The recently concluded Taiwanese election has proven to be a setback for the pro-China camp and Chinese President Xi Jinping. Investors now face the likelihood of an escalation in the ongoing U.S.-China conflict, particularly regarding access to semiconductor technology. However, despite these tensions, the risk of a full-fledged war remains relatively low at present.

In the election, Taiwanese voters elected Lai Ching-te as their new president, a candidate who favors independence from China. Nevertheless, his Democratic Progressive Party failed to secure a parliamentary majority. This outcome curtails the potential for a formal push toward Taiwanese independence and reduces the chances of triggering a chain of events that could potentially lead Beijing to forcibly unify Taiwan with the mainland. Such a war would inadvertently jeopardize a significant portion of the world's semiconductor industry, including the vital operations of Taiwan Semiconductor Manufacturing.

Although there is a possibility that Beijing may escalate military drills in the run-up to the National People's Congress in March and also before Lai Ching-te's inauguration in May, it is unlikely that geopolitical risks will intensify beyond these events, according to Carlos Casanova, chief Asia economist for Swiss private bank Union Bancaire Privée.

The global markets have responded positively thus far. In premarket trading on Tuesday, Taiwan Semiconductor's American depositary receipts experienced only a marginal 1% decline, indicating that investors are not hastily abandoning the sector.

Overall, while the Taiwanese election results may deepen the U.S.-China conflict over semiconductor technology, it is crucial to remain cautious but hopeful of a peaceful resolution in the near term.

The Fracturing Global Chip Industry and the Rise of Semiconductor Nationalism

Despite recent developments, the ongoing rift between the United States and China continues to cause fractures in the global chip industry. As a result, the concept of semiconductor nationalism remains prevalent, leading to market inefficiencies and potential challenges ahead.

Lagging Hopes of a "Chip 4" Alliance

The United States had high hopes of establishing a solid alliance, known as "Chip 4," among itself, Japan, South Korea, and Taiwan. However, progress has been slow in this regard.

Korean Companies Caught in the Middle

Korean companies like Samsung Electronics and SK Hynix find themselves exposed to both China as a manufacturing base and a market. This puts them in a delicate position amidst the ongoing tensions.

Diversifying Supply Chains Geographically

In an effort to diversify semiconductor supply chains geographically among the proposed allies, Taiwan Semiconductor Manufacturing (TSMC) is constructing chip factories in Arizona. This marks a significant step forward. However, the project has encountered delays due to a shortage of skilled labor and has sparked a debate with unions regarding the recruitment of Taiwanese workers. These issues could persist unless there are immigration reforms in the United States to boost domestic chip manufacturing.

China's Influence and Drive for Technological Advancement

China continues to try and drive a wedge between the United States and its allies while simultaneously strengthening its own chip industry. While Huawei's chips may not yet match the quality of Nvidia's, they have surprised the U.S. with significant advancements in certain areas. Chinese companies will actively seek ways to obtain semiconductor equipment and technology, despite American sanctions aimed at preventing such access.

Washington's Determination to Win the Chip War

The United States is determined to emerge victorious in what can be seen as a chip war. However, this will require unwavering commitment from its allies, including Taiwan and its new president. The road ahead will undoubtedly present further challenges.