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What next for Taiwan? Expert says China's demand for on semi-conductors enough to prevent serious trouble

The lion is on perfectly good terms with the antelope until that moment he chooses to eat one. Such is the nature of the unpredictability of the African savannah and much of the Asia-Pacific diplomatic world today.

None is more wary of the Chinese assertiveness than Taiwan that has become a target of threats from Beijing including frequent military intrusions into its air space.

Attempts to lure Taiwan with promises of Hong Kong-like status within Beijing's control, while never accepted at face value, had gained some minority support for the sake of peace in our time. But such hopes were dashed when China broke the terms of the Joint Declaration with Britain and intervened in the internal affairs of the former British colony long before that expected in 2049, allowing people enough time to devise exit strategies.

Now with anti-Beijing activists fleeing Hong Kong to Taiwan and such people being arrested for expressing their pro-democracy views, hostility is open.

Judging what the Chinese lion will do next is uppermost in Taiwan's mind as it assesses its situation. One expert to do so is Roy C Lee, deputy executive director at the Taiwan WTO and RTA Centre, also known as the Chung-Hua Institution for Economic Research (CHIER).

He looks at the wider situation, fully recognising  that the lion is in stalking mode, positioning itself to pounce effectively. On the other hand, and less figuratively, China faces obstacles between itself and its prey.

It does not know what the US will do, governed as it is by a weakling administration fighting great resistance forces as it attempts to impose a radical agenda on a polarized country, which is now only united on one thing - opposition to China.

But whether that hostility - so inconvenient to the ruling Democrat's radical domestic agenda - is enough to bring that mighty giant to decisive action is far from certain. Japan, despite its peacenik rhetoric, has sound military capacity and is ready, willing and able to deal with material threats should they arise.

Border incidents in the Himalayas have served to mobilize India's China-scale armed forces, which have a regimental fighting tradition China lacks. And with the vast Muslim detention camps. China may yet do the impossible and have Pakistan ally itself to India in common cause.

Any perceived malevolent moves emanating from China's otherwise peaceful and wholesome Belt and Road Initiative to upgrade infrastructure worldwide only works in times of peace. Whatever threat Belt and Road poses, it can be rendered harmless whenever circumstances arise to make it unavoidable for the West to think of China as anything but an enemy.

Students of World War II might think of Germany's invasion of Poland as analogous, likening its prior occupation of the Ruhr, Austria and Czechoslovakia to China's takeover the Spratly and Paracel Islands, Hong Kong and threats to Taiwan to these events in the late 1930s.

In dealing with the mounting threat CHIER's Mr Lee first notes the relative standings of the players. He first cites Taiwan's "remarkable economic performance in 2020", which he says is something to celebrate given most countries have been plunged into recession because of the Covid scare.

Taiwan’s GDP increased 3.11 per cent in 2020 compared to the global average of negative 4.5 per cent. It is the first time in three decades that Taiwan has achieved a growth rate greater than China’s, said Mr Lee.

Taiwanese exports increased to a record-breaking 4.9 per cent in 2020, with China (Hong Kong included) receiving close to 44 per cent of Taiwan’s exports, a 12 per cent increase from 2019. This makes China Taiwan’s single most important trading partner and a key source of trade surplus.

Many in Taiwan argue that trade dependence on China indicates that the current Democratic Progressive Party (DPP) government’s approach - keeping China at arms-length while pursuing a closer alliance with the United States - is just political rhetoric. Taiwan, after all, needs China for economic prosperity.

Said Mr Lee: "There are calls to address this high export concentration issue based on economic security concerns. One key risk is that this structure may increase China’s ability to coerce Taiwan for political benefit. China’s decisions in January and April 2021 to block Taiwan’s pork and pineapple imports based on arbitrary quarantine reasons are recent examples that support this argument.

"The key question is whether trade concentration represents low resilience levels, over-dependence and other economic security risks that Taiwan faces, or to the contrary, is an indication of China’s ‘supplier dependency’ on Taiwan," he said..

The top five export product categories from Taiwan to China measured in export value are electrical machinery and equipment and parts; machinery, mechanical appliances and computers; optical and other precision instruments and accessories; plastics and articles; and organic chemicals. Together, they accounted for 86.3 per cent of Taiwan’s exports to China in 2020.

Cross-strait trade is predominately electrical machinery trade - it accounts for 64 per cent of total exports. Semiconductors are the most important product item under the electrical machinery category, accounting for 78 per cent of electrical machinery exports. As such, the 27 per cent increase in semiconductor exports to China in 2020 was the main factor underpinning the overall increase in exports.

Chinese demand for semiconductors surged in 2020 because of the growing demand for electronic consumer products due to the worldwide proliferation of working from home and home-schooling. The stockpiling strategy of Chinese tech firms, including Huawei and SMIC, in light of potential US export controls contributed to the surge of demand as well.

Chinese demand for semiconductors surged in 2020 because of the growing demand for electronic consumer products due to the worldwide proliferation of working from home and home-schooling, said Mr Lee.

The stockpiling strategy of Chinese tech firms, including Huawei and SMIC, in light of potential US export controls contributed to the surge of demand as well, he said.

"As far as the danger of economic coercion is concerned, the risk for Taiwan is at this stage limited. Taking semiconductor trade as an example, China’s current domestic capacity can only supply somewhere between 15 to 20 per cent of semiconductor demand.

"This ‘reverse’ dependency structure means that if Beijing were to weaponize semiconductor trade to coerce Taiwan, it could potentially harm China’s own economic growth much more than Taiwan," he said.

"The ‘reverse’ dependency structure is one of China’s primary strategic concerns and was a key driver of China’s semiconductor import substitution policy created more than 20 years ago." said Mr Lee.

According to his research, Taiwan’s current trade structure suggests that the threat of economic coercion is small. As a major hub in global supply chains, the future orientation of Taiwan’s trade relationship with China depends more on other external factors, like the direction of US policy towards China and supply chain reform.

 

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Roy C Lee, deputy executive director at the Taiwan WTO and RTA Centre, (Chung-Hua Institution for Economic Research) is optimistic about cross-strait relations on the basis of China's dependence on semiconductors. Is such confidence justified?

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