Shadow war strikes at heart of China-US relations

Tensions between China, Taiwan, and the United States aren’t limited to military maneuvers on the high seas. A shadow conflict is also playing out in the technological arena.

One of the central drivers of the deepening geopolitical rifts between Beijing on one side and Taipei and Washington 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 chips surges, not least owing to the blistering growth of artificial intelligence or AI, 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 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.

Taiwan’s experience

As researchers in geopolitics and advanced technologies, we see the competition to control the supply chains as one of the defining struggles of the 21st century. Taiwan’s experience could serve as an example to the US, which announced a fresh wave of export controls last month.

The democratic island did not emerge as the world’s semiconductor powerhouse by accident. It 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, 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 its intellectual property.

Moreover, it wants to keep the chips from powering Chinese missiles pointing at Taipei.

Until the early 1990s, the transfer of technologies to China was prohibited under Taiwanese law. But regulations were weakly enforced. As a result, businesses frequently circumvented 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 tech, deals valued at more than US$50 million, and specialized critical infrastructure projects.

Political ties

Crafted over decades, this “outbound investment screening” system features multiple checks intended to safeguard Taiwan’s core chip technologies. Authorities actively monitor and oversee investment decisions involving China.

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.

When a 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.

While the cautious policy shift appears prescient today given rising 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 US corporations. In 2000, President Bill Clinton granted Beijing permanent normal trade relations.

That paved the way for China’s accession to the World Trade Organization a year later. Trade with the country, including advanced technologies, exploded thereafter.

But US strategic calculations have shifted dramatically over the past decade. In 2018, Washington singled out Beijing as a strategic competitor, designating several Chinese hackers and the government itself as national security threats.

Last year, President Joe Biden directed the United States Treasury Department to draft regulations to develop an outbound investment security program to safeguard semiconductor, quantum, and AI technologies.

Washington then issued sweeping restrictions on the trade of advanced chips and chipmaking equipment with China. Earlier this year, the European Union released a white paper proposing to do the same.

Build influence

Of course, Taiwan has its own specific political concerns when it comes to China.

Given Beijing’s long-standing ambition to, as Chinese leaders put it, “reunify” the island with the mainland, local officials are particularly aware of how doing business with China might have unpredictable and damaging political ramifications.

The Taiwanese National Security Bureau has long warned that Beijing is using business to covertly advance its political ambition, including by leveraging Taipei to build influence and proxies within Taiwan.

In late 2023, the island’s National Science and Technology Council announced a list of over 20 core technologies it wanted to prevent Beijing from acquiring, including know-how and raw material to make chips smaller than 14 nanometers.

Taiwanese authorities and businesses have built on the outbound screening system to push back against Chinese influence.

In recent years, additional principles to protect its semiconductor dominance have been introduced, including requiring Taiwanese investors to retain a controlling interest in all Chinese subsidiaries.

Nonetheless, its outbound investment screening system is facing multiple tests. While it is designed to curb the transfer of advanced technologies to China, it also has to oversee financial investments from Taiwan into China’s surging chipmaking sector.

In 2022, for example, the Taiwanese technology group Foxconn announced an investment in Tsinghua Unigroup through its Chinese subsidiary.

Tsinghua Unigroup is backed by China’s National Integrated Circuit Industry Investment Fund and controlled by a Beijing-based private equity firm. Owing to Foxconn’s failure to submit a required preapproval application, it was fined and eventually withdrew its investment.

China’s growing chip industry is also expanding its supply chain, raising questions about whether Taipei should increase restrictions on other semiconductor manufacturers.

Export controls

After the US introduced export controls on China last year, Huawei aggressively expanded its chip production network by leveraging Taiwanese suppliers.

Four semiconductor firms that had previously been approved for outbound investment were subsequently accused of aiding the company in building China’s domestic chip supply chain.

With access to Taiwanese semiconductors increasingly restricted, Beijing has aggressively pursued greater technological autonomy. It has done so by reducing its reliance on imports of advanced equipment and materials from the US, Japan, the Netherlands, and Taiwan.

There are legitimate concerns in the West that tightening international export restrictions on microchips and relevant suppliers could inadvertently strengthen China’s determination to accelerate the development of its domestic production.

Official data appears to corroborate this view. China’s overall imports of microchips in 2023 were below 2017 levels. Exports of Taiwanese chips to China dropped by 18% last year.

Meanwhile, China’s National Bureau of Statistics reported that overall domestic chip production grew by 40% in the first quarter of this year. Its share of global capacity to produce logic chips at 10-22 nanometers could rise from 6% to 19% by 2032.

But these data points do not necessarily mean that China is close to technological autonomy. Most of the increases in domestic production involve “mature” chips for household appliances and electric vehicles, rather than advanced semiconductors required to accelerate AI.

Meanwhile, China is still dependent on Taiwan for its chips.

The decrease in overall semiconductor imports could be a result of international export restrictions on the most cutting-edge tech needed for high-end smartphones and other AI-driven, high-performance computing products.

Restricting China’s access to the global superconductor supply chain is challenging. While doing so makes it reliant on Taiwan – and as such may serve as a temporary protective shield against invasion – it could also exacerbate Beijing’s insecurities.

Coordinated approach

In turn, that could push President Xi Jinping to hasten efforts to become self-sufficient in advanced chip manufacturing. At the same time, outright bans haven’t prevented China from producing a range of semiconductors using foreign capital and technology.

To address this challenge, Taiwan’s screening mechanisms not only need to remain nimble and vigilant – they need to be supported by a coordinated international approach. Only then will it be possible to slow the progress of authoritarian regimes in the AI race.

Min-Yen Chiang is a PhD student in political science at Georgia State University. Robert Muggah is a Lecturer at Pontifícia Universidade Católica do Rio de Janeiro.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy of China Factor.