The Risks of Semiconductor Dependence: Case for American Action

Taiwan’s international role as the near-monopolistic powerhouse in semiconductor manufacturing has taken on additional weight in recent years as tensions with China intensify and the fragility of the global supply chain becomes increasingly clear. The geopolitical and technological implications of this consolidation of manufacturing are profound, particularly for countries like the United States, which find themselves increasingly dependent on Taiwan for these critical components. This dependency not only raises concerns about supply chain security and economic stability but also positions the U.S. at a significant strategic disadvantage to China.

Centralization of chip development in Taiwan: A brief history

Taiwan’s ascent to semiconductor dominance was no historical accident; rather, it was a result of deliberate policy, significant R&D investment, and an educational system designed to produce a skilled workforce. Companies like Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, have benefited immensely from these efforts. Government policies in the 1980s and 1990s, particularly key tax incentives and the creation of Hsinchu Science Park fostered an ecosystem conducive to technological innovation and specialization in semiconductors.

Taiwan’s strategic focus was partly inspired by its geopolitical situation and the urgent need to develop high-tech industries that could ensure economic independence and security. Post-1970s, as Taiwan faced diplomatic isolation and was deemed ineligible for foreign aid, turning to technology was a strategic pivot to self-sufficiency.

Geopolitical and technological concerns: Stuck between two giants

The centralization of the semiconductor industry in Taiwan presents stark geopolitical challenges due to its foundational role in global technology — from consumer electronics to defense systems. Taiwan’s geopolitical tension with China, underpinned by China’s territorial claims and military posturing, adds to the uncertainty. Any conflict or disruption could severely impact global supply chains, heavily affecting countries reliant on Taiwanese semiconductors.

Today, the US imports ~44% of its logic chips from Taiwan. In the event of a major disruption, US could see prices rise as much as 59% for these critical components[1]. This dependency places the United States in a tricky position. Taiwan is both an ally in the region and a chokepoint in the US’ technology supply chain, aligning U.S. strategic interests closely with Taiwan’s security. At the same time, the U.S.’s reliance complicates its relationship with China. Supporting Taiwan could provoke Chinese economic or military responses, which could in turn risk disruptions in semiconductor supply and escalate regional tensions.

Challenges replicating Taiwan’s success: Why can’t we build them here?

Replicating Taiwan’s semiconductor manufacturing capabilities in the U.S. is not straightforward. This industry requires highly specialized knowledge, a developed supply chain, and billions of dollars in investment. The U.S. faces several hurdles in this regard, including higher labor costs and a current lack of the necessary infrastructure and workforce specialization. What is more, semiconductor fabrication plants (known as “fabs,” for short) require several years to build and make profitable, necessitating sustained political and economic commitment — a complicated affair, given America’s swift election cycles.

Above all, chips are just plain difficult to make. Let me highlight just two ways: For one, semiconductor manufacturing requires extreme precision at the nanometer scale (e.g., modern chips can have features as small as 5 nanometers). For perspective, a strand of human DNA is 2.5 nanometers in diameter. Achieving such precision involves sophisticated photolithography equipment that uses ultraviolet light to etch tiny patterns on silicon wafers. Second, the materials used in semiconductors, such as silicon, must be handled in an ultra-clean environment to avoid any contamination. A single dust particle can ruin a wafer during production. Specialized clean rooms are therefore needed that are both technically and financially difficult to build and maintain.

Strategic Imperatives for the U.S.: A Bold Path Forward

To secure its technological sovereignty and mitigate geopolitical risks, the United States must adopt aggressive measures to develop its semiconductor industry. Here’s a roadmap for national action:

1. The U.S. must massively escalate federal investments in semiconductor research and development — faster and greater than what was allocated in the CHIPS act[2] — to develop state-of-the-art fabs that can compete on a global scale. These funds should not only support established giants but also incentivize disruptive innovators in the semiconductor space. As argued by the Brookings Institution, the federal government could also consider creating a government fund with industry and Wall Street co-investment to reduce industry cost of capital by leveraging the Federal Reserve balance sheet.[3]

2. We need to revolutionize our educational framework. This means targeted investment in STEM education, from primary levels through university, ensuring a sufficient supply of talent ready to enter the semiconductor space, as Taiwan did. Public-private partnerships should be formed to tailor university curricula to the needs of the semiconductor industry.

3. The U.S. must strategically broaden its international cooperation beyond superficial partnerships to alliances specifically in semiconductor production. For example, forming a “Semiconductor Alliance” akin to NATO in its structure and gravity, comprising key technology partner nations like South Korea, Japan, Germany, and potentially emerging hubs like India. This alliance would focus on joint research projects, shared fabs, and reciprocal security commitments.

4. Fostering a culture of innovation requires a paradigm shift in how we support the technology sector. The U.S. government could, for example, implement a tiered incentive system that rewards companies for achieving specific technological milestones, such as advancements in chip miniaturization or energy efficiency.

Together, these strategic moves would begin to wean the US from Taiwanese dependence, thereby increasing global geopolitical security, technological innovation, and supply chain resilience.

[1]https://www.usitc.gov/publications/332/working_papers/us_exposure_to_the_taiwanese_semiconductor_industry_11-21-2023_508.pdf

[2] https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/

[3] https://www.brookings.edu/articles/a-semiconductor-strategy-for-the-united-states/