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Taiwan’s “Silicon Shield”: The Role of Semiconductors in cross-strait Relations

Updated: Apr 25

Unrecognised as a sovereign state and largely excluded from intergovernmental organisations, Taiwan, also known as the Republic of China (ROC), aspires to lead the world in the semiconductor industry. These minuscule yet pivotal components power all electronic devices, from cars and fridges to mobile phones and computers, driving a global multi-billion-dollar industry. In the shadow of potential invasion or forceful reunification with the People’s Republic of China (PRC), this industry could act as Taiwan's formidable "silicon shield."

While the terms "semiconductor" or "microchips" are widely circulated in the media, what exactly are they? A semiconductor refers to a material whose electric current conduction properties can be modified. This varying conductivity allows the material to shift from being an almost perfect insulator to adopting the conduction of a metal as the temperature increases (Crecraft and Gergely, 2002). The most common semiconductor material is silicon, hence the reference to the "silicon" shield.

The semiconductor industry comprises three types of manufacturers: Integrated Device Manufacturers (IDMs), which encompass the entire value chain; fabless manufacturers, responsible for design but not manufacturing; and foundries, the factories in charge of manufacturing but not design. Taiwan Semiconductor Manufacturing Company (TSMC) is the largest foundry on the global stage, accounting for over half of the market share.

The global demand for electronic devices has been steadily increasing, with a notable surge during the COVID-19 pandemic, propelling the industry to new heights. The scarcity of cutting-edge microchips exacerbated disruptions in the global supply chain, leading to shortages of high-demand electronics throughout the pandemic (King, Wu and Pogkas, 2021). This underscored the industry's vulnerability and the critical need for resilience in times of crisis.

This fragility primarily arises from the limited number of companies equipped to develop the latest generation of chips, given the significant investment required to sustain profitable factories operating continuously. The rapid pace of innovation, doubling every two years, exacerbates this challenge (Canales, 2021). Taiwanese TSMC and Korean Samsung have emerged as the exclusive manufacturers of cutting-edge chip technology, positioning them prominently on the global stage, with major firms worldwide reliant on them. Recognising this reality, both the US and the EU seek to diversify the supply chain and localise microchip manufacturing to address vulnerabilities.

Why Taiwan?

In the 80s and 90s, the microchip industry was concentrated in Japan, with Japanese manufacturers functioning as IDMs, overseeing the entire value chain. However, the landscape changed with the entry of TSMC, leading to the closure of Japanese factories as TSMC fragmented and diversified the global value chain (Lim, 2024). 

Established in 1987 as a public-private entity originating from a Taiwanese public institute, TSMC absorbed knowledge and expertise from scientists trained and employed in the United States. Pioneering the foundry model, TSMC focused solely on manufacturing, not design (Lim, 2024). 

Martil (2022) identifies three crucial factors contributing to Taiwan's success in the industry. Firstly, he underscores the "social prestige" bestowed upon the sector within Taiwanese society, emphasising unparalleled social, economic, and political backing for TSMC. This is evidenced by its consumption, which constitutes 10% of the country's total energy usage (Martil, 2022). Moreover, TSMC, alongside Samsung, stands as the sole company capable of spearheading the latest developments in the semiconductor industry and launching cutting-edge microchips. In 2003, approximately 14 companies were at the innovation forefront; presently, TSMC manufactures 65% of the world’s latest technology microchips, solidifying its dominance (Tsang, 2023). 

Another crucial element in TSMC's hegemonic role is its non-competitive stance with clients. As a foundry, TSMC refrains from designing microchips, positioning itself favourably and independently of successful clients like Apple or Tesla. Breckenfeld, Khan and Schneider (2022), from the Semiconductor Industry Association, attribute this success to the "Taiwanese ecosystem," comprising a significant pool of professionals, cumulative knowledge, and a complex network of research and innovation institutions. 

However, the microelectronics industry in Taiwan is intricately linked to the socioeconomic and political context. Isabel Tsang (2023) argues that Taiwan’s tumultuous political history significantly influences decision-making and technological development, citing the impact of the United Nations General Assembly Resolution 2758. This resolution marked the People’s Republic of China (PRC) replacing the Republic of China (Taiwan) as the internationally recognised representative in the UN, causing economic and political turmoil in Taiwan. 

Tsang contends that Taiwan strategically pursued the semiconductor industry to enhance its technological capabilities and boost its economy in response to the crisis (Tsang, 2023). This strategic decision, she argues, was driven by the government to protect Taiwan's sovereignty, making the semiconductor industry a diplomatic asset. 

Due to its distinctive global positioning in this strategic sector, the semiconductor industry could potentially become a crucial diplomatic asset for Taiwan, influencing cross-strait relations. But where does China stand in this microelectronic race? The following section will delve into how the PRC) is navigating the microchip industry, which is in an unfavourable position vis-à-vis Taiwan.

