Pelosi’s trip to Taiwan shows that the US and China are not ready to fight for the “third rail” of chips

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 seem to be exhaling.

China’s dramatic list of responses to the House Speaker’s visit has notably sidestepped the chip issue, signaling that both the US and China hope to keep Taiwan’s valuable semiconductor factories running no matter what. in the coming weeks and months.

“I think both the US and China are starting to be a little more pragmatic when it comes to semiconductors,” Sarah Kreps, a professor and director of Cornell’s Technology Policy Lab, told Yahoo Finance this week.

After a couple of years of pandemic and supply chain issues, he noted, “Chips have almost become a third rail that these two countries don’t want to mess with.”

TAIPEI, TAIWAN - AUGUST 3: US House Speaker Nancy Pelosi (D-CA), left, poses for photos with Taiwanese President Tsai Ing-wen, right , at the president's office on August 3, 2022 in Taipei, Taiwan.  .  Pelosi arrived in Taiwan on Tuesday as part of an Asia tour intended to reassure allies in the region, as China made it clear her visit to Taiwan would be viewed negatively.  (Handout Photo/Getty Images)

Speaker Nancy Pelosi with Taiwanese President Tsai Ing-wen at the president’s office on August 3 in Taipei. (False images)

And the signals sent by the two nations seem to confirm it.

To be sure, the chances of a military confrontation continue to rise with Beijing firing missiles near Taiwan on Thursday as part of “military exercises”. The country also reacted on the economic front by blocking selected imports such as citrus, fish and other foods from Taiwan. Still, China has notably said it will continue to allow imports of semiconductors from Taiwan.

‘There is still a lot of uncertainty’

Taiwan is a world leader in the production of semiconductor chips, especially advanced chips coveted by companies in both the US and China. Taiwan Semiconductor Manufacturing Company (TSM) is the world’s largest semiconductor company, and its products power electronics around the world.

But the implications for the company could still be forthcoming.

“As we know her, [Chinese president] Xi Jinping was incredibly unhappy with this visit. [and] there is still a lot of uncertainty about the future of Taiwan,” Futurum Research principal analyst Daniel Newman, a close industry watcher, told Yahoo Finance.

But he added Wednesday that “there are kind of two debates going on” around the conflict, the first focused on semiconductors and the second focused on “the role of everything else.”

HSINCHU, TAIWAN - 09/22/2021: A person walks past a TSMC (Taiwan Semiconductor Manufacturing Company) logo on the Taiwanese semiconductor design and contract manufacturing company's building in Hsinchu.  (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)

A Taiwan Semiconductor Manufacturing Company building in Hsinchu, northern Taiwan. (Walid Berrazeg/SOPA Images/LightRocket via Getty Images)

Pelosi’s visit also came just days after US lawmakers passed the CHIPS and Science Act of 2022, which includes a provision that sends $50 billion to semiconductor companies.

The CHIPS Act represents the largest effort in years to stimulate US chip manufacturing and try to reverse the decline of the US role in semiconductor manufacturing. Chip manufacturing in the US has fallen from nearly 40% of global production in 1990 to 12% today, according to the Semiconductor Industry Association. The situation is even worse with the most advanced logic semiconductors in the world, 100% of them were made abroad in 2019.

President Joe Biden is set to sign the bill into law at a White House ceremony next Tuesday. However, experts say the effects, in the form of newly built manufacturing plants inside the US, are years away.

“The CHIPS act itself is really not going to do anything for our supply chain problem for at least two years,” says Newman.

The process of rebuilding US manufacturing capacity in space will be slow, he said, emphasizing: “We have to walk before we run.”

‘Strengthen our two economies’

While the CHIPS Act might not solve the shortage immediately, observers have noted that the final form of the bill is less likely to provoke a confrontation with China than previous versions. While previous iterations of the bill took direct aim at China and its trade practices, the final bill focuses on boosting US capabilities.

The upcoming law is also notable for allowing foreign companies to claim a portion of that $50 billion, if they put it toward new manufacturing or design within the United States.

Pelosi brought up that aspect of the CHIPS Act repeatedly during her visit to Taipei, noting how her main economic takeaway from the trip, aside from working toward a new framework for trade, was how “our CHIPS Act and Science will go a long way strengthening our two economies”.

During a press conference with President Tsai Ing-wen of Taiwan, he argued that the CHIPS Act will help the US and Taiwan “enhance our relations” in the face of Chinese aggression.

Industry leaders in Taiwan have already signaled their interest in further investment within the US GlobalWafers is eyeing a $5 billion facility in Texas, and Taiwan Semiconductor Manufacturing Company is eyeing new facilities in Arizona.

But Kreps points out that Pelosi and other US lawmakers need to remember that “Taiwan has options other than the US.” for new semiconductor plants in the coming years, especially in places like Singapore, which was another stop on Pelosi’s tour this week.

“I think the United States cannot be complacent and expect Taiwan to have an inelastic interest,” he says. “So Pelosi’s visit is likely to help reinforce the view that the relationship is a win-win and should continue.”

Ben Werschkul is the Washington correspondent for Yahoo Finance.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, flip board, LinkedIn, YoutubeY Reddit.

Leave a Comment