Jason Hsu explains why TSMC must balance geographic diversification with the protection its chips provide for Taiwan

Often referred to as the “Silicon Shield,” Taiwan produces a staggering 65% of the world’s semiconductors and over 90% of the highest-end chips. As such, no company is more singularly important to the global economy than TSMC (Taiwan Semiconductor Manufacturing Company). TSMC’s advanced microchips are indispensable to iPhones, medical devices, missile launch platforms, and many other technologies, and they are largely unrivaled. Countries and companies that cannot avail themselves of TSMC’s most advanced semiconductors simply cannot develop certain critical technologies. The company’s decisions thus can bear directly on matters of global security.

With the outlook for Sino-American relations grim, TSMC announced plans to invest $40 billion to build a second fabricating plant in Arizona, where it will make three-nanometer chips (the first plant, for four-nanometer chips, is scheduled to be up and running in 2024). The company’s decision to site more production in the United States is understandable now that tensions over Taiwan have taken center stage. Following US House Speaker Nancy Pelosi’s visit to the island in August, China conducted unprecedentedly aggressive military exercises, launching missiles near the island and simulating a blockade in the Taiwan Strait.

Then, in October, US President Joe Biden’s administration announced sweeping new export controls designed to cripple China’s ability to produce advanced chips and pursue other high-tech manufacturing. Although China has invested massively in domestic chip production, the results have been disappointing. Now that President Xi Jinping has secured a third term as China’s leader, his regime could retaliate by terminating US tech firms’ contracts to build data centers for provincial governments.

While TSMC has received a one-year exemption from the new US export controls, there could come a time when the US government will push it to cut off most of its business in China. The Biden administration worries that China is using TSMC chips in a new class of hypersonic missiles, and to pursue global dominance in artificial intelligence.

China’s dependence on Taiwanese chips has served as a form of deterrence and protection for Taiwan, because the Chinese government simply cannot seize the island’s highly sensitive chip-manufacturing facilities by force. While some observers worry that China may regard TSMC as a reason in itself to take Taiwan, TSMC chair Mark Liu has pointed out that a war would inevitably destroy TSMC’s fabs or render them inoperable.

Still, TSMC finds itself caught in the middle of a great-power competition, because it produces chips that both sides want and has operations on both sides. While the Chinese market accounts for 10-12% of the company’s total revenue, the US is its largest customer base, and Taiwan is still its major production base and research and development center.

TSMC is diversifying its chip-manufacturing capacities precisely to avoid becoming entangled in geopolitical complexities. Beyond Arizona, it plans to open fabs in Japan, and it is in the process of evaluating sites in Europe. But there is a limit to how far TSMC’s diversification can go before it deprives Taiwan of its silicon shield.

China will almost certainly fall behind in the semiconductor race, because it lacks access to the lithography machines needed to manufacture the most advanced chips. Nonetheless, it is likely to dominate the market in legacy chips (those ranging from 28 to 44 nanometers), and it is working quickly to develop its own technology standards.

While the US has sought to reduce its own dependence on Taiwanese chips by enacting the 2022 CHIPS and Science Act, increased federal support for domestic semiconductor producers will not resolve the issue entirely. TSMC will still make the most advanced chips for the foreseeable future, and much of the supply chain will remain in Taiwan. US policymakers therefore must be prudent when it comes to export controls. Policies that succeed in cutting China off entirely from advanced chips could change the deterrence calculus and leave China with nothing to lose by invading. As Taiwanese President Tsai Ing-wen noted in a recent speech, the superpowers’ shared dependence on Taiwanese chips must continue to be seen as “not a risk, but … the key to the reorganisation of the global semiconductor industry.”

As geopolitical tensions rise, maintaining deterrence in the Taiwan Strait is more important than ever. Xi’s address to the recent 20th National Congress of the Communist Party of China showed that he is serious about unifying Taiwan with mainland China – by force, if necessary – though when remains unclear. As the US and Taiwan head into their own presidential election cycles, politicians may feel increased domestic pressure to act provocatively.

That said, TSMC’s goal remains the same: to maintain its status as the unrivaled industry leader. To do so, it will have to play a smart long game. That means making necessary sacrifices in its Chinese business, pacing itself with new investments and diversification overseas, and ultimately keeping its most advanced chips in Taiwan.

China and the US will see each other as strategic rivals for many years to come, and technology and national security will remain at the center of their competition. Ensuring that Taiwan’s economy, trade, and technology supply chains are resilient and less dependent on China is in America’s vital interest. Caught in the middle of the twenty-first century’s great-power competition, TSMC can only hope that US leaders continue to recognise this.

Jason Hsu, a former at-large member of Taiwan’s Legislative Yuan (parliament), is a senior research fellow at the Ash Center for Democratic Governance and Innovation at Harvard Kennedy School. This content is © Project Syndicate, 2022, and is here with permission.