The “democratic supply chain” – a China decoupling policy that the US hasn’t spoken about much since mid-2022 but could be crucial to the future of Taiwan’s semiconductor industry – is back and may soon be back in the news as Beijing challenges the legality of Washington’s chip war.
The Taiwanese government, saying it has a “clear and substantial trade interest” in the matter, has asked to join China’s consultations at the Geneva-based World Trade Organization over US chip export bans on the mainland.
A WTO member since 2002, Taiwan argues in a statement submitted to the WTO this week that it needs to know about how the US-China chip disputes will affect the supply and demand of semiconductor products in its bilateral trade and the world market.
John Deng, minister without portfolio in Taiwan’s Executive Yuan, said Friday (January 7) that Taiwan wants to observe the consultations as a “third country” so as to understand the stances and arguments of both the US and China. He insisted that Taiwan’s participation would not mean that it supports or opposes either side.
It was left to Taiwan’s Ministry of Economic Affairs (MOEA) to indicate where this may be headed. The ministry said its request to join the consultations is aimed at understanding the situation so the island can ensure the healthy development of its strategic industry. And it said Taiwan’s stance to promote a “democratic supply chain” remains firm and unshaken.
The idea of setting up a democratic supply chain dates back to the Trump administration. The concept was floated by the US and Taiwan in 2020 as they called on countries that have similar democratic values to jointly form a semiconductor supply and reduce reliance on China and suppress the expansion of authoritarianism.
The Biden administration picked up the idea and US and Taiwanese officials have scheduled concrete trade talks in Taipei between January 14 and 17, following a brainstorming session last November.
Taiwan’s fab in Arizona
There’s a lot of history behind this. In September 2020, Foreign Affairs Minister Joseph Wu said that if most of Taiwan’s chip facilities were built in mainland China, then the island would face a serious national security threat if it was attacked. Wu said there was great potential for Taiwan, the US, Europe and Japan to jointly restructure the global supply chain.
Even before Wu spoke, TSMC, the world’s largest contract semiconductor foundry, had announced in May 2020 its plan to build a chip foundry in Arizona with support from the state and the United States federal government.
The project accelerated last August after US President Joe Biden signed to approve the CHIPS and Science Act, which involves a US$280 billion plan to boost the local chip-making sector.
Yin Naiping, a professor of finance at Chengchi University in Taipei, said last month that the global supply chain had been split into two – the West and non-West – after the Trump administration called for “America First” and the Biden administration then decided to subsidize the US chip sector.
Yin said it was the right move for the US to attract TSMC to set up chip foundries in Arizona but the US still had to figure out how to lower its production costs.
Cai Minghan, an analyst at Cathay Futures Consultant, said if more key upstream and downstream firms relocated to the US, many mid-stream manufacturers would follow suit or they would lose competitiveness.
Media reports said Apple would start purchasing high-end chips from TSMC’s Arizona plant.
US sanctions
Since mid-2022, the US has imposed several rounds of sanctions against Chinese chip makers and banned the exports of its high-end chips and chip-making tools to China.
On October 7, the US Commerce Department’s Bureau of Industry and Security (BIS) said mainland China-based chip fabs that produce logic chips of 16 nanometers (nm) or below, DRAM memory chips of 18nm half-pitch or less, or NAND chips with 128 layers or more would have to apply for licenses to purchase items from the US.
On December 15, China filed a case to WTO and requested consultations over the US chip exports ban. Russia asked to join the consultations on December 22 while Taiwan made the same request on Thursday.
“We supply an important share of the world market in semiconductors,” Taiwan noted in a document submitted to the WTO on Thursday.
Taiwan told the WTO that its chip makers account for 26% of global semiconductor revenue and produce 61% of the world’s chips below 16nm. It said it looks forward to being informed of the time and venue for the WTO consultations.
Liu Pei-chen, a researcher at the Taiwan Institute of Economic Research, said China wanted to rescue its declining semiconductor sector by filing a case at the WTO against the US sanctions but estimated that it would take several years for the case to proceed.
Liu said although China planned to boost its research and development investments, it did not have the technologies or enough engineers to develop its own chips amid the US sanctions.
On December 13 last year, Reuters reported that China was considering spending 1 trillion yuan (US$143 billion) to support companies that develop or make their own semiconductors over the next five years. It said subsidies could be delivered as early as this year’s first quarter.
However, Bloomberg reported on Wednesday citing anonymous sources that China was pausing these investments due to the government’s deteriorating finances caused by recent coronavirus outbreaks.
Read: US sanctions bite as Huawei runs out of phone chipsets
Follow Jeff Pao on Twitter at @jeffpao3