Sat, Feb 27, 2021 page8

• Looking to Taiwan in chip shortage

  • By Thomas Shattuck
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  As the US marks one month under the leadership of President Joe Biden, the conversations around Taiwan have shifted. As I discussed in a Taipei Times article (“No more talk of ‘bargaining chips,’” Jan. 30, page 8), with the end of former US president Donald Trump’s administration — and all of the unpredictability associated with it — Taiwan would not have to worry about being used as a “bargaining chip” in some sort of deal with the People’s Republic of China.

  The talk of Taiwan being used as a bargaining chip never subsided over those four years, but under Biden, those two words do not need to be used anymore. Early messages and signals from the Biden administration demonstrate continued US commitment to Taiwan’s security.

  From last month to this month, the conversation about Taiwan has shifted again — from Taiwan being a “bargaining chip” to Taiwan bargaining its chips.

  This year, news stories abound about Taiwan and its importance in the global supply chain of semiconductors, specifically chips from Taiwan Semiconductor Manufacturing Co (TSMC).

  The big news has been the supply shortage of automotive chips, with the problem escalating to point where German automakers had to slow production.

  German Minister of Economic Affairs Peter Altmaier appealed to Minister of Economic Affairs Wang Mei-hua (王美花) in a letter to assist Germany in getting access to more automotive chips manufactured by TSMC.

  Following this development, Taiwan needed to ask for the German government’s assistance in obtaining vaccines produced by German companies.

  At the time of writing, it appears that the issues are being addressed: Wang spoke with TSMC about the chip issue and Taiwan is supposed to receive its vaccines shipments.

  TSMC is working on alleviating the chip shortage, but executives have said that they are already operating at full capacity. Fixing the supply issue is about “reprioritizing” and “reallocating” resources.

  Wang has specifically denied rumors of a chips-for-vaccines swap, saying: “Taiwan is a free and democratic country. It is beyond the government’s power to interfere with private commercial contracts.”

  The auto chip shortage is being felt around the world. US automakers Ford and General Motors announced that they might be forced to slow, or even halt, production of certain vehicles, with Chinese and French companies following suit.

  The Biden administration has also been in contact with President Tsai Ing-wen’s (蔡英文) government about supply-chain issues in the semiconductor industry. Officials from the two countries videoconferenced with semiconductor industry leaders.

  At the meeting, industry leaders from both countries called for Taiwan and the US to work toward signing a bilateral trade agreement. Closer economic cooperation between the two nations would help to reduce trade barriers and potentially address supply-chain issues in the critical semiconductor industry.

  A bilateral trade agreement would further cement the US-Taiwan relationship, but such a deal would require lengthy negotiations between the two.

  During the Trump administration, TSMC announced that it would open new manufacturing centers in Arizona. While the factories would not have a huge effect on the global output of semiconductors, it demonstrated US resolve to “onshore” some semiconductor production.

  It is not difficult to imagine that, during negotiations for a bilateral trade agreement, the US would put more pressure on Taiwan and TSMC for the company to expand its US presence.

  This month, TSMC announced that it would open a subsidiary in Japan. The subsidiary, which is to open later this year, would work on “3D semiconductor material research.” This announcement falls short of the Japanese government’s desire to have TSMC open factories in Japan, as the firm is doing in Arizona.

  The EU has even begun discussing opening its own semiconductor manufacturing hub, to reduce dependence on companies such as TSMC, but such a plan would require immense funding and technological know-how — the same limiting factors that have pushed TSMC to the top of the industry.

  Manufacturing semiconductors is such an expensive process that it is not financially feasible for every company. The EU would probably have an easier time entering into serious talks with TSMC about opening a manufacturing center somewhere in Europe than going at it alone.

  The EU discussions are in the early stages (and TSMC could well be part of them), so it would take years for anything serious to materialize. The Arizona plants are not to begin producing chips until 2024. If Japan has not yet been able to persuade TSMC to sign a similar deal, the EU should not have high expectations.

  All of these conversations about the auto chip shortage and countries trying to coax TSMC to open hubs demonstrate just how important Taiwan is to the global tech supply chain.

  The world’s auto industry is almost entirely reliant on TSMC to produce chips, even though these types of chip only accounted for 3 percent of TSMC’s sales last year.

  One company’s production can cause production shutdowns in Germany, China, France and the US. For TSMC, that is good for its bottom line. It seems like everyone needs TSMC’s help.

  For Taiwan, that means that countries have a strong interest in ensuring peace between Taiwan and China. If changes to production due to the COVID-19 pandemic can lead to an auto chip shortage, then a conflict over and about Taiwan would have catastrophic results for anything that requires semiconductors made by TSMC.

  A war could destroy TSMC’s factories, which would end production for a number of goods around the world, and even cause global economic tremors. For countries around the world, this reliance shows how vulnerable they are with respect to the semiconductor supply.

  After four years of being characterized as a bargaining chip that Trump might use with China, the conversation has changed to countries, companies and governments directly appealing to their Taiwanese counterparts in an attempt to bargain over chips.

  The Tsai government should not overplay its hand when bargaining over chip production. So far, based on Wang’s comments and the generally cooperative nature of the government with other countries, it is toeing that fine line.

  Taipei should use this newfound “popularity” to work toward greater discussions on economic and security cooperation with interested parties. The global reliance on Taiwan’s semiconductor industry should make all players interested in its security.

  Between its COVID-19 response and world-class semiconductor industry, Taiwan has much to offer the world. Perhaps the conversation about semiconductors will make other governments begin to realize that.

  Thomas Shattuck is a research associate in the Asia Program and managing editor at the Foreign Policy Research Institute.
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