Semiconductor industry: a shield to Taiwan or the source of insecurity?

Written by Guo-Huei Chen and Ming-En Hsiao.

Image credit: TSMC factory in Taichung’s Central Taiwan Science Park by Briáxis F. Mendes (孟必思)/ Wikimedia Commons, license: CC BY-SA 4.0.

Taiwan semiconductor industry under US-China Competition

Microchips have become a key strategic material, and the semiconductor industry has become a field every nation is trying to dominate. By mastering critical processes in the semiconductor industry, producing and distributing chips could be controlled, which changes the direction and speed of the global economic and trade layout. Furthermore, it sets up a new order for technology.

That is why Taiwan’s semiconductor industry is a key element in the strategic competition between the United States and China in science and technology. Losing Taiwan is equivalent to losing the power to speak in future innovative technology. Neither the United States nor China can afford the consequences of losing Taiwan’s semiconductors.

However, Taiwan and China have close economic and trade exchanges, and China is TSMC’s third-largest market, accounting for 10.3% of its overall revenue. Cases of Chinese commercial spies stealing trade secrets from Taiwan’s high-tech industries are not uncommon. This fact made Washington wary, recognizing that Taiwan is a breach of innovative technology from the United States to China.

Therefore, Washington has stepped up its efforts to control technology and weaponized the dominant position of the United States in the semiconductor price chain, including exercising long-arm jurisdiction, launching the Entity List, enacting the Foreign Direct Product Rule, and passing tough measures such as the CHIPS and Science Act. These measures aim to suppress China’s development and restrict Taiwan’s semiconductor exports to China.

Some American scholars even suggested the Broken Nest strategy in the U.S. Army War College Quarterly “Parameters” that they should adopt the strategy to deter Beijing’s aggression by threatening to destroy TSMC, thereby curbing China’s expansion ambitions.

Faced with the blockade and suppression by Washington, Beijing strongly felt suffocated that others were controlling the high-tech industry, so it actively adopted a catch-up strategy and proposed two terms of “big funds” with a scale of nearly 340 billion yuan to fully support the local semiconductor industry. As a result, China is expected to increase the chip self-production rate to 70% in 2025, shortening the technological strength gap between the United States and China.

In addition, Beijing has stepped-up military exercises with military aircraft and warships around and encircling Taiwan, demonstrating its determination to control Taiwan. 

Taiwan’s “Silicon Shield”

Taiwan, as the hub, plays a key role in the semiconductor industry. The output value of the semiconductor sector accounted for 26%, ranking second globally. The market share of wafer fabrication, packaging and testing industries ranks top globally. I.C. design’s global market share is 27%, ranking second in the world. In addition, more than 90% of the most advanced chips below the 10 nm process are made in Taiwan.

In other words, whoever controls Taiwan’s semiconductor industry can control the world’s technological lifeline. This is Taiwan’s competitive advantage and the main reason the U.S., E.U. and Japan are urging TSMC to set up foundries in their nations.

The dense semiconductor industry supply chain embeds Taiwan’s security in developing the global technology industry network, forming a silicon shield for Taiwan’s security. 

Morris Chang (張忠謀), Founder of TSMC, delivered his opinion that “maybe somebody will refrain from attacking it. If that person’s priority is economic well-being, I think they will refrain from attacking.” During the interview on 60 Minutes, CBS.

Meanwhile, in the CNN interview with TSMC Chairman Mark Liu (劉德音), he also made a similar point,“Nobody can control TSMC by force. If you take a military force or invasion, you will render the TSMC factory not operable because this is such a sophisticated manufacturing facility.”

In short, the operation of TSMC is the result of the global industrial division of labour. Due to this particularity, China will consider the international community’s reaction before taking military action against Taiwan, which increases the cost and scruples of using force.

U.S. strategic Concerns 

As the semiconductor industry is highly concentrated in Taiwan, it creates security concerns for Washington. Secretary of the Treasury, Janet Louise Yellen, noted, “Moreover, the semiconductor industry is characterized by extreme concentration risk. As of last year, nearly all manufacturing of the world’s most advanced semiconductors occurred in just one East Asian economy: Taiwan.”

