China turned to the familiar playbook of trade restrictions following the visit to Taiwan by US House of Representatives Speaker Nancy Pelosi.
After Pelosi continued her trip to the democratically-ruled island despite warnings from Beijing, Chinese authorities suspended Taiwanese citrus and fish imports and sand exports.
State media also reported that major military drills around Taiwan would begin on Thursday, calling the drills a “reunification rehearsal.”
The trade moves have been widely interpreted as political moves to pressure the island, which Beijing sees as a breakaway province that should be “reunited” – by force if necessary – although Chinese officials have cited biosecurity and other trade-related reasons.
However, Beijing’s latest apparent attempt at economic coercion has evidently left Taiwan’s most valuable export untouched: semiconductors.
This is most likely because China depends on Taiwan’s exports of critical components almost as much as the island itself.
For Beijing, targeting Taiwan’s semiconductor industry would come at the cost of significant harm to itself.
How important are semiconductors in Taiwan?
Taiwan dominates the global semiconductor industry, critical components used in everything from smartphones and medical devices to cars and fighter jets.
The self-governing island accounts for 64% of semiconductor manufacturing revenue, according to TrendForce, with industry leader Taiwan Semiconductor Manufacturing Co (TSMC) alone accounting for more than half of the total pie.
South Korea, the world’s second largest producer, controls less than a fifth of the market.
For the most advanced semiconductors, Taiwan accounts for 92% of production, according to a Boston Consulting report.
For Taipei, which is only officially recognized by 13 countries and the Vatican, the importance of the semiconductor industry to the island’s economy and security can hardly be overstated.
After years of explosive demand, semiconductors now account for almost 40% of exports and about 15% of gross domestic product.
“Taiwan’s semiconductor industry is critical to its economy, as Taiwan positions itself as a high-tech leader and the Fourth Industrial Revolution will rely on cutting-edge semiconductors that Taiwanese companies can design and produce,” said James Lee, research assistant. scholarship holder from Academia Sinica in Taiwan, Al Jazeera told Al Jazeera.
“The semiconductor industry is also critical to Taiwan’s security as it elevates Taiwan’s strategic importance to other countries, especially the United States and Western Europe.”
While Beijing’s targeting of citrus fruits and fish should have minimal effect on Taiwan’s economy, it could inflict much more damage by cutting off imports of potato chips.
Why does China need Taiwan’s semiconductors?
As much as Taiwan depends on its semiconductor industry, so does China.
The world’s second-largest economy accounts for 60% of global semiconductor demand, according to a 2020 Congressional Research Service report.
More than 90% of this demand is met by imports and foreign companies with production in the country, according to the same report.
Although it has invested billions of dollars in the development of its industry, China controls less than 10% of the market, led by the Shanghai-based SMIC.
“China depends on Taiwan because while Chinese companies can design semiconductors, they only have limited capacity to manufacture them, especially at the cutting edge,” Lee said.
“Recently, there have been reports that SMIC has developed the capability to manufacture 7nm chips, but this is still in its infancy and well behind TSMC and Samsung.”
While China has often been accused of using economic coercion against other countries, it has excluded certain goods important to its economy from sanctions in the past.
After China halted imports of Australian beef, wine and barley in 2020 following a dispute over the origins of the COVID-19 pandemic, Beijing continued to import huge amounts of the ore of iron to satisfy his ferocious appetite for steel.
Could China target semiconductors in the future?
How long Taiwan’s dominance in semiconductors will last is uncertain.
Chinese President Xi Jinping has described dependence on foreign technology as the “greatest hidden danger” facing the country and pledged to increase self-sufficiency.
Under the “Made in China” initiative, Beijing has pledged to invest $1.4 trillion between 2020 and 2025 in high-tech industries, including semiconductors.
In 2020 alone, Chinese semiconductor companies received 227.6 billion yuan ($33.7 billion) in investment, four times more than the previous year, according to research by TechNode.
Last year, China’s IC production rose to 359.4 billion units, a 33.3 percent increase from a year earlier, according to official government data.
“I think China is unlikely to use sanctions against the semiconductor industry when it still depends on Taiwanese companies for manufacturing,” Lee said. “That could change if Beijing develops its own manufacturing capacity, but it will take several more years, in my opinion.”