The U.S-China Tech War Expands to Taiwan

Last week the U.S. government ordered Nvidia and AMD to stop selling high-performance AI chips to China due to potential risks of these products being used by the Chinese military. The scope of the order appears to go beyond Nvidia and AMD as other technology companies have reportedly received similar letters in recent weeks informing them that the high-end technologies, they export to China have been restricted.  

This is another move in the chess play between the two countries and the cold war for supremacy in economic power and advanced technologies. Taiwan has been a key player in this mix due to its strategic importance to the semiconductor technology industry. 

Taiwan makes 65% of the world’s semiconductors and Taiwan’s TSMC makes almost 90% of the advanced chips meaning China and the world depend heavily on semiconductor supplies from Taiwan. 

Taiwan has been governed independently of China since 1949, but China views the island as part of its territory and has vowed to eventually “unify” Taiwan with the mainland, using force if necessary.

China has been strengthening its military positioning near Taiwan by building at least three islands in the disputed South China Sea (SCS) and fully militarizing, arming them with anti-ship and anti-aircraft missile systems, laser and jamming equipment, and fighter jets in an increasingly aggressive move that threatens all nations operating nearby.  

Last year the U.S. Defense Department released a report on the U.S. strategy and response to China’s aggression in the SCS, stating that Chinese expansion in the SCS is detrimental to the stability and security of the Indo-Pacific region (IPR) and further outlining that the U.S. will be obstructing China’s information dominance in the region with cyber and precision strikes on China’s key economic and informational capabilities. US Secretary of Defense Lloyd J. Austin said “The Department will prioritize China as our number one pacing challenge and develop the right operational concepts, capabilities, and plans to bolster deterrence and maintain our competitive advantage. We will ensure that our approach toward China is coordinated and synchronized across the enterprise to advance our priorities, integrated into domestic and foreign policy in a whole-of-government strategy, strengthened by our alliances and partnerships, and supported on a bipartisan basis in Congress.”  

Nancy Pelosi’s visit to Taiwan last month has intensified the military maneuvers on both sides in the region signaling an escalation in the tensions and increased risk of war.  

How did we get here

Asia Times reported that U.S.-China relations have moved from building bridges in 1972 to building walls in 2022 and global trade will never be the same.  

Since President Nixon recognized the PRC as China’s sole government and accepted its “One China” policy in 1972, trade between the two countries opened and western manufacturing firms began outsourcing to Chinese firms due to cheaper production prices.  The Chinese economy grew exponentially since then and the Chinese middle class grew wealthier. Western manufacturers and businesses also benefited due to cheaper production costs, higher profit margins, and a new Chinese consumer market.  

According to the World Bank, China and the U.S. are the biggest two economies in the world. The U.S. GDP grew from $4.4 trillion to $20.9 trillion from 1980 - 2020, while China’s grew from $310 billion to $14.7 trillion. 

China’s fast economic and military growth as well as, technology and geopolitical aspiration toward Taiwan and advancements in the South China Sea became increasingly concerning to the U.S. leading to a shift in the U.S.’s trade, defense, and political policies with China.  

In 2018 the U.S. began imposing tariffs on Chinese imports which began a trade war between the two countries as China countered this move by placing tariffs on U.S. imports.  

The tension between the two countries has continually escalated since then with the U.S., placing incremental sanctions on China, restricting technology and foreign investments in the country, as part of its strategy to limit China’s technology and military growth.  

In response to these pressures, China pledged a $1.4 trillion investment in technology to seize the world’s tech crown from the US between 2020 - 2025.  

Where are we now

The U.S. has been steadily increasing pressures on China by expanding sanctions and restricting imports from the Uyghur region and limiting sales of semiconductor and chip manufacturing equipment to China.  

The Biden administration also recently passed the Science and Chip Act planning to invest $52 billion to ensure U.S. technology and innovation global dominance.  

Most recently the U.S. government asked Nvidia and AMD to stop selling AI chips to China to curb their technology and military advancement.  

In response, President Xi Jinping said on Tuesday that China will continue to advance its state-led system to achieve breakthroughs in core technologies, and strengthen the ruling Communist Party's leadership in tech innovations. 

The tensions between the two countries recently escalated to military maneuvers around Taiwan. The U.S. Defense Security Cooperation Agency (DSCA) said Saturday that it had formally informed Congress about the possible $1.1 billion arms sale to Taiwan. China has warned the United States to cease its arms sales and military interactions with Taiwan after Washington agreed to sell anti-ship and air-to-air missiles to Taiwan. Liu Pengyu, a spokesperson for the Chinese Embassy in Washington, warned that China will “resolutely take legitimate and necessary countermeasures” in light of the recent U.S. arms sales to Taiwan. 

He further said this move “severely jeopardizes China-US relations and peace and stability across the Taiwan Strait,” and urged Washington to immediately revoke the plan.

Technology industry response to tensions …  

As both sides have increased their rhetoric and military posturing, the industry has been watching and slowly decoupling itself from China looking to move manufacturing to other countries like Vietnam, Korea, Mexico, India, and the U.S. 

The US-China technology and trade war, dispute over Taiwan, and ongoing COVID measures have led many technology companies to slowly shift production away from China and restructure their supply chains. 

For example, in June, Apple moved some iPad production from China to Vietnam. Foxconn also recently signed a $300 million deal to expand in northern Vietnam with a new factory that will generate 30,000 jobs, according to state media. The latest spending was in addition to the $1.5 billion that the Vietnamese government had said Foxconn had already invested in the country.

Foxconn and Pegatron are considering producing iPhones for North America in Mexico rather than China to take advantage of lower labor costs and the free-trade agreement between the US and Mexico.

The construction of new manufacturing facilities in the US has soared 116% over the past year with many companies using the buzzwords onshoring, reshoring, or nearshoring. European and Korean firms have also announced their plans to leave China as well.  

Bottom line is that countries are increasingly being forced to choose sides as tensions between U.S. and China rise and companies will have to plan their supply chains accordingly.