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From Tsai to Lai: Taiwan’s Economic Security Reforms Amid the AI Chip Surge

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From Tsai to Lai: Taiwan’s Economic Security Reforms Amid the AI Chip Surge

Reviewing past achievements and highlighting three unfinished challenges.

From Tsai to Lai: Taiwan’s Economic Security Reforms Amid the AI Chip Surge
Credit: Depositphotos

Leaders of global tech titans recently converged at COMPUTEX 2024 in Taipei. Since its inception in 1981, this international technology expo has captivated global audiences, drawing unprecedented excitement this year. The fervor stems not just from burgeoning opportunities in AI technology, but from Taiwan’s robust, comprehensive semiconductor ecosystem. This has effectively narrowed the gap between the tech-centric island nation and Silicon Valley’s major tech firms, a relationship underscored by the Intel’s CEO’s witty remark: “IT stands for Intel plus Taiwan.” While this friendly banter might seem out of character to the Taiwanese, who have long seen Intel as a distant leader in the global value chain, it signifies a shift in perceptions of Taiwan’s role in the global value chain.

However, beneath Taiwan’s industrial success lies a precarious geopolitical reality. Dubbed “the most dangerous place on Earth” by international media, this label is backed by tangible threats, such as the recent Chinese military exercises timed with Taiwan’s presidential inauguration. Despite their smaller scale compared to previous displays during then-U.S. House Speaker Nancy Pelosi’s visit, China’s strategic positioning and encirclement tactics near Taiwan’s waters underscore an escalating tension.

This juxtaposition of economic triumph and geopolitical distress raises a crucial question: How has Taiwan managed to become a global economic focal point amidst such pervasive crises? 

Contrary to the expectation that peril stifles progress, Taiwan has thrived. The resilience stems from the island’s commitment to maintaining regional stability, continuous economic growth, and an open society during President Tsai Ing-wen’s tenure (2016-2024). These factors have not only fortified Taiwan internally but have also blunted the edge of China’s aggressive posturing.

Central to this resilience is Tsai’s attunement to civil society, which has decisively moved Taiwan away from economic entanglements with China’s semiconductor ambitions. This strategic pivot came at a critical time, as Taiwan’s semiconductor sector, nurtured over decades, faced existential threats from Chinese firms empowered by the state-backed Big Fund seeking aggressive expansions. The 2015 resistance to Tsinghua Unigroup’s attempted investment in MediaTek, fueled by the Sunflower Movement’s backlash against the Kuomintang’s pro-China policies, previewed Taiwan’s new trajectory under Tsai’s leadership.

Since 2018, Taiwanese companies have been navigating a volatile global trade environment reshaped by China-U.S. trade disputes and a subsequent technology war. These developments, which realigned the global supply chain, presented both challenges and opportunities to bolster Taiwan’s economic autonomy. Following Taiwan and China’s accessions to the World Trade Organization in the early 2000s, Taiwan’s trade with China initially surpassed that with the United States. However, the lower production costs in China also encouraged a significant westward investment by Taiwanese businesses, enhancing China’s economic influence.

These intricate cross-strait economic and political ties laid the groundwork for China’s economic coercion tactics. Not only has the Chinese government exerted pressure through trade sanctions, but it has also leveraged Taiwanese businesses in China to advocate its sovereignty claims over Taiwan.

Dramatic geopolitical shifts empowered Tsai to intensify efforts to decouple Taiwan’s supply chain from China. In 2023, Taiwanese investments in China dwindled to levels last seen in the early 2000s. More symbolically, by early 2024, Taiwan’s exports to the U.S. consistently exceeded those to China, marking the re-emergence of the United States as Taiwan’s largest export market after nearly a quarter-century of Chinese dominance. Tsai’s emphasis on building a resilient supply chain has been vindicated. 

Taiwan’s adept handling of the COVID-19 pandemic further showcased the Tsai administration’s ability to manage crises effectively. By stabilizing the public health environment, Taiwan ensured that its industries not only continued to operate but also excelled, reinforcing its status as an economic outlier during tumultuous times. Between 2020 and 2021, Taiwan’s trade numbers grew, particularly in semiconductor supplies, which saw stable growth among various partner nations. 

Now President Lai Ching-te, Tsai’s successor, faces the critical task of building upon her achievements while navigating emerging challenges. His administration should focus on three strategic goals: mitigating China’s economic coercion by securing support from like-minded nations, safeguarding Taiwan’s national interests amid the global semiconductor supply chain reorganization, and establishing a robust legal framework for economic security.

China’s routine economic coercion tactics target Taiwan’s vital sectors such as agriculture, fisheries, petrochemicals, and machine tools. Despite this pressure and the China-U.S. technology war that restricts advanced semiconductors, Taiwan’s exports to China – including semiconductors and related manufacturing equipment, and chemicals – continue to grow, emphasizing Taiwan’s strategic significance in the global supply chain.

However, this balance is at a tipping point due to the U.S.-led initiative to decouple the technology industry from China. As China strives for supply chain autonomy, its reliance on Taiwanese technology will decrease, shifting the cross-strait relationship from complementary to competitive. A likely escalation of economic coercion against Taiwan’s ICT sector underscores the necessity for Lai to adopt a collaborative, international approach rather than tackling these challenges in isolation. This issue, already on the agenda of the G-7 leaders’ meeting for two consecutive years, highlights the need for ongoing international attention and action.

Moreover, the global semiconductor supply chain is undergoing a significant transformation as nations strive to “reshore” manufacturing capabilities and diversify to prevent disruptions. Central to this shift are the substantial subsidies offered to Taiwanese companies like TSMC for setting up local manufacturing facilities in the United States, Japan, and Germany. 

While the Tsai administration endorsed TSMC’s acceptance of foreign subsidies to preserve alliances with like-minded nations, this strategy has spawned intricate challenges. Taiwan’s semiconductor industry, often hailed as its “silicon shield,” plays a pivotal role in both its economic prosperity and national security. However, Taiwan faces a delicate balance: It must diversify its production capacity without compromising the strategic advantages of this shield. Notably, current negotiations regarding subsidies for TSMC’s expansion are being held directly with the company, circumventing the Taiwanese government.

In this dynamic landscape, Lai must reconcile the interests of these partner nations with Taiwan’s strategic imperatives. Departing from Tsai’s reserved approach, he should engage proactively in supply chain negotiations, seeking “win-win” scenarios that not only preserve Taiwan’s semiconductor market share but also enhance global supply chain resilience.

Furthermore, Tsai’s conservative stance on economic security regulation, especially in contrast to more proactive reforms in the U.S., Europe, and Japan, requires reevaluation. Taiwan’s failure to establish a robust export control regime or update its investment screening and export licensing systems, despite its reliance on a list of “national core critical technologies,” has only intensified penalties for economic espionage rather than addressing broader economic security concerns.

The short-term alignment of Tsai’s policies with corporate interests, aimed at protecting trade secrets, may ultimately restrict Taiwan’s economic growth and diminish its state capacity to navigate the increasingly complex geopolitical environment. Additionally, Taiwan’s unrecognized sovereign status and limited international diplomatic engagement place it at a distinct disadvantage in influencing the ongoing transformation of the global order.

It is crucial that Lai’s administration demonstrate sufficient foresight to recognize the shortcomings in Tsai’s approach to economic security. Moreover, his administration must exert greater effort in coordinating supply chain strategies with allied nations and in helping the industry develop a more comprehensive awareness of risks. Together, they must confront the challenges posed by the emerging era of technology geopolitics. 

Over the past eight years, Taiwan has achieved remarkable economic success despite the risks of conflict. In the coming years, it must continue to do so – and it will.