The Taiwan Factor isn't about trade, it's about who writes the rules of the futureWhat if I were to tell you the Chinese were the first in recorded history to practice protectionism thousands of years ago. China had the technology for the production of silk from silk worms (Brombyx mori). They had perfected the technology for extracting and weaving the silk. The technology was considered a state secret protected by (1) death penalty for anyone revealing it; (2) the state owning the whole process and supply chain; (3) workers lived in isolation. Because they had the monopoly, they controlled the price. They weaponised silk which was used as a tool of diplomacy. The Chinese protected the technology so well for thousands of years until the 6th century CE when two Nestorian Christian monks smuggled some silk worms out.
In the previous blog I wrote about the five scenarios of the tariff war - Full Decoupling, Economic Cold War, Controlled Decoupling, Managed Rivalry, and Reconciliation. Every scenario is shaped by the risk of a Taiwan crisis. If conflict breaks out, the world shifts instantly into Cold War or even hot war territory, with catastrophic economic consequences for both countries and the global economy. Taiwan often looks like a side issue in the US-China tariff war and thus hardly covered by all those experts vying for online spotlight. Actually it is deeply centre stage not purely because of trade but strategic terms.
Most of the world holds the view America is the big bully in the tariff war. I think there is much to be said for the US if the tariffs were a quick-fix attempt to rebalance trade and even out unfair trade practices. But tariffs meant to protect domestic industries is something that is not arguable for protectionism begets inefficiencies. Protection for targeted industries for national security is difficult to argue against. However Trump needs to be wary of war and China hawks who may hijack and weaponise tariffs to subvert China's development.
Friend or foe, I think more people see the US in unfavourable light given their propensity to interfere in the internal politics of other countries and their involvement in too many wars. Most see China as a benign superpower that has never been involved in any major wars. Memories are short and people forget the generosity of Americans who are always first on the scene in natural disasters playing major roles such as 2004 Indian Ocean Tsunami, 2010 Haiti Earthquake, 2005 Kashmir Earthquake, 2011 Japan Earthquake, 1970 Bhola Cyclone, 1985 Mexico Earthquake, even 2003 Bam (Iran) Earthquake they were there. Where other countries cheated in world trade with currency manipulation, the Americans voluntarily devalued USD in response to economic pressures, trade imbalances and global monetary system adjustments such as in 1973 Bretton Woods and 1985 Plaza Accord.
Tech as a Battleground:
The U.S. views dominance in technology as the key to maintaining global influence both in trade and military prowess. China’s 'Made in China 2025' strategy aims to match and overtake the U.S. in tech, much of which still depends on Taiwan's industrial output. Taiwan’s chip sector is seen as a strategic bottleneck that both superpowers want to control, protect, or leverage.
Taiwan is home to TSMC (Taiwan Semiconductor Manufacturing Company) — the world's most advanced and dominant chipmaker. Chips are the "oil" of the modern economy — there are chips in all things electronic, such as smartphones, AI, military tech, electric vehicles, cloud systems, etc.
Both the U.S. and China cannot fully decouple from Taiwan without disrupting their supply chains for high-end tech. China wants tech self-sufficiency; the U.S. wants to prevent China from accessing advanced chips that could power military or surveillance systems.
The U.S. has already imposed chip export controls on China, and Taiwan companies are caught in the middle.
Supply Chain Crossroads:
Taiwan is a global logistics and tech node. Taiwanese firms produce not just chips but components for U.S., Chinese, European, and Japanese products. Any trade war with tariffs on electronics or tech components indirectly hits Taiwan's business. Taiwan’s economy is deeply tied to both U.S. and Chinese demand, so even when the fight is U.S.-China, the pain (or gain) shows up in Taiwan’s factories and stock market. Even though Taiwan isn’t setting tariffs, its industries and geopolitical position make it the quiet center of gravity in this whole U.S.-China economic rivalry
"The number of transistors on a chip doubles approximately every 2 years, while the cost per transistor decreases."The chart below shows as the chip gets smaller, there is an uptick in performance and significant reduction in energy usage. Power reduction is extremely important for huge energy consumers such as crypto-miners and AI data storage, as well as mobile devices such handphones.
