How the Computer Chip Shortage Could Incite a U.S. Conflict With China - The New York Times

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A war game and study by a think tank illustrate how dependent the world is on Taiwan’s semiconductor foundries.

WASHINGTON — The war game scenario conducted by a Washington think tank began with a sudden failure at three Taiwanese semiconductor foundries that make high-end computer chips used in such items as smartphones, automobiles and military equipment.

The halt in production raised questions of whether a cyberattack by Beijing was responsible — touching off an international crisis between China and the United States that the researchers said could grind the global economy to a halt and incite a military confrontation.

The war game and study by the Center for a New American Security, which is set to be released on Thursday, illustrate how dependent the world is on Taiwanese computer chips — and how that dependence could draw the United States and China into various kinds of conflict.

The report comes as Congress has put new energy into bills to increase domestic production of semiconductors in the United States. Diversifying the global supply chain for computer chips is a key recommendation in the report.

Last week, President Biden urged Congress to pass those bills and promised he would work to bring production of semiconductor chips back to the United States.

“Today we barely produce 10 percent of the computer chips, despite being the leader in chip design and research,” Mr. Biden said. “And we don’t have the ability to make the most advanced chips now — right now. But today, 75 percent of production takes place in East Asia. Ninety percent of the most advanced chips are made in Taiwan. China is doing everything it can to take over the global market so they can try to outcompete the rest of us and have a lot of applications — including military applications.”

Even if Congress approves new government investments in America’s microchip production capacities, matching Taiwanese expertise is years away, if it is even possible, the report’s authors say. The United States is already more dependent on Taiwan’s high-end microchips than it was on Middle Eastern oil in decades past, the report said.

China, the war game predicts, could use economic coercion, cyberoperations and hybrid tactics to try to seize or harm Taiwan’s semiconductor industry — and the United States must become better able to identify and counter Chinese tactics that could threaten the microchip supply.

War games like this one involve current and former officials, academics and other experts sitting around a table playing various roles. After an initial scenario is presented, the teams take turns making strategic decisions. Such exercises are supposed to yield insights about how different players would act, and lay plain what sort of moves each group might make.

Becca Wasser, who helped design and lead the scenario, said that while many war games were conducted to study China, most focused on conventional military threats, giving short shrift to the many ways China could exert pressure on Taiwan.

And countering those pressure points could be difficult, especially if the United States and Taiwan were at odds over the best strategy. In the scenario, the U.S. team presumed the Taiwan team would go along with its strategies to counter China. But Taiwan’s interest sometimes led it to cross-purposes. For example, when the United States wanted to bring semiconductor engineers to the safety of America, Taiwan resisted, worried about a brain drain.

“Whatever the United States tried to do by itself in the game really fell flat,” Ms. Wasser said. “We have seen a variety of examples of that in real life.”

As a result, multilateral responses and global efforts to build resiliency in the supply chain for computer chips are most likely the best strategy, the report said.

Taiwan has relied on its dominance of the microchip industry for its defense. The “silicon shield” theory argued that because its semiconductor industry is so important to Chinese manufacturing and the United States consumer economy, actions that threaten its foundries would be too risky.

Martijn Rasser, a co-author of the study and a former C.I.A. analyst, said it was crucial for the international community to convince Taiwan that its shield strategy needed to be internationalized. “The long-term play has to be a geographic dispersal of those capabilities out of Taiwan in exchange for enhanced security guarantees for the island,” he said.

Understand the Global Chip Shortage

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In short supply. Around the world, industries are struggling because there are too few computer chips. Here is what to know:

A vital component. Computer chips, also known as semiconductors, are the brains of products like smartphones, cars, medical devices and most modern appliances. ​​The vast majority are made in Taiwan, South Korea and China.

How the shortage began. Computer chips started becoming scarce early in the pandemic, when chip buyers, in particular automakers, slashed their orders fearing a global recession. In response, semiconductor plants reduced their production.

An increase in demand. As the pandemic forced people to spend more time at home, global demand for products like desktop monitors and printers surged. By then it was too late for the chip industry to increase production quickly.

Ongoing struggles. Adding back chip-making capacity can require as much as two years of lead time and billions of dollars. Manufacturers have scrambled to fill orders from their largest customers, making things exceedingly difficult for smaller companies.

Troubles in the U.S. The Biden administration has warned that the U.S., which only accounts for 12 percent of global production, is facing “alarming” shortages that threaten American factory production and could fuel inflation.

In search of solutions. President Biden has called on Congress to pass a stalled bill that would prop up semiconductor makers by providing $52 billion in subsidies. Cities and companies like Intel and Ford also have taken steps to support local production.

The Biden administration has made clear that in the case of Ukraine, while the United States would economically punish Russia for any invasion, it would not commit troops to fight alongside Kyiv to stop any intervention by Moscow. The longstanding American policy toward Taiwan calls for shoring up its defenses and practicing strategic ambiguity over whether Washington would militarily intervene in a conflict over the island.

But Taiwan and its semiconductors are far more important to America’s economy than Ukraine is — meaning it would very likely be far more difficult for the United States to stay out of a conflict involving Taiwan.

Taiwan accounts for half of the overall production of microchips that are critical to the functioning of mobile phones, consumer electronics, cars, military equipment and more. South Korea, the nearest competitor, has about 17 percent of the overall market. But Taiwanese chips are the smallest and fastest, and its foundries account for 92 percent of the most advanced designs.

“It’s almost impossible to duplicate Taiwan’s manufacturing capability of high-end chips, of low-end chips,” said Dan Blumenthal, a scholar at the American Enterprise Institute. “It’s just the manufacturing hub of the world.”

Although the United States and Europe are trying to boost their own domestic design and production of semiconductors, they do not have the abilities to mass produce the most advanced designs that the Taiwan Semiconductor Manufacturing Company, or TSMC, can make.

“If the semiconductor supply chain is infringed upon by China in some way, all of the sudden the things that Americans look to in their daily lives, to get to and from work, to call their loved ones, to do a variety of different things, those disappear,” Ms. Wasser said.

Other experts said it would be an overstatement to say that the United States would be dragged into a war over microchips. China will decide what kinds of coercive measures it will take against the Taiwanese based on the perceived threat to its sovereignty and the expected international backlog, said Bonny Lin of the Center for Strategic and International Studies.

“China is not going to base their Taiwan policy, or any decision to use force against Taiwan, based on chips,” Dr. Lin said. “China thinks about the costs of an invasion of Taiwan — there are significant political and military costs. That is why I don’t think chips would figure among the top three factors of using military force against Taiwan.”

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