Why China is Concerned for Taiwanese Chip Imports

China has imposed economic sanctions against Taiwan following a trip by US House Speaker Nancy Pelosi to the island but avoided its chip industry altogether. China suspended the import of some fruits and fish from Taiwan and banned the export of natural sand to the island.

There is a possibility that China may expand sanctions against Taiwan as the tension between China and Taiwan due to high profile US politician visit to the island is escalating, experts said sanctions are not expected to directly include the chips sector, which is a vital component of most industrial goods.

While China has often been accused of using economic coercion against other countries, it has excluded certain goods that are 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 importing huge quantities of iron ore to meet its ferocious appetite for steel.

Beijing's latest attempt at economic coercion, however, conspicuously left Taiwan's most valuable export of all untouched - semiconductors. That is most likely because China depends on Taiwan's exports of the critical components almost as much as the island does itself. For Beijing, targeting Taiwan's semiconductor industry would come at the cost of inflicting significant harm on itself.

Taiwan dominates the global industry for semiconductors, critical components used in everything from smartphones and medical devices to cars and fighter jets. The self-ruled island accounts for 64 per cent of semiconductor manufacturing revenue, according to Trend Force. For the most advanced semiconductors, Taiwan accounts for 92 per cent of production, according to a report by Boston Consulting.

Taiwan generates 70 per cent of its total income from exports, 38.5 per cent of which constitutes from electronic components, 34.8 per cent from microchips and 13 per cent from communication devices. The Taiwan Semiconductor Manufacturing Company (TSMC) makes up more than half of the world's chips market.

As Taiwan has great importance to the world economy as a major computer chips maker, it doesn't make much sense for China to take a direct step on chips as it will create a global problem, it will draw the reaction of everyone.

The semiconductor industry is also critical for Taiwan's security because it elevates Taiwan's strategic importance for other countries, especially the United States and Western Europe. While Beijing's targeting of citrus fruits and fish are expected to have a minimal effect on Taiwan's economy, it could inflict far more damage by cutting off imports of the chips.

The world's second-largest economy China accounts for 60 per cent of the global demand for semiconductors, according to a 2020 Congressional Research Service report. More than 90 per cent of that demand is met by imports and foreign firms with production in the country, according to the same report. Despite pouring billions of dollars into developing its industry, China controls less than 10 per cent of the market, led by Shanghai-based SMIC. China is dependent on Taiwan because while Chinese companies can design semiconductors, they have only a limited capacity to manufacture them, especially at the leading edge.

China views democratically, self-ruled Taiwan as a renegade province that needs to be reunited with the mainland. Beijing spent weeks telling Pelosi not to come to Taiwan.

During her visit, China increased tensions by carrying out live military exercises. There is a concern that any kind of invasion of Taiwan by China could massively affect the power structure of the global chip market, giving Beijing control of technology it had not previously had. On top of that, there is a fear that an invasion could choke off the supply of cutting-edge chips to the rest of the world.