The Future of Taiwan in U.S.-China Technology Competition
In Washington, policy discussions about Taiwan have traditionally centered around democracy and human rights, or defense and regional security in Asia. Even though Taiwan has been a key hub in global technology supply chains for decades, it took the recent escalation of U.S.–China tensions over information and communications technologies (ICTs), and specifically a heightened focus on semiconductors, to bring the island’s unique position into the spotlight. As an uncertain degree of U.S.–China technology decoupling and new global supply chain security efforts unfold, Taiwan is likely to remain a focal point.
One firm, Taiwan Semiconductor Manufacturing Company (TSMC), has been emblematic of Taiwan’s position amidst U.S.–China technology tensions. Semiconductors, or integrated circuits (ICs), are irreplaceable components for leading-edge technology, from artificial intelligence to the Internet of Things, autonomous vehicles to 5G, consumer products to the defense industrial base. The global semiconductor ecosystem is complex, highly specialized, and resource-intensive, involving multiple stakeholders in design, manufacturing, assembly, and testing—and Taiwan’s role is crucial. TSMC alone dominates the manufacturing phase, capturing over half of the global foundry market. Today, only TSMC and South Korea-based Samsung have the capability to sustainably run cutting-edge 5-nanometer fabs.
Businesses from all countries rely on this hard-to-duplicate semiconductor supply chain, and U.S. policies toward China have far-reaching effects. U.S. actions against the Chinese technology giant Huawei are a primary example. When the U.S. Commerce Department added Huawei and its 114 overseas affiliates to the Entity List in May 2019 and amended the foreign direct product rule to restrict Huawei’s acquisition of semiconductors, it leveraged export controls linked to U.S.-regulated intellectual property to compel TSMC and others to dramatically alter their customer relationships with Huawei—a huge buyer of semiconductors for products ranging from 5G infrastructure to smartphones. In the short term, Huawei has stockpiled more than 2 million 7-nanometer units from TSMC before restrictions become effective, but the future is uncertain as Chinese planners scramble to set up semiconductor supply chains outside the reach of U.S. sanctions.
Taiwan Faces Cybersecurity and Talent Challenges from China
With its special awareness of Chinese security threats, Taiwan had already excluded Chinese firms from its 4G wireless infrastructure in 2014, previewing the U.S. and other governments’ concerns about Huawei in 5G by several years. Then, under President Tsai Ing-wen’s leadership, Taiwan’s government declared “cybersecurity is national security” and continued to direct resources, draft legislation, and formulate policies to strengthen the general cybersecurity ecosystem of the island. In January 2019, Taiwan’s Cyber Security Management Act went into effect and became the island’s most comprehensive law on cyberspace. The law creates obligations for providers of critical infrastructure such as energy, water, ICTs, finance, and health. Like many Taiwanese laws, the Act lays out a broad vision but leaves specific details for future legislation to fill in. Thus, in April 2019, Taiwan’s Executive Yuan published the “Principles on Restricting the Use of Products That Endanger National Cyber Security” (各機關對危害國家資通安全產品限制使用原則) prohibiting Taiwanese government agencies from using ICT products and services that might pose national security risks. Even though the document does not specifically call out China, there have been a series of activities since then to replace Chinese ICT products in government procurement, and many agencies have announced plans to exclude Huawei. Additionally, government employees were told not to surf Chinese websites or use Chinese apps, such as WeChat, during work hours without taking precautions.
Since the United States announced restrictions on Huawei, the Taiwanese semiconductor industry has reported increased attacks from China targeting semiconductor designs, roadmaps, and chip-design software, especially around the Hsinchu Industrial Park, where TSMC is headquartered. According to Wired, Taiwanese researchers presented findings at the Black Hat security conference in August 2020, suggesting Chinese hacking campaigns may have compromised internal data of at least seven Taiwanese chip firms over the past two years. Though TSMC has not made any public statements regarding system compromises or targeting by malicious actors, it plans to enhance internal resources on cybersecurity and formed a supply chain security association with the Taiwanese Industrial Technology Research Institute (ITRI, 工業技術研究院) to strengthen vulnerability management and enhance vendor best practices. Those activities also prompted the United States and Taiwan to hold their first joint Cyber Offensive and Defense Exercise (CODE), hosted by the American Institute in Taiwan (AIT) and the Executive Yuan’s Department of Cyber Security.
Taiwan’s technology industries also face talent competition from China as it targets growth in the third-generation semiconductor industry and a move toward self-reliance. To amass talent and technological know-how, China has ramped up its campaign to attract Taiwanese talent with huge pay raises, free trips home, and heavily subsidized housing and education benefits. Taiwanese engineers may also be attracted by financial incentives and the opportunity to be early leaders in the Chinese semiconductor market. Semiconductor Manufacturing International Corp. (SMIC), among the firms Chinese planners hope will help build national autonomy in chip-making, has made repeated attempts to win over key talent from TSMC. More than 300 senior Taiwanese engineers also reportedly moved to newer Chinese semiconductor firms.
