The Project 2049 Institute and US-Taiwan Business Council have published a comprehensive report titled “US, Taiwan, and Semiconductors: A Critical Supply Chain Partnership,” shedding light on the intricate and crucial relationship between the US and Taiwan in the semiconductor industry and emphasizing its strategic importance for both economic stability and national security. 

According to the report, the semiconductor supply chain involves several key steps: pre-competitive research, design, frontend manufacturing (wafer fabrication), and backend manufacturing (assembly, packaging, and testing). Each step relies on a specialized ecosystem of materials, equipment, and software suppliers. To enhance supply chain resilience, the report identifies vulnerabilities in the semiconductor supply chain, categorizing them into design risks, supply risks, and demand risks. Design risks include talent shortages, posing challenges in attracting and retaining skilled talent essential for maintaining innovation. Intellectual property and trade secrets also present design risk, particularly from theft by China. Supply risks involve limited availability and geopolitical concentration of high-purity silicon, high costs and reliance on a few manufacturers for critical semiconductor processing equipment, specialized and geopolitically sourced semiconductor processing equipment, specialized and geopolitically sourced semiconductor-grade materials, and high demand for ultrapure water and a stable power supply, making fabs susceptible to regional resource shortages and disruptions. Lastly, demand risks are exemplified by changes in demand that can disrupt the industry, as seen during the recent chip shortages.

In the global technology supply chain, Taiwan’s pivotal role is underscored by its dominance in semiconductor manufacturing and primarily through four reasons according to the report. First, the global semiconductor economy is growing rapidly, with sales reaching $570 billion in 2022, driven by increasing demand across sectors including consumer electronics, automotive, and industrial applications. Second, the US-Taiwan economic relationship is marked by significant bilateral trade in technology and semiconductors with the US heavily reliant on Taiwanese semiconductors and Taiwan benefiting from American investments and technological collaboration. Third, Taiwan leads in logical chip production and hosts two of the world’s largest semiconductor foundries, TSMC and UMC. Fourth, TSMC, in particular,  commands over 50% of the global market share for foundry services and leads in producing the most advanced semiconductor nodes below 7 nanometers. 

However, the report identifies several potential disruptions to Taiwan’s semiconductor production, each with profound global implications. Geopolitical tension between Taiwan and China presents a constant threat, where any military conflict or blockade could halt semiconductor production. Natural disasters, such as earthquakes and typhoons, also pose significant risks, potentially damaging critical infrastructure and disrupting utilities essential for semiconductor manufacturing. In addition, the complexity of the supply chain makes it vulnerable to disruptions in the supply of raw materials, chemicals, and equipment, exacerbated by heavy reliance on imported components. Finally, policy changes in international trade policies and local regulations can impact production capabilities and costs.

Losing access to Taiwan’s semiconductor production would have severe economic consequences for the United States. There could be an estimated potential 5 to 10% hit to US GDP due to the important role semiconductors play in various industries. Immediate disruptions in the technology sector would halt production lines, delay product launches, and reduce global competitiveness. The automotive sector could face production bottlenecks, potentially leading to job losses and economic slowdown. National security risks are also a concern, as semiconductors are critical for modern defense systems, with supply disruptions compromising operational readiness and technological superiority.

Looking ahead to 2027, the report points out several variables that will shape the future of the semiconductor industry. Ongoing disruptions highlighted during the COVID-19 pandemic, such as chip shortages, have driven up prices, delayed product releases, and potentially reduced technological innovation. Significant investment in global semiconductor manufacturing capacity presents a risk of overinvestment if market demand stabilizes or decreases, potentially leading to financial losses and market corrections. Government policies, such as the CHIPS and Science Act in the US, aim to incentivize domestic semiconductor production and reduce foreign dependency. While effective policies can enhance supply chain resilience and technological leadership, protectionist measures could lead to trade tensions and inefficiencies. 

Ensuring the resilience of the semiconductor supply chain is important for U.S. economic prosperity and national security. Though strengthening domestic capabilities is a priority, maintaining robust ties with Taiwan will be essential to mitigate risks associated with potential supply chain disruptions.

This article is based on the report “US, Taiwan, and Semiconductors: A Critical Supply Chain Partnership” by the Project 2049 Institute and the US-Taiwan Business Council. Read the full report.