Moore's Law
OK bear with me now. We need to skim through some technical stuff in order to understand the situation.
Microchips lie at the heart of all electronic devices. A chip is an integrated circuit (IC) built on a silicon wafer, where transistors and other components are intricately etched and connected to perform computing tasks. The transistors are the devices that do computational work in a computer. The more the numbers of transistors that can be packed onto a chip, the greater its computing power. With miniaturisation, more and more transistors can be packed onto a chip. Today, there are billions of transistors on a chip. Miniaturisation allows the chips to be used in smaller and smaller electronic devices such as implantable medical devices and smart dust.
However, the industry is hitting 2 constraints:
* Atomic scale limits — once transistors get to smaller than a few atoms thick, they break the laws of physics. 'Quantum tunneling' happens, which is basically leakage of electrons. This causes power wastage, generates heat and corrupts the binary logic state which means computational errors. Quantum tunneling is one reason why the industry is approaching the end of Moore's Law using classical CMOS scaling — it’s not just manufacturing limits, but physics itself getting in the way.
* Photolithography - this is the art of making circuitry patterns using ultra violet (UV) lights which are then etched onto the wafer. Lower and lower wavelengths of UV is used for smaller and smaller chips in order to get precise resolutions. Current technology is EUV (Extreme UV) lithography which is critical for use in 7nm, 5nm, 3nm, and 2nm chips.
Photolithography is challenging, but for transistors, physics is the deeper constraint. The soon-to-be-produced 2nm chips represent one of the last frontiers in silicon-based chip shrinking before hitting atomic scale limits.
Semiconductors are central to everything — smartphones, AI, weapons, cars. Both the U.S. and China know whoever controls this industry has the upper hand.
This is where Taiwan's TSMC comes in.
The top 3 chip makers :
TSMC - Taiwan company, the largest producer and most advanced chips in the world.
SMIC - China-owned, several years behind TSMC in technology.
In July 2024 TSMC completed their trial production of 2nm chips (A20) and will go into mass production in 2nd half of this year. Apple is their first customer who will use the A20 in their Iphone 18 series. Each new smaller chip brings greater computing power and energy consumption reduction, which, and more importantly of all, drives a whole new upgrades in all sorts of electronic devices across the board. More computing power means better multitasking, and faster computation, which is especially crucial for AI.
The A20 is up to 30–40% energy savings compared to 5nm chips — huge for phones, laptops, and data centers. It is key to:
* Advanced AI models
* Edge computing
* 5G/6G devices
* Autonomous vehicles
* Quantum-class encryption and simulations
Edge computing needs some explaining:
Instead of sending data "to the cloud" (where the data server is) for processing, this can be done "at the edge" — like on a sensor, smartphone, or nearby local server. This provides for (1) lower latency (faster response time), (2) reduced bandwidth usage, (3) better privacy and security (sensitive data stays local) and (4) increased reliability (less reliance on connectivity). Edge computing is exploding because it serves 3 critical needs - (a) for IoT (Internet of Things) devices, (b) need for real-time processing (e.g., drones, vehicles, medical devices), (c) data volumes too large to send to the cloud constantly.
TSMC had a plant since 2020 (under Trump term 1) in Phoenix, Arizona, US. Since then their fabrication facilities have chalked up to US$65 billion in investments. In March 2025 they committed another US$100 billion in order to produce 30% of their A20 chips in US. In addition, TSMC receives substantial funding, cheap loans and US$100 billion tax credits from the US government.
TSMC has a plant in Nanjing, China since 2016. However, this fabricates only legacy chips, not the cutting edge chips of 7 nm and below. Due to geopolitical pressure, TSMC is focused on expansion in Taiwan, Japan, US and EU.
Where is China in all this?
Lay people the world over, including almost all Singaporeans, believe China has surpassed the U.S. in technology. China builds fast and big. It dazzles the world with visible achievements and fast progress. Let's wonder at these capabilities and achievements:
* Massive Market Scale Rapid Deployment : Cashless payments via WeChat Pay and Alipay; Facial recognition, AI surveillance, smart cities; 5G network rollout by Huawei and ZTE. China scaled digital platforms far more widely and deeply in daily life use.
