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How Silicon Chips Rule the World

When I arrived in Taiwan as a student in the summer of 1973, there was no ambiguity about the American role on the island.

Over the past two years, President Richard M. Nixon and his national security adviser, Henry Kissinger, had opened relations with the People’s Republic of China in Beijing. But a short distance in Taiwan, which is considered a breakaway province by the People’s Republic, US Air Force jets flew over. There was an American base in Taipei, walking distance from my favorite bookstore.

After reading Chinese philosophy, I stopped by the base cafeteria for a bite of cheeseburgers, Coca-Cola, and rock and roll. At night, the local bars were often filled with hard-partying GIs, flown in from Vietnam for rest and recreation.

As an American in Taipei, you deeply understood that you lived in an outpost of the American Empire in Asia, protected by the American military.

While Taiwan remains a close ally, it is also protected by something much more subtle: its absolutely central role in global markets.

More specifically, Taiwan is a behemoth in the global semiconductor market, the brain of modern electronics. Taiwan takes comfort in what its president, Tsai Ing-wen, is. calls “silicon shield”” — controlling the production of microchips that are just as essential to the economy in the 21st century as oil 100 years ago.

Taiwan produces some of the world’s most advanced silicon chips – fingernail-sized slivers on which billions of microscopic transistors are embedded. The very best chips are made – “manufactured” is the term of art – at the Taiwan Semiconductor Manufacturing Companyor TSMC, arguably the most important company that most people in the United States have never heard of.

Taiwan Semiconductor is the most valuable company in Asia and one of the tens most valuable in the world, with a market capitalization of more than $400 billion. If you invest in international stocks through a broad-based diversified mutual fund or exchange-traded fund, you probably own some of it. I do that, through various Vanguard index funds in my retirement accounts.

It has been a wonderful investment. In the 20 years through Wednesday, Taiwan Semiconductor has earned back 18.6 percent annually, including dividends, data from FactSet shows. That crushed the S&P 500, with an annual return of 10.3 percent, and Intel, the largest US chipmaker, at 6.7 percent.

Taiwan Semiconductor is not a household name because it does not sell its products directly to consumers. But our own customers certainly do. For an idea of ​​the company’s commercial strength, consider that the microchips it makes for Apple are at the heart of every iPhone sold.

The iPhone 13 mini in my pocket, as well as the new iPhone 14 models introduced on Wednesday, are built around chips designed by Apple in California; produced by Taiwan Semiconductor in Hsinchu, Taiwan; and shipped for assembly in mainland China or maybe some other country these days.

China has made manufacturing its own state-of-the-art silicon chips a national priority, but has not been able to catch up with Taiwan. The Biden administration plans to ensure that isn’t the case and is imposing restrictions on the export of the most advanced chips — and chip-making equipment — to China. And with $50 billion from the new CHIPS and Science Act, the government is trying to move some of the manufacturing of the best chips back to US shores.

As my colleague David Leonhardt put it, “The most advanced category of mass-produced semiconductors — used in smartphones, military technology, and more — is known as 5nm. A single company in Taiwan, known as TSMC, makes about 90 percent of them. American factories don’t make any.”

The structures etched onto these microchips are negligibly small. “Nm” is an abbreviation for nanometer. Read this slowly: A nanometer is a millionth of a millimeter.

Chris Miller, professor of international history at the Fletcher School of Law and Diplomacy at Tufts University, eloquently describes the microchips coming out of Taiwan in his forthcoming book, “Chip War: The battle for the world’s most critical technology.” He points out that the coronavirus that began spreading across the planet in 2020 was only about 100 nanometers in diameter. In the same year, Taiwan Semiconductor etched shapes smaller than half the size of that size on tens of millions of chips for Apple.

In the 20th century, I listened to ball games on a transistor radio. Now I watch them on my phone and iPad, thanks in part to the Apple A15 processor inside, which: 16 billion transistorsall etched in Taiwan.

In addition, modern weapon systems of all kinds and the world’s telecommunications infrastructure, plus applications in artificial intelligence, self-driving vehicles and much more, depend on these extraordinarily complex chips.

As Dale C. Copeland, a professor of international relations at the University of Virginia, writes: Foreign Affairs: “China now has some ability to produce chips with transistors smaller than 15 and even smaller than 10 nanometers. But to stay at the forefront of technological developments, China needs chips that “measure below seven or below five nanometers, which only Taiwan can mass-produce at a high level of quality.”

How long that technical divide can be sustained is perhaps as important a geopolitical question as the nuclear, ballistic and antiballistic puzzles of the Cold War.

The origin of Taiwan’s success story is hard to explain in a nutshell, but I’ll try.

In the 1980s, the Taiwanese government wanted to develop a local Silicon Valley and had cheap land, ready capital and a highly skilled workforce willing to work at wages much lower than companies paid in the United States.

But it didn’t have the expertise until it brought in Morris Chang, a Chinese-born American tech veteran, who realized that producing chips, not designing them, would be Taiwan’s strength. Mr. Chang founded Taiwan Semiconductor and the rest is history.

In a long Zoom talk, Professor Copeland said that a country’s military might has always been built on its economic strength.

“Cutting countries off access to critical materials can start a war,” he said, “but carefully calibrating access can prevent a war.”

In that sense, restricting trade in the most advanced semiconductors is provocative to say the least for China, which desperately needs them. But allowing trade in “fairly advanced” semiconductors softens the blow and could promote prosperity, Professor Copeland said. That is essentially what the Biden administration is doing.

Most important is “a country’s expectations of future trade,” said Professor Copeland. If it’s clear that China will be better off with a steady stream of chips from Taiwan, he added, peace is likely to prevail.

Taiwan is “the beating heart” of the global semiconductor industry, says Professor Miller. But China’s military exercises in response to House Speaker Nancy Pelosi’s visit to Taiwan illustrate how fragile the global economy has become.

If Taiwan’s semiconductor business were destroyed, Professor Miller estimated, the total global economic damage could easily exceed the cost of the entire coronavirus pandemic.

“When you look at the role Taiwan plays in just about every industry, which is huge and everyone relies on it, you have to ask yourself, ‘What could we produce without it if it were gone?’

“In Year 1, we would see massive disruptions across all sectors of the economy. It would take years to restore and replace that capacity if destroyed.”

That’s why I’ve been keeping a close eye on Taiwan Semiconductor’s stock price. From Aug. 2, the date of Ms. Pelosi’s arrival in Taiwan, through Thursday, the stock fell more than 5 percent. That’s not great, but it’s not a sign of the apocalypse.

The stock market seems undisturbed, but the situation is precarious.

Central problems in the relationship between the US and China have never been solved. back in the Shanghai Communiqué of February 1972, which reopened diplomatic relations, the two sides agreed that there is only “one China”. Chinese leaders made it clear that “the Taiwan issue is the crucial issue standing in the way of the normalization of relations between China and the United States”, and 50 years later it remains a huge problem.

China would prefer to achieve reunification peacefully, but does not rule out a military solution if it comes down to it. The United States remains committed to protecting Taiwan, but it cannot prevent China from degrading or destroying the island’s semiconductor manufacturing capabilities.

The extraordinary importance of Taiwan’s semiconductor industry in world trade is perhaps the only thing that can provide that protection.

Ideology and nationalist zeal have led to war in the past, and Chinese leaders say the Taiwan question cannot be postponed indefinitely.

At the moment, however, almost everyone is dependent on the strength of the silicone shield.