Written by Gunter Schubert.
Image credit: Building of Taiwan Semiconductor Manufacturing Fab 12B at dusk2 by 曾 成訓. / Flickr, license: CC BY 2.0.
Taiwan finds itself in the midst of global power shifts that have brought a new geopolitical and geoeconomic mindset to international politics. “Decoupling” or “de-risking”, “resilience”, and “strategic autonomy” characterise the current debates on the necessary national and regional strategies to adapt to these power shifts. On the one hand, the consolidation of a new global power constellation is expected, characterised by a frontline position between the US and Europe and China and Russia on the other, each of which is vying for the states of the Global South. This ossifying constellation is accompanied by the discursive rehabilitation of political thinking in categories of “spheres of influence” and “concerts of power”, so-called “multipolarity”. In addition, every state and every globally positioned company feels compelled to maintain its own capacity to act by increasing its autonomy of action or reducing its dependence on competing political and economic actors. Some observers point to a new “Westphalian age” of national anarchy and survival of the fittest, driven by the battle for high-end semiconductors.
Taiwan is particularly exposed in the current power constellation because, on the one hand, it identifies with the “Western camp”, and, on the other, it is claimed by China as an integral part of its nation-state-like empire. At the same time, Taiwan is a world leader in the production of what is seen as the crucial source of future power and wealth: microchips. This exposure has earned Taiwan the reputation of being “the most dangerous place on earth”. It is forcing its economic and political elites to develop new strategies to secure Taiwan’s position in the global economy. For the high-tech industry, and in particular the complex ecosystem of Taiwan’s semiconductor industry, these are strategies to significantly shape the ongoing reorganisation of the global production and supply chains for different generations of microchips in order to maintain the industry’s technological advantages and leading market position. For the Taiwanese government, on the other hand, these are strategies to strengthen the country’s military and economic security. Security, in turn, is largely determined by the government’s ability to promote the resilience of Taiwan’s high-tech industries, especially semiconductors, to ensure their international competitiveness and crisis resilience. This raises two questions: First, what strategies are the Taiwanese semiconductor industry pursuing to secure its technological edge and markets in the new global power constellation, and second, what is the Taiwanese government doing to strengthen the country’s economic security, which arguably depends essentially on maintaining Taiwan’s leading position in the global high-tech industry over the long term?
Strategies of the Taiwanese semiconductor industry
For many years, Taiwan has accounted for more than 60 per cent of global semiconductor production and around 90 per cent of the high-performance chips used in the graphics processing units (GPUs) important to the AI revolution, which currently have a structure width of 2-3 nm at the cutting edge. In 2023, Taiwanese manufacturers still exported more than 50 per cent of their total chip production to China, but the figures have been falling steadily in recent years, highlighting important strategic adjustments made by Taiwan’s semiconductor industry:
First, the Taiwanese chip manufacturers are gradually withdrawing from the Chinese market by selling production and sales facilities to Chinese companies and, at best, holding minority stakes in order to benefit at least partially from the Chinese legacy chip business. The share of Taiwanese chip exports to China is therefore declining, as is the share of Taiwanese chip production on the mainland, but this is apparently not seen as a problem by Taiwanese chip manufacturers. China is benefiting from the adaptation strategies of Taiwanese chipmakers, who are transferring their old chip know-how to the mainland. This is helping China to develop a complete semiconductor ecosystem at home, against all odds – most notably Washington’s attempts to cut off China’s access to high-tech components of US origin through a global sanctions regime.
Second, investment in neighbouring Asian countries is increasing. Taiwan Semiconductor Manufacturing Company (TSMC), Taiwan’s flagship company, which to a large extent represents the strategic thinking of the entire spectrum of the island republic’s semiconductor industry, has invested in the construction of new facilities in Japan with the aim of establishing integrated semiconductor research and production for cutting-edge microchips. The aim is to build a high-tech alliance with Japan and, in the longer term, with South Korea. Other investments in Southeast Asia (Singapore, Vietnam, Indonesia) in smaller production facilities or joint ventures with local companies are aimed at serving Western markets (especially the US) whose customers are demanding to de-risk, if not decouple, from China (although Chinese components are still used in most of the new factories).