* Hyper-Integrated Ecosystems : WeChat = messaging + payments + news + shopping + ride hailing; Douyin (TikTok China) = short video + live commerce + fintech. This integration allows mass data collection, leading to AI refinement and user-specific applications.
* Hardware Integration and Adaptation : Drones (DJI); Surveillance systems; Smart appliances; Industrial automation; Electric vehicles (BYD, NIO). China makes things “smart” — smart homes, smart cities, smart factories — and connects them via IoT and cloud platforms.
* AI and Big Data at Scale : Loose privacy norms; Government-corporate synergy; Strong presence in surveillance, fintech, logistics. Baidu, SenseTime, and Alibaba are leaders in computer vision, voice recognition, and AI diagnostics.
* Fast Iteration and Local Customization:Speed-to-market (products can move from idea to store shelf in weeks); adapting foreign tech to local needs quickly (e.g., localizing apps, devices). Shenzhen is known as the hardware Silicon Valley — highly flexible, vertically integrated supply chains.
* Government-Driven Applications : State involvement accelerates adoption in areas like Digital Yuan (e-CNY) — world’s first large-scale central bank digital currency (CBDC); smart traffic, energy, and logistics systems; AI-backed public administration, including courts and social credit systems
China promotes soft power and nationalism, positioning itself as a tech leader in the Global South. Many developing countries see Chinese infrastructure and tech as aspirational. Chinese diaspora communities may also amplify national achievements out of pride, which contributes to public perception. Chinese state media heavily promotes “Made in China 2025” and similar initiatives as signs of dominance. Some international media repeat these messages without critical analysis, creating an echo chamber. This is further amplified by thousands of so-called ixperts and influencers whose videos and tiktoks often go viral.
China's semiconductor value chain:
As part of China’s push to become more self-sufficient in semiconductor manufacturing and reduce reliance on foreign suppliers, China established two key players at the turn of the millennial.
SMIC (Semiconductor Manufacturing International Corporation):
This is China’s largest and most advanced foundry, HQ in Shanghai (2000). It has the capability to fabricate 7 nm chips thus it is a few generations behind Taiwan's 2 nm chips. However, SMIC's 7 nm chips has limited capability. They have less computing power and energy reduction compared to TSMC's 7 nm chips. The reason is because they are using DUV (Deep UV) machines while TSMC is using cutting edge EUV (Extreme UV) machines.
SMEE (Shanghai Micro Electronics Equipment):
While semiconductor companies are powerhouses, they depend on one critical machinery - UV photolithographic presses. There was up till 2002, only one UV photolithographer company in the world, and that's the Dutch company ASML. Their cutting edge technology allows them to make EUV photolithographic machines that work on very low light wavelengths of 13.5 nm which supports fabrication of chips 7 nm and below.
China set up SMEE a
China is at a crossroad because it's technology is choked by US which has banned the sales to China of 7 nm and below chips to China and EUV photolithographic machines by ASML. Is US the big bully that forces Taiwan and Netherlands not to sell cutting edge technology to China? Absolutely not. US holds the original technologies and it is simply exercising its contractual intellectual proprietary rights to advantage.
Key IPs in the semiconductor value chain held by US:
* EDA Software (Electronic Design Automation) - These are essential tools used to design chips without which advanced chip design is nearly impossible. China can manufacture some chips, but designing competitive ones without this software is an uphill climb. Three U.S. companies dominate - Synopsys, Cadence, and Mentor (Siemens USA)
* Chip Architecture IP - U.S. companies control core design IP such as: x86 architecture (Intel, AMD); RISC-V (open, but US-led); Arm (British origin, but heavily interlinked with US IP and licensing oversight.
* Materials and Process Patents - Many process patents for extreme miniaturization (2nm, 3nm) are held by U.S. firms like IBM, Intel, Applied Materials. These are critical for making EUV-compatible photoresists, masks, and etching steps.
