Taiwan, TSMC & the Kill Switch: The Unthinkable Risk Global Markets Struggle to Price

Markets recently had an accelerated lesson in what happens when an important chokepoint for the global economy closes. Since the US and Israel struck Iran in February, traffic through the Strait of Hormuz has collapsed from roughly 130 transits a day to between eight and fifteen, in what most experts are describing as the largest energy disruption in recorded history.  

Just when you thought you’d seen it all, there’s another potential chokepoint worth being aware of: Taiwan. In fact, the Taiwan Strait is arguably an even more significant chokepoint than the Strait of Hormuz, with cargo that’s harder to replace than oil.  

There are significant questions at the heart of this discussion. Like: How likely is a Chinese move on Taiwan? Why does the Taiwanese technology company, TSMC, sit at the centre of the global economy? Is TSMC’s much-discussed kill switch real? What can investors do to navigate this risk? 

Key Takeaways 

• TSMC accounts for around 70% of global semiconductor foundry revenue, and Taiwan produces close to 90% of the world’s most advanced chips. 
• Bloomberg Economics puts the most severe US-China conflict over Taiwan at US$10.6 trillion, or 9.6% of global GDP, in the first year alone — more than the pandemic or the financial crisis. 
• The US intelligence community’s 2026 Annual Threat Assessment found that Chinese leaders do not currently plan to invade Taiwan in 2027 and have no fixed timeline to do so. 
• The nearer-term risk is a blockade or quarantine, already rehearsed in China’s Justice Mission 2025 exercises, which needs no landing craft or declaration of war yet would still sever the global chip supply chain. 
• TSMC’s kill switch is a real capability — ASML has told the Dutch government it could remotely disable TSMC’s lithography machines — but in every scenario where it is used, global chip supply has already stopped. 
• Four practical responses for investors: know your true TSMC exposure, diversify by geography, hold assets that behave differently in a shock, and keep some dry powder. 

What is Taiwan Worth to Global Markets? 

Let’s start with the value of the Taiwan Strait to the global economy. 

Bloomberg Economics have modelled five paths for the Taiwan Strait. In the most severe, a US-China conflict would cost the global economy US$10.6 trillion, or 9.6% of global GDP, in the first year alone, exceeding both the pandemic and the financial crisis. The largest component of this fallout would be the severe impact on global semiconductor supply. 

The numbers are stark.  

TSMC accounts for some 70% of global semiconductor foundry revenue, and Taiwan produces close to 90% of the world’s most advanced chips.  

You read that right. TSMC is arguably the most strategically valuable company in the world, and Taiwan plays an important global role as a country. 

Former US Commerce Secretary Gina Raimondo told Congress that a Chinese seizure of TSMC would be absolutely devastating for the US, which buys 92% of its leading-edge chips from the island. 

Australia would be impacted as well.  

The Australian Strategic Policy Institute’s Taiwan Matters report argues that a Chinese invasion of Taiwan would be a systemic shock felt in Australian households and businesses within days, hitting export demand, shipping routes and financial stability at once.  

Does Beijing Plan to Invade? 

So, is this a real risk, or just a geopolitical threat that’s likely to remain theoretical? 

Based on the recent evidence and rhetoric, a Chinese invasion of Taiwan doesn’t appear to be imminent (although it probably wouldn’t even if it was planned).  

To that end, the US intelligence community’s 2026 Annual Threat Assessment assessed that Chinese leaders do not currently plan to invade Taiwan in 2027 and have no fixed timeline to do so. It noted that Chinese officials view an amphibious invasion of the country as extremely challenging with a high risk of failure. 

That’s a meaningful revision on earlier consensual thinking on this issue.  

For example, the Davidson Window, the idea that 2027 was the year Beijing wanted to be ready to invade, came from a 2021 congressional hearing and has shaped US defence budgets ever since.  

Most analysts are less committed to this theory these days, although few can refute that Beijing still frames unification as necessary for national rejuvenation by 2049.  

The Pressure is Real  

Despite the above, there are signals that China remains focused on its goal of reunification. 

In particular, Japan is starting to worry about the risk of an invasion.  

