How TSMC and US-China Tensions May Dictate Fate of Global Economy

• The fate of the global economy may rest on the shoulders of one company: TSMC. 
• TSMC is the world’s biggest chipmaker — its chips power everything from cars to iPhones. 
• But US-China tensions, and China’s standoff with Taiwan, could cost the global economy trillions.

On a tiny island off the coast of China, one company manufactures a product used across the globe for countless household products as varied as PCs and washing machines.

And as that island — Taiwan — worries about the threat of a standoff between the US and China, the world’s economy holds its breath. That’s because there could be trillions of dollars’ worth of economic activity tied to that one company: Taiwan Semiconductor Manufacturing Company, the world’s biggest chipmaker.

Industry watchers say an escalating dispute between the US and China over Taiwan could drag down the global economy, given the fact that no other company makes such advanced chips at such a high volume. If TSMC goes offline, they say, the production of everything from cars to iPhones could screech to a halt.

“If China would invade Taiwan, that would be the biggest impact we’ve seen to the global economy — possibly ever,” Glenn O’Donnell, the vice president and research director at Forrester, told Insider. “This could be bigger than 1929.”

What is TSMC?

While TSMC may not be a household name, you almost certainly own something that’s powered by its chips.

TSMC is in the foundry business, meaning it doesn’t design its own chips but instead produces them at fabrication plants for other companies. The company accounts for over half of the global semiconductor market, and when it comes to advanced processors that number is, by some estimates, as high as 90%. In fact, even the best chip from China’s top semiconductor manufacturer, SMIC, has been said to be about five years behind TSMC’s.

TSMC counts Apple as its biggest customer, supplying the California tech giant with the chips that power iPhones. In fact, most of the world’s roughly 1.4 billion smartphone processors are produced by TSMC, as are about 60% of the chips used by automakers, according to The Wall Street Journal.

TSMC semiconductors are also used in high-performance computing: They can quickly process reams of data and guide missiles, making the company highly valuable in the eyes of government entities.

As TSMC has grown to dominate the industry, it has automatically become an oligopoly, according to William Alan Reinsch, a senior advisor at the Center for Strategic and International Studies, a national security think tank.

“When you have a very complex, very sophisticated, and very expensive technology where barriers to entry are very high — I mean, building a fab plant is in the billions — you can’t just decide tomorrow, ‘Well, I’m going to go into that business,'” he said. “It’s not like making tea.”

How did we become so reliant on chips made in Taiwan?

The semiconductor industry has its roots in the US, as much of the research and development is done on US soil. Companies in other countries license the US-made technology.

Dylan Patel, a chief analyst at the semiconductor research and consulting firm SemiAnalysis, pointed to the Dutch company ASML as an example: ASML produces high-end chipmaking equipment, but one of the technologies for which it’s best known was invented in the US National Laboratories.

Over the past 30 years or so, manufacturers in developed countries concluded it was in their best interest to outsource the manufacturing of the chips, according to Reinsch.

“You build a big factory and you crank these things out by the thousands, and you do it in a low-wage, nonunion country that probably doesn’t have environmental requirements,” he said. “You keep all the design and IP at home and you do all your sales, marketing, and service at home, and that’s where you make the money.”

It’s this approach that has directly led to the growth of chip foundries like TSMC and reduced production on American soil, Reinsch said.

According to a 2021 report from the Semiconductor Industry Association, in 1990 the US produced 37% of the world’s chip supply. These days, the US is responsible for only 12% of global chip production.

Why is this a problem now?

As the coronavirus pandemic and the war in Ukraine have illustrated, having too much reliance on certain countries can upend supply chains when disruptions arise. It’s for this reason that many US corporations are exploring “onshoring” — moving some of their manufacturing to the US — to make their supply chains more resilient.

The US’s access to TSMC chips, however, is especially vulnerable, because though Taiwan is self-governing, China claims the island as its own and has threatened to invade. Controlling Taiwan is central to Chinese President Xi Jinping’s goal of achieving a “great rejuvenation of the Chinese nation” by 2049, the 100th anniversary of the People’s Republic of China.

While the consequences of an invasion could be significant, many experts say it’s just a matter of time before it happens, whether it’s by 2030, 2025, or even by the end of next year. On Monday, US Secretary of State Antony Blinken predicted China would take steps to annex Taiwan on a “much faster timeline” than previously thought, signaling that it could be sooner rather than later. The US government is already playing out war-game scenarios to prepare for this, and in the event of a full invasion it would reportedly consider evacuating the skilled chipmaker engineers on which it’s become so reliant.

The spotlight has focused increasingly on Taiwan and the semiconductor industry as a whole in recent weeks following the export regulations the US government slapped on China. Those regulations limit sales of semiconductors made using US technology and are meant to curb China’s ability to develop advanced technology.

The US and China are now locked in what Patel described as “a full-scale bilateral economic cold war,” one that’s likely to have severe financial repercussions, especially given how intertwined the semiconductor supply chain is.

What would happen if China invaded Taiwan?

Taiwan hopes its…