By Hannah Kirk
In the 21st century, the battlefield between superpowers relies more on the trade of bits, bytes, and computers than bombs, bullets, and coal. Technological dominance is a key factor in power struggles, replacing “arms race” with “AI race” and “space” with “silicon.” The software armory of sophisticated technology running on artificial intelligence is birthed from hardware chips no larger than a postage stamp. The entire digital ecosystem runs on silicon, made fragile by highly interconnected semiconductor supply lines.
The media view China-U.S. technology competition as a bitter rivalry. Apple and Huawei, two sparring tech companies, fight for ground, jostling for better, faster, and smarter phones, representing their nations in the technology battle. Despite seemingly stark differences, Apple and Huawei have ended up with an identical problem: They rely on Taiwan for outsourced manufacturing of all-important silicon components. With increasing trade tensions threatening to disrupt semiconductor supply chains and sanctions inhibiting the sharing of technology between the United States and mainland China, Taiwan has been thrust into a difficult geopolitical (or more aptly, geo-technological) situation. Were the technology economies of the world’s two strongest powers to fully decouple, Taiwan may ultimately have to choose which to trade with.
Despite its small geographic size, Taiwan is a global giant in semiconductors. Taiwan Semiconductor Manufacturing Corp (TSMC) supplies 48 percent of the global chip market. For many years, Taiwan has been the top player in silicon foundries, entrenching its pivotal role in the semiconductor industry and its importance to the value chain of firms globally. For years, TSMC has flourished through a studious neutrality, playing both markets by manufacturing Chinese and American designed chips and subsequently supplying them to competitors such as Apple and Huawei.
If supremacy in silicon chips wasn’t enough to mark Taiwan as a country of critical importance in U.S.-China competition, it is likely that the market will become even more complex in coming years. As technologies become more specialized, custom chips will be needed to meet the computationally intense needs of machine learning. TSMC’s ability to design and manufacture the most advanced chips capable of hosting artificially intelligent applications puts it in a very strong position in a market that is estimated to reach $16 billion in the next three years.
A second area of strategic importance is wireless communication technology. In September 2020, Taiwan’s economics minister, Shen Jong-Chin, unveiled plans to turn Taiwan into a key player in the supply chain for 5G technology with the development of smart semiconductors. In the past, the combustion engine, fuelled by coal and oil, was the cornerstone technology of the industrial revolution. Today’s information age and tomorrow’s technological revolutions will be fuelled by artificial intelligence and 5G.
Although the United States has its own domestic prowess in chip manufacturing, the explosive growth in the U.S. personal computer industry was enabled by Taiwan from the outset. Much of the success enjoyed by companies such as Nvidia, Intel, and Qualcomm came about as a result of Taiwanese silicon plants. The recent push from U.S. tech giants to secure R&D partnerships with Taiwanese companies is indicative of America’s response to increasing tension with the mainland. Companies like Google and Facebook, barred from entering the Chinese market, are excluded from accessing over a billion potential customers. In response, Google has designated Taiwan as a gateway location to Asia’s artificial intelligence market. American Institute in Taiwan (AIT) Director Brent Christensen told attendees at the 2018 Global Entrepreneurship Congress in Taipei he had “every confidence that Taiwan can become to AI in Asia what Wall Street has become to finance in North America.” Mirroring this confidence, Google announced in early 2018 that Taiwan would be its biggest Asian R&D hub. To reach this goal, the American tech giant committed to hiring 300 AI engineers and to training over 5,000 AI experts and 50,000 digital marketing personnel. Google’s investment in Taiwan may be the largest from any international company but it is not unique. Other leading American companies such as Microsoft, Amazon, IBM, Uber, and Qualcomm have established AI R&D centers in Taiwan, or have expressed future plans to expand there. Confidence aside, America’s choice of Taiwan as a strategic technological base close to the mainland signifies the island’s greater tactical importance in the broader U.S.-China competition.
Mainland China remains highly reliant on others for high-end chips, including a strong dependence on Taiwanese imports. Efforts to develop domestic industry have been slow; China notoriously spends more each year importing semiconductors than oil. SMIC, the largest and most advanced chip foundry on the mainland, has an annual revenue only one-tenth of TSMC’s and is approximately five years behind in technology capability. The majority of consumer technology products that bear a “Made in China” label depend on Taiwanese semiconductors, introducing the risk of rippling damage if supply chains are compromised.
Taiwan is likewise dependent on demand from the mainland. In TSMC’s most recent annual report, exports to China accounted for 17 percent of revenue, a share only set to grow in the coming years. After Apple, Huawei is their biggest customer. Taiwanese supply lines may be tightly integrated with U.S. firms, but parts of the Taiwan’s chip industry actually operate within the borders of mainland China. In line with the trend of increasing globalization of the previous two decades, Taiwan’s largest companies have been building factories in the Yangtze and Pearl River deltas, integrating the semiconductor industry more and more across the Taiwanese Strait.
In terms of human capital, the regions are codependent. A staggering one-tenth of Taiwan’s labor force work in the mainland, and the mainland is intimately dependent on Taiwan’s AI talent pool. China has been headhunting AI engineers from leading Taiwanese semiconductor firms, including the new CEO of SMIC. The mutual dependency between Taiwan and mainland China introduces complexities into sustaining the working relationship. Amid burgeoning trade war tensions, Huawei’s top executives made a trip to Taiwan to secure the supply lines of the most advanced chips manufactured by TSMC.
