Who controls semiconductors controls the global economy?

The years 2021 and 2022 represent an interesting period for the Taiwanese economy, since despite its complexity, Taiwan maintains optimistic numbers despite the pandemic and the war in Ukraine. This is confirmed by the data from the International Monetary Fund, such as the annual growth of 6.5% in 2021 and 3.3% in 2022; inflation of 1.9% and 3.1%, respectively; and unemployment of 3.6% for this year. It is one of the Asian economies that has been least affected by the economic turbulence and the scenario that is looming for 2023.

This is the result of the process that began in the 1960s, with industrialization and export orientation, mainly encouraged by its links with the United States; achieving an average annual growth of 8.8% from 1951 to 1987. This is thanks to the commitment made to innovation, since in 1973 the Institute for Industrial and Technological Research was created, which would give rise to the Hsin¬chu Science-based Industrial Park, home of the Taiwan Semiconductor Manufacturing Corporation (TSMC), which specializes in manufacturing motherboards, laptops, computer drives, and mobile phones. However, these boom years were complicated by the scarcity and cost of labor, and by the value of its currency. Hence, in the last decade of the last century, a process of deceleration began, growing at only 7.6%. This also generated a process of attracting investment to other Asian economies.

This challenge was overcome with the change in regulations regarding mainland China, since by 1990 Taiwanese companies began to place capital on the other side of the Taiwan Strait, achieving lower costs and a new wave. However, this led to a moment of crisis at the end of the decade, motivated by unbalanced growth, excessive reliance on foreign technology, and a dearth of internationally recognized brands. This situation led to greater proximity with mainland partners, resulting in Taiwanese exports to mainland China growing from $1.2 to $19.1 billion between 1987 and 1996.

Political dialogue between Beijing and Taipei has played an important role in economic linkage. We find moments and documents such as the 1981 Message to Compatriots in Taiwan, the 1992 Consensus (“One China, two interpretations”) and the 1994 White Paper on Relations between the two sides of the Taiwan Strait, which are key in the construction of the relationship. However, the economic dynamics became one of the vital axes between the two. The arrival of Ma Ying Jeou to the Taiwanese presidency created an opportunity to strengthen Beijing’s interests on the island. Likewise, the proposal of the Economic Cooperation Framework Agreement between China and Taiwan (Economic Cooperation Framework Agreement, ECFA) arose, signed on June 29, 2010. Giving way to the Cross-Strait Service Trade Agreement (Cross-Strait Service Trade Agreement, CSSTA) in 2013.

The ECFA is an agreement proposed from Taiwan and that came at a complex time for the island, since the ability to attract foreign direct investment had been lost and Taiwanese companies faced the challenge of excluding operating benefits in the region of Asia Pacific, this due to the limited recognition that Taiwan has within global governance. Therefore, the agreement serves to position Taiwanese companies within global production networks, since it not only generates competitive conditions with China, but also allows expanding links with partners such as the US, Japan and the EU.

In 2010, China received 25.7% of Taiwanese exports and was its main trading partner with the purchase of integrated circuits and LCDs. Since then, Beijing continues to be the first partner (27.7%), and the one who consumes the most these products from Taiwan, accounting for 30.5% with a continental destination and 24.8% from Hong Kong.

At an economic level, this agreement has brought greater economic interdependence between both actors. However, the evolution of the agreement is also perceived as a mechanism of continental presence in Taiwan, since this rapprochement unleashed a series of controversies in Taiwan, generating anti-China movements, such as the Sunflower Movement, civil activism against the rapprochement policy. of Chairman Ma with Beijing. The result of all this is the pro-democracy wave led by the current president Tsai Ingwen.

According to the World Economic Forum, Taiwan is a command innovation economy. This situation is evident throughout the process that he experienced during the last decades of the last century. In this sense, in the period from 1986 to 1997, the transition from heavy to light industry was gestated, achieving a specialization in technology-intensive products, leaving traditional manufacturing aside. While this type of industry grew by 10.7% annually, heavy industry began to contract by up to 24.5% in 1997. To achieve this, it is worth mentioning that the bureaucratization of the government-company relationship was not as rigid as in the cases of Japan, South Korea or mainland China, which allowed Taiwanese companies to have a more equitable evolution. However, policies such as “Don’t Hurry, Be Patient” in 1996 began to hinder Taiwanese investment in the mainland, mainly investment in semiconductors was banned. In 2001, the “Active Opening and Effective Management” policy was implemented, which removed the bans on high-tech products. With this change, Taiwanese companies began to use their Chinese subsidiaries to enter the global market, causing a surplus in the trade balance and achieving that in 2008 more than 90% of the laptops and motherboards sold in the world were Taiwanese. .

As a result of this, leading companies are identified such as: TSMC (world leader in semiconductors), ASE Technology Holding Co. (semiconductor assembly), United Microelectronics Corp. (semiconductors), Chunghwa Telecom Co. (telecommunications and broadband), Himax Technologies Inc. (semiconductors), Foxconn/Hon Hai Precision Industry Co. (hardware and software), Pegatron (electronics), Quanta Computer (leader in notebook production), Compal Electronics (electronics), and Wistron (information and communications). In 2020, the exportable supply of these companies is identified in the following products and amounts in dollars (OEC, 2022):

• Integrated circuits (138,000 million),

• Office machine parts (16.1 billion),

• Computers (10,900 million),

• Blank audio media (9.2 billion),

• Transmission equipment (8,000 billion).

The consolidation of these companies gives rise to solving the question: why are Taiwanese semiconductors1 the most innovative in the world? This question is resolved through the evolution that this industry has had on the island. Some authors such as Lai, Chang and Shyu (2004), who point out a critical path of Taiwanese success.

