The world’s dependency on Taiwan’s semiconductor industry is increasing 

Taiwan’s semiconductor manufacturing dominance has deepened in recent years, solidifying its status as the linchpin of global chip production. At the same time, this dependence is reshaping the geopolitical landscape. As Taiwan’s strategic importance grows, so too does debate over how this reliance affects the risk of conflict between China and Taiwan. Questions about whether the international community would tolerate a Chinese takeover of Taiwan’s chipmaking capabilities, and what would happen if Taiwan’s fabrication plants were destroyed, have become central to discussions on global security and economic resilience. 

IEP estimates that a full-scale conflict over Taiwan could result in a $10 trillion loss to the global economy. Even a blockade scenario would carry a global cost of $2.7 trillion. Unsurprisingly, the bulk of these losses would fall on China and Taiwan, with the two countries having a combined lost output of $1.6 trillion. A Chinese blockade of Taiwan would cause global economic output to decline by 2.8 per cent in the first year alone, with China’s economy shrinking by an estimated seven per cent and Taiwan’s by nearly 40 per cent. These figures far exceed the global economic cost of the war in Ukraine, which remains under $250 billion. The data underscores that a conflict over Taiwan would be untenable, even for China.

Two years ago, Taiwan accounted for 20 per cent of global semiconductor production, 37 per cent of logic chip manufacturing, and a dominant 92 per cent of the world’s most advanced logic chip capacity. TSMC alone was producing 70 per cent of smartphone chipsets and 35 per cent of automotive microcontrollers. In 2024, that influence expanded further. TSMC’s global market share in dedicated contract chipmaking rose to 64 per cent, up from 60 per cent the year prior, driven by surging demand for chips powering artificial intelligence, smartphones, and advanced computing systems. Taiwan’s total semiconductor output reached $165 billion in 2024, a 22 per cent increase year-on-year. 

In response, major economies are scrambling to reduce their reliance. The US CHIPS and Science Act has catalysed more than $450 billion in private investment across over 90 projects, leading to fab construction in states like Arizona, New York, and Texas. Europe has committed over $103 billion, with Germany, France and Poland emerging as key hubs. South Korea plans to invest over $470 billion through 2047 in chip mega-clusters, while Japan is rebuilding its capacity through robust public-private collaboration.  

Yet these efforts remain several years behind Taiwan’s technological edge. Sub-5nm process technology, the cornerstone of next-generation computing, continues to be concentrated in Taiwan. TSMC’s unparalleled manufacturing efficiency, integrated supply chain and deep engineering talent pool maintain a lead that rivals have yet to match. Even with a projected 203 per cent increase in US fab capacity by 2032, Taiwan remains the critical node for the most advanced chip production. 

This structural dependence introduces profound strategic tension. On one hand, Taiwan’s semiconductor centrality acts as a stabiliser, making any military conflict an economic catastrophe for all sides, including China, which still receives over half of Taiwan’s chip exports. On the other hand, this very importance could increase China’s incentives to assert greater control, potentially seeing technological dominance as vital to long-term national security goals. If Beijing were to act, the rest of the world, particularly the US, EU, Japan and South Korea, would be forced to weigh economic self-preservation against geopolitical escalation. A takeover of Taiwan’s chip industry would give China leverage over the global economy unlike anything in recent history. 

In a more extreme scenario, where semiconductor facilities are damaged or destroyed by conflict, the outcome would be equally destabilising. Advanced industries dependent on Taiwan’s chips, from aerospace to health care, would experience immediate disruption. Yet over time, such a rupture could catalyse the global reordering of semiconductor supply. Countries already investing in domestic production would be best placed to recover, provided they can overcome talent shortages and establish end-to-end supply chains. The US., EU, South Korea and Japan could collectively emerge stronger, as they accelerate efforts currently constrained by bureaucracy and capacity limits. 

China, however, faces several significant challenges. Firstly, US restrictions on AI chips have forced Chinese technology companies to rely on domestic alternatives and accelerate homegrown development. While some firms claim to have enough high-end chips for future AI models, they continue to struggle with performance and scaling without access to US technology. Secondly, although China is strong in lower-end chip assembly, it lags in advanced semiconductor manufacturing. The destruction or loss of Taiwan’s cutting-edge production could seriously undermine its ambitions, especially if accompanied by sanctions, limited access to design tools, and capital controls. Even if China were to seize these facilities intact, it would still face major difficulties operating them under global sanctions and a likely exodus of talent. 

In either case, the risk of disruption makes clear that current levels of dependency are untenable. The international effort to localise chip production is not just about economic competitiveness, it is a strategic imperative in an increasingly urgent effort for other regions to match both the sophistication and volume of Taiwan’s output.