers, and more. Every mobile phone needs about 1,500 different components.

About 70% of Apple’s main suppliers, which make everything from processors to cases, are located in China (26%), Taiwan (23%) or the United States (18%).

The most valuable components, including core processors, 5G modems, Wi-Fi chips, and premium camera lenses, are made in Taiwan by Taiwanese companies. In total, the suppliers on the island represent almost 200 dollars of the product. That is, 36% of the total cost of materials of each iPhone.

In China, meanwhile, 95% of iPhones are assembled.

Without some of these components produced in Taiwan and China, an iPhone would not be an iPhone. For this reason, the company led by Tim Cook has spent years urging its suppliers to build capacity outside of China. It currently has some alternative production capacity in countries such as India and Vietnam. But the gap is still very uneven. It is that, according to an analysis of the newspapers Nikkei Asia and Financial Times, more than 80% of Apple’s top 188 suppliers continue to have at least one company-serving facility in China. Of those 188, some 151 have production facilities in the Asian giant. That is, more than 80%. In fact, last year the total number of facilities in China that make parts for Apple increased from 251 to 276.

Thus, Apple’s decade-long efforts to build the world’s most sophisticated technology supply chain could be seriously undermined in the event of a Chinese invasion of Taiwan. This threat has led not only Apple, but dozens of companies, to look for new variants to change their operating strategies.

Last December, Tim Cook shared an event in Arizona with Chairman Joe Bien to celebrate Taiwan Semiconductor Manufacturing Co moving equipment to its new $40 billion Phoenix chip plant. It is the first of Taiwanese manufacturer on North American soil in more than 20 years. In this way, with TSMC manufacturing some of its most advanced semiconductors in the United States, Apple is guaranteed to be able to stamp the “Made in America” seal on the designed chips for the first time.

“This is the opportunity for the United States to usher in a new era of advanced manufacturing,” Cook said.

However, customer concerns are not recent. An executive at Unimicron, a maker of printed circuit boards that supply Apple, Intel and other companies, told the Financial Times that two years ago, at the height of the US-China trade war under the Trump administration, “customers told us they wanted production options outside of China, so we decided to expand manufacturing capacity in Taiwan.”

But in the middle of last year, after the visit of the former speaker of the United States House of Representatives, Nancy Pelosi, to Taipei, those same customers also asked for production alternatives “outside of Taiwan”. The reason?: “For fear of a war.”

Likewise, several technology executives acknowledged to the British newspaper that since August last year, companies such as Intel, AMD, Nvidia, Meta, Google and Amazon have requested production capacity outside of China and Taiwan.

Dell, for its part, aims to phase out Chinese-made chips by 2024.

An executive from the Japanese manufacturer Advantest was blunt when speaking to Nikkei Asia and the Financial Times: “We have a business contingency plan -the so-called BCP- to prepare for interruptions in the supply chain, such as a war (…) But if there really is a military conflict in the Taiwan Strait, I honestly believe that any contingency plan will be totally useless. It would be doomsday for the chip supply chain, and no one wants to imagine that happening.”

The technology sector is no longer just evaluating the consequences of an eventual full-scale war. A Chinese blockade of Taiwan could also cause heavy economic losses globally. According to an estimate by the Semiconductor Industry Association, a disruption in chip production at contract manufacturers in Taiwan could cause nearly $500 billion in lost revenue for electronic device makers that rely on this supply.

“People underestimate Taiwan’s position in the supply chain. It is much more than semiconductors. We have a very complete supply chain, from chips, to components, to PCBs, to casings, to lenses, to assembly… Anything you can imagine,” said a senior executive at Compal, an assembler of vital products for Dell, HP and Apple.

“If there is military friction in Taiwan, the entire global supply chain will collapse for sure,” he added.

Against this background, Washington is trying to speed up the process, focusing on chips. Like TSMC, it offers incentives to foreign companies – including South Korea’s Samsung – to help build the US semiconductor industry.

TSMC’s plant in Arizona, which will manufacture state-of-the-art 3-nanometer chips that can be used in supercomputers, smartphones, cars, fighter planes and military equipment, is considered one of the greatest achievements of this initiative.

According to a Counterpoint projection, if all the planned investments are made, both foreign and domestic, by 2027 the United States will manufacture 26% of the world’s advanced chips. It currently manufactures 10%. And Taiwan, meanwhile, would go from 54% to 45% in the same period.

This month the G7 leaders, meeting in Japan, pledged to “reduce excessive dependencies in our critical supply chains.” However, the Chinese regime is not planning to sit idly by and is also speeding up to establish its own technological supremacy. And in the middle, trapped, is Taiwan, with the constant Chinese threat.

“Most of the executives we spoke to acknowledge that the war in Ukraine has had a major impact on their business because of their exposure to Russia. However, a conflict between China and Taiwan would be of a much larger magnitude. The importance of China compared to Russia is much higher for the West. The dependence on semiconductors is much greater than the one that Europe maintained on Russian gas. The impact on the world economy would be ten times greater than what we have experienced up to now with the war in Ukraine” , explained David Bach, professor and expert in Strategy and Political Economy, in an interview with the Spanish newspaper El Economista.

For now, while China continues to increase tension with constant military maneuvers in the vicinity of the island of Taiwan, Washington and Taipei are strengthening their alliance through trade and military agreements. The Xi Jinping regime has warned on more than one occasion that “one day” it will achieve unification with Taiwan. But lately he decided to move from warnings to outright threats. The most recent was launched by Defense Ministry spokesman Colonel Tan Kefei , who stated that Beijing will “crush” any bid for Taiwanese independence.