China begins economic sanctions against Taiwan

Since Russia’s invasion of Ukraine, concern has grown around the world that the Chinese government could try to conquer Taiwan in a similar way. In 1979, the USA committed itself to supporting Taiwan’s defense capabilities with the “Taiwan Relations Act”.

A military conflict between the major powers over Taiwan would have serious repercussions on the global economy. Taiwan is one of the 22 largest economies and is highly integrated with the global economy. A large part of the already scarce high-tech semiconductors come from the Taiwanese world market and technology leader Taiwan Semiconductor, better known as TSMC.

China’s sanctions could also affect US companies

The economic sanctions China has announced so far as a result of Pelosi’s visit are manageable. But this may only be the beginning of potential penalties, warns Ian Bremmer, head of risk adviser Eurasia Group. “I can very well imagine that there will be even more restrictions on companies doing business with the mainland.”

The measures could not only be limited to Taiwanese companies. Jörg Wuttke, President of the European Chamber of Commerce in China, believes that Pelosi’s visit to Taiwan will severely strain the already difficult relationship between the USA and China.

He assumes that Beijing is considering the extent to which punitive measures can be taken against American companies. On the other hand, he does not expect any effects on European companies.

Above all, Beijing is likely to direct its retaliatory measures against Taiwan, partly to intimidate advocates of an independent island state and partly because the Taiwanese economy is heavily dependent on the Chinese market. The economic ties with the mainland have increased more and more since economic relations were established over the past 30 years.

Between 1991 and 2021, Taiwanese companies have invested US$193 billion in the mainland, according to the Taiwanese government. In 2021, exports to China and Hong Kong soared to US$188 billion, a new record, driven by Taiwan’s strong semiconductor industry. This made China the main buyer, accounting for 42 percent of Taiwan’s exports.

China has used this dependency several times in the past, to punish Taiwan economically:

• In 2018, angered by Taiwan President Tsai Ing-wen’s tougher course, Beijing halted group tours to Taiwan, which until then had been important business for China.
• Individual tourism was also made more difficult in 2019,
• Banned the import of pineapple fruit from the island in 2021.

As the examples show, these have so far been targeted needlesticks. The leadership in Beijing has so far excluded important areas such as Taiwan’s strong chip industry, as China depends heavily on technology imports from the island.

Semiconductors as a shield against China

Semiconductors are Taiwan’s “‘silicon shield’ against Chinese aggression,” wrote Liam Gibson, a Taipei-based geopolitical analyst, in a recent op-ed in Japan’s Nikkei business daily.

Taiwan accounts for 92 percent of the world’s sub-ten nanometer processor production. These high-tech semiconductors drive the most modern machines in the world. Semiconductors are China’s most important import. The People’s Republic is dependent on imports in order to modernize its economy.

Due to this economic dependency, even the American economy in Taiwan is still relaxed, especially with regard to the warnings of a possible war.

>> Read here: TSMC – Perhaps the most important company in the world keeps its name on the back burner

Andrew Wylegala, President of the American Chamber of Commerce in Taiwan, told the Wall Street Journal: “Our Chamber is made up of 535 corporate and organizational members, virtually all of whom are based in Taiwan. I didn’t hear any alarm bells ringing from them.”

However, no one can say with certainty that this will remain the case. Because China’s rulers are currently redefining their Taiwan policy until the 20th Party Congress of the Chinese Communist Party in the fall. Expert Bremmer says: “The most important question is whether they then change the economic or diplomatic status of Taiwan.”

He expects a tightening of pace. “I believe that we will see retribution on a considerable scale.” The warnings from the Chinese side were very clear, as was the loss of face from the Pelosi trip from a Chinese perspective.

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This makes expansion into other markets all the more important for Taiwan. With her “new southward policy,” President Tsai wants to strengthen Taiwan’s ties with India and Southeast Asian countries in order to become more independent from China in the medium term.

There are first successes. In 2021, Taiwan’s companies invested slightly more in the target region than in China, according to government data. One reason was that companies reduced their investments in China by 14 percent.

The paradox: The exploitation of dependency has not worked in China’s favor so far. On the contrary, the backlash to Beijing’s pressure poses a risk for China. In the past, when China stepped up the pressure, Taiwanese opinion polls increased the proportion of people who identify themselves as Taiwanese.

China expert Taylor Fravel, director of the Security Studies Program at the Massachusetts Institute of Technology, believes this dynamic could now spill over into the United States. “China’s actions are likely to backfire and result in a redoubling of efforts, particularly in the US Congress, to do even more for Taiwan.”

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