Such widespread talent acquisition activity from China worries many in Taiwan’s semiconductor industry. TSMC announced plans to raise employee wages by an average of 20 percent in an effort to attract and retain talent. The government also released plans to relax tax regulations on employee stock ownership and strengthen regulations on trade secrets and intellectual property rights. However, the semiconductor talent competition between China and Taiwan is unlikely to end anytime soon; in fact, it could intensify if U.S.–China technology decoupling deepens.
Taiwan in the U.S. Technology Competition Vision
The specific trajectory of U.S. policy is uncertain as the administration of President Joe Biden takes shape, but ongoing efforts to counter Chinese global influence in 5G and other key technologies are likely to persist in some form. In August 2020, Secretary of State Mike Pompeo announced the expansion of the Clean Network program to isolate State Department networks from Chinese technology and to form a “like-minded” alliance on trusted digital standards. Five Taiwanese companies joined the initiative, including Chunghwa Telecom, Taiwan Mobile, T Star, GT Mobile, and Far EasTone. Although the Biden State Department has not clarified its intentions regarding the program, it has conducted extensive outreach to friendly governments on China policy, including ICT issues.
The U.S. policy community has also shown interest in new international alliances and partnerships for ICT supply chain cooperation. In October 2020, the Cybersecurity Solarium Commission released a white paper on trusted ICT supply chain issues, flagging that dependency on China and other adversaries could undermine the trustworthiness of critical technology in cyberspace. One section of the paper highlights the geostrategic importance of Taiwan and recommends that the United States consider a more formal, bilateral partnership with the island than currently exists. The U.S.–Taiwan Economic Prosperity Partnership Dialogue (EPP) was inaugurated in November 2020, and Taiwan’s de facto ambassador Hsiao Bi-khim attended Biden’s inauguration—a first since the United States and the People’s Republic of China normalized relations in 1979. Public-private engagement has continued, with Taiwan’s Economics Minister Wang Mei-hua and AIT Director Brent Christensen attending the U.S.–Taiwan Business Forum: Prospect of Supply Chain Cooperation on Semiconductor Industry in February 2021.
Semiconductors remain high on the agenda. A recent supply shortage in chips used across multiple industries—but in automobiles in particular—has also drawn increased attention to the need to incentivize semiconductor research, development, and manufacturing in the United States. Here too Taiwan has a role. The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act aims to promote investment in the domestic semiconductor industry, yet the programs authorized by the measure (passed as part of the 2021 National Defense Authorization Act) have not yet been funded by Congress. According to industry executives and independent observers, a significant level of investment in the form of direct funding and investment tax credits will be necessary to compete with the incentives lavished on semiconductor companies by other governments and offset the cost of building these significantly capital-intensive fabs. Biden’s recent announcement in his infrastructure package calling for $50 billion to fund the CHIPS for America Act signals a continued commitment at the highest levels of the U.S. government to making such an investment in the domestic semiconductor supply chain. Though it is still unclear how the U.S. semiconductor ecosystem will mature, independent investment in the United States is in the news: TSMC reportedly plans to invest at least $12 billion and reportedly as much as $35 billion to build a semiconductor plant in Arizona; Samsung and Intel are also reportedly planning to build new U.S. manufacturing facilities.
Taiwan’s Enduring Seat at the Table
Given Taiwan’s unique position as an unofficial ally of the United States and its tense relationship with Mainland China, we can expect more efforts to exclude the so-called “red supply chain” from the island, including a pending ICT blacklist from the Executive Yuan. However, Taiwan faces risks from overregulation or clamping down more tightly than its partners such as the United States and Japan, especially given uncertainty over the Biden administration’s longer-term posture toward Chinese technology competition. Taiwan will also have to navigate ICT supply chain movement to Southeast Asia over cost considerations, raising the importance of advantages in R&D and strategic ties with the United States and other allies.
Broader U.S.–Taiwan trade cooperation may also advance, either through a comprehensive bilateral trade agreement, through sector-specific collaboration similar to that of the U.S.–Japan Digital Trade Agreement, or in plurilateral settings. In the longer term, the United States may reengage with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and Taiwan’s potential participation in the pact has been another topic of discussion.
The U.S. and Chinese governments both appear determined to establish more mutually independent domestic semiconductor supply chains. Unless their postures change significantly, this portends an era in this critical technological field in which Taiwan is even more important to the United States, and the United States and its allies are even more important to Taiwan, while Chinese customers are either cut off by U.S. export controls or, in time, shift to domestic alternatives.
For Taiwan, much rides on how the island will balance safeguarding national security in the ICT space, entanglement with U.S. export controls, and commercial ties with China. So far, China has not retaliated against Taiwan for its deepening semiconductor and technology cooperation with the United States. However, if U.S.–China technology decoupling advances further, Taiwanese companies could be forced to reassess business models that currently include significant China sales. Most companies do not want to pick sides in a geopolitical fight, and disrupting existing supply chain structures without fully assessing potential consequences will likely hurt innovation.
One thing is for certain. Whether due to its central role in semiconductor markets, its richness in rare R&D talent, or its alignment with world democracies in nascent battles over technology governance, Taiwan has secured a seat at the table and will not be overlooked by the United States, China, or other major actors.