Taiwan’s role in the global economy has largely existed below the radar until recently, when a shortage of microchips in the automobile industry exposed the island’s outsized position in the global semiconductor supply chain. In a January Bloomberg article entitled “The World is Dangerously Dependent on Taiwan for Semiconductors,” the authors highlighted how a chip shortage from Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造) took a heavy toll on automakers, resulting in reduced output and projected billions in lost earnings. According to IHS Markit, the production of nearly 1 million vehicles worldwide would be delayed in the first quarter of 2021, with the shortage affecting Volkswagen, Ford Motor, General Motors, Tokyo Motor, Nissan Motor, Fiat Chrysler, and other carmakers.
TSMC is the world’s largest foundry and the go-to producer of chips for Apple Inc. smartphones, artificial intelligence, high-performance computing, and automakers, and is also one of Germany’s main suppliers. As a result, Berlin has asked Taiwanese manufacturers to help ease the shortage in the auto sector, which is hampering Germany’s economic recovery from the COVID-19 pandemic. According to Fitch Solutions, Europe’s biggest carmaker Volkswagen Group will be hit the hardest by the shortage, while Hyundai/Kia of Korea and BMW have secured good long-term access to chip requirements—and, along with Toyota, will likely ride out the storm without much issue.
Nonetheless, according to Jan-Peter Kleinhans, director of the technology and geopolitics project at Berlin-based think tank Stiftung Neue Verantwortung (SNV), by dominating the US-developed model of outsourcing chip manufacturing capacity, Taiwan has become “potentially the most critical single point of failure in the entire semiconductor value chain.” Given Taipei’s grip on the semiconductor business and growing role as a choke point in the global supply chain, this is lending new urgency to plans from Brussels to Washington and Tokyo to Beijing to increase self-reliance.
Chokepoint and Anti-Access/Area Denial
To hedge against a potential future supply chokepoint, the EU now plans to increase state support to ramp up domestic production of semiconductors, weighing possible deals with TSMC and Samsung to establish microchip foundries. Likewise, the United States has negotiated with TSMC to set up a USD $12 billion chip fabrication plant in Arizona, while Samsung is set to follow with a USD $10 billion facility in Austin, Texas.
In late February of this year, Director of the American Institute in Taiwan Brent Christensen met with dozens of Taiwanese chipmaker and supply chain executives to encourage a closer partnership with the United States. Japanese and German representatives also joined the meeting, which came hours after the Biden administration ordered scrutiny of US critical supply chains. Back in September, Christensen convened another meeting in Taiwan with European, Canadian, and Japanese counterparts to seek the support of “like-minded” democracies in working to shift supply chains away from China.
China also understands the importance of access to critical inputs like semiconductors and the security of its high-tech supply line. In a world where technology is increasingly being enlisted in the great power rivalry between Washington and Beijing, the weaponization of economic interdependence and the potential for a semiconductor supply cut-off are real concerns. Indeed, the Trump administration had exploited that pressure point to deny Beijing access to TSMC semiconductors. By banning access to all US chip technology, including design, Washington was able to cut off the supply of semiconductors from TSMC and other foundries to Huawei Technologies (華為技術有限公司), hobbling the advance of China’s biggest tech company.
Despite Beijing touting its “Made in China 2025” vision, which aims to transform the country into a “manufacturing superpower,” its leading national foundry—Semiconductor Manufacturing International Corporation (SMIC, 中芯國際集成電路製造有限公司)—remains years behind its competitors in the United States, South Korea, and Taiwan. SMIC has been unable to complete manufacture of 10 nanometer (nm) chips, largely due to US sanctions on the export of specialized equipment to the company, while TSMC is already manufacturing 5 nm chips, with plans to upgrade to the even more advanced 3 nm chips.
And while China’s most recent five-year plan presented Beijing’s strategy of channeling help to the chip industry and other key technologies to the tune of USD $1.4 trillion through 2025, this still does not negate its continuing need to import Taiwanese chips, knowledge, and talent. Indeed, China has long tapped Taiwan for its chip-making talent: two key executives at China’s SMIC, co-CEO Liang Mong-song (梁孟松) and current Vice Chairman Chiang Shang-yi (蔣尚義), used to work at TSMC as senior director for research and development and as its chief operating officer, respectively.
