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TSMC is China’s trump card against U.S. and Taiwan

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The logo of Taiwan Semiconductor Manufacturing Company (TSMC) is pictured at its headquarters in Hsinchu, Taiwan, January 19, 2021.

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WASHINGTON, Aug 5 (Reuters Breakingviews) – It’s possible that Americans will start to care about U.S. House Speaker Nancy Pelosi’s visit to Taiwan once they find out the production of their new Toyota is risk. If strains between China and Taiwan continue to worsen, the People’s Republic has a trump card: threatening to cut off the island’s exports, which include products from pivotal chipmaker TSMC, formally known as Taiwan Semiconductor Manufacturing (2330.TW). That company plays an outsized role in the global economy, supplying Apple (AAPL.O), Qualcomm , and other industrial giants with key components. It should be enough to make even Americans – who otherwise remain largely uninterested – nervous.

Pelosi’s trip earlier this week was the first time a U.S. House speaker has gone to the region since 1997. Beijing, which is in a much stronger position now, responded by launching its largest military drills ever in the Taiwan Strait on Thursday, which included firing missiles and dispatching aircraft to the area. The People’s Republic could threaten to retaliate further. A naval blockade and a no-fly zone, for example, could in theory keep Taiwan’s main products from heading around the world.

China, too, would face consequences if it were to make life difficult for TSMC. Mainland chipmakers, handset brands, electric vehicles and more rely on the $447 billion company’s cutting-edge technology just as much as their U.S. rivals. That makes it less likely read more that the People’s Republic will follow through.

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Still, the strength of TSMC puts U.S. companies, who have many friends in Washington, on the back foot. The company’s chip factories, which are mostly in Taiwan, supply more than half of the contract chip-making market, including 80% of microcontrollers used in cars and 90% of the most advanced semiconductors, according to Bain & Company. U.S. companies are just coming out of a global chip shortage spurred by the pandemic, which already shut down production at auto factories across the globe. With the threat of a recession and war in Ukraine, American chieftains are highly resistant to any other potential curveballs.

Isolating or disrupting TSMC would be a fresh disaster for the global economy. As tensions rise to threats that can cause real consequences, China holds a big chip in its hand.

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China fired multiple missiles near Taiwan on Aug. 4, a day after U.S. House of Representatives Speaker Nancy Pelosi visited the island claimed by Beijing. It was the largest military drills in the Taiwan Strait.

Separately, TSMC Chair Mark Liu told CNN that the company’s advanced chip factory would become inoperable if China invaded Taiwan, according to an interview aired on July 31. TSMC has more than 50% share of the global market for contract chip-making, according to Bain & Company.

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Editing by Lauren Silva Laughlin

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.