Its 2026 Defence White Paper recorded more than 3,700 Chinese military aircraft sorties around Taiwan last year, up from 970 in 2021. Moreover, China’s Justice Mission 2025 exercises rehearsed a full maritime blockade, including port isolation and seizure. A quarantine scenario like this needs no landing craft or a declaration of war, yet would still sever the global chip supply chain.  

Both highlight that this risk may be more real and present than markets currently assume. 

What Did Recent Military Action in Ukraine & Iran Change? 

Precedents have a way of paving the way for more of the same in geopolitics. 

Recently, markets have had to contend with ongoing military action in Ukraine and Iran. 

Russia’s attacks on Ukraine showed how a modern industrial economy can absorb comprehensive sanctions and keep fighting for years, weakening the argument that trade interdependence deters aggression.  

This year’s American and Israeli military action in Iran has provided a different perspective.  

It has shown that the US is willing to use force at scale when its interests are threatened, raising the cost of any Taiwan military action.  

It has also shown how cheaply a determined actor can weaponise an important global chokepoint. Iran didn’t need to win the war to inflict a global energy shock. It just needed to make one waterway unusable.  

Why is TSMC the Prize? 

It’s hard to deny that China would gain enormously from controlling TSMC. The country has spent a decade trying to build leading-edge capacity while export controls deny it the lithography machines advanced chips require.  

A fab is not a factory you can capture and restart. They come from one supplier, ASML in the Netherlands, and require continuous calibration, parts and vendor support. Importantly, ASML and TSMC share a symbiotic, interdependent partnership whereby ASML builds the critical extreme ultraviolet lithography machines, and TSMC operates them to mass-produce the world’s most advanced silicon chips.  

TSMC has been at the forefront of global innovation in this space for many years. It is expected to spend US$60-64 billion on capex this year and has committed US$265 billion to its expanding Arizona operations. 

In other words, TSMC’s competitive advantages have been created through many years of planned, focused capex and execution.  

The Kill Switch: Real or Useful Mythology? 

None of this is a surprise to TSMC management.  

The looming threat of a Chinese invasion is one of the biggest known risks facing the company. Management have been preparing for this scenario for a long time. 

To that end, ASML and TSMC have communicated that they have the means to remotely disable TSMC’s lithography machines in Taiwan, should they need to. ASML assured the Dutch government it could do so if China invaded.  

TSMC’s leadership has been clear on the issue. Former chairman Mark Liu has said that nobody can control TSMC by force, adding that an invasion would render the company’s factories non-operable.  

Richard Gordon, Vice President, Semiconductors for The Futurum Group, isn’t so sure that would be necessary. He believes TSMC’s equipment is so complex to calibrate and maintain that it could not run for long without ASML on site anyway. So why bother disabling it? 

That may mean that the kill switch is a real capability but its significance is overstated.  

For global investors, it’s also worth remembering that in every scenario in which the kill switch is flipped, global chip supply has already stopped.  

How Can Investors Prepare for a Low-Probability, High-Consequence Risk? 

The temptation with tail risks is to ignore them or make a dramatic bet on one unlikely outcome.  

Four approaches sit in between and are worthy of consideration: 

1. Know your true exposure to TSMC in your emerging markets exposure. 

Emerging market indices carry heavy TSMC weightings, as do emerging markets ETFs such as the Global X Semiconductor ETF or Betashares Asia Technology Tigers.  

Both should be regarded as higher risk as a result. 

Check a fund’s holdings prior to investment and adjust your weighting according to the risk profile. 

2. Diversify by geography. 

If you’re exposed to the global semiconductor industry whether it be through global funds or ETFs, or through thematic ETFs such as Global X Semiconductor ETF, it’s prudent to ensure you are sufficiently diversified by geography. 

For example, owning US, Japanese and European chip-making capacity, and equipment makers outside the strait, allows you to spread your risk without abandoning the growth story at the heart of the global semi sector. 

3. Hold assets that behave differently in a shock. 

Diversification is about ensuring you are exposed to a range of assets that behave differently during market sell-offs. 

For example, real assets performed strongly through the Iran conflict, and commodities and gold exposures are among the few reliable forms of protection during periods of geopolitical stress. 

