The semiconductor dynamic between China and Taiwan operates within a three-tier paradigm encompassing cultural, military, and techno-economic dimensions. Taiwan’s export-driven, semiconductor-centric economy is a double-edged sword—serving as both a shield of technological supremacy deterring Chinese aggression and a vulnerability due to its lack of economic diversification for long-term stability.

On New Year’s Eve, Chinese President Xi Jinping reaffirmed the historical reunification of Taiwan into mainland China. This comes in the backdrop of Taiwan conducting its first-ever “table-top” exercise simulating defence preparedness against military escalations by China. Increasing grey-zone warfare tactics by China near the Taiwan Strait, seen through the People’s Liberation Army’s repeated naval and aerospace incursions into Taiwan’s Air Defence Identification Zone (ADIZ), have amplified the looming spectre of an incoming invasion.

The threat of Taiwan’s invasion stems from the One China Principle—a hardline insistence by the Chinese Communist Party on Taiwan’s eventual unification. This cultural principle is deeply embedded in Xi’s military doctrine and is a driving force behind what is observed as the “anaconda strategy”: China seeks to slowly but surely make it difficult for Taiwan to breathe politically, militarily, economically, and diplomatically.

However, a persistent conundrum confronts the Chinese government in fulfilling its unification ambitions: the island state remains a significant global hub for semiconductor production. The Taiwan Semiconductor Manufacturing Company (TSMC) produces 90 percent of the world’s most advanced chips, with China relying on Taiwan for up to 60 percent of its chip imports. In 2023 alone, China received up to 54.2 percent of Taiwan’s total semiconductor exports. This reluctant dependence on Taiwanese semiconductors is the basis to the “Silicon Shield,” a term coined by Craig Addison to imply that Taiwan’s chip dominance has created a strong technological deterrent against a potential Chinese invasion.

The semiconductor equation between China and Taiwan is a three-tier paradigm involving cultural, military, and techno-economic aspects. While the One China Principle forms the foundation of China’s unification ambitions, and with Chinese military manoeuvres aimed at fulfilling those ambitions, the techno-economic dependencies of China on Taiwan’s semiconductor production provide a strategic advantage to the island state in restraining Chinese forces.

Cracks in the Shield?

Taiwan’s semiconductor supremacy can be traced to decades of targeted policies prioritising semiconductor specialisation. In the 1980s, the United Microelectronics Corporation (UMC) emerged as the first-ever specialised semiconductor manufacturing company. By the 2000s, TSMC had developed on the UMC-model, and Taiwan became the leading outsourcing hub for semiconductor production for American and global tech giants. The island state’s semiconductor specialisation offered two critical advantages: a geopolitical deterrence against Chinese invasion, and an economic capability contributing nearly 15 percent to Taiwan’s GDP.

Despite the dominance of Taiwan’s semiconductor industry, recent developments suggest growing risks to its long-term sustainability. Externally, TSMC’s monopoly has been diluted by increased geopolitical competition with several countries adopting semiconductor sovereignty laws. Notable examples include Washington’s CHIPS and Science Act, Beijing’s Made in China initiative, the Japan-led Rapidus consortium, and South Korea’s K-Chips Act. Cyber-attacks are another rapidly growing threat to Taiwan’s semiconductor industry, as seen through the recent Russian-based LockBit ransomware attack claiming TSMC’s data breach. Further, the COVID-19 pandemic exposed vulnerabilities underlying Taiwan’s export-dependent economy, with supply chain disruptions rippling across global markets.

Internal challenges to Taiwan’s chip industry are related to resource availability. Taiwan is import-dependent for 97 percent of its energy needs. Semiconductor production remains a highly water-intensive process, and Taiwan’s depleting water reserves due to climate change are a growing source of concern. A decline in the talent pool for skilled engineers further imperils the innovation required for Taiwan’s semiconductor industry.

Acknowledging these realisations, Taiwan is seeking to diversify its semiconductor-driven and export-dependent economy. The island state is making forays in new sectors including space and biotechnologies, with industries such as tourism and apparel holding potential for growth. Taiwan is also keen to diversify its trade partnerships and “decouple” from China as the primary destination for Taiwan’s exports. The country’s New Southbound Policy seeks to expand trade ties across South and Southeast Asia, while its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) reflects the attempt to expand economic connectivity beyond Beijing. However, Taiwan is unlikely to be permitted to join CPTPP, considering China’s aggressive diplomatic isolation tactics against the island state and its firm instance on the One China Principle. Moreover, stiff competition from Asian rivals across technological sectors is forcing Taiwan’s continued overreliance on semiconductors and China-oriented exports.

From a Shield to a Snare: The Taiwan Trap 

The new world order is slowly yet systematically de-linking Taiwan from its crown jewel of semiconductor supremacy. Consider the Chips-4 alliance, despite Taiwan’s continued centrality, Asian counterparts such as South Korea and Japan are fast emerging as alternatives in the semiconductor race. Recent collaboration between the US and India to set up the first semiconductor fabrication unit in India is another case reflecting the growth of alternatives to Taiwanese semiconductors. Global attempts to diversify semiconductor production beyond Taiwan may also suggest a pre-emptive strategy at securing semiconductor supply chains in case the island state is imperilled by a Chinese invasion.

Winds of change further suggest a dilution of Taiwan’s techno-strategic ties with the US. Semiconductor sovereignty laws under former President Joe Biden have directly challenged Taiwan’s semiconductor supremacy. Meanwhile, export controls by the US have sought to curb the sale of advanced chips to Chinese firms, negatively impacting the demand for Taiwanese semiconductors. On 27 January, President Donald Trump proposed tariffs of up to 100 percent on Taiwan-produced semiconductors, further inhibiting TSMC’s exports westwards. Trump has openly blamed Taiwan for stealing America’s global chip business.

Cracks in the silicon shield further embolden China strategically, while a lack of diversified growth beyond semiconductors exposes Taiwan economically.  The semiconductor equation between Taiwan and China is a paradox: semiconductor supremacy provides a geostrategic shield inhibiting China’s invasion, but the island state now finds itself bereft of economic diversification and trapped in the snare of semiconductor specialisation.

Aarushi Shekhar Barthwal has completed her Masters from Jawaharlal Nehru University and is currently a Geopolitical Analyst at MitKat Advisory. Her areas of interest include power politics of the Asia Pacific region and non-traditional security issues in international relations. You can find her LinkedIn profile here.

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