How Taiwan’s Economy Became the Most Strategically Important 36,000 Square Kilometers on Earth

Following Nancy Pelosi’s August 2022 visit to Taiwan, Hsieh Yong-fen, founder of chip and material testing company MA-tek, shared a moment that sticks with you. The phones at Taiwanese supplier companies just wouldn’t stop ringing in the days after her visit, as Beijing began unprecedented military drills throughout the island, diplomats scrambled, and news anchors discussed worst-case scenarios. Amazon, Apple, Google, and Meta.

Can you make this somewhere else? is the desperate question they are all posing. It turned out that the solution was not straightforward. It might never be easy. “If anyone hits Taiwan, or there is a serious disruption,” Hsieh stated, “the tech and electronics industry worldwide is basically screwed.” You wouldn’t expect a materials testing executive to make such a claim. It’s also, annoyingly, difficult to disagree with.

Situated about 70 nautical miles off the coast of mainland China, Taiwan is an island roughly the size of Maryland, covering 36,000 square kilometers of mountainous land. There are 23 million people living there. It does not belong to the United Nations. Most governments do not formally acknowledge it as a sovereign state. However, it occupies a position in the global supply chain that no nation of its size has any right to occupy by practically any honest measure of economic leverage.

It produces the circuit boards in your laptop, the chips in your phone, and the lenses in your camera. A vast Asian supply chain supports the iPhone, which has sold over two billion units since 2007 and brought in over a trillion dollars for Apple. Taiwan is at the center of that supply chain.

How this occurred is a question worth pondering. Taiwan lacked abundant natural resources. It lacked oil, significant rare earth deposits, and a clear advantageous location for production. What it had, starting in earnest after the Second World War, was a population that approached engineering with something approaching cultural seriousness, a government prepared to place long-term, patient bets on industrial development, and a set of geopolitical conditions that forced its businesses to become indispensable rather than merely competitive.

Taiwanese companies were discreetly integrating themselves into the supply chains of major Western technology companies by the 1980s and 1990s. Eliminating them by the 2000s would have meant starting over with whole industries. It might have gone unnoticed until it was too late to change the situation.

The most obvious example of this dominance is Taiwan Semiconductor Manufacturing Company, or TSMC. Established in 1987, it invented the idea of a dedicated semiconductor foundry—a business that produces chips created by others at a scale and level of accuracy that no other could match. The world’s most sophisticated chips are currently made by TSMC. Nearly all of the world’s largest technology companies are among the clients. The literature on this sector gives the impression that TSMC’s competitive advantage was never solely technical. It was also a calculated decision to become indispensable to the world economy, making it impossible to replace.

Even so, semiconductors are not the whole story. A triangle of interdependence between Taiwan, China, and the United States is created by Taiwan’s companies’ dominance in printed circuit boards, sophisticated camera optics, and a startling portion of the world’s electronics assembly operations, much of which is done in mainland China. This triangle becomes more unsettling the closer you look at it. Despite their growing political animosity, these three actors are intricately linked economically.

Taiwanese components are used in Chinese factories to assemble goods. American businesses create goods that are produced using Taiwanese machinery. Because everyone depends on everyone else, the system functions as a whole. When geopolitics seemed manageable, this arrangement made perfect sense, and it continued to function long after it no longer felt secure.

The way Taiwan’s geography and economy have developed into mutually reinforcing strategic assets is what makes its position truly unique, setting it apart from other small, export-dependent economies. Taiwan’s importance as a maritime buffer, a gateway to the Pacific, and a “portal” that could disrupt Beijing’s perceived semi-enclosed position in Asia has been extensively discussed by Chinese military strategists.

The East and South China Seas are joined by the Taiwan Strait. Chinese analysts calculated that taking control of the island would unify Beijing’s naval operations in ways that are not currently feasible. Think tanks are not discussing these theoretical issues. The National Defense University of China publishes books that feature them. They provide information for the years-long, intensified military drills around the strait.

The realization that Taiwan’s military vulnerability and its economic centrality are not distinct issues is subtly disorienting. They nourish one another. The stakes of any conflict increase as Taiwan’s economy becomes more vital. Beijing and Washington feel more pressure to posture, signal, and press when the stakes are higher. Additionally, as they put more pressure on Taiwanese suppliers, tech companies are calling them anxiously to inquire about backup plans.

It turns out that those backup plans are more difficult to implement than they seem. The ecosystem of talent, supply connections, and manufacturing culture that Taiwan has developed over decades cannot be easily or affordably relocated, despite years of efforts by Western companies to diversify, including the construction of factories in Arizona, Germany, and Japan. It’s still unclear if any of these initiatives will significantly lessen global reliance on the island or if they will only add a small amount of redundancy while maintaining the essential framework.

As you watch this unfold, the quiet stubbornness of economic gravity is more striking than the drama of geopolitics. The world needed what Taiwan created. It was the center of the world’s organization. Everyone is now realizing that fragility and irreplaceability are two sides of the same coin as they consider the possibility that this arrangement is fragile. 36,000 square kilometers. a smaller island than the majority of states in the United States. Nevertheless, this is the location where the contemporary economy is most concentrated, exposed, and challenging to replace.

Ultimately, that is a tale of decisions made over many years by engineers, legislators, and business executives who were trying to maximize speed, cost, and efficiency. No one chose to put too many eggs in one basket. As it happened, the basket was incredibly effective at holding eggs.