The lesson from this year’s military action in Iran was that investment positioning before a military event is significantly more valuable than reacting afterwards when speculators are trying to second-guess the next news headline. That’s why the oil price ran so hard at the beginning of the conflict and then sold off.  

As such, if you are holding commodities and gold as a form of protection, it’s probably prudent to ensure you have an allocation before a shock, such as an invasion of Taiwan, occurs. 

4. Keep some dry powder. 

Cash and short-duration fixed income are unglamorous, but events in Iran rewarded those who were able to buy after the first repricing rather than sell into it. Liquidity gives you optionality to benefit from future sell-offs. 

Being Ready for Known Risks is Part of Sensible Risk Management 

A Taiwan invasion appears to be unlikely in the near term, and US intelligence has stepped back from the 2027 timeline. But the risk that threatens portfolios is the blockade that Beijing has already rehearsed. That needs no formal war and would sever a supply chain in which one company on one island makes the components underpinning most of the world’s technology earnings. 

The kill switch probably doesn’t reduce the risk of that scenario occurring. Although it does reduce what China could gain while doing nothing to protect what an investor could lose. Iran has just shown a chokepoint can be closed by a far weaker actor, for a long time, at a price the global economy is still paying. 

With this risk ever present, it’s probably a good idea to hold your emerging markets and technology exposure at a risk-adjusted weighting alongside other exposures that don’t depend on China not invading Taiwan.  

Frequently Asked Questions 

Why is TSMC so important to the global economy? 

TSMC accounts for around 70% of global semiconductor foundry revenue, and Taiwan produces close to 90% of the world’s most advanced chips. The US buys 92% of its leading-edge chips from the island. Most of the world’s technology earnings depend on components made by one company on one island. 

Is TSMC’s kill switch real? 

Yes, as a capability. ASML and TSMC have communicated that they have the means to remotely disable TSMC’s lithography machines in Taiwan, and ASML assured the Dutch government it could do so if China invaded. Its significance may be overstated, because the machines are so complex to calibrate and maintain that they could not run for long without ASML on site anyway. 

How likely is a Chinese invasion of Taiwan? 

Not imminent on the current evidence. The US intelligence community’s 2026 Annual Threat Assessment found Chinese leaders do not currently plan to invade in 2027 and have no fixed timeline, and that Chinese officials view an amphibious invasion as extremely challenging with a high risk of failure. Beijing still frames unification as necessary for national rejuvenation by 2049. 

What is the Davidson Window? 

The Davidson Window is the idea that 2027 was the year Beijing wanted to be ready to invade Taiwan. It came from a 2021 congressional hearing and has shaped US defence budgets ever since, though most analysts are less committed to the theory today. 

What would a conflict over Taiwan cost the global economy? 

In Bloomberg Economics’ most severe modelled path, a US-China conflict would cost the global economy US$10.6 trillion, or 9.6% of global GDP, in the first year alone. The largest component of that fallout would be the impact on global semiconductor supply. 

Would a blockade be less damaging than an invasion? 

Not for investors. A quarantine or blockade scenario needs no landing craft and no declaration of war, yet would still sever the global chip supply chain. China rehearsed exactly this in its Justice Mission 2025 exercises, including port isolation and seizure. 

How does a Taiwan conflict affect Australian investors? 

The Australian Strategic Policy Institute’s Taiwan Matters report argues a Chinese invasion of Taiwan would be a systemic shock felt in Australian households and businesses within days, hitting export demand, shipping routes and financial stability at once. Emerging market indices and semiconductor ETFs also carry heavy TSMC weightings, so check a fund’s holdings before investing. 

Funds Mentioned 

Global X Semiconductor ETF (ASX: SEMI)

Invest in the world’s leading microchip makers and designers.

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Objective

Growth

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ETFs

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$500

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Listed

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Open for investment

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ASX: ASIA

BetaShares Asia Technology Tigers ETF

ASIA aims to track the performance of an index (before fees and expenses) comprising the 50 largest technology and online retail stocks in Asia (ex-Japan), including technology giants such as Alibaba, Tencent, Baidu and JD.com.

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Objective

Growth

Category

ETFs

Min. Investment

$1

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Listed

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N/A

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Listed

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ETF

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Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.