MoneyWeek

Taiwan: the world’s tinderbox

On 3 April, Taiwan was hit by its biggest earthquake in 25 years, a potent reminder that the island nation sits atop a major geological fault line. Mercifully, casualties were limited. But Taiwan – officially the Republic of China (ROC) – is positioned along another potentially far more dangerous tectonic fault, this one geopolitical.

On one side lies America, determined to remain the dominant Indo-Pacific power; on the other, president Xi Jinping’s increasingly assertive People’s Republic of China (PRC), which wants that role for itself. The PRC has never ruled Taiwan – to which the defeated nationalist Kuomintang retreated at the end of China’s civil war in 1949 – but still claims it as a renegade province. For markets, that leaves a multi-trillion-dollar question mark hanging over the island. But why is Taiwan so critical?

A ROC and a hard place

Taiwan is the epicentre of the manufacturing of advanced semiconductors. It produces around a third of all global processing power and 90% of the most advanced chips. These are the foundation stones of the modern economy, vital for artificial-intelligence (AI) systems, smartphones, laptops, guided weapons, cars and

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