Taiwan Needs to Preserve the Globalized Semiconductor Industry, Before It Becomes Too Late

The Biden Administration recently announced its plan to impose a new rule that would further restrict foreign partners’–including Taiwan’s—ability to export semiconductor manufacturing equipment to Mainland China. With the purpose of protecting national security and supply chain resilience, this measure adds to the already-comprehensive list of export controls enacted in October 2022 and October 2023 and further decouples Mainland China from the global semiconductor ecosystem. However, the true victim of this decoupling process is not the two superpowers. It is Taiwan’s semiconductor industry. With competitive pressure in opposite directions stemming from the United States and Mainland China, Taipei needs to advocate for maintaining the globalized semiconductor industry before it is too late.

The core driver behind U.S.-China semiconductor decoupling is Washington’s recurring export controls. Washington is adamant with cutting off Mainland China’s access to advanced semiconductor technology. Out of fears that such technology could strengthen Chinese military capacities, Washington has made clear that it will do “whatever it takes” to block cutting-edge semiconductor from entering China. Since 2022, Washington has continuously and frequently introduced additional export controls and required allies’ compliance in isolating the Chinese market.

Beijing, therefore, has no choice but to develop semiconductor self-sufficiency. Export controls force Chinese firms to switch to domestic alternatives that they would have never considered due to inferior performance. The importance of advanced chips in AI development and the high likelihood of future U.S. restrictions further make self-sufficiency a priority for Beijing. Observing this trend, investment funds in China direct their attention to domestic firms. The shift has led to significant state and private investment, coupled with forced prioritization of domestic firms, and the result is an internal circulation and capacity build-up in Mainland China’s semiconductor ecosystem. 

With this rapidly-developing Mainland Chinese industry, Taiwan’s semiconductor industry is losing the lower-end, legacy chip market to its Mainland China competitors. Mainland China has achieved significant progress in enhancing its production capacity, and is predicted to increase its global market share from 33% to 45% by 2027. Beijing has further committed an additional $48 billion on top of its $47 billion investment to develop its semiconductor self-sufficiency. 

This poses a serious threat to the Taiwan semiconductor industry given its reliance on the Chinese market. Nearly 60% of Taiwan’s semiconductor chips are sold to Mainland China. Mainland China and Hong Kong account for 45% of the global semiconductor chip imports when no other markets in the world import more than 10%. An increasingly self-sufficient semiconductor ecosystem in Mainland China not only absorbs Taiwan’s share in the global market, but also pushes Taiwan’s semiconductor industry out of its single largest market.

The picture does not become more optimistic on the other side of the industry. Taiwan’s semiconductor industry is losing its cutting-edge chip market to the United States. The White House is explicit in its vision to “produce roughly 20% of the world’s most advanced logic chips by the end of the decade” and seeks to “onshore critical semiconductor supply chain” for national security concerns. With Taiwan’s TSMC building its third leading-edge chip manufacturing fab in Arizona, Taiwan’s semiconductor industry is not only facing competition in cutting-edge semiconductor technology, but is also experiencing internal challenges. 

This is a wake-up call for Taiwan’s semiconductor industry. Squeezed in between the decoupling, the future of Taiwan’s semiconductor industry appears bleak. By 2027, Taiwan’s share in the legacy chip market is predicted to drop lower than that of Mainland China to only 37%. Its share in the advanced chip market will decrease by 15%. While its largest TSMC may survive the competition, the rest of Taiwan’s semiconductor industry will suffer.

The true danger lies in the fact that decoupling accelerates decoupling. Seeing restrictions, increasingly more Mainland Chinese firms switch to domestic alternatives and Beijing doubles down its support for endogenization. Mainland China’s development then incentivizes Washington to impose new restrictions and prioritize reshoring the semiconductor industry to protect its supply chain security. 

A downward spiral begins, where the two superpowers increasingly prioritize developing their own independent domestic semiconductor value chain. In the worst case scenario, both countries succeed and have only lingering reliance on Taiwan’s semiconductor industry. In the best case scenario, both countries somewhat succeed, and Taiwan loses significant market share in the semiconductor market to its two largest trading partners. 

Yet, Taiwan relies on its semiconductor edge. The industry alone consists of 18% of the island’s GDP, 38% of its stock market and 40% of its exports. As the U.S. and Mainland China continue to independently develop their semiconductor supply chain, Taiwan will eventually lose its irreplaceable role in the semiconductor world. When a globalized supply chain is no longer globalized, Taiwan loses the “silicon shield” that it proudly depended on. There are no “wins” for Taiwan, only “losses” of varying extents.

What Taipei needs to do, therefore, is to break its silence on the U.S.-China decoupling process. 

First, Taipei should actively protect its industry from recurring U.S. export controls. For instance, both the Netherlands and Japan were able to successfully resist U.S. controls and exempt ASML and Tokyo Electrons from Washington’s most recent export restrictions on manufacturing equipment. Their importance in the value chain is no less than Taiwan, and their justifications are just as applicable to Taiwan’s situation—to protect their companies’ business and stabilize their relationship with Mainland China.

Second, Taipei should leverage its significance in the semiconductor supply chain to influence Washington’s decisions. There are strong and convincing arguments and evidence that reflect the inefficacy of U.S. restrictions and dangers of a de-globalized semiconductor supply chain. The issue is that these arguments have not reached Washington’s considerations yet. However, with several TSMC fabs building in Arizona and significant lobbying power, Taipei could effectively deliver the message.

Third, Taipei should strike a balance in its position, and refrain from completely siding with Washington. Its unique connection to the two countries enables itself to adopt a mediating role. One immediate solution to mitigate Mainland China’s threat in the legacy chip market is to build fabs in Mainland China. Though advanced foundries are not possible, establishing new foundries in Mainland China could recalibrate the geopolitical tension in the U.S.-China semiconductor competition and at least alleviate some competitive pressure off Taiwan’s semiconductor industry. 

Ultimately , both the U.S. and Mainland China have the capacity to support a domestic semiconductor supply chain while simultaneously competing in other technological and economic fronts. What is different about Taiwan is that it cannot. Therefore, as the U.S. imposes additional restrictions on Chinese semiconductor development, it is important for Taiwan to seriously reflect on what its semiconductor edge depends on. It depends on a globalized supply chain—one that will become impossible to maintain if the U.S. and Mainland China continue to decouple.