China doesn’t need to take Taiwan’s fabs to escape US trade bans

Threatening to destroy them could give them just as much leverage, while averting all out war

Comment Let's be clear about something: Even if Taiwan Semiconductor Manufacturing Co. (TSMC), fell into Chinese hands in the event of an invasion, it wouldn't do them much good.

Cut off from global materials supplies, intellectual property, electronic design software and manufacturing equipment, the facilities would be essentially useless, according to Chen Ming-tong, Taiwan's director-general of the nation's National Security Bureau.

While this may be a reassuring thought for those concerned China will try to take Taiwan's chipmaking tech by force, such an invasion would undoubtedly be broadly catastrophic. In such an instance, Taiwan and its allies would have far bigger things to worry about than who holds the keys to TSMC's chipmaking kit.

Such a move would risk drawing western nations into a protracted, painful conflict, one that the US sees as a possibility on the horizon. As reported by Reuters last month, US President Joe Biden has made abundantly clear that any act of aggression by China toward Taiwan would be met with a response by US armed forces.

More specifically, some former US officials have called for the US to destroy TSMC facilities in the event of Chinese occupation, according to Bloomberg.

The idea that either US or Taiwanese governments would enact a scorched earth policy on TSMC or other foundries on the island just to deny China access to the manufacturing capabilities, is to Chen's point, a short-sighted one.

For one, it assumes that TSMC is what Chinese premier Xi Jingping is ultimately after. What's to say in his pursuit to claim Taiwan for China, Xi doesn't consider the loss of TSMC an acceptable casualty. As Chen makes clear, TSMC's fabs are practically worthless to China, where the real value lies is access to the intellectual property and equipment.

"TSMC needs to integrate global elements before producing high-end chips. Without components or equipment like ASML's lithography equipment, without any key components, there is no way TSMC can continue its production," Chen said, according to Bloomberg.

On the other hand, the US National Security Agency puts the economic consequences from the loss of TSMC at more than $1 trillion dollars. Viewed through this lens, there's no reason to think Xi wouldn't use TSMC as a bargaining chip to secure relief from US sanctions on chipmaking kit. And the threat of an invasion, provides Xi that leverage.

Such a strategy wouldn't even require the Chinese military to land troops on the island nation. Xi could simply threaten an air strike on TSMC's facilities, and the risk of ensuing economic fallout might be enough to convince the US to ease export restrictions on key semiconductor manufacturing goods to China, especially if such action would avert an armed conflict.

The question is, who stands to lose the most? Both the US and China remain heavily reliant on TSMC and other foreign fabs for semiconductor manufacturing. This will remain the case for at least the next five years until both countries can meaningfully bolster their domestic foundry footprint.

However, continued pressure from the US to stymie China's chipmaking efforts could very well backfire should access to TSMC fabs become so restricted that the foundry's strategic value becomes lopsided.

As it stands, the Biden administration shows no signs of letting up. Just last week, the US Commerce Department added more than 30 Chinese companies and institutions, including memory vendor Yangtze Memory Technologies Company, to its "Unverified List,"  effectively barring them from importing controlled goods, including semiconductor manufacturing equipment and software.

While there's little doubt about Xi's ambition to take Taiwan, the current political posturing suggests there may be more at play here than simply expanding China's borders. ®

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