After Pelosi continued her trip to the democratically-ruled island, despite Beijing’s warnings, Chinese authorities suspended imports of Taiwanese citrus and fish and exports of sand. State media also announced that major military exercises around Taiwan would begin on Thursday, describing the drills as a “reunion rehearsal operation”. The trade moves have been widely interpreted as political actions aimed at putting pressure on the island, which Beijing considers a breakaway province that should be “reunified” — by force if necessary — although Chinese officials have cited biosecurity and other related reasons. with trade. Beijing’s latest apparent attempt at economic coercion, however, left Taiwan’s most valuable export conspicuously untouched: semiconductors. This is most likely because China depends on Taiwanese exports of critical ingredients almost as much as the island itself. For Beijing, targeting Taiwan’s semiconductor industry would come at the cost of causing significant damage to itself.

How important are semiconductors to 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 percent of semiconductor manufacturing revenue, according to TrendForce, with industry leader Taiwan Semiconductor Manufacturing Co (TSMC) taking more than half of the total pie. South Korea, the next largest producer, controls less than a fifth of the market. For the most advanced semiconductors, Taiwan accounts for 92 percent of production, according to a Boston Consulting report. For Taipei, which is officially recognized by just 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 booming demand, semiconductors now make up nearly 40 percent of exports and about 15 percent 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. fellow at the Academia Sinica in Taiwan, told Al Jazeera. “The semiconductor industry is also critical to Taiwan’s security because it enhances Taiwan’s strategic importance to other countries, especially the United States and Western Europe.” While Beijing’s targeting of citrus and fish is expected to have little effect on Taiwan’s economy, it could do far more damage by disrupting chip imports.

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 percent of global demand for semiconductors, according to a 2020 Congressional Research Service report. More than 90 percent of this demand is met by imports and foreign companies with production in the country, according to the same report. Despite pouring billions of dollars into developing its industry, China controls less than 10 percent of the market, led by Shanghai-based SMIC. “China depends on Taiwan because while Chinese companies can design semiconductors, they have only 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 the early stages and far behind TSMC and Samsung.” While China has often been accused of using economic coercion against other countries, it has excluded some 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 has continued to import huge amounts of iron ore to feed its ferocious appetite for steel.

Could China Target Semiconductors in the Future?

How long Taiwan’s semiconductor dominance can last is uncertain. Chinese President Xi Jinping has described reliance on foreign technology as the “biggest hidden danger” facing the country and pledged to increase its self-sufficiency. As part of 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 the previous year, according to TechNode research. Last year, China’s output of integrated circuits rose to 359.4 billion units, up 33.3 percent from a year earlier, according to official government data. “I think China is unlikely to use sanctions against the semiconductor industry while still depending on Taiwanese companies for manufacturing,” Lee said. “That may change if Beijing develops a stronger manufacturing capacity of its own, but that’s still several years away, in my view.”