How silicon chips rule the world
By Jeff Sommer
When I first arrived in Taiwan as a college student in the summer of 1973, there was no ambiguity whatsoever about the American role on the island.
Over the previous two years, President Richard Nixon and his national security adviser, Henry Kissinger, had opened relations with the People’s Republic of China in Beijing. But a short distance away in Taiwan, which the People’s Republic considers a breakaway province, U.S. Air Force jets soared overhead. There was a U.S. base right in Taipei, within walking distance of my favorite bookstore.
After reading Chinese philosophy, I’d drop by the base canteen for a fix of cheeseburgers, Coca-Cola and rock ’n’ roll. At night, the local bars were often filled with hard-partying GIs, flown in from Vietnam for rest and recreation.
As an American in Taipei, you understood in a visceral way that you were living in an outpost of the American empire in Asia, protected by the U.S. military.
Now, while Taiwan remains a close ally, it is also protected by something far more subtle — its absolutely central role in world markets.
The ‘silicon shield’
More specifically, Taiwan is a colossus in the global market for semiconductors, the brains of modern electronics. Taiwan takes some comfort in what its president, Tsai Ing-wen, calls its “silicon shield” — its mastery of the manufacturing of the microchips that are as essential to the economy in the 21st century as oil was 100 years ago.
Taiwan produces most of the world’s highest-tech silicon chips — slivers the size of a fingernail, on which are embedded billions of microscopic transistors. The very best chips are made — “fabricated” is the term of art — at the Taiwan Semiconductor Manufacturing Co., or TSMC, which may be the most important company that most people in the United States have never heard of.
Taiwan Semiconductor is the most valuable company in Asia and one of the dozen most valuable in the world, with a market capitalization of more than $400 billion. If you invest in international stocks through a broad, diversified mutual fund or exchange-traded fund, you probably own a piece of it. I do, through several Vanguard index funds in my retirement accounts.
It has been a splendid investment. Over the 20 years through Wednesday, Taiwan Semiconductor returned 18.6% annually, including dividends, FactSet data shows. That thrashed the S&P 500, with an annual return of 10.3%, and Intel, the biggest American chipmaker, at 6.7%.
The magic of those chips
Taiwan Semiconductor isn’t a household name because it doesn’t sell its products directly to consumers. But its own customers certainly do. For a clue about the company’s commercial power, consider that the microchips it makes for Apple are the core of every iPhone sold.
The iPhone 13 mini in my pocket, as well as the new iPhone 14 models introduced Wednesday, is built around chips that were designed by Apple in California; produced by Taiwan Semiconductor in Hsinchu, Taiwan; and shipped for assembly on mainland China or perhaps, these days, in another country.
China has made the production of its own state-of-the-art silicon chips a national priority, but it has been unable to catch up with Taiwan. The Biden administration is intent on making sure that it does not, imposing restrictions on the export of the most advanced chips — and chipmaking equipment — to China. And with $50 billion from the new CHIPS and Science Act, the administration is trying to shift some of the fabrication of the best chips back to American shores.
As my colleague David Leonhardt put it: “The most advanced category of mass-produced semiconductors — used in smartphones, military technology and much more — is known as 5 nm. A single company in Taiwan, known as TSMC, makes about 90% of them. U.S. factories make none.”
The structures etched on these microchips are vanishingly small. “Nm” is short for nanometer. Read this slowly: A nanometer is one-millionth of a millimeter.
Chris Miller, a professor of international history at the Fletcher School of Law and Diplomacy at Tufts University, describes the microchips coming out of Taiwan eloquently in his forthcoming book, “Chip War: The Fight for the World’s Most Critical Technology.” He points out that the coronavirus that began spreading around the planet in 2020 was only about 100 nanometers in diameter. The same year, Taiwan Semiconductor was etching shapes less than half that size onto scores of millions of chips for Apple.
As Dale C. Copeland, a professor of international relations at the University of Virginia, writes in Foreign Affairs: “China now has some capability to produce chips with transistors that are under 15 and even under 10 nanometers in size. But to stay on the cutting edge of technological developments,” China needs chips “measuring under seven or under five nanometers, which only Taiwan can mass-produce at a high level of quality.”
How long that tech gap can be sustained may be as important a geopolitical question as the nuclear, ballistic and anti-ballistic puzzles of the Cold War.
Stock prices and the pelosi visit
In a long Zoom conversation, Copeland said a nation’s military power had always been built on its economic strength.
“Cutting countries off from access to critical materials can cause a war,” he said, “but calibrating access carefully might be able to prevent one.”
In this sense, limiting trade in the most advanced semiconductors is, at a bare minimum, provocative to China, which dearly needs them. But permitting trade in “fairly advanced” semiconductors softens the blow and can promote prosperity, Copeland said. That is essentially what the Biden administration is doing.
What is most important is “a country’s expectations of future trade,” Copeland said. If it is clear that China will be better off with a steady flow of chips from Taiwan, he added, peace is likely to prevail.
Taiwan is “the beating heart” of the global semiconductor industry, Miller said. But China’s military exercises, in response to the Taiwan visit of Nancy Pelosi, the speaker of the House, illustrate how vulnerable the global economy has become.
Were Taiwan’s semiconductor operations to be destroyed, Miller estimated, the total worldwide economic damage could easily exceed the cost of the entire coronavirus pandemic.
“If you start looking at the role Taiwan plays in just about every industry, which is tremendous and which everyone relies on, you have to ask, ‘What could we produce without it if it were gone?’
“In Year 1, we would face tremendous disruptions across all sectors of the economy. It would take years to recover and to replace that capacity, if it were destroyed.”
Ideology and nationalistic fervor have led to war in the past, and Chinese leaders say the Taiwan question can’t be put off indefinitely.
At the moment, though, just about everyone else is depending on the power of the silicon shield.