… and not China?

The Made in China 2025 Initiative stands as one of the Chinese government's pivotal policies, focusing on fostering indigenous innovation in key sectors such as science, technology, and green energy. The objective is to reduce dependency on foreign countries, a goal that gained increased momentum during the pandemic, revealing the vulnerability of global value chains due to heightened barriers.

Within indigenous technological development, microchips have emerged as a critical priority for China. This is primarily due to the industry's mentioned fragility, heavily reliant on Taiwan and South Korea. Consequently, a substantial national mobilisation is underway in China to position itself at the forefront of the microchip race.

The current state of the microchip industry in China reveals a lack of major IDMs. Although there are a few, they remain relatively insignificant. In the realm of fabless manufacturing, China boasts HI Silicon as a significant player, designing chips for Huawei and holding a 25% share in the Chinese domestic market (Cheng, 2022). However, due to the sanctions imposed on Huawei during the Trump Administration, HI Silicon is currently experiencing a decline.

Foundries represent a crucial asset for China; notable progress has been made in this domain. In 2015, Chinese foundries accounted for 10% of the world's market share (Cheng, 2022). Only eight years later, this figure has risen to 17%, with 25 foundries currently under construction in China. The ambitious goal is to cover 25% of the world's market by 2030 (Cheng, 2022).

Despite advancements in volume, China faces significant challenges in developing the latest technology microchips. The absence of critical machinery required to handle the smallest components of the chips poses a considerable obstacle. The competitive edge in the microelectronics industry hinges on the ability to reduce chip size, making it imperative for China to address this limitation to lead the race effectively.

Also limiting China’s self-sufficiency ambition, Hassan Khan, Executive Fellow of the National Network for Critical Technology Analytics (NNCTA), supports that a complete decoupling of the microchip industry is unlikely. The typical route of a chip through the global manufacturing chain involves at least four countries and covers over 40,000 km in a hundred days (Martil, 2022). Khan argues that owning the entire value chain within China is neither viable nor profitable in the near future.

Considering these factors, it appears challenging for China to sever all dependencies on Taiwan's microchip industry. In reality, China imports capabilities from TSMC, and in the microelectronics industry, Taiwan and China function as significant trade partners.

An issue beyond the Strait. 

The global dominance of Taiwan in the semiconductor industry, coupled with China's industry gaps and critical dependencies on the island, positions the semiconductor sector as a potentially pivotal element in the complex dynamics of cross-strait relations. This brings us to the key question of this article: what role might this industry play in the event of a potential "invasion" or "reunification" of Taiwan with China?

Given the low levels of support for a Chinese takeover within Taiwan, a potential scenario would be that a significant number, if not the majority, of professionals – engineers, designers, manufacturers –would likely flee the island, disrupting its unique ecosystem. 

The resulting loss of access to this industry would carry an immense economic cost, impacting not only Taiwan but also China and the world, including the US, whose major firms heavily rely on Taiwanese semiconductor companies. This transforms the Taiwan issue into a global concern, with some experts even suggesting the likelihood of US intervention in the event of a Chinese takeover.

Additionally, even if China were to take over Taiwan, operating the fabs would require continued access to US and allies' capabilities and equipment to function, and the United States would most likely refuse to provide any support to China in this scenario.

On the other hand, the pandemic and the war in Ukraine have prompted major powers to address "critical dependencies" and the fragility of global value chains. In response, major global players have implemented reactionary policies in an attempt to secure or "de-risk" critical sectors, as evident in the EU’s Chips Act and the US’ CHIPS and Science Act.

This global reconfiguration of semiconductor value routes presents an opportunity for Taiwan to invest and enhance its economic presence abroad. However, if fully realised, it would entail the loss of its unique hegemony and dominance in this pivotal industry—the loss of its metaphorical "silicon" shield.

This article does not necessarily reflect the opinions of European Guanxi, its leadership, members, partners, or stakeholders, nor of those of its editors or staff. They have been formulated by the author in their full capacity, and shall not be used for any other purposes other than those they are intended for. European Guanxi assumes no liability or responsibility deriving from the improper use of the contents of this report. Any false facts, errors, and controversial opinions contained in the articles are proper and exclusive of the authors. European Guanxi or its staff and collaborators cannot be held responsible or legally liable for the use of any and all information contained in this document.


Elixabete Arrieta is a researcher with a focus on the political economy of China, Taiwan, and the broader East Asian region. She holds a bachelor's degree in Global Studies and specialised in the Asia-Pacific region for her master's degree at Pompeu Fabra University in Barcelona and National Taiwan University. During her year-long stay in Taiwan, Arrieta was a trainee in the Political Section of the EU Delegation in Taiwan, where she delved into EU-Taiwan relations, cross-strait dynamics, and wider Indo-Pacific issues.You can find her on Linkedin:

This article was edited by Angelo M'Ba and Douglas B. Anderson.


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