Thirdly, TSMC, in particular, is now investing some 75 billion US dollars in production capacity in the US and Europe (Dresden, Germany) in order to further diversify the production of older but lucrative chip generations and gradually move into high-performance chips. These are clearly high-risk investments for the Taiwanese chipmaker and are unlikely to be made without massive government subsidies in the target countries. Such politically motivated involvement prompted Morris Chang to say that globalisation is dead because it is no longer based on hard business calculations but on geopolitical considerations. Obviously, globalisation has been “geopoliticised”.
These strategies by companies such as TSMC and other Taiwanese firms to decentralise their global production and supply chains ensure greater regional and global resilience in the production of legacy chips. At the same time, the de facto decoupling of leading-edge technologies from China and their concentration in Taiwan increases the importance of domestic chip production (“silicon shield”), which still accounts for four-fifths of total output, but also the global vulnerability of the semiconductor industry in the high-end segments leading the AI revolution in the event of a military escalation in the Taiwan Strait.
…and the Taiwan government?
The Taiwanese government has limited influence over the business decisions of TSMC and other key high-tech players in the country. Its policy approach is, therefore, to improve the investment environment for companies in Taiwan itself, primarily through subsidies and tax breaks, the provision of land, electricity and water, high-talent programmes to attract skilled workers, and gradual liberalisation of immigration policy. Fortunately, there is broad agreement between the Taiwanese government and the high-tech industry on the goal of consolidating cutting-edge technologies in Taiwan and diversifying supply chains globally. However, both sides know that the Silicon Shield is primarily about securing Taiwan’s technological edge in the global competition for high-tech autonomy rather than military security; an attack by China on Taiwan is not part of the economic equation, at least for Taiwanese high-tech firms – as many of my conversations with CEOs of prominent companies in the semiconductor industry have shown.
Nevertheless, maintaining Taiwan’s technological edge is likely to be crucial for the Chinese and US governments in considering military intervention in the Taiwan Strait. On the Chinese side, the development of an internationally competitive Chinese high-tech industry, which the government has said will enable the country to achieve economic autonomy in the next 10–20 years, is likely to be a key factor in this consideration. Closing the technology gap in the high-end segment of chip production is (still) difficult for China due to the US sanctions policy. But don’t be fooled: the pace of innovation in China is rapid, and no sanctions regime in the world will be tough enough to permanently prevent China from catching up. The more it does, the less relevant Taiwan’s “silicon shield” will be for a military invasion. This is precisely why it is important for Washington that sanctions work, at least as long as the US remains vulnerable in the semiconductor business.
As high-performance chips, combined with the AI revolution, become critical to tomorrow’s military power, a “chip war” is looming, notwithstanding all the progress made in restructuring global supply chains. Global techno-nationalism is focused on the final battle for global technological supremacy in the production of advanced weapons systems. While the global chip industry looks forward to golden times, global peace largely depends on the outcome of the current race for cutting-edge semiconductors that will usher in the AI age. The de facto decoupling of China and the US, rather than open markets and economic cooperation, is likely to significantly increase the risk of war in the Taiwan Strait – and beyond – in the medium to long term.
Gunter Schubert is Chair Professor of Greater China Studies and Director of the European Research Centre on Contemporary Taiwan (ERCCT) at the University of Tübingen. His current research focuses on the political economy and geopolitical consequences of global supply chain restructuring. He has led two forum discussions published in the International Journal of Taiwan Studies (IJTS) (1) Gunter Schubert et al. (2018), ‘Linking the Taiwan Studies and China Studies Fields: How to Argue for the Faculty Recruitment of Taiwan Scholars at Western Universities’, IJTS 1(1): 193–208; and (2) Gunter Schubert et al. (2021), ‘Delimiting “Cross-Strait Studies”: Kua’an (跨岸) vs. Liang’an (兩岸)’, IJTS 4(1): 163–191.
This article was published as part of a special issue on ‘International Journal of Taiwan Studies: Contemplating AI & Taiwan Studies‘.
Adam Barnett is the coordinator of the Taiwan Insight-International Journal of Taiwan Studies Special Issue for August 2024.
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