* EUV photolithography - ASML (Netherlands) builds the world’s only EUV photolithography machines. But key components inside ASML's EUV tools come from the U.S., including - Laser light source (from Cymer, a U.S. company owned by ASML), Precision optics, software systems, and vacuum components control systems with U.S. software and firmware. Therefore, any EUV export to China requires a US export license, because of US content rules (the “Foreign Direct Product Rule”).
Other key IPs in semiconductor value chain held by US-friendly nations:
1. ASML (Netherlands) - Photolithography equipment (EUV and DUV). Only company in the world that makes EUV photolithography machines, critical for chips of 7nm and below.
2. Tokyo Electron (Japan) - Etching, deposition, cleaning, photoresist coating. Global leader in multiple front-end chip manufacturing processes.
3. JSR, Shin-Etsu Chemical, Sumco, Tokyo Ohka Kogyo (Japan) - Raw materials and photoresists. Shin-Etsu and Sumco are top silicon wafer producers. JSR and TOK are photoresists and specialty chemicals used in photolithography. Japan provides ~90% of the world’s photoresist and high-purity chemicals for chip production.
4. Carl Zeiss SMT (Germany) - Advanced optics. Supplies the ultra-precise lenses used in ASML's EUV machines. Without Zeiss optics, ASML’s machines wouldn’t work.
5. DISCO Corporation and Advantest (Japan) - Ensure chips are cut, packaged, and validated precisely. DISCO - Saws and grinders for slicing wafers; Advantest - Semiconductor testing systems.
6. GlobalWafers (Taiwan) - Silicon wafer supplier. One of the top three suppliers of the ultra-pure silicon substrates all chips start from.
7. Merck KGaA (Germany) - Specialty gases and chemicals for etching and cleaning. Supplies high-purity gases and materials crucial for chip etching and doping.
US Leverage Over Taiwanese TSMC:
TSMC uses US design tools, process tech, and equipment (e.g., from Applied Materials, Lam Research, KLA). It relies on U.S. customers like Apple, Qualcomm, NVIDIA. Thus TSMC cannot sidestep US restrictions without losing access to design software and key equipment.
US leverage over Dutch ASML:
Although based in the Netherlands, ASML relies on US IP and components. The US successfully pressured the Dutch government to deny China access to ASML's EUV machines. Also restricted some DUV systems (deep UV), which are a step down but still critical.
Semiconductor value chain overview:
Upstream - Raw materials, design tools, wafer fabrication tools.
Midstream - Chip designers and manufacturers (foundries)
Downstream - System integrators, end-product makers.
China has constraints and technology gap of several years in the upstream and midstream segments, namely in EUV Machines, EDA tools, and high end photolithography/inspection. It is however very strong in the downstream segment due to its prowess in manufacturing.
In the US-China tech rivalry, China is the The Master of Application and Scale while the US controls the brains and innovation in IP. China’s strength lies in its speed, scale, and execution. It has become a global leader in the application and deployment of technologies, even when it does not own the underlying IP. The U.S. maintains technological superiority through its ownership of foundational science, architecture, and intellectual property — the core blueprints upon which others build.
For strategic reasons, US wants to cut China off from cutting edge technology. This has forced China to urgently develop self-sufficiency. Currently it is decades behind US in some of the original technology critical for the semiconductor sector. Pardon the pun, but at the moment, the chips are against China. US semiconductor technology has basically reached the end of Moore's Law, China is still on the curve. The question is, can they catch up real quick.
Taiwan is not just economic — it’s a security flashpoint. China sees Taiwan as a breakaway province and uses the trade war to push back on American support for Taiwan. The U.S. uses tariffs and sanctions partly to limit China’s economic rise, which directly affects Beijing’s long-term strategic goals, including Taiwan reunification. The US has defense commitments to Taiwan under the Taiwan Relations Act. There are many who doubt US has the stomach to commit to Taiwan's defence in light of perceived power projected by China's economic and military might. The ramification of what's at stake given Taiwan's deeply entrenched position in the midstream sector of the semiconductor value chain must surely steel American resolve. Taiwan is now producing the 'silk worms' with US technology, surely the Americans would want to protect this the way the Chinese did in ancient times.
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