China has blocked many of Taiwan’s exports in retaliation for U.S. House Speaker Nancy Pelosi’s visit to Taiwan on August 2, but certain goods including semiconductors and high-tech products have been spared because of China’s reliance on those products from Taiwan, experts say.
“It is unlikely that Beijing will take serious trade actions against electronic exports from Taiwan. Doing so would be China shooting itself in its own foot,” Dexter Roberts, a senior fellow at the Atlantic Council, told VOA.
Taiwan makes 65% of the world’s semiconductors and almost 90% of the advanced chips.
By comparison, China produces a little over 5% while the U.S. produces approximately 10%, according to market analysts. South Korea, Japan, and the Netherlands are the other sources of the product, which is at the heart of many electronic devices and machinery.
Though China produces some semiconductors, it depends heavily on supplies from Taiwan for advanced chips. Taiwan’s TSMC makes most of the advanced chips in the world and counts Advanced Micro Devices, Apple and Nvidia among its customers.
Semiconductor Manufacturing International Corp. (SMIC) in China, which has 5% of the global fabrication market, produces 14-nanometer chips. There is also evidence that SMIC has 7-nm technology, according to a TechInsights blog. These are considered less advanced than the 3-nm chips produced by TSMC.
Beijing may not block the flow of semiconductors even if the military confrontation escalates, analysts say.
“Taiwan-based TSMC is the biggest world producer of chips, and China and the rest of the world need TSMC semiconductors. Hence, I don’t expect China to target electronic exports,” said Lourdes Casanova, Gail and Rob Canizares director of the Emerging Markets Institute at Cornell University.
Though China’s People’s Liberation Army says it is rehearsing to impose a military blockade around Taiwan, it will be careful not to hurt semiconductor companies like TSMC, Casanova said.
“The stoppage of supply of TSMC semiconductors would be the worst scenario for China and for many other countries. TSMC’s semiconductors are used by Foxconn, another Taiwanese firm, which is the main manufacturer of the iPhone in plants based in China and elsewhere,” she said.
Fear of invasion
A military invasion of Taiwan could disrupt supplies of semiconductors and seriously hamper dozens of high-tech companies that depend on them. TSMC Chairman Mark Liu voiced that fear when he said a military invasion would make TSMC factories inoperable.
“Our interruption would create great economic turmoil in China — suddenly their most advanced component supply disappears. It is an interruption, I must say, so people will think twice on this,” Liu said.
“Nobody can control TSMC by force ... because it is a sophisticated manufacturing facility that depends on the real-time connection with the outside world,” such as Europe, the U.S. and Japan, for materials, chemicals and engineering software, he said.
Even with China’s ban on certain imports from Taiwan, analysts said, Taiwan is unlikely to retaliate because it is heavily dependent on Beijing in terms of trade and investment.
“Companies like TSMC are deeply reliant simultaneously on both the U.S. and China markets. Unless the situation in the Taiwan Strait badly deteriorates and turns to outright open hostilities, Taiwan will try to avoid taking any drastic action which would be cutting off chips to China,” said Roberts, author of The Myth of Chinese Capitalism.
China’s domestic manufacturing
China has been pushing to boost its domestic semiconductor manufacturing capacity. Beijing has pledged $150 billion to expand the industry and be more self-reliant. Plans are in place for new semiconductor factories.
Just last year, China’s chip manufacturing grew by 33.3%, according to China’s National Bureau of Statistics.
“China’s rapid growth in semiconductor chip sales is likely to continue due in large part to the unwavering commitment from the central government and robust policy support in the face of deteriorating U.S-China relations,” the Semiconductor Industry Association said in a blog.
Much of what will be produced in China is expected to be chips containing more mature technologies, analysts say.
Under President Joe Biden, the U.S. has intensified efforts to strengthen its chip-making capabilities and reduce the reliance on external sources.
On Tuesday, Biden signed the much-awaited CHIPS and Science Act, which allocates around $52 billion to promote the production of microchips, the powerful driver for high-end electronics used in a wide range of products, including smartphones, electric vehicles, aircraft and military hardware.
Biden said the legislation would help “win the economic competition in the 21st century.”
U.S. Commerce Secretary Gina Raimondo said last month that it was necessary to reduce the dependence on supplies from Taiwan.
“Our dependence on Taiwan for chips is untenable and unsafe,” she said on July 22. “This is a Sputnik moment for America,” Raimondo said, referring to the CHIPS Act. “I mean that very sincerely. And this is a project we’re working on.”
Taiwan’s TSMC website states it is building a fabrication plant in the U.S. state of Arizona with the aim of starting production in 2024. It will produce semiconductor wafers using 5-nm technology. During her recent controversial visit to Taiwan, Pelosi met TSMC's Liu. TSMC is expected to be one of the beneficiaries of the $52 billion CHIPS and Science Act.
The U.S. is also countering China’s semiconductor industry in different ways. It recently broadened its ban on sales of chip-making equipment to China, according to Tim Archer, the chief executive officer of Lam Research Corp., a California supplier of silicon wafer fabrication gear.
The restriction would affect the shipment of machinery to produce 14 nm chips in China. This is an extension of the earlier ban, which prevented the supply of machinery for making advanced technology nodes of 10 nanometers. The idea is to cover a wider range of semiconductor equipment going to China.
South Korea, a U.S. ally, has indicated it would also cut off the chip supply to China in case Washington imposed global sanctions on it. Cutting off supplies would put China and Russia at a major technological disadvantage and hamper their manufacture of advanced military hardware.