Why China is not sanctioning Taiwan’s key chip industry

Beijing relies on self-ruled island’s semiconductors to keep its economy on track.

Published On 4 Aug 20224 Aug 2022

China has turned to the familiar playbook of trade restrictions following US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan.

After Pelosi proceeded with her trip to the democratically-ruled island in spite of Beijing’s warnings, Chinese authorities suspended imports of Taiwanese citrus fruits and fish, and exports of sand.

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State media also announced that major military drills around Taiwan would start on Thursday, framing the exercises as a “rehearse reunification operation”.

The trade moves have been widely interpreted as political actions aimed at pressuring the island, which Beijing considers a breakaway province that should be “reunified” — by force if necessary — although Chinese officials cited biosecurity and other trade-related grounds.

Beijing’s latest apparent 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.

How important are semiconductors to Taiwan?

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 percent of semiconductor manufacturing revenue, according to TrendForce, with industry leader Taiwan Semiconductor Manufacturing Co (TSMC) alone taking up more than half of the total pie.

South Korea, the next biggest producer, controls less than one-fifth of the market.

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For the most advanced semiconductors, Taiwan accounts for 92 percent of production, according to a report by Boston Consulting.