Its four phases explain the technological advances that were developed in Taiwan, generating a high specialization in the entire process and with hi-performance. It is important to highlight how the combination of policies, business development and education led Taiwan to achieve self-sufficiency in less than fifty years. The high nanotechnology manufacturing that was achieved is something that even in the context of the pandemic becomes visible, mainly making it clear that this expertise is something that no other economy in East Asia or North America has. Regarding the latter, it is important to point out that in the union the brands that are identified are not Taiwanese, but companies such as: Intel (USA), Samsung Electronics (South Korea), SK Hinyx (South Korea), Micron Technology (US), Qualcomm (US), Broadcom (US), Texas Instruments (US), MediaTek (Taiwan), Kioxia (Japan), and Nvidia (US) . Although these companies are the ones that sell, it is important to note that 80% of the supply of these companies is located in Asia, of which 90% is produced in Taiwan (BBC, 2021).

Coupled with this, the other issue is technological innovation based on size. This is explained through Moore’s law, formulated by the co-founder of Intel, which mentions “that the number of transistors per device will double every two years.” It is important to note that this law focuses on the number of transistors in a given area. The result of this is the continuous advance regarding the size, since the tendency is for them to be smaller and smaller. From 1971 to 2020, semiconductors have gone from 10 µm to 5 nanometers, reducing the size 18 times. In the same way, it began with 2,300 transistors and by the year 2000 they exceeded 592 million. In the case of the TSMC company, for the 2020s it has focused on developing 3-nanometer semiconductors, an innovation that this Taiwanese company monopolizes. The result of this is that said company accounts for 55% of the world market.

Although this article has focused on the purely economic, it is important to note that the issue of semiconductors can be analyzed from geoeconomics and geopolitics, since there is much speculation that this product is the new oil. However, beyond speculation, the Taiwan-semiconductor pairing becomes a sensitive point in the so-called trade war between China and the US, which has been transforming and generating other spaces, such as the diplomatic and military. At this point, the pandemic and internal political discourse became catalysts in the triangle formed by Taipei-Beijing-Washington. One of the most important changes was the evolution of the North American position regarding Taiwan with the arrival of Joe Biden as president.

Regarding semiconductors, companies from the US and China have sought positioning in this industry, the second being the one that has motivated a policy of seeking self-sufficiency through research cadres and the hiring of retired TSMC personnel by Chinese companies, in order to reduce the distance with respect to Taiwanese companies. It should also be noted that, in recent years, this Taiwanese company has been closer to Japan and the US in search of greater internationalization. Regarding the relationship between TSMC and this second country, remember that it is not only an Apple supplier, but also part of the supply to the US army.

The pandemic revealed what Kuo and Klingler-Vidra (2021) call the technology triangle, which is based on “designed in the US”, “order received in Taiwan” and “made in China”. From a geopolitical perspective, this production model is uncomfortable for the interests of each of these actors. A situation that has been complicated by trade blockades, mainly on Chinese companies in the US, and with the political actions of paradiplomacy between Taipei and Washington, with Nancy Pelosi’s visit to the island among the most controversial.

There is a debate about the effects of the pandemic on the semiconductor industry. On the one hand, a pessimistic view points to how the pandemic and the “Zero covid” policy in China have reduced the demand for electronic products and have caused TSMC shares to fall by 20%. While, on the other hand, the statistics on the requirement of semiconductors in the world show an increase. In November 2022, the TSMC company reported a 50% increase in its sales (Bloomberg, 2022). Beyond these data, an evident aspect during the pandemic has been how the semiconductor industry has gone from being seen as a niche industry to occupying a prominent place in the idea of ​​the new normal, since it is naive to think that semiconductors they are a component limited to smartphones, when in the new reality, semiconductors are a key component of the products and services of the current wave of digitization and artificial intelligence. On this, the World Bank’s GovTech Maturity Index (2022) indicates that “154 of 198 economies (78%) have launched digital government or GovTech initiatives and 147 economies (74%) have relevant strategies to address transformation challenges.” specific to each country”, generating progress compared to 2020; However, this does not mean that there is no digital divide between countries of the global North and South.

Regarding the question in the title, the following are identified as key aspects:

• Taiwan has a clear technological advantage over other countries, mainly the US and China, which have not been able to consolidate high specialization and self-sufficiency in the semiconductor manufacturing and innovation process. However, this does not mean that both countries are not generating strategies that lead them to balance this advantage.

• At this moment, this geoeconomic advantage is a bargaining chip with respect to Taiwan’s limited conditions within the international system, mainly with respect to its interdependence with China; but at the geopolitical level, these same conditions leave it in a non-symmetrical dialogue with other actors.

Given all this, speaking of Taiwan in its entirety as an economic power is not possible, since what it has is a great competitive advantage, but the Chinese straitjacket limits it to empower itself or cover other spaces within international trade and finance. . The technological triangle becomes the reason that provides stability to this region of the world, but that does not mean that with respect to high politics it is enough to dialogue on equal terms with China or the US. In this type of dialogue, the Taiwan issue becomes the point of discussion between these two powers. The pandemic has accelerated the need for digitization and the demand for semiconductors; but, this does not mean that other actors have not already initiated policies towards self-sufficiency, this mainly in the economies of East Asia, so the advantage carries a countdown. However, while that happens, this issue becomes a perfect argument in the midst of American and Chinese interests, and how complex this relationship has become and its impact on the international system.

Raquel Isamara León de la Rosa is director of the Chinese Policy Observatory and researcher at the Meritorious Autonomous University of Puebla, Mexico.