SIM Report: Taiwan-US trade talks underscore geopolitical, commercial pressures amid global chip shortages

SIM Report: Northeast Asia, Issue 13

U.S. Trade Representative Katherine Tai is preparing to start discussions on trade and investment with her Taiwanese counterpart, according to a Wall Street Journal report on 9 June. The report came after remarks by US Secretary of State Antony Blinken on 7 June that trade negotiations with Taiwan would recommence soon. The developments gave rise to widespread speculation that there are efforts to revive the dormant Trade Investment Framework Agreement (TIFA) talks, which were held in 2016 under the Obama administration and subsequently halted under the Trump administration over criticism around Taiwan’s considerable trade surplus. Increased momentum towards TIFA notably comes against the backdrop of a significant decline in Taiwanese President Tsai Ing-wen’s popularity over perceived mismanagement of the COVID-19 pandemic. The island, which had largely escaped the brunt of the pandemic unscathed, recently experienced an unprecedented wave of infections.

Tsai’s popularity had also been dented over her government’s lifting of a ban on US pork exports in August 2020. The ban had previously been in place due to health concerns around the additive ractopamine and had presented a hurdle towards resuming trade talks. Securing a trade agreement with the US would alleviate some of the pressure and damage inflicted on popular support for the Tsai administration. However, a trade agreement would also almost certainly inflame geopolitical tensions with Beijing. China’s ruling Chinese Communist Party (CCP) views Taiwan as a renegade province and accordingly deems any gestures legitimising Taiwan as interference in its internal affairs. Beijing sees Taiwan as one of its most sensitive issues and bristled at Japan’s donation of large quantities of Oxford-AstraZeneca COVID-19 vaccine doses earlier in June. Beijing was likely similarly angered by the Japanese upper house of parliament’s recent backing of Taiwan’s inclusion in the yearly World Health Assembly as of 2022.

A trade agreement with Taiwan is likely to include provisions involving Taiwan’s crucial semiconductor industry, given that the island is the world’s top supplier and global chip shortages have severely dented the operations of industries including automakers. Moves by Taiwan Semiconductor Manufacturing Company (TSMC) towards expanding operations in Japan and the US are reportedly under way. However, Taipei is likely to limit offshoring of chip manufacturing given strategic concerns. Taiwan’s chip industry serves as a so-called ‘silicone shield’ protecting the island from Chinese assertiveness, given that hostile military confrontations would likely seriously disrupt precious chip supplies. China, like other countries, remains reliant on Taiwan for chips despite advancements in its domestic high-tech industry galvanised by the CCP’s ‘Made in China 2025’ strategy and 14th five-year plan. However, some level of offshoring will likely be necessary given multiple coinciding threats to Taiwan’s chip industry, including power infrastructure instabilities, water shortages, and potential operational disruption at technology firms despite a gradual decrease in COVID-19 cases. Vaccine shortages mean that even small COVID-19 outbreaks pose a disproportionate threat to public health and commercial operations, especially in this industry.

WANT TO READ MORE ANALYSIS IN THIS LATEST SIM EDITION...

China: Anti-sanctions law underscores increasingly complex political risk environment

Open Source Intelligence Review