Chip Diplomacy: Semiconductors and the Threat of Conflict​

By Michael Barth

Tensions continue to rise between the United States and the People’s Republic of China (PRC). The Biden administration’s decision to keep many of the Trump-era tariffs until China lives up to its trade commitments, the passage of the CHIPS and Science Act (CHIPS Act), and a dramatic increase in the number and size of Chinese military operations in proximity to Taiwan may leave one asking if escalated rivalry or war between the two great powers is possible, or even inevitable. It is unlikely that war will arise due to the PRC’s human rights violations or mutual trade issues, as the economic and human costs would be staggering. However, a blockade of Taiwan or highly escalated tensions may be plausible if the PRC feels that its strategic position has deteriorated to the point where it must act.

The PRC significantly lags Taiwan and South Korea in the design and manufacture of semiconductors – arguably the most important technological resource in the twenty-first century, both for civilian and military applications. Semiconductors are vital in technologies ranging from missile systems to iPhones. China also lags the US in semiconductor design and production, with the PRC’s flagship semiconductor manufacturer, Semiconductor Manufacturing International Corporation (SMIC), producing 14-nanometer semiconductors compared to Intel’s standard 7nm chips – the narrower the transistor, the faster, more efficient, and more complex the chip. However, in July of 2022, SMIC began shipping 7nm (“N+2”) Bitcoin-mining chips. These mining chips are fairly simple compared to other logic chips and large-scale production will be extremely difficult given current US restrictions of chip-making equipment. That said, this impressive two-generational leap – which occurred rapidly and despite US sanctions – shows that the PRC has the potential to develop more sophisticated chips. Taiwan is still considerably more advanced in terms of semiconductor design, with the Taiwan Semiconductor Manufacturing Company (TSMC) set to begin production of 3nm chips in the coming weeks, with a 2nm production process arriving in 2025.

Currently, the United States has a roughly 50% market share in semiconductor design, versus China’s roughly 5%; Taiwan has a 63% share of the semiconductor foundry market, while China has only 6%. China alone purchases 60% of the world’s chip production, approximately 90% of which is sourced from foreign manufacturers. This puts China in a strategically vulnerable position, as domestic production does not come close to meeting military and civilian demand – particularly for advanced chips. It is estimated that by 2025, Taiwan will account for roughly 69% of advanced process capacity of 7nm chips and below, followed by South Korea at 18%, the United States at 12%, and China at only 1%; although China is promoting domestic equipment and production, it is still expected to significantly lag the US and Taiwan in the ability to produce faster, more complicated chips. Additionally, Trump-era policies targeting unfair trade have severely limited China’s access to obtain chipmaking equipment, and the CHIPS Act has only worsened China’s position.

The CHIPS Act was signed into law in August of 2022 to boost US semiconductor research, development, and production, reduce reliance on other countries for semiconductors, and introduce additional restrictions primarily aimed at China. Under the CHIPS Act, companies that receive subsidies from the US are prohibited from investing in process technologies below 28nm in the PRC. Additionally, Washington recently expanded restrictions on the export of chipmaking equipment to China. Previously, US producers were prohibited on exporting equipment that could fabricate 10nm or better chips to China – that has been expanded to anything under 14nm. As a further blow to China’s chipmaking production efforts, US export controls recently restricted technologies used for the advanced production of chips, including electronic computer-aided design software and two advanced chip substrates (gallium oxide and diamond). The US has also recently banned Nvidia and AMD from selling certain high-end chips used in AI, high-performance computing, and data analytics to China. Meanwhile, Taiwan’s TSMC has deepened its ties with the US by announcing a $12B investment in the construction of a wafer plant in Arizona. If the restrictions set by US and US-allied nations continue to tighten, relations between Taiwan and other nations deepen, and the technology and production gap widens, China will be put in a very challenging position.

In the most extreme scenario, China could attempt to forcibly take over Taiwan’s intellectual and physical semiconductor manufacturing capabilities – or bluntly, to invade the island of Taiwan and attempt to take over its facilities. President Xi Jinping has made declarations about the desire for reunification of Taiwan and the PRC, stating in his July 1 address to commemorate the 100th anniversary of the CPC’s founding, “Resolving the Taiwan question and realizing China’s complete reunification is a historic mission and an unshakable commitment of the Communist Party of China…We must take resolute action to utterly defeat any attempt toward ‘Taiwan independence,’ and work together to create a bright future for national rejuvenation.” However, a direct military invasion is unlikely. In addition to the complexities involved in staging an amphibious invasion and potential for major casualties, many (if not all) of Taiwan’s semiconductor foundries would be rendered inoperable, causing irreparable damage to China’s economy which is reliant on Taiwanese chips. Additionally, China is likely taking note of Russia’s blunder in which Putin significantly underestimated the amount of support the US and others provided to Ukraine. The US has publicly declared that it would support Taiwan militarily if China were to invade and would no doubt provide large amounts of military equipment and financial backing. A head-to-head confrontation with the US and the destruction of the very industry China is reliant on makes this scenario improbable.

In a more likely case, China may decide to blockade Taiwan to disrupt shipping routes and force more favorable trading terms for Beijing or put pressure on Taiwan and its allies. Since US House Speaker Nancy Pelosi visited Taiwan and met with both political and semiconductor industry leaders, the PRC has significantly ramped up military drills around the island. In August of 2022, the Chinese military conducted exercises in which it encircled Taiwan, engaged in live fire exercises, and deployed fighter jets and warships. Although China has long had the ability to encircle Taiwan, the message was clear – China may use such tactics to force negotiations or cause damage to the Taiwanese economy. Admittedly, a prolonged naval blockade is incredibly challenging to maintain. However, the PRC could announce military exercises around Taiwan for distinct periods of time to disrupt commerce and shipping, which could have highly detrimental effects to importers of Taiwanese goods and Taiwanese industry. To prevent this, Taiwan could launch exercises of its own and demonstrate its ability to prevent a full-scale blockade. Taiwan could also participate in regular military operations in which it operates close to Chinese military assets and monitors their behavior. Additionally, the US could increase its military presence in the region to show full commitment to defending Taiwan, rather than keeping a single aircraft carrier in the area—and away from the Taiwan Strait. Although such measures risk escalation, there are limited other options if Taiwan and the US want to return to the pre-August 2022 status quo and demonstrate their mutual commitment and resolve.

Michael Barth is a Strategy Senior Associate within JPMorgan Chase & Co.’s Commercial Banking Strategy team and serves as an officer in the United States Coast Guard Reserve. Mr. Barth graduated magna cum laude from Columbia University, majoring in financial economics with a concentration in East Asian studies, and was previously decorated as the Coast Guard’s 2019 Auxiliarist of the Year. Mr. Barth is proficient in Mandarin Chinese and has previous experience conducting market research in China, working in the United States Congress, investment banking, and management consulting.

The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of any agency of the U.S. government. Examples of analysis performed within this article are only examples and are based on very limited and open-source information. Assumptions made within the analysis are not reflective of the position of any U.S. government entity.

The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.