The entire semiconductor industry seemed to be holding its breath as Nancy Pelosi’s plane made its final approach to Taipei this week. Some in the sector now appear to be expiring.
China’s dramatic list of responses to the House speaker’s visit notably avoided the issue of chips – signaling that the United States and China hope that Taiwan’s precious semiconductor factories will continue to operate no matter what. it is coming in the weeks and months to come.
“I think the United States and China are starting to get a little more pragmatic when it comes to semiconductors,” Sarah Kreps, professor and director of the Cornell Tech Policy Lab, told Yahoo Finance this week.
After a few years of the pandemic and supply chain issues, she noted, “Chips have become almost a third rail that these two countries don’t want to mess with.”
And the signals sent by the two nations seem to confirm it.
Certainly, the chances of a military confrontation continue to escalate, with Beijing dramatically firing missiles near Taiwan on Thursday as part of “military exercises”. The country has also reacted on the economic front by blocking certain imports such as citrus fruits, fish and other foods from Taiwan. Yet China has notably said that it will continue to allow imports of semiconductors from Taiwan.
“There is still a ton of uncertainty”
Taiwan is a world leader in the production of semiconductor chips, especially advanced chips coveted by companies in the United States and China. The Taiwan Semiconductor Manufacturing Company (TSM) is the world’s largest semiconductor company with its products powering electronics worldwide.
But the implications for the company could still be ahead.
“As we know it, [Chinese president] Xi Jinping was incredibly unhappy with this visit [and] there’s still a ton of uncertainty surrounding Taiwan’s future,” Daniel Newman, senior analyst at Futurum Research, a keen industry watcher, told Yahoo Finance.
But he added on Wednesday that “there are sort of two debates going on” around the conflict, the first focusing on semiconductors and the second on “the role of everything else”.
Pelosi’s visit also came just days after U.S. lawmakers passed the CHIPS and Science Act of 2022, which includes a provision sending $50 billion to semiconductor companies.
The CHIPS Act represents the largest effort in years to boost chip manufacturing in the United States and attempt to reverse the declining role of the United States in semiconductor manufacturing. Chip manufacturing in the United States has fallen from nearly 40% of global output in 1990 to 12% today, according to the Semiconductor Industry Association. The situation is even worse with the world’s most advanced logic semiconductors, 100% of which were manufactured overseas in 2019.
President Joe Biden is expected to sign the bill in a ceremony at the White House next Tuesday. However, experts say the effects – in the form of newly built manufacturing plants in the United States – are years away.
“The CHIPS Act by itself is really not going to do anything for our supply chain problem for at least two years,” Newman says.
The process of rebuilding American manufacturing capability in space will be slow, he said, stressing, “We have to walk before we run.”
“Strengthening our two economies”
Although the CHIPS law will not immediately resolve the shortage, observers have noted that the final form of the bill is less likely to spark a confrontation with China than previous versions. While previous versions of the bill directly targeted China and its business practices, the final bill focuses on building US capabilities.
The upcoming law is also notable for allowing foreign companies to reclaim a portion of that $50 billion, if they earmark it for new manufacturing or redesigning in the United States.
Pelosi brought up this aspect of the CHIPS law several times during his visit to Taipei, noting that his main economic lesson from the trip, in addition to working on a new framework for commerce, was how “our CHIPS law and scientific go a long way to strengthening our two economies.
In a press conference with President Tsai Ing-wen of Taiwan, she said the CHIPS law will help the United States and Taiwan “strengthen our relationship” in the face of Chinese aggression.
Industry leaders in Taiwan have already expressed interest in more investment in the United States. GlobalWafers is considering a $5 billion facility in Texas, and the Taiwan Semiconductor Manufacturing Company is considering new facilities in Arizona.
But Kreps notes that Pelosi and other U.S. policymakers should remember that “Taiwan has other options than the United States” for new semiconductor factories in the coming years, especially in places like Singapore, which was another stop on Pelosi’s tour this week.
“I think the United States can’t be complacent and expect Taiwan to have an inelastic interest,” she notes. “So Pelosi’s visit probably helps reinforce the idea that the relationship is a win-win and should continue.”
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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