Taiwan, China and the U.S. are in a fight to control your microchips

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Taiwan, China and the U.S.: Inside the fight to control the microchips that power your car and computer

In the wake of House Speaker Nancy Pelosi’s (D-Calif.) visit to Taiwan, the Chinese military ran its largest-scale exercises in decades and fired missiles near the island, disrupting supply routes for days. Beyond the geopolitical crisis, as hulking container ships dodged the drills, the world got a preview of what might happen to global commerce if a real conflict broke out in the Taiwan Strait.


Hear more from Lili Pike about this story:




The ships leaving Taiwan are carrying precious cargo for the global supply chain — semiconductors, the tiny chips that are at the heart of modern consumer and military electronics, from iPhones to cars, home appliances to missiles. Taiwan has long dominated the production of these powerful chips, supplying the vast majority of the world’s most advanced semiconductors. Any rupture to the supply chain of this critical commodity would send shock waves through the global economy.

That risk was very much in mind when Congress passed a sweeping bipartisan bill to lessen U.S. dependence on foreign chips — a bill signed into law by President Joe Biden on Tuesday. The legislation aims to build more semiconductor factories, or “fabs” in industry lingo, on U.S. shores with the help of $52 billion in subsidies.

Senate Majority Leader Chuck Schumer (D-N.Y.) called the Chips and Science Act “one of the most important things we’ve done for America in years, if not decades,” in a speech on Tuesday. Biden, in his remarks, referred to the Ohio plot where Intel is breaking ground on new semiconductor fabs as “a field of dreams.”

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Behind that lofty rhetoric is a core mission for the U.S. that has won bipartisan support: outcompeting China in the 21st century. While China doesn’t dominate chipmaking today, lawmakers are worried about the country’s recent race to catch up. That concern has driven a significant change in the way the U.S. approaches economic development. Instead of letting the market shape the future, a bipartisan group of lawmakers signed on to a law that mirrors China’s own industrial policy. It was China, after all, that decided the semiconductor business was worth government support and put huge sums of money behind the technology. Now the U.S. has — belatedly, many would say — jumped into the game.

This deep investment in building domestic semiconductor supply chains on both sides of the Pacific reflects growing distrust between the two superpowers. It also suggests a profound shift away from globalization. Orville Schell, director of the Center on U.S.-China Relations at the Asia Society, said the chips industry was globalized with “no regard to the possible political tensions and conflicts that are inherent in where things are made, and to whom they get traded.” And now, he told Grid, that’s changing: “I think we are at a point of extraordinary inflection, and chips lie right at the center of it.”

Why the U.S. thinks depending on Taiwan’s chips is risky

Taiwan’s semiconductor strength, and U.S. dependence on Taiwan for chips, has become synonymous with four letters: TSMC — the Taiwan Semiconductor Manufacturing Company. TSMC is a semiconductor juggernaut, a company that helped Taiwan produce a staggering 63 percent of global supply of semiconductors in 2020. In one sign of its market dominance, TSMC supplied 92 percent of the most advanced chips in 2019, according to a recent report.

The U.S. invented the microchip, but while it still leads in chip research and design, in 2019 it produced only 13 percent of the global chip total, down from 37 percent in 1990. Apple and other major U.S. companies are now highly dependent on TSMC for the chips that go into iPhones, iPads and various household appliances. TSMC’s critical role in supplying the U.S. was on display during Pelosi’s trip; in a 19-hour visit to Taiwan, she took time to meet with senior TSMC executives.

To understand the risks associated with this dependence, one need only glance at a map. TSMC churns out chips in a set of giant fabs on Taiwan’s west coast — the shores where China would land if it were to invade the island. Some have argued that China’s own dependence on Taiwan for these chips would deter it from attacking — a theory known as the “silicon shield.” But the risk can’t be ruled out, and the consequences would reverberate all over the world.

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“It’s likely that military force used against Taiwan would really be catastrophic for this industry, in ways that we can’t really imagine,” said Paul Triolo, senior vice president for China and technology policy at Albright Stonebridge Group. “At a minimum, it would be hugely disruptive, and then the question would be how long it would take to restore and if it could be restored.”

U.S. officials were candid about this threat as they promoted the chips bill. Speaking at the Aspen Security Forum in July, Secretary of Commerce Gina Raimondo said, “Our dependence on Taiwan for the sophisticated chips is untenable and unsafe.”

The U.S. has long criticized China’s industrial policy. Now it’s copying it.

The United States’ game plan to address its weakness in semiconductor manufacturing, and its overdependence on Taiwan, appears to have been borrowed from an unexpected place — China.

Like the U.S., China has relied on foreign manufacturers for most of its chip supply. But recently, it has poured government cash into changing that. Boosting domestic output of chips was crystallized as a Chinese government priority back in 2014, with the release of a national plan for the industry. The U.S. Semiconductor Industry Association estimates that China will invest $150 billion in the industry between 2014 and 2030; China’s state-backed “Big Fund” for semiconductor development along with associated local funds had already invested $73 billion as of 2021.

