On September 23, Taiwan’s Ministry of Financial Affairs introduced that it will limit exports of semiconductors to South Africa. The announcement got here amid a year-long diplomatic spat between Taiwan and South Africa over the relocation of the Taipei Liaison Workplace, Taiwan’s de facto embassy within the nation, from Pretoria, the executive capital, to Johannesburg. The South African authorities’s request was seen as a transfer to downgrade South Africa-Taiwan relations and was seemingly attributable to Chinese language strain on Pretoria.
Two days after the announcement, the Ministry of Financial Affairs rescinded the export restrictions after South Africa requested additional negotiations concerning the relocation of the Liaison Workplace.
The incident was not the primary time the Taiwanese authorities has positioned export restrictions on its semiconductors. In 2022, Taipei joined the US and its allies in sanctioning Russia, stopping the export of chips to the nation after it invaded Ukraine. Nonetheless, the episode with South Africa marks the primary time that Taiwan has actively and unilaterally utilized its distinctive place within the international semiconductor provide chain to have interaction in financial coercion and advance its personal diplomatic pursuits.
Taiwan, as a number one foundry hub, at present manufactures round 60 p.c of semiconductor chips worldwide, and 92 p.c of superior logic chips – chips beneath 10 nanometers essential for “paradigm-shifting applied sciences” corresponding to quantum computing and synthetic intelligence – in addition to wide-ranging client merchandise together with client electronics like smartphones. The vast majority of these chips are made by Taiwan Semiconductor Manufacturing Co. (TSMC).
Particulars are nonetheless scarce about why Taipei agreed to pause the export restrictions. It could possibly be an indication of Taiwan’s uncertainty in weaponizing its Most worthy product. The mere menace of reducing off semiconductor provides is a potent motion. It’s notably notable that South Africa agreed to restart negotiations, provided that Taiwan solely exported round $4 million value of the merchandise on the restricted items record to South Africa final yr.
The episode highlights the potential for Taipei to have interaction in financial coercion by way of the usage of semiconductor exports. Up to now, Taiwan has not used the damaging instruments of financial statecraft, together with sanctions and export restrictions, closely. When it does, Taipei often acts in alignment with its allies or with the worldwide neighborhood. For example, regardless of not being a member of the United Nations, Taiwan at present adheres to sanctions applied by the U.N. Safety Council.
On the subject of unilateral relationships, Taiwan has historically most well-liked to make use of financial inducements to win over different international locations, using so-called “greenback diplomacy” by way of investments, international support, and even, once in a while, bribes. Nonetheless, as China’s financial and geopolitical affect surged within the late twentieth and early twenty first centuries, Taiwan’s efforts to make the most of financial inducements to attain recognition have been more and more stymied. In 2023, after Honduras switched its diplomatic recognition from China to Taiwan, then-Taiwanese president Tsai Ing-wen remarked that Taipei would “not have interaction in a meaningless contest of greenback diplomacy with China.”
In more moderen years, Taiwan has emphasised a value-based strategy to diplomacy. By emphasizing its file on human rights, democracy, and protections for minorities and marginalized teams, Taiwan has positioned itself as a “good international citizen.” By way of this technique, Taiwan goals to realize recognition, or at the least set up relatability, by way of its smooth energy.
At the same time as Taipei depends on constructive types of statecraft, its financial place opens up the opportunity of extra coercive measures. Taiwan’s dominance in chip fabrication offers it essential financial leverage over mates and foes alike. Extra importantly, in contrast to many manufactured items, substitutes for the semiconductors that Taiwan produces are extraordinarily restricted. Within the brief time period, it’s unlikely that international locations focused by export restrictions would have the ability to discover different suppliers that meet their semiconductor wants in each high quality and amount. From an financial sanctions perspective, this makes export restrictions on semiconductors notably formidable.
With its foray into leveraging chips for coercion, Taiwan has opened the door to a brand new possibility for its financial statecraft, signaling a willingness, nevertheless tentative, to make use of sticks, along with carrots, to safeguard its international coverage pursuits. Whereas it guarantees to be a potent device of coercion, Taipei should train warning in weaponizing its affect over semiconductors. Classes could possibly be drawn from different international locations’ use of export restrictions, notably in essential minerals.
