The chips are down on Taiwan

Taiwanese Deputy Foreign Minister Francois Chih-chung Wu has put a spotlight on the world’s great strategic vulnerability that comes with Beijing’s increasingly assertive attitude towards the democratic territory. That vulnerability is Taiwan’s global dominance in the manufacture and supply of advanced computer chips essential to modern manufacturing and defence. Like rare earths, computer chips are a defining currency in the modern world given their use in everything from rockets to mobile phones, and they have been on the frontline of diplomatic and trade disputes involving the US and Beijing.

Mr Wu told foreign affairs and defence correspondent Ben Packham a Chinese invasion of Taiwan would allow Xi Jinping to “rule the world”, as Adolf Hitler planned in the 1930s. Mr Wu compared Taiwan’s chip sector to Czechoslovakia’s pre-World War II armaments industry, which Germany gained after annexing the European nation in 1938 and used to dominate the battlefields of Europe in the early years of the war. He made his comments in support of Taiwan’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership free-trade agreement.

Consideration of separate bids for CPTPP membership by Taiwan and China is a diplomatic challenge. Given its existing membership of the Asia-Pacific Economic Co-operation forum, Taiwan has a strong case for inclusion. But the issue is unlikely to be resolved by the Albanese government during its current period of oversight of the pact, not least because it would require a consensus of all members.

Taiwan is rightly proud of what it considers to be a “silicon shield” that gives foreign countries a strong incentive to protect it from invasion. But, as with other trade issues involving China, the real lesson from Mr Wu’s wartime analogy is that the West urgently must build resilience and manufacturing capacity of its own to withstand any future trade disruptions.

Taiwan produces more than 60 per cent of the world’s supply of semiconductors and more than 90 per cent of the most advanced chips. China and the US have shown they are willing to use access to advanced chips and minerals to pursue their broader geopolitical aims. Access to the most advanced chips is vital to the future of artificial intelligence and defence. The US share of global semiconductor supply has slipped from 40 per cent in 1990 to only 12 per cent today. In April, Donald Trump signed an executive order setting up a new entity to take over the Biden-era Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act to onshore semiconductor manufacturing. Under the scheme, Taiwan Semiconductor Manufacturing Company will receive $US6.6bn ($10.1bn) in grants and $US5bn in loans to support three fabrication plants in Arizona as part of a $US165bn plan, the largest foreign direct investment in a greenfield in US history. Last Friday, the US government used the CHIPS scheme to take a 10 per cent stake in US chipmaker Intel.

Mr Trump has said he will announce new tariffs on semiconductors that will start low and rise to very high levels to encourage businesses to relocate operations to the US. The trade policy will interrupt what has been a global hi-tech collaboration in which Taiwan has been the manufacturing hub. But it recognises, as Mr Wu warned, that if China were to gain control of Taiwan’s chips industry, Beijing would be in a position to dominate global technology into the future.