The escalating trade war has seen Taiwan caught in the cross-fire both directly and indirectly. Taiwanese companies have been hit directly by U.S. sanctions. Washington’s growing fear of Beijing-born technology has resulted in the United States using the stick, not the carrot. In July 2018, U.S. Congress passed a bipartisan bill known as the Microchips Act precisely to defend against external threats to the semiconductor supply chain. Subsequent rounds of tariffs and sanctions have further pressured technology companies in both countries, with Taiwan stuck in the middle.
This came to a head in May 2019 when U.S. President Donald Trump blacklisted Huawei and 70 other affiliated companies, acting under the belief that interconnected supply lines posed serious threat to U.S. national security. American firms like Intel and Qualcomm are forbidden to sell chips to any blacklisted companies. It was also rumored the United States reprimanded TSMC for continuing to sell chips to Huawei. The U.S. considers Taiwan, the third player in the supply chain, as the weak link for Chinese interference in technology bound for America. TSMC denied the allegation, claiming their decision to continue supplying to Huawei was supported by their supply-chain management systems, which ensure that exports to Huawei do not contain enough American intellectual property to fall under the ban. Despite this loophole, it is also likely that TSMC wants to maintain a strong relationship with Huawei given how much business their big neighbor brings.
Through loophole or loyalty, Taiwanese companies continue to operate in grey areas when it comes to sanctions. Quanta Computer, the world’s largest contract notebook computer and server builder, and Pegatron, a key iPhone assembler, both announced plans to move their company operations back across the straits in order to avoid being hit by trade war tariffs.
Whether or not Taiwan finds ways to avoid the impact of direct sanctions, severing shared manufacturing by blacklisting Chinese companies disrupts the system as a whole, creating long-lasting shock waves. The Trump administration narrative is thus a dangerous one. Despite claims of protecting national interests, antagonism may ultimately harm America, dragging Taiwan into the fray. Conversely, the disruptions may help China in the long term. Restricting China’s dependence on imported technology nurtures independence. As a case in point, U.S. trade bans seeking to cripple ZTE Corp, a Chinese state-owned telecommunication equipment company, only intensified the firm’s pursuit of self-sufficiency as part of a nationwide response to eliminate risky dependencies. An address from President Xi Jingping professed self-reliance and yet more money was plowed into the National Technology Team. Pressure falls on the shoulders of Alibaba, Baidu, and Huawei to bring their supply lines home.
Even before U.S.-China relations began to worsen, China had begun a drive for self-sufficiency. “Made in China 2025,” an ambitious set of technology development goals, exploded onto the world stage in 2015. As part of the plan, the Chinese government seeks to grow its domestic semiconductor industry output to $305 billion by 2030, absorbing 80 percent of domestic demand. To achieve these challenging goals, a $29 billion state-backed fund was created to finance the nascent semiconductor industry. Given how much China currently spends on imports, this is likely to be a profitable investment. Prior to the “Made in China” pronouncement, Chinese producers met 29 percent of domestic demand. Now, they meet 49 percent.
It seems China’s rejection of foreign dependence is already reaping gains. For example, Alibaba and Huawei have both recently announced the launch of specialized AI chips for cloud computing, machine learning, and autonomous driving applications. Early efforts indicate that China is set to reach high-quantity and high-quality production. AI chips is the sector where China can make the biggest advances over Taiwanese and American competitors. Moore’s Law is a technological constraint on the pace of growth in computing power, and it could also act as a limit to the pace of China’s catch-up. In Moore’s world, where computing power doubles every two years and cost halves, with a pre-existing technology gap of between five and 10 years, China has already lost the race.
However, Moore’s Law has begun to slow down, which implies that giants like TSMC and Qualcomm won’t be able to move forward so fast. In the words of Jackson Hu, former chief executive of semiconductor foundry United Microelectronics Corporation (UMC), “If China works hard enough, invests significantly enough, they can gradually move forward and [narrow the gap], while the industry might slow or hit a wall.”
In addition, China’s advances in the 21st century come from its large population and high penetration of technologies, which create a vast datasphere. Data fuels AI and AI chips in turn fuel AI applications. Wang Yuntao, deputy director at the China Academy of Information and Communication Technology, identified AI chips as China’s chance to “overtake the competition on the bend.” The dependence of AI on custom computer chips demonstrates that, in the future, strategic AI competition will be founded on cutting-edge manufacture of semiconductors. In this future, China has the chance to become a winner, despite its lag today.
The current trade war environment forces Taiwanese manufacturers into the middle of an intensifying U.S.-China battle. While a greater decoupling may force Taiwan, alongside other East Asian regions, to choose sides, it also has the potential to significantly damage this semiconductor giant. With China’s self-sufficiency and America’s suspicions of interference, neither country will want Taiwanese chips. Currently Taiwan is caught in the middle of a technological trade spat, a small yet important third player. If the race becomes two-player then this may result in a worse scenario, where Taiwanese semiconductors become irrelevant.
Direct hits may be overcome, sanctions avoided, and Taiwan’s neutral trade position may continue to please both parties. However, if U.S.-China trade continues to decouple, Taiwan’s industry may be sunk as collateral damage to U.S.-China suspicions driving the domestication of technology. Regardless of what the future holds, the global interconnectedness of technological supply lines between China, the United States, and Taiwan decree geo-technological relations as equally trilateral.
Hannah Kirk is a graduate student and Yenching Scholar at Peking University. She graduated from Trinity College, University of Cambridge in 2018 with a double first in Economics (B.A).
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