Brexit, Taiwan and the Global Semiconductor Industry

Written by Yu-Ching Kuo and Robyn Klingler-Vidra.

Image credit: 30% of all WW semiconductors? by Erik Charlton/Flickr, license CC BY 2.0

In this piece, we discuss how Brexit affects Taiwan in its role as a key player in the critical innovation arena of the global semiconductor industry. To do so, we contextualise Taiwan’s semiconductor industry in the dynamics of the global marketplace and discuss the potential effects of uncertainty on innovation.

Taiwan in the Global Semiconductor Industry

The national giants of the semiconductor world are the United States, China, Taiwan, South Korea, Japan, with Singapore and Hong Kong rounding out the list of giants, by virtue of their role as import/export hubs. Taiwan is a crucial manufacturer, particularly in the ‘global foundry’ segment. Taiwanese officials claim that the country has “the world’s densest and most technologically advanced semiconductor production base”. When diving into specific segments of the semiconductor market, Taiwan is first in the world, with Formosa accounting for as much as 70 percent of the world’s chip manufacturing and 50 percent of packaging and testing.

Several of these giants are locking horns in trade disputes; notably the tit-for-tat tariffs and ‘blacklisting’ of specific firms between the US and China, and removal of preferential trade status between Japan and Korea. Trade disputes spark uncertainty that undermines consumer confidence and hampers consumption volumes. These disputes have also caused several firms to begin reorganising or expanding their supply chains in an effort to reduce their exposure to sudden hikes in prices or, in the case of Huawei, the loss of a key buyer. A report by Goldman Sachs suggested that rising trade tensions between China and the US could cost Asian Semiconductor exporters dearly. Taiwan in particular could potentially lose more than 1% of its GDP.

The Impact of Brexit

A report on the possible economic impact of Brexit on Taiwan, commissioned by the Chinese National Association of Industry and Commerce in Taiwan, released in November 2018, indicated that Brexit would have little if any effect on Taiwan’s market access conditions. This conclusion reflected the fact that Britain accounts for a low proportion of Taiwan’s overall foreign trade – less than 1.5% as of 2018. A 2016 report by the Central Bank examined the potential impact of Brexit and drew two conclusions. First, the direct impact on Taiwan’s trade in the short term is limited, but may yet in the long run affect the domestic economy through spill-over into global finance and trade. Second, the trading volume and deposit balance of the British pound in Taiwan’s foreign exchange market are low, and Taiwan’s foreign exchange transactions would not be affected by the fluctuation in value of the British pound. Said another way, Brexit is not expected to have a large direct effect on Taiwan’s economy or currency.

Britain is not a major global player in the semiconductor industry. However, it has companies that are centrally positioned. Most notably, Arm Holdings Plc. holds a crucial role in the global industry given the use of its designs by major Chinese and American firms. Arm designs and licenses processors that “power 95% of smartphones” globally. In addition to Arm’s input into virtually all global smartphones, it has a direct impact on Taiwan’s leading semiconductor manufacturer vis-à-vis a 2014 partnership agreement with Taiwan Semiconductor Manufacturing Company.

This is to say that there are relatively small trade patterns between the UK and Taiwan, but that some key semiconductor firms are situated in the two countries. More broadly, though, is the importance of the UK as a partner for Taiwan in Europe through its political support. British Members of the European Parliament (MEPs) have been the strongest supporters of Taiwan. Even though the UK withdrew its official recognition of the Republic of China in 1950, the two governments have maintained robust channels of communication and the UK remains an important ally of Taiwan and popular destination for Taiwanese students. Even talk of a more formalised trade agreement came via a 2014 Memorandum of Understanding between Taiwan and the UK on economic and trade exchange. More recently, President Tsai has been considering a Free Trade Agreement or Bilateral Investment Agreement with the UK after meeting Lord Rogan, the co-chair of the British-Taiwanese All-Party Parliamentary Group, and UK MPs in July 2019.

Given the strength of UK-Taiwan relations, some suggest that Brexit primarily poses a political risk to Taiwan. As it stands, the European Union has a One China policy, with neither diplomatic nor formal political relations with Taiwan, as a result of its relations with China. Despite the lack of official channels, the EU Business and Regulatory Cooperation Programme in Taiwan, which is fully funded by the EU, was launched in 2014 to engage trade and economic relations with Taiwan. The European Economic and Trade Office notes that the “EBRC has been designed specifically for Taiwan” to strengthen regulatory cooperation between the EU and Taiwan. Integrated circuits, the essential elements of small semiconductor-based electronic devices, appears to be the number one export product from Taiwan to the EU (7.96%), and the third (7.02%) import product from the EU to Taiwan. The UK was Taiwan’s third largest EU trading partner.

Aligned and extended from these trade and economic relations, EU and Taiwanese officials have been eager to further enhance cooperation in research and innovation through cross-border and national initiatives. For example, the EU welcomes both EU and Non-EU researchers to participate in Horizon 2020. There are 25 active Horizon 2020 projects involving Taiwanese partners in 2018, with two projects coordinated mainly by the UK. Researchers from Taiwan have been facilitated through the Taiwan’s National Contact Point. One project looks at 5G Infrastructure Public Private Partnership (PPP) research and validation of critical technologies and systems, and the other focuses on the 5G PPP convergent technologies. The UK is currently a key player in the Horizon 2020 Framework Programme 8 (FP8). The risk to such innovation collaborations and to better trade links is that the EU will be less inclined to develop Taiwanese partnerships once the European Parliament is without UK MEPs. Without representation from its strongest political ally, the energy and efforts for more-formalised EU-Taiwan channels will dwindle.

Conclusion

Economic success has been central to Taiwan’s strategy for survival as an autonomous entity. In addition to the uncertainties stemming from trade disputes, there are elections on the horizon; Presidents Tsai and Trump both face re-election in 2020. However, despite China’s insistence on a One China policy and efforts to undermine Taiwan’s foreign relations, Taiwan has so far continued to further trade and economic relations with its European partners.

The reframing of post-Brexit UK-Taiwan relations poses both risks and opportunities for both governments. One opportunity would be the further enhancement of research and development collaboration and talent flows. Several Taiwanese high-tech industrialists have warned that Taiwan’s semiconductor industry has been the most acutely damaged by talent shortages, asking the government and universities to make extra effort to prepare talent for both domestic and international high-skill jobs. The Taiwanese government responded to these concerns by communicating with its UK counterpart about enhancing bilateral R&D collaboration. Taiwan’s Ministry of Science and Technology has been working with the British Academy and research councils to encourage research collaboration and facilitate exchange programmes. To maintain Taiwan’s semiconductor industry’s competitive edge, some Taiwanese professionals suggested that the concept of heterogeneous integration need be adapted to benefit Taiwan. Such cross-sectoral partnerships with UK counterparts could provide an opportunity for Taiwanese semiconductor firms to address current domestic challenges and boost their innovation capacity. Without harnessing such opportunities between the UK and Taiwan, Brexit otherwise risks reducing the likelihood for greater trade, and established diplomatic and economic channels, between Taiwan and a post-UK European Union.

Yu-Ching Kuo currently works in the private sector and a freelance writer. She is the first author of In dialogue with science’s social contract with society (2018) and Research, Development and Innovation: Transformation in Taiwanese Higher Education (2019).

Robyn Klingler-Vidra is Senior Lecturer in Political Economy at King’s College London, Department of International Development, and author of The Venture Capital State: The Silicon Valley Model in East Asia. She is now leading a three-year study, supported by a Chiang Ching-kuo Foundation Research Grant, on the role of higher education on Northeast Asia’s innovation policies.

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