Bruno’s Newsletter #8

When the war against Ukraine started, one of the goals of the Western allies was to deprive Russia of access to the kind of chips it needs to build aircraft and missiles, or to modernise its economy. It was vital that Taiwan joined the sanctions, which it did. China quickly became an alternative supplier for Russia, but China is not yet capable of producing the most advanced chips. The fact that Russia faced shortages of guided cruise missiles within several weeks of attacking Ukraine is also partly due to the sorry state of its semiconductor industry. By contrast, Ukraine has received huge stockpiles of guided munitions from the West, such as Javelin antitank missiles, and each missile contains upward of 200 microchips. The message from the West was clear: were China to invade Taiwan, it would be similarly excluded from access to semiconductors, and the consequences might be catastrophic for an economy with such a voracious appetite for chips.

One obvious complication is that advanced chips are predominantly manufactured in Taiwan. A war in Taiwan might deprive everyone, not just China, of the latest generation of chips, triggering a worldwide industrial depression. “These days,” one commentator noted, “when we look five years out we hope to be building 5G networks and metaverses, but if Taiwan were taken offline we might find ourselves struggling to acquire dishwashers.” Two geopolitical analysts argued in 2021 that the best way to stop a Chinese invasion of Taiwan would be for its government to announce in advance that the Taiwanese semiconductor industry would be destroyed in the initial moments of an invasion. That seems unnecessary. There is no danger that Chinese forces will simply seize — intact or almost intact — the industry on the island, which depends on high-precision machinery, deep and delicate global networks, and large inputs of human capital.

But imagine China imposed a blockade on the island, using its navy to force customs checks on ships sailing out of its ports and demanding that Taiwan Semiconductor Manufacturer Company restart chip production for Huawei and other Chinese technology companies? Chen Wenling, chief economist at the China Center for International Economic Exchanges, argued in May 2022 that China “should seize TSMC” as a way to reconstruct the Chinese semiconductor supply chain, battered by export restrictions and threatened by the looming transfer of TSMC chip fabs to the U.S. As Chris Miller puts it, in this indirect way “Beijing could conceivably gain influence or control over the only fabs with the technological capability and production capacity to churn out the chips we depend on.” There would be an American response, of course, but at this point events become more difficult to predict. New export restrictions would be imposed on China and now, perhaps, also on Taiwan. The two blocs would be entering a critical phase where control over the fundamental gateways of the world system would be decided. I believe it was just to try and preempt such a perilous clash, one with a very uncertain outcome, that Washington approved a set of draconian measures against the Chinese semiconductor industry in October 2022. The ultimate result of a chess game is decided a few moves ahead. Or, as Zoltan Pozsar cleverly observed, the US is trying to “invert time” using technology sanctions. Like in the movie Tenet, “inversion” is being used to shape future outcomes before they happen, “one technology sanction at a time.”

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