Introduction
The Republic of China, commonly referred to as Taiwan, is a peculiar participant in international trade and global politics. On the one hand, this island nation fits essential requirements for statehood — Taiwan has a permanent population, a defined area, and a functioning government. On the other hand, the long conflict with the People’s Republic of China severely restricts Taiwan’s ability to conduct international relations. According to Nations Online Project (2021), the Taiwanese government has diplomatic relations with only fifteen countries. However, Taiwan managed to create substantive ties with Australia, Canada, EU countries, New Zealand, Japan, and the United States (Nations Online Project, 2021). Despite the lack of official recognition, Taiwan has become a powerful economy even by global standards. In 2020, Taiwan occupied a top ten spot in the global exports list (The Observatory of Economic Complexity, 2020). In this regard, one can claim that Taiwan successfully used international trade to overcome political challenges.
Moreover, international trade is vital for Taiwan’s existence, as the island nation possesses a global comparative advantage. The country protects itself with a “silicon shield” — an international leadership in semiconductor manufacturing (Gibson, 2022). Using its comparative advantage in high-technology manufacturing, Taiwan has ensured political and economic security. In particular, Taiwan’s importance to the global economy is high enough to deter potential aggression from such a powerful and ambitious neighbor as China. Therefore, one can argue that international trade and the semiconductor industry, in particular, have become a guarantee of Taiwan’s de-facto independence and international security.
Taiwan: International Trade Statistics and Overview
The Taiwanese economy is market, free, export-oriented, and primarily driven by industrial manufacturing. The island country, populated by 23,6 million people, accumulated an impressive gross domestic product (GDP) of $1,3 billion, or $55,724 per capita (The Heritage Foundation, 2022). In 2020, Taiwan exported goods for $374 billion, taking tenth place among 226 countries (The Observatory of Economic Complexity, 2020). More than one-third, or 36.9% of Taiwan’s total export value, came from integrated circuits; in comparison, office machine parts took second place with a 4,29% share (The Observatory of Economic Complexity, 2020). According to the World Trade Organization (2020), Taiwan has a 1,97% share of world exports. The most important export destinations for Taiwanese goods were China — 27,7%, the United States — 14,6%, and Hong Kong — 13,3% (The Observatory of Economic Complexity, 2020). Overall, one can see that Taiwan managed to take the place of one of the world’s most prominent technological goods exporters. Integrated circuits hold the biggest export value for the Taiwanese economy.
Taiwan has a substantial surplus in international trade with its partners. For instance, in 2020, the country imported goods for $259 billion, making it the twentieth-biggest importer worldwide (The Observatory of Economic Complexity, 2020). Manufacturers were the biggest commodity group imported by Taiwan in 2020, with 72% of the total share; in comparison, the second-place group — fuels and mining products, accommodated 20,7% (World Trade Organization, 2020). The goods imported by Taiwan primarily originated from China — 22,2%, Japan — 16,1%, and the United States — 11,5% (World Trade Organization, 2020). In addition, almost one-third — 32,9% of total imports accumulated from different countries that were not mentioned explicitly (World Trade Organization, 2020). In this example, one can see that Taiwan has a burgeoning international trade with countries that do not officially recognize it or, in the case of China, actively deny its existence.
Lastly, it is necessary to cover the subject of international trade relations between Taiwan and other parties. According to the International Trade Administration (2021), Taiwan has only two operational free trade agreements with Panama and El Salvador. However, Taiwan has membership in such international trade organizations as the WTO, Asia Pacific Economic Cooperation (APEC), the Pacific Economic Cooperation Council (PECC), and the Pacific Basin Economic Council (PBEC) (International Trade Administration, 2021). Furthermore, by 2015, the ASEAN countries have become Taiwan’s biggest trading partners despite the absence of diplomatic ties (Hoang et al., 2020). Finally, it is evident from the international trade statistics that Taiwan has beneficial economic relationships with the United States, Japan, and even its worst geopolitical rival — China. One might wonder how a relatively small island nation managed to survive and achieve such outstanding results without significant natural resources or diplomatic recognition. The answer lies in the history of Taiwan’s most valuable industry — semiconductor manufacturing.
History of the Semiconductor Industry in Taiwan
Semiconductors are essential to the modern-day most sophisticated technologies and devices — computers, smartphones, cars, weapon systems, and telecommunication equipment. The early development of semiconductor technology happened in the United States. Transistor, the first semiconductor device, was invented in 1947 at Bell Labs. In the 1950s, Fairchild Semiconductor and Texas Instruments invented how to place multiple transistors on a single flat frame, thus creating an integrated scheme (Bown, 2020). Initially, the U.S.-based companies handled R&D and manufacturing processes within the country. However, as the demand for electronic components grew rapidly, American manufacturers began to outsource semiconductor manufacturing to friendly Asian countries, which had a comparative advantage of a cheaper workforce.
