TSMC: Taiwan’s Silicon Dagger

TSMC: Taiwan’s Silicon Dagger

TSMC: Taiwan’s Silicon Dagger

A recent article in the US Army War College’s quarterly journal, Parameters, has garnered significant attention for proposing a new method of Taiwanese deterrence against the People’s Republic of China (PRC). In “Broken Nest: Deterring China from Invading Taiwan,” authors Jared McKinney and Peter Harris discuss how Taiwan could threaten to destroy Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司) facilities as part of a scorched earth strategy to deter an invasion. They argue that by threatening to self-destroy the TSMC plants, by targeting PRC semiconductor plants, and by holding out the prospect of a drawn-out insurgency, Taiwan could make itself a “broken nest” that the PRC would not want. 

While such a strategy is novel, there are multiple issues that make it infeasible—and worse, ineffective as a deterrent against invasion. The vaunted “silicon shield” and the economic disruption of microchip supply is simply another cost that Xi Jinping (習近平) must consider, alongside an enormous number of other, still greater concerns. (In the Spring 2022 edition of Parameters, I will take a deeper look into these issues.)  

However, while threatening to blow up TSMC would not be particularly effective at deterring an invasion nor popular with the Taiwanese public, there is considerable value in TSMC integration into a defensive strategy intended to counter gray zone warfare. While TSMC is not and should not be a Taiwan state-owned enterprise, an enhanced degree of private-public partnership and coordination with US companies like Intel could be both profitable and strategically effective. In this article, I will look at why Western responses to PRC gray zone activity have not been effective. Instead of formal, symmetric responses, the United States and Taiwan can leverage chokepoint technologies, as well as the party’s fears of economic blackmail, to deter PRC gray zone aggression. By having TSMC be part of a strong diplomatic and economic toolkit to impose gray zone costs on the PRC, additional resources could be freed up for the Taiwan military to focus on readiness against invasion. In short, the value of TSMC in Taiwan’s security should not be thought of as a silicon shield, but as a silicon dagger

The Other “Deterrence by Denial” 

The Chinese Communist Party (CCP) sees deniability as key to its political, informational, economic, and gray zone warfare (an integration of the first three concepts with military action). During the 2018-2021 US-PRC trade war, both sides engaged in formal tariff imposition; the PRC, however, also engaged in a series of unofficial bans, delays, and ad hoc coercive measures. In gray zone activity, this has been exemplified by the swarm tactics of fishermen and dredgers around Matsu. This use of deniability allows the party greater flexibility in moving up and down the escalation ladder with less fear of retaliation. Moreover, it exploits organizational, political, and national seams to encourage paralysis on the part of opponents, and to leverage the full force of the Chinese state. As a result, current Western responses to this style of coercion have not been very effective, as evidenced by the number of Western companies being forced to toe the party line.

Taiwan has done somewhat better, given its experience over the last decade with the PRC’s attempts to influence Taiwanese media, trade, universities, and the internet ecosystem. However, Taiwan’s victories in the gray zone have been defensive successes that do not impose significant costs on the adversary. Instead, the PRC has doubled down on other, sharper gray zone tactics. These measures include the aforementioned fishermen/dredgers, as well as incursions into Taiwan’s Air Defense Identification Zone. In these cases, Taiwan has found it difficult to respond in a sustainable way. Instead, symmetric responses of matching intercept to incursion have significantly increased operational costs for Taiwan’s air force. A new method of response must be found.

Identifying Chokepoints 

In the US-PRC technological rivalry, both sides recognize the criticality of so-called chokepoint technologies: technologies that allow for the domination of whole fields, with the ability to set standards and market share. One often mentioned example is lithography systems for semiconductor chip circuitry, a field in which the PRC semiconductor industry is badly dependent on the machinery of the Dutch company ASML. The PRC has identified some 41 sectors vulnerable to chokepoints, including operating systems and telecom. The United States, too, has its own chokepoint in the design and manufacturing of advanced semiconductors

Fortunately, the current monopoly on advanced semiconductors is held by Taiwan’s TSMC. This state of affairs, while not ideal from the US perspective, still gives the United States a significant edge in the tech rivalry. The party’s response has been predictable: the October 2020 14th 5-Year Plan (十四個目標規劃) established high-tech self-sufficiency as a top priority. In practice, this has meant the establishment of several “National Integrated Circuit Industry Investment Funds” (國家產業投資基金, also known as “Big Funds”) with a valuation of USD $50 billion, with an additional USD $25 billion from local and provincial governments. Private venture capital funding reached a record USD $131 billion in 2021, with USD $8.8 billion going to semiconductor manufacturers. 

Despite this vast flood of money, the PRC has not been successful in its drive for self-sufficiency. In 2021, PRC domestic chip production only met 16 percent of domestic demand, falling well short of the government goal of 40 percent by 2020, and 70 percent by 2025. A number of lavishly-funded chipmakers, including PRC national champion Tsinghua Unigroup (清華紫光), have collapsed. Current PRC state of the art semiconductors (14-28nm) remain at least 3-4 generations behind the chips coming out of TSMC (3nm). In short, the party is desperate to reach technological self-sufficiency in fields that do not lend themselves to self-sufficiency—due primarily to difficulties in overcoming low global market-share, American intervention, and lack of domestic expertise/technology. This desperation can be exploited. Until recently, however, both the United States and Taiwan have been relatively inefficient in using this weakness to deter PRC aggression.   

