Taiwan Invasion Would Wreck US Economy, Military Development: Report

The Arleigh Burke-class guided-missile destroyer USS Chung-Hoon is observing the Chinese PLA Navy vessel Luyang III (top) while on a transit through the Taiwan Strait with the Royal Canadian Navy's HMCS Montreal, on June 3, 2023. Andre T. Richard/U.S. Navy/AFP/Getty Images

A Chinese communist invasion of Taiwan would wreck the United States’ economy and military development due to the nation’s reliance on the island for its advanced semiconductors, according to a new report.

The report (pdf), published jointly by the U.S.-Taiwan Business Council and the Project 2049 Institute think tank, says that any disruption in access to Taiwan’s semiconductor industry could cause cascading and catastrophic effects for the U.S. economy and national security.

Such risks have only increased, it says, due to communist China’s growing military aggression against the island and its efforts to push the United States and Taiwan apart.

“Semiconductor supply chain disruptions could … have severe repercussions for U.S. national security and U.S. critical infrastructure,” the report says.

“Potential risks to the semiconductor supply chain are especially acute in Taiwan, given its complex political situation and the challenges posed to it by China.”

Taiwan ‘Most Critical Link’ in Global Tech Ecosystem

The report warns that a disruption in Taiwan’s semiconductor manufacturing capacity could brutalize the U.S. economy and hamper military development.

It reports that some projections estimate that a loss of access to Taiwan-made chips could cause a 5–10 percent decline in U.S. gross domestic product. Based on 2022 figures, that would amount to a total loss of $1.2–2.4 trillion.

Moreover, the report notes that such a loss would also likely result in a blow to stock markets equal to or exceeding that of the COVID-19 pandemic. Those losses included a 37 percent drop to the Dow Jones and a 34 percent hit to the S&P 500.

As such, the report says that “Taiwan may be the most critical link in the entire technology ecosystem,” and warns that a disruption caused by Chinese invasion or natural disaster would wreak havoc on economies worldwide.

“A serious conflict in the Taiwan Strait could significantly and negatively impact not only Taiwan but also the rest of the world, including China,” the report says.

“Compromising Taiwan’s national security would negatively impact the global supply of semiconductors, and by extension the American, global, and Chinese economies.”

A visitor looks at a 300mm wafer at the booth of Taiwan Semiconductor Manufacturing Company Limited (TSMC) during the 2021 World Semiconductor Conference in Nanjing, Jiangsu Province, China, on June 9, 2021. Long Wei/VCG via Getty Images

Concerning the threat to U.S. military readiness, the report notes that the entirety of the United States’ most advanced semiconductors, such as those used in its advanced aircraft, are produced in Taiwan or South Korea.

Though the U.S. military engages in “lifetime buys,” purchasing all the semiconductors a weapon system will need for its lifecycle, the report says that some military systems would still require access to state-of-the-art technologies and would thus be affected by any disruption.

“Access to cutting-edge semiconductor technologies is a key driver for the weaponry that the U.S. military needs for its defensive and offensive capabilities,” the report says.

“Currently, Taiwan and South Korea account for 100 [percent] of installed capacity to mass produce high-end semiconductors … which leaves the supply to the U.S. military vulnerable.”

China Threatened by US-Taiwan Cooperation

The Chinese Communist Party (CCP), which rules China as a single-party state, claims that Taiwan is part of its territory and must be united with the mainland. Though the regime has never actually controlled any part of Taiwan, its leadership has nevertheless vowed to “start a war” to prevent Taiwan’s de facto independence from being recognized internationally.

The report notes that the CCP’s most recent five-year plan outlines its ambitions to become a world leader in semiconductor technology by 2030, perhaps giving the regime increased cause to conquer the democratic island and seize its manufactories.

To that end, the report says that Taiwanese companies reported their “biggest concern was aggressive action from China.”

“[Taiwanese leaders] were confident that they could handle almost any disruption, with armed conflict the exception,” the report says.

“In a worst-case scenario of a Chinese invasion, all flow of goods and services in and out of Taiwan are stopped, manufacturing capacity is shut down, and Taiwan’s semiconductor industry eventually comes under the control of the Chinese Communist Party.”

That presents a problem because any effort that the United States takes to secure its supply chain in Taiwan or increase ties with the island’s democratic government will necessarily be seen as a provocation by the CCP, possibly resulting in more aggression and, thus, ironically decreasing supply chain resiliency in the long term.

However the United States decides to manage this predicament, the report says, the nation must ensure that its informal alliance with Taiwan remains strong and that the two economies foster increased partnerships in order to ensure their mutual defense against disruptions, including the military interloping of the CCP.

“Almost any action taken to make the U.S.-Taiwan semiconductor supply chain more resilient will likely be seen as a threat to China,” the report says. “How China reacts to that supposed threat is hard to predict.

“Taiwan will remain a critical partner for the foreseeable future and the U.S. must do everything it can to ensure that Taiwan remains a close ally.”