Geopolitical Risks and Semiconductor Supply Chains: China's Coercion Campaigns and Their Economic Fallout

The global semiconductor industry, a linchpin of modern economic and technological systems, now faces unprecedented geopolitical risks. At the heart of this volatility lies China's escalating coercion campaigns against Taiwan, a critical node in the global supply chain. These campaigns-encompassing military posturing, cyberattacks, and economic leverage-threaten not only the stability of semiconductor production but also the equities and commodities tied to this sector. Investors must grapple with the cascading effects of these tensions, which intertwine national security, industrial policy, and market dynamics.

China's Coercion: A Multi-Dimensional Strategy

China's approach to Taiwan's semiconductor industry has grown increasingly sophisticated. In 2025, the Chinese military launched "Justice Mission 2025," a series of large-scale drills simulating blockades around Taiwan. These exercises, involving multi-domain joint operations and port closures, signal a readiness to disrupt trade routes and supply chains, particularly for semiconductors. Simultaneously, cyber espionage groups like TA415, aligned with Chinese interests, have intensified attacks on Taiwanese semiconductor manufacturers and their supply chains. These campaigns employ advanced tactics, including spear-phishing and custom malware, to steal intellectual property and undermine operational resilience.

Economically, China has weaponized its control over critical materials. Export restrictions on gallium and germanium-key components in chip production-have already been deployed as retaliatory measures against U.S. semiconductor tariffs. China's dominance in rare earth elements, which account for over 80% of global refining capacity, further amplifies its strategic leverage. These actions reflect a broader push for technological self-sufficiency, as Beijing seeks to reduce reliance on foreign manufacturing and counter Western export controls.

Supply Chain Vulnerabilities and the U.S. Response

Taiwan's centrality to the semiconductor industry cannot be overstated. The island produces 90% of the world's most advanced chips, with TSMC alone commanding 92% of the market in this segment. However, its reliance on just-in-time logistics and limited stockpiles of raw materials makes it acutely vulnerable to disruptions. A sustained blockade or cyberattack could trigger over $2.5 trillion in annual global economic losses.

The U.S. has responded with initiatives like the CHIPS and Science Act, aiming to onshore production and reduce dependency on foreign manufacturing. Yet, these efforts face significant hurdles, including high costs and the time required to build new fabrication ecosystems. Meanwhile, climate-related disruptions-such as droughts and typhoons in East Asia-have compounded supply chain fragility, creating a compounding risk environment.

Market and Commodity Impacts

The semiconductor sector's equities have become a barometer of geopolitical risk. TSMC, the industry's bellwether, has seen its strategic importance grow as U.S.-Taiwan trade reached $158.6 billion in 2024. However, this prominence also heightens exposure to volatility. U.S. export controls and tariffs on Chinese semiconductors, set to escalate by 2027, have already prompted TSMC to expand manufacturing in the U.S. Such shifts, while aimed at diversifying risk, come at the cost of increased capital expenditures and operational complexity.

Commodity markets have also felt the strain. Chinese chipmaker SMIC recently raised wafer prices by 10%, reflecting tighter capacity and geopolitical pressures. Export controls on rare earth processing technologies and U.S. restrictions on semiconductor equipment for China-based fabs have further constrained supply. These dynamics are likely to drive up costs for downstream industries, from consumer electronics to automotive manufacturing.

The Path Forward: Mitigating Risk in a Fractured World

The semiconductor crisis underscores a broader truth: in an era of fragmented globalization, supply chain resilience is inseparable from geopolitical strategy. Investors must factor in not only the direct risks of coercion campaigns but also the secondary effects of retaliatory measures and climate shocks. Diversification-both in sourcing and manufacturing-remains a key hedge. Yet, as the U.S. and China continue to weaponize trade and technology, the cost of such diversification will likely rise.

For now, the semiconductor industry stands at a crossroads. The choices made by policymakers, corporate leaders, and investors in the coming months will shape not only the sector's future but also the broader trajectory of global economic stability.