Despite its relatively small size, Taiwan plays an important role in the global economy thanks to its advanced semiconductor industry. This not only creates national wealth, but also contributes to the maintenance of national defense. Its technological treasure was forged in the 1970s, when the United States transferred some of its technology to Taiwan to outsource manufacturing.

It covered a wide range of industries and was part of a wider trend in which American politicians and companies contributed to the development of friendly countries such as South Korea, Japan and Taiwan. In the context of the Cold War, the logic was both economic and geopolitical and was justified by the strengthening of the industrial capacity of the allies in conflict with the Soviet Union. The same logic would apply from the 1980s onwards in the People’s Republic of China.

‘One China principle’, Beijing’s red line

The semiconductor industry has become the largest industry in Taiwan over the years, especially after the establishment of Taiwan Semiconductor Manufacturing Company Limited (TSMC) in 1987. Together with another Taiwanese manufacturer, United Microelectronics Corporation, the two companies are the world’s largest contract chip manufacturers, producing chips primarily for Western companies. Together, Taiwanese companies produce about 90% of the world’s supply of advanced chips.

Its role is crucial on a global level, not only in production, but also in research and development and distribution. Often through Taiwanese companies, China even gets American and European chips, reflecting Taiwan’s footprint in the entire semiconductor production chain.

From the perspective of the government in Taipei, the semiconductor industry is crucial and this is reflected in its subsidy programs for companies, as well as its direct or indirect participation in these companies. This is understood by politicians, both from the ruling Democratic Progressive Party (DPP) and the opposition Kuomintang (KMT), which means that the upcoming elections will not significantly affect the sector. The motivation is economic, since the business is profitable, and political: the top job provides Taiwan with political capital in Washington and, to some extent, in Beijing.

Lai Ching-te won the election in Taiwan and promises to protect the island from threats from China

Taiwan has thus become a key battleground in the current Cold War between the United States and China. Beijing is trying to emulate the success of Taiwan’s chip industry, and although it surpasses it in total global sales, it still lags behind in advanced technology. Since China claims Taiwan as its territory, there is an uneasy neutrality between the two countries. Beijing’s increasing pressure, including military pressure, on the island makes Taiwan dependent on support from the United States for its defense.

This explains why Taiwan is more than accommodating to US controls and sanctions against China’s semiconductor sector, even if it hurts its companies economically in the short term. Unlike many other Taiwanese companies, Chinese involvement in these companies is limited, and cooperation between Taiwanese and Chinese companies is mostly limited to the outsourcing of distribution and production, often of older technology.

Although China is currently a few years behind the Taiwanese giants, this gap is not only closing, but this trend could continue. Beijing has invested heavily in its domestic research and development of advanced semiconductors. And while some of the progress announced by Beijing may not be as significant as the state media makes it out to be, a lot of progress has still been made. Sanctions have certainly prevented China’s access to the most advanced chip technology, but they have made domestic research and development a growing priority for the Chinese Communist Party (CCP).

Although in some other sectors (such as aircraft and rocket engines) China benefits from Russian isolation, this does not appear to be the case in semiconductors, as Russia is also almost entirely dependent on Western suppliers. China therefore has to rely on its own research and development capacity, but also on the efforts of its intelligence agencies to acquire Western and Taiwanese technology through illegal and unethical means.

Although some argue that US sanctions have a negative effect by making China less dependent on Western technology and less susceptible to diplomatic pressure, both arguments may not hold water. The long-term Chinese policy was technological self-sufficiency, and in politically sensitive areas China did not act rationally and proved immune to diplomacy, as the case of Hong Kong shows. So, the sanctions applied in the last three years have clearly slowed down China’s technological progress, but it is very possible that China will catch up with Taiwan and the West in the long run. This would complicate the economic and political position of Taiwan itself in the world.

Taiwanese politicians and business people understand and value this advantage. As companies try to maintain their privileged position in the global semiconductor market, for politicians the chip industry is something they can use in diplomatic negotiations and, more importantly, is seen as crucial to preserving independence actually from Taiwan. This role of Taiwanese chipmakers in national defense is often referred to as the “silicon shield.”

The argument, used even by Taiwan’s outgoing president, Tsai Ing-Wen, is that China will refrain from attacking Taiwan because it would disrupt global supply chains, effectively risking major damage to its own economic and political stability. Other observers, however, agree that it is incorrect to apply this “conventional wisdom” to the CCP. In many cases, it has shown that its policy is beyond any such rationality, meaning that, if necessary, the chip industry will not deter China from attacking Taiwan.

Now the “silicon shield” could protect Taiwan in another way: by creating more incentives for the United States, the rest of the West, and Japan to actively support Taiwan’s defense, including military intervention on behalf of the island’s democracy. This could deter Beijing from the invasion it is apparently preparing for. In a sense, what you think about Taiwan is more important to Taiwan and world peace than what the CCP thinks about Taiwan.

However, this entire relationship is full of contradictions and the recent US regulations may negatively affect not only Chinese chipmakers, but even Taiwanese giants. TSMC’s founder claims US policy is destroying semiconductor globalization by favoring officially designated “friendly countries,” a list that does not include Taiwan.

Taiwan has recently tried to expand its cooperation in the semiconductor sector with new friendly countries. Through its willingness to acquire diplomatic allies, Taiwan may be much more willing to share its technology and business with countries that support its existence, something China often only promises but fails to deliver. This cooperation with Taiwan would help deter China from a possible invasion of the island. (OR)

Filip Jirouš is a Sinologist and an independent researcher of the Chinese political system and an associate of Sinic Analysis www.cadal.org