The Emerging Fractures in the Taiwanese Silicon Shield

The people of Taiwan have sent with their vote a resolute signal to mainland China. They are committed to preserving their identity, freedom, and alignment with the West while maintaining the status quo. China has expressed disappointment with the election results, but its reaction has been relatively muted. Yet, it is likely we will see more pressure on Taiwan in the coming months, especially in May when the new president will take office.

Although reunification will remain a top priority for Xi Jinping, it is unlikely that military force will be used in the short term to regain control over what Beijing views as a “rebel province.” This is not only because it would be complicated from a military standpoint, but also due to the potential for US intervention and the significant economic risks involved. Taiwan holds substantial economic leverage over China and this might help to keep Beijing’s most extreme actions in check. The island is the key player in the global supply chain for microchips, accounting for about 60% of all semiconductors manufactured worldwide. Additionally, Taiwan leads in the manufacturing of the most advanced semiconductors, making up over 90% of the global production capacity, which are essential for applications like artificial intelligence. This makes the island crucial for China and the global economy.

Taiwan’s status as a dominant player in this vital supply chain is one of its most important geopolitical assets. The island’s chip industry has earned the nickname “silicon shield” because it is believed that Taiwan’s chip production capacity protects it from a potential Chinese military invasion. However, in recent years, Beijing has been taking significant steps to reduce its over-reliance on Taiwanese production. And it is not the only one. In this turbulent time, even actors that support the island’s autonomy, such as the US and the EU, are taking steps to de-risk their supply chain from Taiwan. Nevertheless, while mitigating one risk, they may inadvertently be creating another one: diminishing Taipei’s crucial role in one of the world’s most significant supply chains could weaken one of the primary deterrents against Chinese action on the island. The “Taiwanese silicon shield” might be at risk.

China’s steps to tackle semiconductor import dependency

While Taiwan and the People’s Republic of China (PRC) seem increasingly distant from a political point of view, they remain strictly economically intertwined. In 2023 over a third of Taiwan’s exports were destined to China, highlighting the importance of the mainland market for Taiwanese businesses. Vice-versa, Taiwan plays a crucial role in supplying Chinese firms with essential components, particularly semiconductors (also known as integrated circuits). Chinese data indicates that Taiwan is responsible for nearly 40% of its semiconductor imports by value, a figure that has even increased slightly in recent years due to the success of companies like TSMC. Adding the imports from South Korea, a formal US ally, China’s imports of semiconductors reach a percentage of nearly 60%. 

However, it was observed that in 2023, China’s semiconductor imports declined in both volume and value. According to official data, China imported a total of 479.5 billion integrated circuits units worth US$349.4 billion in the past year, a decrease of 10.8% by volume and 15.4% by value from the previous year. The declining demand for semiconductors in China can be attributed not just to its turbulent relationship with Taiwan, but also to the economic challenges faced by the nation, including domestic issues and increasing pressure from the US to restrict Chinese access to advanced technologies. It also indicates that the country is making an effort to reduce its reliance on Taiwan and other Western allies for one of the most critical inputs. In fact, while the nation experienced a decline in imported microchips, Chinese imports of semiconductor manufacturing equipment increased by 14% in the same year, reaching almost $40 billion. Chinese enterprises hurriedly purchased lithography machines for microchip production from the Dutch company ASML, which agreed to comply with U.S. constraints that limit Beijing’s ability to access cutting-edge semiconductors. Those same restrictions have pushed China to invest heavily in producing chips locally and now it can import fewer of them. 

In the long run, China self reliance on microchip production could reduce the economic risk of attacking Taiwan. Nonetheless, this is still an unlikely scenario: despite China’s imports of semiconductors plunging by both volume and value in 2023, they are still the mainland’s largest import item ahead of crude oil, according to customs data released by the country.  

EU and the US de-risking steps

As geopolitical rivalries persist, the EU and US are also increasingly investing to secure their supply chains. As a consequence, a growing amount of funds are being allocated to developing major programs supporting domestic chipmakers.

The US issued the CHIPS and Science Act in 2022. This legislation allocates $52 billion in federal subsidies to support global chip manufacturing firms that establish fabrication facilities on American soil, among other things. Over the past 30 years, the United States’ global chip manufacturing share has significantly decreased, dropping from 37 per cent in 1990 to a mere 12 per cent today. With the Chips and Science Act, the Biden administration is aiming to reverse this trend by introducing measures that incentivize semiconductor fabrication’s return to the United States. The subsidies have already stimulated a surge in investment in US chip manufacturing from prominent companies like Intel, Samsung, TSMC, and Micron.

The European Union has also moved to strengthen its production capacity in the field of semiconductors with the adoption of the European Chips Act. This measure is expected to infuse billions of euros into enhancing “competitiveness and resilience” while reducing vulnerabilities and dependencies on foreign actors. It set the ambitious goal of “doubling the EU’s global market share in semiconductors from 10% to at least 20% by 2030”. Given the much smaller budget compared to the US, the EU has also relaxed its state aid rules, allowing key players like France and Germany to offer significant subsidies for the construction of chip production plants.

A double-edged sword

While the production capacity of TSMC, Taiwan’s top player in the business, is expected to grow significantly in the coming years, due in part to favourable business environments in the US and EU, the proportion of advanced chips produced solely on the island is predicted to gradually decline.

One issue with the de-risking strategies of the EU and US is that they can undermine Taiwan’s key survival tactic of being crucial to the global semiconductor supply. Due to the persistent threat of Chinese invasion and the US’s ambiguous stance regarding intervention in case of escalation, many Taiwanese view their significant role in global semiconductors as a compelling reason for the international community to uphold the current status quo in the strait. Taiwan’s leadership in semiconductor manufacturing is unlikely to change rapidly, but the attempt by the US and the EU (and China) to decrease their reliance on Taiwanese production is causing concern among many in Taiwan. The island’s significant role in global semiconductors is perceived as a compelling reason for the international community to uphold the current status quo. With the US and its strategic partners becoming less reliant on Taiwan’s fabs, the island’s protection may no longer be considered an economic security imperative. This shift challenges the fundamental logic of the Silicon Shield and raises questions about Taiwan’s future.

[Photo by Arusanov, via Wikimedia Commons]

The views contained in this article are the author’s alone and do not represent the views of ISPI or The Geopolitics.

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