Currently, the United States appears to be applying a geo-economic anti-access/area denial strategy for technology decoupling from China via the Clean Network Initiative. [1] Specifically, Washington is employing export controls to deny critical inputs to certain Chinese companies, while imposing market access restrictions on Chinese technology in the US. Indeed, on March 2, the US National Security Council for Artificial Intelligence (NSCAI) issued a 750-page report—directed by former Google chairman Eric Schmidt and former Deputy Secretary of Defense (during the Obama Administration) Robert Work—recommending that “the United States and its allies should utilize targeted export controls on high-end semiconductor manufacturing equipment […] to protect existing technical advantages and slow the advancement of China’s semiconductor industry.”
The report was picked up by China’s political websites, concerned that the US’ denial of access to high-end computer chips would threaten China’s high-tech ambitions. With China attempting to reduce its annual USD $300 billion semiconductor imports and developing plans for a USD $200 billion rollout of a national 5G broadband network, if Huawei and ZTE cannot source the chips required for their 5G base stations, some observers predict a full-scale tech war may be in the offing. China is already considering retaliation by curbing exports of rare-earth minerals to hobble the US defense industry, and others worry that TSMC’s chip factories could become collateral damage if China were to invade Taiwan.
With the blurring of seams between geo-economics and geo-politics regarding the global high-tech supply chain, this issue will likely have important implications for transatlantic security.
EU, NATO, and the Transatlantic Alliance’s Defense Industrial Edge
Given ongoing US concerns regarding integration of Chinese technology into NATO allies’ national critical telecommunications infrastructure, export of dual-use technology to China, and investment by Chinese companies into high tech focused industry and start-ups in NATO member states, these issues are being heavily debated within NATO. In reference to the NATO 2030 proposal, NATO Secretary General Jens Stoltenberg expressed the desire to “put further proposals on the table to maintain [NATO’s] technological edge, to develop common principles and standards for new technologies, and to enhance cooperation between allies in areas like joint research and development.”
NATO Deputy Secretary General Mircea Geoana also emphasized the risk of over-reliance on China’s market and the need to diversify to other trusted and like-minded partners in the US-led Clean Network, stating that “It is important to have a secure 5G Clean NATO Network, which is non-fractured, because the Alliance is only as strong as its weakest link.” Likewise, then-US Under Secretary of State Keith Krach warned that “Countries and companies are terrified of China’s retaliation. The CCP cannot retaliate against everyone. That is where the EU comes in, the Transatlantic Alliance comes in, NATO comes in.” Secretary Krach further underscored that “the central issue is not about technology, but TRUST,” and to that end, Geoana noted the majority of NATO countries have committed to being “Clean Countries,” following the EU’s decision in September 2020 to integrate the EU 5G Clean Toolbox as part of the Clean Network.
In this regard, Taiwan is figuring more prominently among NATO and EU members’ discussions. NATO is considering the possibility of a NATO-Pacific Partnership Council to upgrade ties with Asian partners in the Indo-Pacific, such as Japan, South Korea, Australia, and New Zealand, which are all Major Non-NATO Allies (MNNA). Additionally, Taiwan is treated as an MNNA without official designation. Back in 2018, when Taiwan’s Ministry of National Defense (MND) organized its second International Conference on Military Education and Regional Security, it was the Commander of the NATO Defense College in Rome— who was visiting Taipei for the second time in six months—who opened the conference. Other NATO members such as Germany, France, the Netherlands, and the UK have also issued policy papers to expand their presence in the Indo-Pacific, with London specifically expressing its intent to expand diplomatic relations and cooperation with Taiwan, especially on global issues such as health, cybersecurity, high-tech supply chains, a potential free-trade agreement, and bringing Taipei into its proposed Indo-Pacific Security Initiative (IPSI).
With the continuing rise of Taipei’s prominence in the global supply chain, successful crisis management of the COVID-19 pandemic, and vibrant democracy, Taiwan appears to be slowly evolving from a playing field to a player in its own right in the eyes of the transatlantic alliance.
The main point: The blurring of seams between geo-politics and geo-economics regarding Taiwan’s outsized role in the global high-tech supply chain is prompting the EU and NATO to incorporate the island nation into their strategic calculus.
[1] The Clean Network is a 2020 US government-led effort to address “the long-term threat to data privacy, security, human rights and principled collaboration posed to the free world from authoritarian malign actors.” The goal is to implement internationally accepted digital trust standards across a coalition of trusted partners “based on democratic values,” and this alliance of democracies include 27 of the 30 NATO members (Turkey, Iceland, and Hungary are still not part of the Clean Network); 26 of the 27 EU members, 31 of the 37 OECD nations, 11 of the 12 Three Seas nations as well as Japan, Israel, Australia, Singapore, Taiwan, Canada, Vietnam, India, and New Zealand.
