Growing Tension around Taiwan and Higher Risks in Semiconductor Industry ― If semiconductor supply is suspended, global GDP could decline by USD 800 billion per year ―

 In addition to vulnerability due to the spread of COVID-19, Taiwan faces many problems such as power shortages and natural disasters as well as geopolitical risks with the escalation of the U.S.-China rivalry over the Taiwan Strait. If these risks materialize in Taiwan, a severe supply chain shock from the semiconductor industry could greatly depress the global economy.
 Taiwan's semiconductor industry has expanded its global share in recent years. In particular, it gained superiority in the production of cutting-edge logic semiconductors, which are important components for smartphones and computers. Taiwanese semiconductor companies mainly take orders from U.S. companies, but their production bases for products using semiconductors are concentrated in China and Southeast Asia, which has a great influence on value added and job creation in related industries in Asia.
 If risks such as natural disasters and military conflict materialize, Taiwan's semiconductor industry could be forced to suspend production. The impact on the global economy is estimated to be USD 67 billion in the case of a one-month suspension and 800 billion (1.0% of the global GDP) in the case of a one-year suspension. By industry, the impact on the electronic products industry, particularly smartphones and computers, is expected to be large, and added value in this industry alone is expected to decline by 533 billion per year. By country, the value added that would be lost in China and the United States would be large, and the ratio of losses in value added to GDP would be large in Vietnam and Malaysia. This estimate only takes the primary impact into consideration, but if such a situation were to occur, the semiconductor shortage would lead to a supply shortage of electronic products, which would likely cause a secondary impact to spread in industries other than manufacturing, such as communications and information services.
 While the risks in Taiwan are growing, developed countries are working to attract the semiconductor industry to their own areas and are planning to set aside a large amount of their government’s budgets for it. However, it is not easy to significantly reduce the dependence on Taiwan’s semiconductors because 1) the possibility of large-scale production base transfers to developed countries is low due to high costs, 2) it will take years to start plant operation even if a transfer is decided, and 3) the Taiwanese government is reluctant to relocate its production base. As the semiconductor industry in Taiwan is surrounded by various supply suspension risks, it remains necessary to brace for a crisis in the electronic products industry, mainly in China and Southeast Asia.

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