How Taipei walked into the Trump trap on TSMC
Tom Fowdy
A visitor views the exhibits during the 17th China International Semiconductor Expo in Shanghai, east China, September 3, 2019. /Xinhua

A visitor views the exhibits during the 17th China International Semiconductor Expo in Shanghai, east China, September 3, 2019. /Xinhua

Editor's note: Tom Fowdy is a British political and international relations analyst and a graduate of Durham and Oxford universities. He writes on topics pertaining to China, the DPRK, Britain and the U.S. The article reflects the author's opinions, and not necessarily the views of CGTN.

On the evening of May 14, Taiwan Semiconductor Manufacturing Corp (TSMC) announced a new 12 billion U.S. dollar investment in the United States for a new Arizona factory, which would see the firm produce semiconductors in the country that rely on direct exports from Taipei. The project will be completed in 2024.

Then suddenly, less than 12 hours after that announcement was made, the U.S. Department of Commerce, as directed from the White House, revealed sweeping new restrictions against the Chinese telecommunications firm Huawei, prohibiting all companies (including overseas) from selling semiconductors and other parts to the Shenzhen Company using technology and software produced by the United States without approval, requiring them to seek a U.S. license.

Ironically, not only does the move hurt American companies, but most strikingly TMSC itself.

With Huawei being the second largest producer of smartphones in the world, the Shenzhen company is in fact one of the Taipei firm's largest customers and markets of which it has traditionally relied on for several key components.

Now, after goading the firm into making an expensive investment in the United States, the Trump administration has immediately turned round and told the company that it has the right to impose restrictions on its business. TMSC have effectively been conned by the dishonest business practices of the White House; they have walked into the Trump trap. The move is a massive embarrassment for Taiwan's authorities.

The Democratic Progressive Party (DPP) authority in Taipei has over the past few years pursued a high-stakes gamble that it can successfully leverage itself away from the Chinese mainland and default on existing cross-strait commitments.

Encouraged by anti-Beijing sentiment in Washington, the DPP authority has calculated it can tilt further towards the United States, push harder against Beijing and not bare significant repercussions for the fallout that follows. This strategy started with limited success, making Tsai Ing-wen unpopular until she weaponized Hong Kong protests in 2019, allowing her to seek re-election.

In the midst of such, Tsai has become overconfident and has increasingly overlooked the fact that Taipei has one critical weakness: the economy.

As a small island of slightly over 20 million people located not far off the cost of Fujian, Taiwan's trade and commerce is inseparably integrated with the Chinese mainland. This is an inevitable product of physical and human geography. Political differences aside, Taiwanese firms rely extensively on China's vast market and supply chains to thrive.

The DPP have talked about "going south" and diversification, but the small clout of the island and the tremendous size of China's market, as well as its exclusion from major trading bloc, make this inherently unrealistic.

As a consequence, TSMC is heavily reliant on Chinese mainland firms, especially so Huawei for its semiconductor business.

The DPP authority itself has not directly tried to interfere with this. However, with the escalation of cross-strait tensions and Taipei hedging towards Washington in the bid to exploit an anti-China pushback, it was wishful thinking the status quo could continue.

A staff member tests the speed with a Huawei 5G mobile phone at Huawei 5G Innovation and Experience Center in London, Britain, January 28, 2020. /Xinhua

A staff member tests the speed with a Huawei 5G mobile phone at Huawei 5G Innovation and Experience Center in London, Britain, January 28, 2020. /Xinhua

For a while now, the Trump administration has, in a series of proposals and leaked discussions, sought to further impose restrictions on Huawei to escalate its technology war against China, in ways which included deliberately stifling the abilities of overseas, non-American companies to sell to them.

Yet Taiwan authorities didn't consider the implications of this. As ever, they were looking for more ways to better curry favor with Washington in the pursuit of DPP goals.

It is not a surprise on such a background that TSMC was encouraged with the support of authorities to make a massive investment in the United States to specifically boost Trump's own agenda of "American jobs and manufacturing first" — thus it seemed the potential political gains from such a move would be huge for Taipei. Not quite.

Within the space of hours in securing such a deal, the Trump administration have shown their true colors by swiftly and decisively imposing new rules which subsequently limits the company's ability to sell semiconductors and other components to Huawei by placing curbs on the use of American components and software.

The timing was not a coincidence. The White House has extracted a gain from TSMC and then subsequently struck it with a provision which ironically hurts Taipei's export partners. This is a huge miscalculation by Tsai Ing-wen.

In doing so, Taiwan ought to be reminded that their strategy of tilting towards the United States has consequences.

The Trump administration is not an honest, reliable or ethical business partner. It has effectively cheated the island's leading firm and is risking to deprive it of a market which although it politically dislikes, is nevertheless dependent upon.

This new factory in Arizona cannot compensate for the massive losses of the Chinese market, which in turn is pushing firms such as Huawei and others to diversify their supply chains, self-innovate and catch up in the space of critical technologies.

The result is that Taipei is left with nothing. By throwing everything on an anti-China gamble, Tsai is quickly discovering there are adverse consequences by leaning too far towards Washington.

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