Why Taiwan needs help slowing China’s supply chain of advanced chips

Tensions between China, Taiwan, and the U.S. aren’t limited to aerial military maneuvers and drills on the high seas. The shadow conflict is also playing out in the technological arena. One of the central drivers of the deepening geopolitical rifts between China on one side and Taiwan and the U.S. on the other is dominance over global semiconductor supply chains. This is because semiconductors—or microchips—power everything from smartphones and home office software to critical infrastructure and advanced military hardware. As international demand for sophisticated microchips surges, not least owing to the blistering growth of artificial intelligence, so does their strategic value to the global economy and the progress of individual nations. China today spends as much importing microchips as it does importing oil. This deepening reliance on semiconductors around the world adds another layer of complexity to simmering China-Taiwan tensions. Today, Taiwan is the world’s largest and most advanced microchip producer, and China is the planet’s biggest consumer of semiconductors. As researchers in geopolitics and advanced technologies, we see the competition to control microchip supply chains as one of the defining struggles of the 21st century. Taiwan’s experience could serve as an example to the U.S., which on September 6 announced a fresh wave of export controls on semiconductor goods. The world’s chipmaker Taiwan did not emerge as the world’s semiconductor powerhouse by accident. The self-governing island has been producing high-quality microchips for decades due in large part to its flexible production network and world-class engineering talent pool. Yet Taiwan faces a delicate balancing act in maintaining its market superiority in semiconductors, especially when it comes to exporting advanced technologies to China. For one, Taiwanese policymakers are understandably determined to both avoid political entanglements with a country that views the island as its own territory and hold on to the island’s intellectual property. Moreover, Taiwan wants to keep microchips from powering Chinese missiles currently pointed at the capital, Taipei. The road to regulating chips Until the early 1990s, the transfer of technologies to China was prohibited under Taiwanese law. But regulations were weakly enforced. As a result, Taiwanese businesses frequently circumvented existing sanctions by rerouting investments through then-British Hong Kong. The reality was that the chip industry was a lucrative source of revenue for the island. Taiwan’s approach to regulating the flow of technologies started to change in 1993 when President Lee Teng-hui implemented the “no haste, be patient” policy. The strict ban was relaxed and replaced by a system in which additional layers of oversight were added to highly advanced technologies, deals valued at more than $50 million and specialized critical infrastructure projects. Crafted over decades, this “outbound investment screening” system features multiple checks intended to safeguard Taiwan’s core chip technologies. Taiwanese authorities are actively involved in monitoring and overseeing investment decisions involving China made by the island’s semiconductor companies. Officials are also keen to ensure that local chipmakers are aligned with Taiwan’s strategic interests while minimizing political ties with its neighbor. During the screening process, Taiwanese companies are required to submit detailed investment plans to government-appointed reviewers for approval. For example, when a Taiwanese semiconductor firm, such as the world’s largest chip manufacturer TSMC, considers establishing a new facility in China, it must first undertake a rigorous approval process. Changing calculations While the cautious policy shift appears prescient today given rising geopolitical tensions, at the time it was considered out of step with the direction of more open global trade relations with China. The restrictive human rights considerations that had curbed Western trade with China were eased in the 1990s after intensive lobbying by U.S. corporations. In 2000, then-President Bill Clinton granted China permanent normal trade relations, paving the way for its accession to the World Trade Organization a year later. Trade with China, including of advanced technologies, exploded thereafter. But Washington’s strategic calculations over trade with China have shifted dramatically over the past decade. In 2018, the U.S. singled out China as a strategic competitor, designating several Chinese hackers and the government itself as national security threats. By August 2023, President Joe Biden directed the Treasury Department to draft regulations to develop an outbound investment security program to safeguard semiconductor, quantum and AI technologies. A few months later, the U.S. issued sweeping restrictions on the trade of advanced chips and chipmaking equipment with China. I