A China-Taiwan conflict could lead to a catastrophic semiconductor shortage in the world

• Taiwan manufactures roughly 50 percent of all the world's semiconductors.
• The conflict between China and Taiwan would have a massive knock-on effect on the world's economy.
• China recently warned U.S. House of Representatives Speaker Nancy Pelosi not to visit Taiwan.

The U.S. Navy has deployed four warships east of Taiwan as U.S. House of Representatives Speaker Nancy Pelosi makes her way to visit the country. According to Reuters, China had previously warned that its military would not "sit idly by" if Pelosi were to visit Taiwan.

Pelosi is expected to spend the night in Taiwan's capital, Taipei, on Tuesday, August 2. She had been warned not to do so by officials from China, who claim sovereignty over the self-ruled island.

While the loss of life would clearly be the worst consequence if conflict were to break out, the heightened tensions also highlight the world's incredible reliance on Taiwan for semiconductors. It's an issue that's especially prescient given the ongoing global impact of Russia's invasion of Ukraine — such as an impending gas crisis in Germany due to Russia's squeeze on gas supplies.

The world's reliance on Taiwan's semiconductors

The effects of the global chip shortage last year, highlighted the world economy's reliance on Taiwan. The semiconductor shortage had massive knock-on effects for the auto industry, for example, forcing many large firms to halt production.

Taiwan Semiconductor Manufacturing Co. (TSMC) is the world's largest chip foundry and it's Apple's main producer of chips. Politicians in the U.S. and Europe have discussed the urgent need to boost or build their own chip industry to reduce the reliance on TSMC's production.

In a podcast by Singapore's DBS Bank last year, Dan Wang, a technology analyst at research firm Gavekal, outlined the world's great reliance on Taiwanese semiconductors. "TSMC, if you just have a look at market share, I believe manufactures around 50 percent of all semiconductors in the world," Wang said. "And I think that still understates how important it is, because these are some of the most advanced chips out there."

The present heightened risk of conflict has encouraged Western governments to spend billions of dollars to improve their domestic chip manufacturing capabilities. The U.S. Congress, for example, recently passed a $52 billion funding bill, which will help Intel Corporation and also TSMC boost their manufacturing footprint in America.

War would be a 'lose-lose' situation for all parties

It goes without saying that the horror of war would far outweigh problems associated with the chip shortage if China were to invade Taiwan. TSMC chairman Dr. Mark Liu has spoken to this effect, while also highlighting the role such an outcome could play for the global economy. In a recent interview with CNN, Dr. Liu pointed out that "war can only create problems on three sides. . . all the sides. We need to prepare for the worst, but we should hope for the best." It would be a lose-lose situation for all sides, he added.

Taiwan's chip industry gives it economic leverage at a time of increased tension between the U.S. and China. Some experts have argued that this fact will prevent China from escalating tensions any further, as the country knows Taiwan's importance to the world — and the retaliation that would likely follow an invasion. Russia's recent invasion of Ukraine provides recent proof that the consensus — and indeed Western intelligence — is not always correct on these matters.