To reduce national security risks, Washington urges TSMC’s investment to drive upstream, midstream, and downstream industries entering the U.S., helping to develop an integrated local semiconductor industry cluster. In addition, the U.S. attempts to copy Taiwan’s Semiconductor Industry Model there.

On the other hand, by proposing the Chip 4 Alliance, the U.S.-led chip alliance signed into law the CHIPS and Science Act by President Joe Biden, combined with the United States, Taiwan, Japan and South Korea, the Americans tried to contain Beijing in the cutting-edge sector, reducing the risk of a highly concentrated semiconductor supply chain, as well as the dependence on Taiwan.

Washington’s strategic response highlights the United States’ attempt to reduce its dependence on Taiwan’s semiconductors by copying and dispersing supply. In response, President Tsai Ing-Wen (蔡英文) stressed that “the concentration of the semiconductor sector in Taiwan is not a risk, but is the key to the reorganization of the global semiconductor industry.” In her latest National Day speech.

Taiwan’s dilemma

The competition between the U.S. and China for technological hegemony requires Taiwan’s semiconductors, but they are also accelerating their efforts to eliminate their dependence on Taiwan. Such a paradoxical phenomenon also puts Taiwan in a dilemma.

On the one hand, the United States relies on Taiwan’s semiconductors, which improves Taiwan’s visibility in the strategic map of Washington, and the semiconductor industry has indeed become Taiwan’s security reliance.

However, Washington also realized that relying on Taiwan’s semiconductors would put its national security at risk, which prompted its sense of urgency to establish a semiconductor ecosystem in the United States, and resorted to regulatory measures to adopt the “Small yard, high fence” strategy to protect high-tech industry in the United States.

This measure threatens Taiwan’s semiconductor industry’s development and weakens Taiwan’s irreplaceability to the U.S. semiconductor industry.

Furthermore, in the process of developing semiconductors, the United States has drawn Taiwan into the Chip 4 alliance established by Washington and proposed the idea of ​​using Taiwan’s semiconductor industry as a strategic tool to deter Beijing, which has aroused Beijing’s security vigilance and caused China to generate a sense of losing Taiwan with external forces intervening in.

It has led China to increase its threat to Taiwan, putting Taiwan in a predicament of insecurity.

This development has unexpectedly changed Taiwan’s semiconductor industry from a reliable shield to psychological pressure on the security sphere, which is also an unavoidable issue for Taiwan.

Fasten the Sword of Damocles

The semiconductor industry is like the “Sword of Damocles” hanging over Taiwan. It is an important source of momentum for Taiwan to be active in the international community, but it is also a strategic burden making Taiwan’s national security at risk, which powerful nations are scrambling for.

Faced with such a dilemma, Taiwan should first ensure the strength of its connection with trusted partners and its determination to continue to comply with the international regulations of the semiconductor industry through a reassurance strategy.

For example, Japan, which is geographically close to Taiwan, can be a priority for cooperation. Through investment in the semiconductor industry, Japan can become a strategic sub-centre for Taiwan’s overseas semiconductor industry operations, enhance Taiwan’s influence in Japan, and indirectly influence Washington’s strategic decisions through Tokyo.

On the other hand, it is also necessary to reassure the domestic semiconductor industry that the government will strengthen investment in the semiconductor industry so that it cannot be copied and moved away quickly, thus fastening the “Sword of Damocles” hanging over Taiwan. These measures can reduce Taiwan’s psychological and strategic burden and strengthen its confidence in confronting China’s military coercion.

Guo-Huei Chen is a PhD student at Tamkang University, Taiwan. He is also a Secretary of the Hsinchu City Government.

Ming-En Hsiao completed his MSc at the London School of Economics and currently works as a Chief of the International and Mainland China Affairs Section at the Hsinchu City Government.

Disclaimer: The above views do not represent the position of the Hsinchu City Government.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s