By far, Beijing’s most triggering pain point is Taiwan.
The faintest suggestion that the thriving, democratic technological superpower across the Taiwan Strait is anything other than an “integral, inseparable part” of the People’s Republic of China throws Beijing’s Communist honchos into a white-hot fury.
Even the United States, which pivoted toward diplomatic relations with Beijing in the 1970s, has to thread the needle carefully, withdrawing official diplomatic recognition from Taiwan but maintaining deep quasi-official ties.
For decades, an uneasy status quo existed. Apart from the odd isolated saber-rattling session, Taiwan didn’t assert its independence (or its own claim to sovereignty over the mainland), and the People’s Republic didn’t assert sovereignty over Taiwan.
It’s much easier to do billions in cross-strait commerce that way… And that’s what happened.
But that’s changing under President Xi Jinping. And the fallout could stretch across the Taiwan Strait all the way to the U.S.’s West Coast.
Xi’s an iron-fisted ruler, even by the standards of your average Communist dictatorship.
And things aren’t changing for the better.
Beijing’s leaders now speak ominously of “re-taking” Taiwan by force or refusing to “tolerate” the status quo much longer. Pundits on every side wonder openly about the possibility of a shooting war or all-out invasion.
Such a conflict would inevitably draw in the U.S. and its allies. It could quickly and easily become a destructive nuclear war.
But why would a country like China – the world’s second-largest economy by GDP – with so much to lose, push the situation to the brink? For that matter, why would the U.S., with even more to lose, rush in headlong?
The answer is surprising... And it’s got nothing to do with what you hear about on the news.
Why This Small Island Is Such a Big Prize
Hot rhetoric of “restoring territorial integrity” or “defending democracy” plays well with war hawks in Beijing and D.C.
But the truth is, Taiwan has what everyone needs right now: semiconductors.
Chips.
It’s hackneyed to say “Oh, they’re in everything nowadays.” But the truth is, that’s no exaggeration.
You find them in cars and trucks, medical devices, airplanes, toothbrushes…
…fighter jets, guided missiles, destroyers, tanks…
Semiconductors, and free access to them, has become a bonafide national security priority for the world’s biggest, most powerful countries.
And chips are essential to a healthy modern economy, too. Remember the economic mayhem that broke out during the COVID-19 pandemic, when the semiconductor supply was disrupted?
That led directly to the steep increase in inflation we’re still grappling with today.
This is why Taiwan is so critical.
Taiwan’s factories produce the world’s best, fastest, most powerful chips on Earth. And they’ve been doing it since the mid-1970s.
Taiwanese technicians are the undisputed masters of silicon-wafer manufacturing. A robust supply chain exists to service the chipmaking industry there.
The island nation dominates the $600-billion global semiconductor segment. A closer look shows no other country even comes close. Its chipmakers, like Taiwan Semiconductor (TSM), ASE Technology, and MediaTek are key global players. And TSM is publicly listed on the Nasdaq.
Thanks to Taiwan’s friendly relations with the U.S. and open trade policies, the country and the West get virtually unfettered access to those quality components. In return, Taiwan gets access to technology, like the EUV ultraviolet lithography machines manufactured by Dutch chipmaker ASML Holding (ASML).
Now, the U.S. happens to manufacture excellent semiconductors of its own… and plenty of them. And the government is investing hundreds of billions of dollars to further beef up domestic manufacturing capacity.
But we’re a long way from self-sufficiency. And Uncle Sam has a vested interest in ensuring those quality chips stay out of Beijing’s hands.
The People’s Republic of China’s largest chipmaking enterprise is Semiconductor Manufacturing International Co. (SMIC).
It’s been on a U.S. government blacklist for tech exports due to concerns the Chinese government may gain some strategic edge via SMIC’s position in the market. The company is blocked from receiving the latest foreign chipmaking technology, such as those EUV machines.
While SMIC can make 7-nanometer chips, like Intel (INTC), they can’t do it cost-effectively and on a meaningful scale. China’s domestic industry makes good memory chips. But with the way the situation stands now, it can’t hope to compete or gain an edge in making the logic chips that really move the needle.
For instance, when the U.S. placed export bans on American chip technology to China, China retaliated. But the hard truth is, China can’t do much to hurt Silicon Valley at this point.
At least not overtly. Though there are more aggressive ways…
Why the Risk of Conflict is Increasing Every Year
So, China isn’t just “at risk” of falling behind in the global race for semiconductor supremacy… it has fallen behind.
And with things as they are now, it may never catch up.
At the same time, China is becoming increasingly competitive with the U.S. in nearly every sphere. But in computing, artificial intelligence, satellite and space tech, Big Data – China won’t be able to gain an edge in any of these increasingly important segments without access to vast quantities of truly high-quality logic chips.
In this context, it’s easy to see why China is casting an envious eye at Taiwan and its dominant chipmaking industry.
It’s not a big stretch to imagine somewhere in the dusty basement vaults of the Chinese military leadership, there’s some war plan for the lightning capture of Taiwan. The island and its industrial base would need to be taken relatively intact.
Of course, the Taiwanese and their allies would get a big say in that plan’s success or failure. It wouldn’t be the first time a battle intended to be a quick, nasty affair turned into a spiraling quagmire.
The risk of an all-out conflict is frighteningly real. But then again, overt confrontation might not be the route the Chinese government chooses.
There are still other, more subtle ways China can try to get ahead: cloak-and-dagger.
Their existing chips can be used to gather technological secrets. Recently their “spy chips” were found in servers used by 30 U.S. companies – including tech firms, major banks, and government consultants.
The chips have been found across the government, too, at Homeland Security, Defense, the Navy, even the CIA. It’s likely these chips are in hundreds of thousands - maybe even millions of devices.
And if these spy chips are successful, China just might get the upper hand without firing a shot.
Until next time,
Greg Madison