Semiconductors are a key component of products we use every day, including smartphones, laptops, and cars - and the majority of them are Taiwan-made.
A “crisis” between China and Taiwan would affect “literally every country on Earth,” US Secretary of State Antony Blinken told Euronews last week.
He was speaking amid rising tensions between the two countries, with China then carrying out three days of military drills around the island of Taiwan, which Beijing sees as a breakaway province.
Any outbreak of hostilities in Taiwan could have many economic and security implications around the world. One of the most impactful however could be around the production of semiconductor chips.
Semiconductors make the world go round. They are essential components of digital products, devices, and infrastructure; from smartphones and cars to healthcare and military equipment.
As the world becomes ever-more digital, with more Internet of Things-enabled devices, more artificial intelligence (AI), and more cloud, edge and quantum computing, the demand for semiconductors is only going to grow.
And Taiwan is by far the world’s biggest producer of the chips - a point noted by Blinken in his Euronews interview.
China has vowed to reunite the democratic island of Taiwan with the mainland, a goal that Western countries interpret as a coded language for a possible full-scale military intervention sometime in the future.
What are semiconductors and why are they so important?
Semiconductors - otherwise known as chips - are essential components in countless electronic products that are used daily in our lives.
From smartphones, radios, TVs, computers, laptops, video games, to cars, aeroplanes and other transport modes, to a wide array of medical devices, without semiconductors the world as we know it would cease to function.
They are projected to become a one trillion dollar industry by 2030, according to a report by consultancy firm McKinsey & Company.
That report states that around 70 per cent of the growth is predicted to be driven by three industries: automotive, computation and data storage, and wireless.
While semiconductors are vital to our modern world, they are also difficult to make. Producing them is a highly precise, and expensive process, involving multiple complex steps.
It is also a costly and time-consuming process - so manufacturers can struggle to respond quickly to market changes or technological advances.
Due to their importance in so many products, disruption to chip manufacturing has severe knock-on effects for the global supply chain. This was seen during the COVID pandemic, when work from home orders prompted chip factories to close down in 2020.
The rise in demand for electronics for people working from home due to lockdown orders meant a rise in demand for chips - and when the factories started to reopen, there was already a backlog of orders.
This led to a shortage of new cars being manufactured, as chip makers struggled respond to the increased demand.
Taiwan’s role in semiconductor production
Taiwan is by far the world’s biggest manufacturer of semiconductors. It produces more than 60 per cent of them globally, and more than 90 per cent of the most advanced ones.
Its biggest producer, Taiwan Semiconductor Manufacturing Company (TSMC), has around a 54 per cent share of the global market, supplying chips to companies such as Apple, Qualcomm, and Nvidia.
The US’s share of the market amounts to around 12 per cent, while European nations combined account for just 9 per cent.
Both the US and the EU have plans to boost semiconductor production. EU officials have said they want to increase Europe’s share to 20 per cent by 2030, while the US government last year passed its CHIPS act, investing billions into semiconductor manufacturing.
But given the difficulties and costs in setting up the total manufacturing process, Taiwan for now remains a critical source of chips for the world’s electronics.
How Chinese aggression towards Taiwan could affect supply
Given the near monopoly Taiwan holds of advanced chip production, any military engagement between China and Taiwan would have huge repercussions globally.
Taiwan’s dominance of semiconductor production has been called the “Silicon Shield” by some analysts - meaning because of its global importance in producing key elements for electronics, China could be kept at bay from forcing it back into its fold.
The latest military drills around the island by China raise questions about how strong the shield is.
"Fifty per cent of global commercial traffic goes through the Taiwan Strait every day,” Blinken told Euronews after a NATO foreign affairs meeting in Brussels on April 5.
“Seventy per cent of the semiconductors that we need for our smartphones, for our dishwashers, for our cars, they're made in Taiwan," he went on.
“If there was some kind of crisis as a result of something that China did, that would have terribly disruptive effects on the global economy, which is why countries around the world look to everyone to behave and act responsibly”.
He added: "I heard this in conversations with many of our NATO allies as well as partners in Asia: there is concern that, were there to be a crisis as a result of China's actions over Taiwan, that would have repercussions for quite literally every country on earth”.
If China were to blockade Taiwan, or invade, it would cause an immediate cut-off of supply of the majority of semiconductors used in products around the world.