The Taiwanese government saw the opportunity and wholeheartedly supported the promising industry. Initially, Taiwan allowed foreign firms, such as Philips, General Instrument, and Texas Instruments to open assembly and packaging facilities (Bown, 2020). In addition, the Taiwanese government invested in technical universities and the first local semiconductor foundries (Bown, 2020). However, the most important development happened in 1987, when Taiwan made a significant investment and established the famous Taiwan Semiconductor Manufacturing Company (TSMC). As the world’s first dedicated semiconductor foundry, TSMC allowed smaller companies to cut costs and focus solely on the R&D process (Shattuck, 2021). As a result, Taiwan reinforced its comparative advantage since TSMC could also focus on increasing production scale, quality, and efficiency instead of spending funds on R&D.
The focus on manufacturing yielded outstanding results as Taiwan took over the leadership in the industry. For instance, in 2020, TSMC accounted for over 50% of the global foundry market semiconductor share (Shattuck, 2021). As one can see from the international trade overview, the income from integrated scheme sales allows Taiwan to cover all its import needs and have a significant trade surplus. In this regard, one can claim that Taiwan created a powerful foothold not only in the semiconductor industry but also in the global economy. Ironically, China found itself dependent on Taiwanese semiconductors, as it cannot produce high-performance computer chips in the necessary quantities (Gibson, 2022). Therefore, the Taiwanese semiconductor industry serves as a fine example of how a particular country extracts maximum benefit from its comparative advantages.
Taiwan International Trade: Ricardo and Heckscher-Ohlin Models
The Taiwanese phenomenon can be understood through two popular international trade models. Firstly, the Ricardo model states that comparative advantage is created when a company or a country can produce particular goods at a lower opportunity cost (Hayes, 2022). In the Taiwanese case, the country initially followed the examples of other Asian countries, such as Korea and Japan. However, the TSMC establishment played a crucial role, as Taiwan’s competitor countries were either manufacturing semiconductors domestically or outsourcing the production on a limited scale. In contrast, TSMC eliminated the manufacturing costs for its clients. As a result, contracting TSMC has become an optimal solution for technological companies across the world.
The Heckscher-Ohlin model explains the dominance of integrated schemes in Taiwanese export value. This model states that countries export what they can produce efficiently and plentifully and import the goods that are impossible to produce efficiently (Kopp, 2022). In the Taiwanese case, the country utilizes TSMC’s experience and technological excellence to earn sufficient income to cover other needs. For instance, Taiwan island does not have sufficient capacity for agriculture, and its natural resources are relatively scarce. However, the maximization of semiconductor sales allows Taiwan to solve the problem by purchasing all necessary products, equipment, and materials in the international market. This feature alone makes TSMC activity virtually invaluable for Taiwan. In addition, the global significance of Taiwanese semiconductor manufacturing turns it from a highly important international trade asset into reliable protection against geopolitical threats.
Silicon Shield – How Semiconductor Industry Protects Taiwan De-Facto Independence
The Taiwanese dominance in the semiconductor industry serves as an effective military threat deterrence. Any attack on Taiwan would result in an unprecedented technological chain disruption. Production downtime would cost global technological companies approximately $600 billion annually (Gibson, 2022). In addition, the vital economic interests of the United States and China — the two greatest powers of the modern era, would be endangered. The United States is interested in protecting Taiwan since this country produces 92% of semiconductor process nodes below 10 nanometers. These chips are used in the most advanced American devices and machinery — from Apple iPhones to F35 fighters, which makes the loss of Taiwan unacceptable (Gibson, 2022). At the same time, China also depends on the supply of Taiwanese chips for its AI and 6G Internet projects (Gibson, 2022). Therefore, a military conflict in Taiwan would be extremely harmful to Chinese technological development. Despite its ambition to produce 70% of semiconductors domestically by 2025, China is expected to reach only the 21% domestic production mark by 2024. (Shattuck, 2021). As such, the “silicon shield” of the semiconductor industry reliably protects Taiwan from the potential Chinese attempts to subjugate the island nation.
Conclusion
Taiwan is a perfect example of a country that overcame the scarcity of resources and unfavorable geopolitical conditions through international trade. The Taiwanese government made two right steps that determined Taiwan’s transformation into a powerful economy despite the lack of official diplomatic recognition. Firstly, the Taiwanese authorities believed in the bright future of the semiconductor industry. However, the establishment of manufacturing-focused TSMC provided Taiwan with a decisive comparative advantage since the country offered an opportunity to eliminate manufacturing costs to clients across the world.
In the end, the dominance in the semiconductor industry not only resulted in a significant trade surplus that covered Taiwan’s economic needs but also ensured its geopolitical security. Due to the Taiwanese semiconductor industry’s significance, the United States is essentially forced to protect Taiwan from external threats. Moreover, China — the greatest threat to Taiwan’s de-facto independent existence, cannot launch a full-scale invasion since its technological development is heavily dependent on Taiwanese chips. As such, the comparative advantage in international trade provided Taiwan with a powerful “silicon shield” that seems impregnable in the foreseeable future.
References
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