This past week saw China send its biggest group of fighter jets in history into the Taiwanese air defense identification zone. The defense ministry of Taiwan responded with an announcement tha they will not scramble their planes in response any longer to save precious resources. This continuing threat to Taiwan's manufacturing base is leverage that China could use to challenge the United States economically.
Gray Zone Campaign Against Taiwan Increasing Pressure on the Island
China now has a “gray zone” campaign in place against Taiwan. Designed to increase economic pain and pressure, it includes a variety of activities ranging from banning Taiwanese pineapple imports to using dredging ships to erode Taiwan's peripheral islands' coasts. The effects are having an impact on Taiwan, as the island has decided to no longer scramble its jets to intercept Chinese planes. Instead the island will target its missile systems on PLA jets whenever they launch an incursion.
This is the second major issue to threaten world trade this month. International commerce is still recovering from the large ship that blocked the Suez Canal just a few weeks ago, halting billions in trade.
Heads of U.S. Pacific Command Warn of Rising Threat of Chinese Attack
American defense planners are warning that China is preparing to attack Taiwan, possibly in the near future. The Senate held two separate hearings on the issue in March. Both the current United States' Indo Pacific Command head and his nominated replacement sounded the alarm about the rising threat of the Chinese attacking. Admiral Phil Davidson cautioned that it might occur “in the next decade, in fact with in the next six years.” Nominated successor Admiral John Aquilino similarly assessed that:
“There are spans from today to 2045. My opinion is this problem is much closer to us than most think.”
Chinese Military Buildup Focuses Specifically on Taiwan Invasion
The Chinese military has carefully crafted its military buildup over the past several decades. They have done more than massively modernize their force over the last 30 years. The country embarked on a national initiative to put together the right resources for an invasion across the strait. One of the biggest ferry operators in China built its ships along the People's Liberation Army designs so that they can transport soldiers and equipment in an amphibious attack.
A critical component of this strategy has centered on weakening American military deterrence by creating anti-access capabilities which would heavily penalize American forces that aided the defense of Taiwan. These weapons could be used to neutralize crucial systems for battlefield surveillance, sink U.S. ships, and even endanger bases farther away. The Pentagon war games modeling potential conflicts surrounding Taiwan consistently show the United States losing against China in a prospective conflict to defend the island.
Unswerving National Determination Underlies Chinese Modernization Drive
This Chinese drive to gain a military advantage in a potential Taiwan conflict has been an unswerving national goal. Regaining control of the island has remained a core interest for the party state that they consider to be necessary for survival. U.S. officials believe that President Xi Jinping sees reunifying Taiwan and China as the critical component in solidifying his personal regime.
The Taiwanese election of (independence-centered) Democratic Progressive Party's President Tsai Ing-wen led the Chinese to sever all cooperation and diplomatic channels. Beijing then increased its efforts to forcefully coerce the island. Should mainland China invade, they have a range of irregular tactics that they could employ to sever Taiwan from the remainder of the world. Among these are disinformation campaigns and cyberattacks.
U.S. Interests in Pacific Region at Stake
Such an attack on Taiwan would massively impact American interests in the Pacific region. The Chinese retaking Taiwan could cause American allies in the area to move into Beijing's sphere of influence. It would put all American regional bases in a vulnerable position. The campaign would also back up Beijing's argument of a declining West, giving it the courage to look for still more gains. Potentially a Chinese-led new order of East Asia could result.
Admiral Aquilino has argued that Congress and the Pentagon need to work together to completely fund efforts to modernize Taiwanese defenses as well as to revamp the American defense capabilities for the Pacific region. On his list of critical items is the Pacific Deterrence Initiative, a multibillion dollar project that would fund new technologies and weapons critical to countering the capabilities of the Chinese. His argument centers on persuading Beijing that their success in an invasion of Taiwan is nearly impossible. Otherwise the fear is that even a chance for a successful attack will cause the Chinese to act.
Semiconductor Economic Threat Posed by Interference With Taiwan Is Real
Taiwan remains the critical site for semiconductor manufacturing. Their foundries produced 66 percent of the world's semiconductor supplies in 2017, per McKinsey data analysis revealed in Statista which this chart below shows:
These semiconductors (often referred to as chips) remain an irreplaceable part of security, economic growth, and technological innovation. They are tinier than a postage stamp with less thickness than human hair yet comprised of almost 40 billion components. These chips are utilized in PCs, smartphones, electronic vehicles, pacemakers, the Internet, hypersonic weapons, and aircraft, making them indispensable in applications from electrical devices to global e-commerce.
Demand for these chips is taking off exponentially. New technologies such as the Internet of Things, quantum computing, and artificial intelligence are just a few of the fields demanding them. Sophisticated wireless communications like 5G especially need state of the art semiconductor devices.
Trapped in the battle between the U.S. and China is the leading industry manufacturer TSMC the Taiwan Semiconductor Manufacturing Corporation. It produces 51.5 percent of the entire foundry market, making the most technologically advances chips on the planet (of 10 nanometers or less). TSMC's chips are crucial to American and Chinese firms alike. These include corporations like Apple, Broadcom, Qualcomm, and Xilinx. Into 2020 the chip maker was also supplying Huawei, but it chose to cut ties with the Chinese behemoth in May as a result of the security concerns that led to the U.S. Department of Commerce restricting Huawei suppliers.
Efforts to Strengthen Relations Between U.S. and Taiwan Highlight Issue
The situation with Taiwan became a central issue when the prior Trump administration took steps to strengthen relations between the U.S. and Taiwan. Now the Biden administration's resolve is being tested as tensions increase in the strait and China boosts its own military activity in the area. The growing threat highlights the substantial and increasing risks to this crucial manufacturing point for the worldwide chip industry. With China and the United States under pressure that is leading to economic decoupling, semiconductors have become central to American and Chinese technological and strategic competition.
Biden Administration Encouraged to Strengthen Taiwan Defense Agreements
Taiwan is quickly evolving into the focal point of tensions between the United States and China. With the island country's key role in semiconductor technology supply chains and manufacturing, China is likely to continue to utilize its economic influence to impact the outcome. Beijing's tools continue to include cyber attacks, talent recruiting, and trade restrictions that will enable them to gain the semiconductor IP intellectual property to build up their own domestic industry.
Meanwhile the Biden administration continues the prior administration's work of increasing and improving ties to Taiwan. Defense agreements with Taiwan from American allies are being signed. Australia and Japan are two examples of important regional nations that have inked defensive pacts with Taipei directly. The tensions in the region rippling over into the global chipmaker industry show why gold makes sense in an IRA. One way to diversify a portfolio is through IRA-approved precious metals.