China’s program hasn’t been a full-blown success; for one thing, executives charged with leading the industry’s expansion are under investigation for corruption. But the investments have helped the industry scale up its fab capacity, and they have already produced some breakthroughs. The New York Times reported in July that SMIC, China’s state-owned chip giant, may have created its most advanced chip yet. The tiny transistors that make up the chip were just 7 nanometers in width; any width below 10 nanometers is generally considered advanced (for perspective, a human hair is about 80,000 nanometers wide). A smaller transistor typically enables a faster processing speed or lower energy usage — which are increasingly important as chips are used for more advanced functions like AI.

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The new law seeks to replicate China’s approach before the U.S. falls too far behind. The $52 billion will be directed toward research and manufacturing chips on U.S. soil, with the Commerce Department in charge of allocating the money to companies. The theory is that government investment will help reduce the costs of manufacturing in the U.S., which (as is the case for most sectors) are higher than in Asia.

“Whether the U.S. or Europe are able to bring down the cost to the level of Asia, I think, will be the key, and also the continuous supply of talent, as well as the integrated ecosystem,” said Jason Hsu, a former legislator in Taiwan and senior research fellow at the Harvard Kennedy School — citing the factors that have made Taiwan’s industry so strong. “Bringing back chip manufacturing won’t be an overnight success for the U.S.”

There are already signs of traction: In the week since the bill passed, the U.S. company Micron announced a $40 billion investment to build out U.S. fabs, and the Taiwanese powerhouse TSMC has already started building a fab in Arizona, anticipating the bill’s incentives.

“I think it’s a necessary and essential first step,” said Schell. “To not get the bill would have been a tremendous letdown and really made it look as if the United States was incapable of responding to the challenge that China is now posing.”

Competition — and containment

As the U.S. tries to move ahead with its own chip production, it’s clear that it is also trying to make sure China stays behind.


The new law explicitly states that companies receiving subsidies from the U.S. cannot build advanced chip factories in China. That’s a significant setback for China, which needs foreign expertise to bolster its own industry.

This is only the latest in a series of moves the U.S. has made to stymie China’s development of chips. The U.S. has placed restrictions on exports of semiconductors and related equipment to Chinese tech powerhouses Huawei and SMIC. It has also worked with the Netherlands to block China from acquiring key chipmaking machinery produced by the Dutch company ASML that would allow it to jump-start its production of the smallest, most cutting-edge chips at home.

“The U.S. government is attempting to draw lines around how far Chinese companies can advance in the sector,” Triolo told Grid.

The motivation for the U.S. isn’t just maintaining an edge economically, but militarily as well. For decades, the U.S. has held a military advantage over other countries by leading in a range of advanced technologies. That, in turn, serves as a critical foundation for deterrence, Matthew Turpin, a visiting fellow at Stanford University’s Hoover Institution and a former China director of the National Security Council, told Grid. Containing China’s technological advances, he said, is part of that strategy.

“We, in our public statements, dress it up in more diplomatic language, but the reality is that is what we are doing. We view them as a nation-state that is seeking to overturn a liberal rules-based international order and to set up an international order that is more advantageous to their regime type,” he said. “The U.S. sees it as prudent to deny them those kinds of capabilities that would allow them to reach a sort of military parity or military superiority.”

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Biden has also explicitly acknowledged the national security aims of the bill. In his speech on Tuesday, he described a recent visit to the Lockheed Martin factory in Alabama that produces Javelin missiles bound for Ukraine. “It’s crystal clear we need these semiconductors not only for those Javelin missiles but also for weapons systems in the future that are going to be even more reliant on advanced chips,” he said. “Unfortunately, we produce zero percent of these chips now. And China is trying to move way ahead of us and manufacture these sophisticated chips as well.”

The downward spiral of U.S.-China “decoupling”

China, unsurprisingly, hasn’t responded well to the bill. “China is firmly against it,” said Chinese foreign ministry spokesperson Zhao Lijian. “It is up to the U.S. how it wants to develop itself, but it should by no means create hurdles for normal technological and people-to-people exchanges and cooperation with China, still less deprive China of or undermine China’s legitimate development rights and interests.”

China could retaliate. Big U.S. tech companies like Qualcomm and Nvidia sell semiconductors and associated equipment into the Chinese market. China could block deals with these companies, cutting off a major source of revenue.

Some experts say that this kind of negative spiral may be unavoidable due to the overall deterioration of U.S.-China relations and, on the U.S. side, a growing bipartisan consensus on the need to confront a rising China.

The trend extends beyond semiconductors: The U.S. is pushing for greater domestic reliance and cutting ties with China on several other fronts. The recently passed climate bill allocates $60 billion to boost domestic production of solar panels, wind turbines and battery components — industries that have been increasingly dominated by China.

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Another recent law, the Uyghur Forced Labor Prevention Act, has forced U.S. companies to relocate some of their China supply chains. The law deems any product made in Xinjiang to have been produced using Uyghur forced labor, and therefore bans U.S. companies from importing all products and raw materials from the region into the U.S. On China’s side, investments in critical technologies fall under the country’s “Made in China 2025″ policy — which emphasizes domestic production and self-reliance.

These moves are gradually breaking down not only commerce between the U.S. and China, but important pieces of the globalized economy and the geopolitics that were built alongside it. Now the world will have to see — literally and figuratively — where the chips will fall.

Thanks to Lillian Barkley for copy editing this article.

  • Lili Pike
    Lili Pike

    China Reporter

    Lili Pike is a China reporter at Grid focused on climate change, technology and U.S.-China relations.