Alexander M. Hynd and Seamus Dove
After US House of Representatives Speaker Nancy Pelosi’s controversial trip to Taiwan in August 2022, Beijing responded in a show of force, firing ballistic missiles and conducting military drills near the island. In Canberra, much has been made of these heightened security tensions, and hypothetical questions have emerged surrounding Australia’s strategic role in a potential cross-strait military conflict. But lost in the recent talk of Taiwan’s security is a forthright discussion of the island’s unique economic situation, and how this might shape the future of its 23 million inhabitants.
Unique Economic Challenges
Taiwan faces two great and interrelated economic challenges. First, its lack of official recognition by the vast majority of states puts obstacles in the way of the island’s economic empowerment. The infrastructure of statehood can play a crucial role in facilitating interstate trade. For example, “choice of law” rules in private international law determine which legal system is used to oversee contracts in international business. Due to its marginal position in international society, Taiwanese businesses are often required to seek contracts with their foreign counterparts under the law of other states, such as Singapore. By doing so, Taiwanese businesses are forced to abide by rules relating to procedure, enforcement, and arbitration that may not be in their interests.
Second, Taiwan’s economy is heavily reliant on the mainland. The People’s Republic of China (PRC) is easily Taiwan’s biggest trade partner, accounting for 42 percent of Taiwanese exports and 22 percent of imports. By comparison, the United States, Taiwan’s second-largest trading partner, accounts for only 10 percent of imports. Taiwan’s economic relationship with the mainland shows no sign of slowing down. Taiwan’s imports from the PRC have increased 87 percent since 2016, while their exports grew by 71 percent in the same period.
These close economic ties also leave Taipei vulnerable to economic coercion. Following Pelosi’s visit, Beijing announced it would no longer import a range of Taiwanese fruits, fish, and packaged goods. Though the official reason was “quality concerns,” such behaviour has become a familiar rhetorical and procedural excuse in China’s economic statecraft. China has targeted Australia and South Korea with similar measures in recent years.
Taiwan has already taken steps to diversify its economy. Days after the sanctions, Taiwan’s Ministry of Economic Affairs announced it was allocating US$7 million to expand Taiwan’s agricultural sector and cultivate new trade partners. Moreover, President Tsai Ing-wen’s flagship New Southbound Policy has sought to rebalance the Taiwanese economy toward Australasia and South and Southeast Asia.
So far, Beijing’s unofficial economic sanctions have been mostly symbolic. Agriculture accounts for a fairly small proportion of Taiwan’s GDP and represents roughly one percent of total exports. China’s shift in trade position has only affected a handful of goods. Compared to the expansive tariffs levied against Australia, which targeted large-scale export products like barley, wine, and coal, China’s recent sanctions against Taiwan look modest. Part of the explanation for this is that Beijing likely knows that it too will suffer if trade with Taiwan is further weaponised – especially around the issue of semiconductors.
The Semiconductor Factor
Taiwan’s economy has performed well in recent years, fuelled by growing global demand for its chief exports, semiconductors and other electronic inputs. Taiwanese firms account for more than 60 percent of global semiconductor revenue, about $300 billion. Taiwanese Semiconductor Manufacturing Company (TSMC) alone accounts for 54 percent of all global semiconductor revenue.
China accounts for about 60 percent of global demand for semiconductors. As Beijing pivots away from cheap manufacturing and pitches itself further up global value chains, it has made major inroads into the high-tech markets. Though China has attempted to bolster its own semiconductor industry, it still imports about 90 percent of its required semiconductors. Its domestic producers simply cannot keep pace with domestic demand and have failed to produce more sophisticated chips. In short, China needs Taiwanese semiconductors.
What’s more, the semiconductor supply chain is extremely complex. Raw silicon, usually sourced from China or the United States, must be transported for fabrication, frequently in Taiwan. The product must then be tested and assembled in a variety of separate stages, with each stage of the supply chain located in a different country.
Significantly, then, disrupting Taiwan’s semiconductor trade wouldn’t just hurt China — it would negatively impact all states along the supply chain, including the United States. While this might in theory be to Beijing’s advantage, it also means that the US is economically invested in Taiwan’s ongoing security and political independence.
Future Developments: The CHIPS Act
Recognising its own vulnerability in this geoeconomic contest, the Biden administration recently passed the CHIPS and Science Act, investing $280 billion in US semiconductor research with the aim of increasing US semiconductor market share. While the US dominates some stages of the semiconductor supply chain, such as design, it manufactures only 12 percent of the world’s semiconductors, down from 37 percent in the 1990s.
The CHIPS Act makes perfect sense from an economic perspective. As tech firms continue to dominate the world’s commercial landscape, semiconductors’ value will only increase. But Washington’s move also represents a shrewd fallback plan if tensions in the Taiwanese Strait boil over. Such a move troubles Taipei. While the US may still have political reasons to support Taiwan, the self-sufficiency promoted by the CHIPS Act may begin to disentangle the Taiwanese and US economies.
What has been lost in discussions of the CHIPS Act is an appreciation of its scale. Though the CHIPS Act represents a substantial investment in the semiconductor industry, it is comparable to the $210 billion that major semiconductor manufacturers will invest in Taiwan over the next five years. While the US is trying to catch up, it may still be too far behind.
We’ve seen similar movements in China, which plans to build 31 large-scale semiconductor plants (or “fabs”) by 2024. Crucially, so far Beijing seems unable to properly calibrate its semiconductor industry. Its efforts to produce advanced semiconductors have largely failed, and it has focused mostly on producing lower-end chip technology.
China’s efforts to establish itself in the industry were further hindered in October this year when the US Commerce Department’s Bureau of Industry and Security imposed a series of new restrictions designed to limit China’s access to supercomputers and computing chips. Taiwan has indicated it will comply with the rules. China was already lagging in the semiconductor race, and this will leave it stranded at the back of the pack.
Changes are coming, and fast. For now at least, Taiwan’s semiconductor dominance may help insulate it from mainland aggression. In many ways, Taiwan’s economy represents a double-edged sword. On the one hand, Taiwan’s semiconductors and their integration in the global technology supply chain makes the island an unattractive target. Aggression against Taiwan would anger much of the world, and potentially starve China’s own tech firms of crucial inputs. But, as Beijing continues its efforts to participate in advanced semiconductor markets, reasserting political control over Taiwan may look increasingly enticing.
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