The essential minerals provide chain shares essential traits with that of semiconductors. Crucial minerals are additionally not simply substitutable, and their provide chains are extremely concentrated at two levels: refining and processing. This makes the essential minerals provide chain particularly susceptible to produce shocks. Additional, for the reason that early 2020s China has utilized its chokehold place on this provide chain for leverage, most not too long ago imposing restrictions on its uncommon earth exports in what was seen as a response to U.S. tariffs.
Resulting from these vulnerabilities, international locations have labored to diversify their essential minerals provide chain by way of securing different sources or turning inward. The USA has been lively in investing in essential mineral ventures, each at residence and overseas, in addition to taking part in ventures such because the Minerals Safety Partnership. Equally, the UK is restarting discussions of a commerce cope with Greenland to safe entry to the area’s uncommon earth components in an effort to diversify away from Chinese language essential minerals.
Makes an attempt to diversify the essential minerals provide chain predate China’s utilization of essential minerals export bans as coercive leverage. The U.S., as an example, finalized the Canada-U.S. Joint Motion Plan on Crucial Minerals Collaboration in 2020. These earlier efforts had been pushed by the financial significance of essential minerals, together with their integral roles in advancing power know-how and their centrality to nationwide safety.
Cognizant of the vulnerability induced by extremely concentrated manufacturing of chips, that are of essential significance in nationwide safety and economic system, governments such because the U.S., EU, the U.Okay., and many others. have additionally taken steps to make sure the resiliency of their semiconductor provide chains. Resulting from Taiwan’s precarious geopolitical place, the specter of a possible provide chain shock is much more pronounced.
With the episode with South Africa, Taiwan has signaled that it’s at the least curious about exploring the usage of semiconductor exports as coercive leverage to attain international coverage targets. Simply as China’s use of export restrictions on its essential minerals has supercharged considerations concerning the resiliency of the essential minerals provide chain, this motion may additional heighten different nations’ considerations concerning the safety of the semiconductor provide chain and hasten already lively efforts to diversify away from Taiwanese producers.
Though Taiwan nonetheless at present dominates chip fabrication, the competitors in chip manufacturing has been rising. In July, Samsung secured a multi-year cope with Tesla to supply the subsequent era of AI chips, which will likely be used within the automobile firm’s driving {hardware} suite, establishing itself as TSMC’s strongest competitor.
Diversification away from Taiwan shouldn’t be pre-ordained, nevertheless. Taiwan’s dominance in semiconductor fabrication, earned by way of many years of funding in infrastructure, expertise, and analysis and growth, continues to be troublesome to usurp. Moreover, and extra critically, Taiwan has and would undoubtedly proceed to work onerous to take care of the vast majority of semiconductor manufacturing domestically. The semiconductor business not solely contributes to round 14 p.c of the island’s GDP, but in addition supplies an important geostrategic benefit. The potential financial fallout from disruptions in semiconductor fabrication supplies Taiwan with the “silicone defend.” The defend serves as an incentive for different international locations to intervene within the occasion of Chinese language aggression.
Politicians and Taiwanese residents alike acknowledge the centrality of the semiconductor business to Taiwan’s nationwide safety. A ballot carried out earlier within the yr by the Basis for the Individuals discovered that over 80 p.c of the Taiwanese surveyed believed that the semiconductor business is Taiwan’s “Guardian Mountain,” and over 60 p.c agreed that the business supplies a “silicon defend” that may induce intervention within the occasion of a Chinese language invasion of the island. Due to this, regardless of intense strain from the US, Taiwan has so far rejected extra drastic proposals to maneuver or spend money on semiconductor manufacturing in North America, together with a latest proposition to separate chips manufacturing “50-50” with the U.S.
It’s nonetheless too early to inform what, if any, impression this dispute between Taiwan and South Africa may have. If Taiwan’s aim was to sign its willingness to make use of export restrictions as deterrence, then the sign has been acquired. Sooner or later, nevertheless, as tempting as it’s to make the most of semiconductor export restrictions to attain international coverage targets, and as efficient because the device could also be, Taiwan should even be aware of the pitfalls that include such coercive insurance policies. Export restrictions, like different devices of financial sanctions, may be overused. When that occurs, Taiwan could discover its coercive leverage diminished, as focused international locations discover workarounds or, much more concerningly, diversify away from Taiwanese semiconductor chips. It’s due to this fact very important to make use of such coercive leverage cautiously and with a transparent goal in thoughts.