Taiwan’s economy expanded 2.98% in 2020, making it Asia’s fastest-growing in a year beset by Covid-19 disruptions. It even edged out China for the top spot for the first time in three decades.
Besides a hugely successful pandemic response—the nation of 24 million has recorded barely 1,000 cases and eight deaths—that allowed its economy to chug along while others ground to a halt, a significant driver of Taiwan’s economic growth was its semiconductor industry.
The country’s statistics office specifically gave shout-outs to the computer chips sector in reporting its advance estimates of economic data last week, crediting “strong demand for parts of electronics products” in propelling the growth of exports. Reporting third-quarter data last November, the office also highlighted the role of semiconductors in driving growth in the manufacturing sector.
Globally, sales of semiconductors—tiny electronic devices that power digital devices at the heart of modern industry— rose 6.5% last year, according to US trade group Semiconductor Industry Association. Taiwan, a crucial link in the global semiconductor supply chain, was well-positioned to meet the burgeoning demand. The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co., is headquartered there, where the overwhelming bulk of its manufacturing facilities is located. Last month, TSMC reported record profits, and is expected to spend an eye-popping $28 billion this year on developing chips and expanding plant capacity.
To get a sense of Taiwan’s outsize role in the world economy, just look at its ripple effects on global car production. Recently, some of the world’s largest automakers from Toyota to Volkswagen have had to slow or halt production due to a shortage of chips, which are now used in vehicles for everything from in-car entertainment to parking sensors.
Governments and industry executives around the world have already pressed Taiwan to ramp up production to ease the car manufacturing logjam. And in the highest-profile meeting between the Biden administration and their Taipei counterparts yet, high-ranking US officials will this week meet with Taiwan’s economics minister to discuss the auto chips crunch.
A key reason behind Taiwan’s dominance in global semiconductors is the structure of its chips industry, argued two researchers in a 2013 paper. In particular, TSMC pioneered the independent chip foundry model, whereby the firm focuses solely on manufacturing chips based on others’ designs. Meanwhile, other Taiwanese semiconductor firms also play highly specialized roles, each focusing on some specific stage in the chips manufacturing process. In doing so, they build leading-edge expertise. Coupled with public policies like government funding, tax benefits, and public infrastructure like the construction of major science and industrial parks, Taiwan created an ecosystem in which the semiconductor industry could flourish and gain international renown.
Looming over Taiwan’s semiconductor industry, however, is the great power rivalry between the US and China. With semiconductors underpinning strategic technologies over which Washington and Beijing are battling for dominance, TSMC and Taiwan’s other chip makers inevitably find themselves on a geopolitical tightrope with limited room to maneuver. Already, Taiwanese chipmakers were forced to stop selling to Chinese tech giant Huawei in light of the Trump administration’s restrictions—not a trivial matter given that Huawei was TSMC’s second largest customer in 2019 after Apple.
While unenviable, the stuck-in-the-middle position of TSMC—and by extension, Taiwan’s semiconductor industry as a whole—may at least provide some measure of stability, argues Thomas Shattuck, a research associate at the Foreign Policy Research Institute.
“While TSMC’s current situation is not ideal, being stuck in the middle of a tech war is perhaps the best, most stable situation available for now,” he wrote in a recent research paper, because neither the US nor China can afford to lose TSMC.