Putting a Dagger to the Chokepoint 

In 2016, the United States effectively used the chokepoint of advanced semiconductors to badly hobble PRC national champions ZTE (中興通訊股份有限公司) and Huawei (華為) through inclusion on the export control “Entity List,” which barred their access to US technologies. In the latter’s case, this also prevented the PRC from being able to dominate another chokepoint technology, 5G communications. 

Taiwan has used its own leverage somewhat differently from the United States, but also in an ad hoc way. In the recent diplomatic fracas over Lithuania opening a Taiwanese Representative Office, Taiwan has attempted to offset the PRC embargo of Lithuania by offering a USD $200 million TSMC investment plan, along with talent development. Similarly, Taiwan has dangled even more significant TSMC investment in Japan and the United States to strengthen ties with Taiwan’s closest partners. All of this is good for defending national interests and building partnerships, but insufficient to deter PRC gray zone activity. 

In addition to these activities, the United States and Taiwan should consider the following:

1. Elevate the partnership between the US semiconductor industry and TSMC, including TSMC participation in the proposed US CHIPS Act.  

With the pandemic-induced global supply chain disruption, a stable Western supply of microchips—as well as continued US/Taiwan dominance of cutting-edge microchips—is crucial. US policy towards Taiwan microchips is somewhat haphazard in that regard: there are both Cabinet-level and Senatorial requests for Taiwan to increase microchip supply to the United States; but at the same time a desire to prop up Intel, especially via the proposed USD $52 billion “Creating Helpful Incentives to Produce Semiconductors for America” (CHIPS) Act. Currently, both Intel and TSMC are enjoying historically high profit margins. Thus, the time is ripe for the US and Taiwan governments to have strategic-level discussions via the newly-developed Technology Trade and Investment Collaboration (TTIC) framework to ensure that Intel and TSMC view each other as “friendly competitors,” as opposed to a “hostile competitor” like the PRC’s Semiconductor Manufacturing International Corporation (中芯國際製造集成電路有限公司). This level of discussion could hold out the prospect of TSMC being able to also benefit from the CHIPS Act—which in turn would improve TSMC’s bottom-line, expand its R&D budget, further diversify its manufacturing base, and increase US semiconductor manufacturing capability.  

2. Turn deniability against the party. 

A secure Western chip supply with a diversified manufacturing base would give Taiwan an even stronger hand to utilize its semiconductor dominance against the CCP. In 2021, TSMC announced a USD $2.8 billion investment in its Nanjing fabrication plant (“fab”) to double 28nm automotive chip building capacity. If the PRC continues to lean on deniable gray zone activity against Taiwan, then Taipei could return the favor by unofficially slow-rolling the expansion to cause PRC economic disruption. This would incur little long-term cost: while current supply chain disruptions have made 28nm chips more profitable lately, these chips also face obsolescence issues (TSMC first developed the 28nm node in 2011). Furthermore, they face the potential for a supply glut, as PRC national champions have focused on this node given their current inability to build more advanced nodes. 

This deniable threat would strengthen once Western demand could fully substitute for PRC demand; as things stand now, the United States accounts for 60 percent of TSMC’s sales, while the PRC only accounts for 20 percent. In addition to threatening future investment in the PRC, Taiwan could also slowroll or deny semiconductor exports to the PRC, which would have far more systemic effects on the PRC high tech sector. In conjunction with the US-led campaign to design bilateral tech alliances to constrain the PRC’s chip industry, this would force the PRC to spend still greater sums to prop up its tech industry.     


The idea that TSMC represents an effective “silicon shield” for Taiwan is unsound. To be sure, a thriving PRC high-tech sector is highly important to the CCP as a prerequisite for the “rejuvenation of the Chinese nation” by 2049. However, a thriving high-tech sector is not crucial for the survival of the CCP, and Xi has demonstrated that he is willing to stomach significant economic costs to assert greater Party control. The threat of stoppage of TSMC products or investment by itself is insufficient to generate the uncertainty of Party survival that is required for deterrence against invasion. 

Yet, what TSMC can do to contribute to Taiwan’s security – and the security of the free world – is to act as a “silicon dagger” against gray zone warfare. By turning the party’s weapon of deniable coercion back upon itself through the hinted withholding TSMC’s investment or products, Taiwan can deter PRC gray zone aggression and impose severe costs if deterrence is not sufficient. Given coordination with the United States and other friendly powers, these effects could be magnified; every renminbi the party spends on inefficient tech indigenization is one less renminbi that will be spent on the People’s Liberation Army. 

The party leadership engages in gray zone warfare because they feel that it is a painless way of coercing others. A reminder that others hold a dagger to the throat of the PRC tech industry would do much to remind them of the risks of aggression. 

The main point: The CCP utilizes deniable actions as a key weapon in gray zone warfare. By integrating TSMC into a Taiwanese and American whole of government strategy, including deniable responses, Taiwan will have a powerful deterrent against gray zone warfare.