Taiwan and China: Chips, Power, and Cross-Strait Tensions

The victory of Taiwan’s Democratic Progressive Party - which rejects the idea of Chinese rule - in last weekend’s elections raises the specter of heightened tensions between Taiwan and China, with potentially severe impacts on the global supply of semiconductors.

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While the semiconductor industry is particularly vulnerable to oscillations in the China-Taiwan relationship, given the region’s strategic location any conflict across the Taiwan Strait may have a global supply-chain impact.

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Background

The relationship between Taiwan and China has been tense since 1949, when  the Chinese Civil War ended with the establishment of the communist People's Republic of China (PRC) on the mainland, while the Republic of China (ROC) government retreated to Taiwan. Since then, the PRC has considered Taiwan a part of its territory, although Taiwan has its own government and operates as a separate entity. The relationship between Taiwan and China has been characterized by periods of friction and relative peace. 

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Current Landscape

In recent years, tensions have risen due to various factors, including Taiwan's increasing global visibility and China's growing assertiveness in its foreign policy. Despite the political divide, economic ties between Taiwan and China have grown. Today, China is Taiwan’s largest trading partner, making up more than 22% of the island’s trade, though 2023 exports to China declined to their lowest point in more than two decades.

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Impact on the Semiconductor Industry

Taiwan and China have a somewhat symbiotic relationship when is comes to semiconductor manufacturing: while Taiwan is a powerhouse in the global supply of semiconductors, producing 90% of the world's most advanced chips, many of its raw materials are imported from China.  On the flip side of the coin, China is a major importer of Taiwanese chips, despite efforts to ramp up domestic production .

Taiwanese firms possess advanced technologies that are crucial for the production of high-end semiconductors in a wide range of products, from smartphones and computers to cars and home appliances.. This has put Taiwan at the center of the global technology supply chain. The semiconductor industry requires significant capital investment, technical expertise, and a stable business environment, all of which Taiwan has successfully cultivated. Taiwan has fostered trading partnerships with the U.S. and Europe in recent years, reducing its dependency on China, though these efforts could be hampered by the concurrent drive in the U.S. and Europe to reduce dependency on Taiwanese chips.

Meanwhile, China has long aimed to become more self-reliant in semiconductor production. The country has invested heavily in its domestic semiconductor industry, but it still lags behind Taiwan in terms of technology and production capacity. This gap is a source of vulnerability for China, particularly in the context of escalating US-China trade tensions and American sanctions targeting Chinese tech firms.

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Tensions and the Chip Supply Chain

The strained relationship between Taiwan and China has significant implications for the global chip supply chain. Any military or political escalation could disrupt Taiwan's semiconductor production, leading to global shortages and affecting industries worldwide. Moreover, the US and other countries' efforts to reduce reliance on Taiwanese chips due to these geopolitical risks may disrupt the global supply chain.

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Global Impact

Any open conflict - or dramatic escalation of current tensions - between China and Taiwan could imperil traffic in the Taiwan Strait, a crucial maritime route for global trade. Delays and increased costs could ripple far beyond the semiconductor industry. 

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Even the threat of such a crisis could trigger profound changes globally. In anticipation of potential supply disruptions, some countries and companies might increase their stockpiling of critical components like semiconductors, leading to short-term shortages and price increases. Companies might also accelerate the shift of their manufacturing bases from China and Taiwan to other countries in Southeast Asia or elsewhere, to mitigate risks associated with the tensions.

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Both China and Taiwan are significant players in technology and R&D. Tensions could disrupt collaborative projects, impact technology development timelines, and lead to a bifurcation in technology standards. Governments might respond with new regulations, trade policies, or alliances, affecting how companies operate in these regions and manage their supply chains.

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Conclusion

The relationship between Taiwan and China is a critical factor in the global semiconductor industry. While economic interdependence has increased, political and military tensions pose a risk to the stability of the global chip supply chain. The situation necessitates a careful balancing act from global stakeholders, including governments and corporations, to mitigate risks while leveraging Taiwan's technological strengths. As the global economy becomes increasingly digitized, the importance of stable and secure semiconductor supply chains will only grow, making the Taiwan-China relationship a key area to watch in international relations and global economics.

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