Author: Michał Malak

For Taiwan the last days of 2025 were characterised by yet another Chinese military drills around the island located 180-kilometers off the coast of mainland China. The drills have been conducted days after the announcement of $11bn U.S. weapons sale to Taiwan, one of the biggest weapon sales in Taiwan’s history. China threateningly described its military drills as “severe punishment for separatist forces seeking independence through force”. According to Taiwan’s transport ministry flights involving over 100 000 passengers had to be rerouted to avoid dangerous areas. China’s military proclaimed that the exercises were also aimed at deterrence “outside the island chain” with the United States and Japan being the implied targets, with the latter entering crosshairs of China following Japan’s prime minister Sanae Takaichi’s remarks in parliament that Japan would intervene militarily if the island was invaded[1].

A Century-Long Standoff

The escalating tensions in the Taiwan Strait are nothing new. The current situation can be traced back to the final stage of the Chinese civil war between the Kuomintang-led government of Republic of China and the communist forces. By 1949 the civil war in mainland China was effectively ended with the victory of the Chinese forces and the proclamation of the establishment of People’s Republic of China. The remaining nationalist forces fled to Taiwan, where the Republic of China continued to exist with plans to one day retake the mainland[2]. While these plans never came to fruition the government located in Taiwan remained recognized in the West as the only legitimate government of China and kept its seat as a permanent member of the United Nations Security Council until 1971 when the seat was handed over to the PRC[3].

From the perspective of the People’s Republic of China, Taiwan constitutes an inalienable part of Chinese territory, a position grounded in Beijing’s interpretation of historical continuity and reflected in its One China principle, which is widely acknowledged by the international community. Taiwan’s international legal status, however, remains deeply ambiguous. While it maintains full de facto autonomy and democratic governance, it is officially recognized as a sovereign state by only 11 United Nations member states, with most other countries, including the United States, adopting deliberately ambiguous positions that combine diplomatic non-recognition with substantial unofficial engagement. In recent years, discussion of a potential invasion of Taiwan by the People’s Republic of China has intensified, alongside China’s growing power and rising nationalist rhetoric. Many analysts argue that the prospect of forceful reunification has become increasingly plausible, even if its timing and likelihood remain uncertain[4].

The Strategic Anchor of the Pacific

Any armed conflict over Taiwan would almost certainly draw in both the United States and Japan, given their deep strategic, economic, and security stakes in the region. For Washington, Taiwan represents not only a long-standing security partner and a vital node in global trade, but also a central element of its broader strategy to constrain China’s power projection in the Indo-Pacific. As articulated in the most recent U.S. National Security Strategy published by the White House, the United States seeks to deter any attempt to alter the status quo by force, viewing stability across the Taiwan Strait as essential to preserving its strategic position along the First Island Chain and limiting China’s unrestricted access to the Pacific Ocean[5]. Japan, for its part, has increasingly signaled its readiness to intervene in a potential conflict[6]. As an island nation heavily dependent on maritime trade and food imports, Japan would face severe economic and societal consequences from any major disruption caused by Chinese military action, including the risk of blockade and the breakdown of critical supply chains[7].

A potential attempt to bring Taiwan back to the Chinese fold may not be in the form of an invasion; instead it could involve a naval blockade designed to isolate the island economically and politically, with the aim of exerting pressure on Taiwan’s leadership without crossing the threshold of full-scale war. Regardless of the specific scenario, and irrespective of the degree of direct military involvement by the United States or Japan, any significant disruption to commercial traffic in and around Taiwan would have far-reaching consequences for the global economy. The Taiwan Strait constitutes one of the world’s most critical maritime chokepoints, with more than one fifth of global maritime trade transiting the strait in 2022 alone[8].

The Pulse of the Digital Age

Taiwan’s central importance to global trade derives primarily from its dominant position in the global semiconductor industry[9]. As demonstrated during the COVID-19 pandemic, disruptions to semiconductor supply chains can rapidly translate into higher prices and shortages across a wide range of goods, from consumer electronics and household appliances to automobiles. Semiconductors constitute the foundational components of modern processors, graphics processing units (GPUs), and other advanced integrated circuits, making them indispensable to the functioning of artificial intelligence technologies. The computationally intensive nature of contemporary AI systems, in particular, has further intensified global demand for advanced chips, rendering semiconductor production a critical bottleneck in the ongoing technological transformation.

At present, Taiwan accounts for over 60% of global semiconductor manufacturing capacity and approximately 90% of the world’s most advanced chip production, creating a profound structural dependence on the island for cutting-edge technologies[10]. This dominance is overwhelmingly concentrated in a single firm, the Taiwan Semiconductor Manufacturing Company (TSMC), whose rise to global preeminence was facilitated by sustained and forward-looking government investment policies beginning in the 1980s[11]. This concentration of production not only amplifies Taiwan’s economic significance but also transforms the island into a critical node in global technological and security competition.

The Silicon Shield: Deterrence Through Dependency

The scale of global dependence on Taiwan’s semiconductor industry has given rise to the concept of the “Silicon Shield,” a term popularized by Craig Addison in his 2001 book Silicon Shield: Taiwan’s Protection Against Chinese Attack[12]. The concept rests on the premise that Taiwan’s central role in the production of advanced semiconductors generates powerful deterrent effects by linking the island’s security to the stability of the global economy. Under this logic, any military conflict in the Taiwan Strait would trigger severe disruptions across global technology supply chains, creating strong incentives for major powers to prevent escalation and preserve the status quo[13].

