Post-COVID-19 Taiwan in the Global Semiconductor Industry: The Context of the New U.S. Administration

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

Image credit: Binario by Marta Diago Marco/Flickr, license CC BY-NC 2.0

Early into the global pandemic — and amidst ongoing U.S.-China trade tensions — the International Monetary Fund’s (IMF) World Economic Outlook in April 2020 forecast that Taiwan’s GDP would shrink by 4% in 2020. However, by October 2020, Taiwan’s exports unexpectedly grew by 3.4% and GDP increased by 2%. The outperformance was partly due to Taiwan’s capacity to fight COVID-19, which contributed to the export growth rate of semiconductors and electronics and information technology industries, which was as high as 20%. In fact, in 2020, the semiconductor industry contributed 15% of Taiwan’s GDP. The strength of Taiwan’s semiconductor firms, led by Taiwan Semiconductor Manufacturing Company (TSMC), is not only pertinent to the island the Portuguese named “Formosa.” Taiwan’s formidable position in global semiconductor manufacturing informed the December 2020 NY Times headline that “Pound for pound, Taiwan is the Most Important Place in the World.” Also, The Economist’s January 2021 asserted that technology parks in Taiwan (and South Korea) are the 21st century’s economic choke-point for the global economy as oil and the Strait of Hormuz was in the previous century.

During the Trump administration, the semiconductor manufacturing heavyweight benefitted from its strong U.S. ties. As part of a geo-technological triangle with China and the U.S., the Tsai administration proactively engaged with the Trump administration, for example, through ‘mask diplomacy’ and facilitating supply chain cooperation in the semiconductor, medical and energy industries. In return, President Trump signed the Taiwan Allies International Protection and Enhancement Initiative (TAIPEI) Act of 2019, the Taiwan Travel Act, and the Taiwan Assurance Act. These policies are generally expected to support Taiwan’s self-defence capacity and boost international participation. Many Taiwanese people welcome these policies as they signal that the United States has gradually moved from strategic ambiguity to strategic clarity in its policy towards Taiwan. Some Legislative Yuan members tend to interpret the Taipei Travel Act, in particular, as a ray of light of restarting trade talks with the U.S., anticipating that these talks would lead to the happening of a Free Trade Agreement or a Bilateral Investment Agreement.

Near the end of the Trump administration, in December 2020, the U.S. Commerce Department announced its decision to blacklist more than 60 other Chinese companies, including Semiconductor Manufacturing International Corp (SMIC) in the name of protecting U.S. national security. Before this announcement, China’s SMIC was reported to have recruited more than 100 veteran engineers and managers from Taiwan’s semiconductor powerhouse, TSMC. A boardroom drama involving these two former TSMC employees has caught media attention. SMIC’s CEO threatened to resign in December 2020, suggesting defeat in SMIC’s bid to match TSMC (for now). In addition to the national security concerns, the TSMC-SMIC drama epitomises the intensifying global race for technology talent, with Taiwan again in the crosshairs.

Despite its attempts to remain politically neutral, TSMC has not decoupled from the China-U.S. race for technology supremacy. TSMC has been a key supplier to Apple and Huawei and the predominant maker for (American) military-grade chips. Plans are advancing for TSMC’s plant in Arizona, as the Ministry of Economic Affairs approved the firm’s U.S. investment plans in late December. It is the largest foreign investment made by a Taiwanese firm in eight years (and at US3.5 billion, amongst the largest of any firm on the planet). This underscores the strong connection between the U.S. and Taiwan in the semiconductor industry in particular. While not remaining as neutral amidst the tensions as it would like, TSMC is performing exceptionally well. In fact, in January 2021, it was the number one emerging markets stock. This outperformance in the same period as its would-be Chinese challenger, SMIC, stumbles.

Given the Trump administration’s unambiguous position in supporting Taiwan and its position in the global semiconductor industry, the new Biden administration presents risks and opportunities for Taiwan. The Biden administration recently announced the prioritisation of domestic investment in workers and infrastructure before negotiating any new free trade agreements. This announcement, amongst other concerns about the Biden administration, has concerned many Taiwanese, while the pending trade talks and exclusions from various international and regional trade agreements have frustrated Taiwan. Without entering into bilateral or multilateral trade agreements, the growth of Taiwan’s exports would be severely hindered. On the positive, the Taipei representative in Washington was formally invited to attend the Biden inauguration, a first in the history of U.S.-Taiwan ties, and trade talks between American and Taiwanese representatives are said to take place from February 2021.

Taking a step back, research analysts have suggested that the Taiwanese economy and, in particular, its semiconductor industry have benefited substantially from the trade tensions. However, some export-oriented Taiwanese manufacturers based in China have been struggling to cope with high tariffs. In 2018, for instance, four Taiwanese firms were on the list of top 10 foreign trade companies in China. The intensifying trade tensions and the presence of coronavirus in many countries have increased trade costs. Thousands of Taiwanese enterprises based in China either are considering leaving or have left as the costs are rising and trade tensions are escalating. The ban on Huawei signalled that the model that vertically integrates supply chains, the upstream, midstream and downstream of business, and connects elements of “designed in the United States”, “order received in Taiwan”, and “made in China” needs reconfiguring.

Thus, Taiwanese tech firms are facing the trends of “reversing globalisation”, “de-centralisation”, “de-standardisation”, “de-centralisation” and “regionalisation”. Some manufacturers have moved back to Taiwan, while some relocate to other South-East Asian countries, for example, Cambodia, India, and Vietnam. These movements and relocations have been intensified by the enforcement of the Regional Comprehensive Economic Partnership (RCEP) Agreement since November 2020 and by Taiwan being excluded from this Agreement. Certainly, this repatriation away from mainland China is one of the aims of the U.S. side of the trade war. However, it does have costs for Taiwanese manufacturers, especially those not manufacturing semiconductors from Hsinchu Park headquarters.

Yu-Ching Kuo was a postdoctoral policy researcher at the Science & Technology Policy Research and Information Center, National Applied Research Laboratories in Taiwan. She currently works in the private sector and an independent researcher. She is the coauthor of Brexit, Supply Chains and the Contest for Supremacy: The Case of Taiwan and the Semiconductor Industry (2021) (with Dr Robyn Klingler-Vidra).

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.

This article was published as part of a special issue on Post-Covid Economy.

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