The US technology war with China, by a combination of both default and design, is pulling Taiwan closer into the orbit of the United States. There have long been reports of US pressure on Taiwanese semiconductor companies to resist sales to China and do more manufacturing in the US. In May, this culminated in both an announcement from TSMC that it would spend US$12 billion on a US manufacturing plant (with an unspecified amount of US government support) and a technical change to export rules.

New export rules in the US designed to target Huawei will have big implications for Taiwanese semiconductor manufacturers such as TSMC. In the past, TSMC earned nearly a fifth of its revenue from sales to China. But much of that has ground to a halt. Because TSMC uses US semiconductor equipment to make the chips it sells, there are now limits on who it can sell to. The rules mean TSMC will be ever more reliant on the US market for sales.

For China, the new rules won’t bite for a little while. Huawei has reportedly stockpiled a year’s supply of chips. There has also been some media speculation about an exemption – will TSMC’s US$12 billion investment in the US buy it some leeway? And a year is a long time in both politics and technology; whether China can negotiate, or innovate, its way out of this dilemma is anyone’s guess.

The ability of Taiwanese semiconductor firms to seek out friendly ties with both the US and China is also made harder by the ideological approach of President Xi Jinping to Taiwan’s status. One might think that China’s dependency on Taiwan for chips might endear it to the status quo. But Xi isn’t such a realist when it comes to Taiwan. Beijing views Taiwan in largely political terms – preoccupied with “the great trend of history” towards unification, as Xi claimed in his January 2019 speech which soured cross-strait relations. This is because ideas of the Communist Party’s legitimacy are tightly bound together with control over China’s territory and historical sovereignty of Taiwan. Save for paying handsome salaries to attract Taiwanese talent, China’s increasingly hostile policy to Taiwan is remarkably at odds with its trade interests.

The technology war, increasingly nationalist trade policies in the US, and ideological hardening in China mean that Taiwan’s ability to keep calm and carry on is getting tricker. And the semiconductor industry is where politics gets real for Taiwan. The industry accounts for around 15% of Taiwan’s GDP, so there’s a lot at stake. Taiwan’s dominance in this tiny but strategically important technology is becoming another layer of complexity in the US, China, Taiwan triangle.