Estimates of the potential economic fallout underscore the magnitude of these risks. According to Bloomberg, a large-scale armed conflict involving Taiwan could cost the global economy approximately $10 trillion—nearly 10 percent of global GDP—exceeding the economic damage of the 2008 financial crisis and the COVID-19 pandemic combined[14]. Beyond immediate economic losses, a prolonged disruption of Taiwan’s semiconductor output could result in years of technological stagnation, as the replication of cutting-edge fabrication capacity is an exceptionally complex and capital-intensive process. Even the Taiwan Semiconductor Manufacturing Company itself has faced significant challenges in expanding advanced production abroad, as illustrated by delays and cost overruns at its Arizona fabrication facility, which focuses on previous-generation chips[15].

While Taiwan’s dominance is increasingly contested, most notably by Samsung, as well as emerging efforts in China and the United States, these competitors remain several years behind in the production of leading-edge semiconductors[16]. As a result, the trajectory of the twenty-first century’s digital transformation continues to hinge on stability across the approximately 180 kilometers of water separating Taiwan from the Chinese mainland. For decades, the ‘Silicon Shield’ has functioned as an informal yet powerful deterrent by binding the economic interests of global powers to Taiwan’s security. However, as the so-called “chip war” accelerates and states invest heavily in domestic semiconductor production, it remains uncertain whether this technological interdependence represents a durable security guarantee or merely a temporary reprieve. What is clear, however, is that any major hostile action in the Taiwan Strait—whether through invasion, blockade, or sustained coercion—would impose catastrophic costs on the global economy.

Sources:

[1] Ewe, Koh. China Holds Military Drills Around Taiwan as Warning to “separatist Forces.” 29 Dec. 2025, www.bbc.com/news/articles/c87l7xjp235o.

[2] 台北時報. “Taiwan in Time: The Great Retreat.” Taipei Times, 4 Mar. 2020, web.archive.org/web/20200620173131/https://www.taipeitimes.com/News/feat/archives/2016/12/04/2003660529.

[3] “People’s Republic of China Is Seated at the United Nations | Diplomacy and International Relations | Research Starters | EBSCO Research.” EBSCO, www.ebsco.com/research-starters/diplomacy-and-international-relations/peoples-republic-china-seated-united.

[4] “The Dragon and the Clock—2027 as the Turning Point Year Between China and Taiwan.” INSS, 4 Jan. 2026, www.inss.org.il/publication/china-taiwan-2027.

[5] Trump. “2025 National Security Strategy” 4 Dec. 2025, https://www.whitehouse.gov/wp-content/uploads/2025/12/2025-National-Security-Strategy.pdf

[6] Ewe, Koh. China and Japan in Escalating Spat Over Taiwan: What to Know. 18 Nov. 2025, www.bbc.com/news/articles/crklvx2n7rzo.

[7] Mijatovic, Bojan. “Japan’s Food Self-Sufficiency Overview: Challenges, Impacts, and Future Strategies for National Security.” Tridge, 9 Sept. 2024, www.tridge.com/stories/japans-food-self-sufficiency-overview-challenges-impacts-and-future-strategies-for.

[8] Verschuur, Matthew P. Funaiole Brian Hart, David Peng, Bonny Lin, and Jasper. Crossroads of Commerce: How the Taiwan Strait Propels the Global Economy. features.csis.org/chinapower/china-taiwan-strait-trade.

[9] Miller, C. (2022) Chip war: The Quest to Dominate the World’s Most Critical Technology.

[10] “Taiwan – Semiconductors Including Chip Design for AI.” International Trade Administration | Trade.gov, 1 Dec. 2025, www.trade.gov/country-commercial-guides/taiwan-semiconductors-including-chip-design-ai.

[11] Chang, Morris. “Pure Play.” IEEE Solid-State Circuits Magazine, vol. 3, no. 4, Jan. 2011, pp. 21–24. https://doi.org/10.1109/mssc.2011.942450.

[12] Addison, Craig. Silicon Shield: Taiwan’s Protection Against Chinese Attack. Authorlink, 2001.

[13] Huang, Joyce. “Can Taiwan’s Silicon Shield Protect It Against China’s Aggression?” Voice of America, 10 May 2021, www.voanews.com/a/east-asia-pacific_can-taiwans-silicon-shield-protect-it-against-chinas-aggression/6205660.html.

[14] Welch, Jennifer, et al. “Xi, Biden and the $10 Trillion Cost of War Over Taiwan.” Bloomberg.com, 9 Jan. 2024, www.bloomberg.com/news/features/2024-01-09/if-china-invades-taiwan-it-would-cost-world-economy-10-trillion.

[15] Goodman, Peter S., and Loren Elliott. “18,000 Reasons It’s so Hard to Build a Chip Factory in America.” The New York Times, 8 Dec. 2025, www.nytimes.com/2025/12/04/business/tsmc-phoenix-fab.html.

[16] Counterpoint, Team. Global Pure Foundry Market Share: Quarterly. 16 Dec. 2025, counterpointresearch.com/en/insights/global-semiconductor-foundry-market-share.