Alexander Neill

.The world’s most sophisticated semiconductor supply chain may come under threat as tensions rise across the Taiwan Strait

In 2005, Beijing opened the floodgates of high-tech economic engagement with Taipei, prompting bilateral trade to flourish for more than a decade. Taiwan became the world’s top manufacturer of silicon chips, with companies like Taiwan Semiconductor Manufacturing Company (TSMC) at the forefront of semiconductor nanotechnologies. According to market estimates, Taiwan makes 60 percent of the world’s semiconductors and 90 percent of the most advanced ones that power everything from consumer electronics to defense industries.

But shifts are taking place, with nations such as the United States and China seeking to reduce reliance on Taiwanese manufacturers.

Economic incentives drove Taiwanese investors to establish production lines in mainland China and the U.S. Still, the island of 24 million people retains production of the world’s most sophisticated silicon chips.

Beijing’s strategy is one of economic absorption: to bind Taipei so inextricably to mainland China that the Taiwanese independence movement fades into irrelevance. Meanwhile, China would benefit from access to sophisticated high-tech supply chains. This integration became a crucible for the digital revolution fueled by Taiwanese semiconductor innovation. Taiwanese chips, components and software have fueled a global supply chain driving the Fourth Industrial Revolution.

The strategic importance of Taiwan’s semiconductor industry gave rise to the Silicon Shield concept. The theory is that Taipei’s indispensable role in the global digital economy would deter Beijing from going to war to force the island to reunite with the mainland. As tension in the Taiwan Strait grows and China invigorates its Digital China strategy, the concept of Taiwan’s Silicon Shield has been called into question.

The centrality of Taiwan’s semiconductor industry and “golden egg” companies like TSMC prompt two fundamental questions for the stability of the Taiwan Strait and the future of global supply chains. First, is the Silicon Shield simply an unrealistic hope that economic interdependence can prevent war? Second, can Taiwan’s role in global semiconductor supply chains mitigate conflict?

China’s digital strategy

The current regional tension is in stark contrast to the rapprochement that took place during former Taiwanese President Ma Ying-jeou’s 2008-2016 tenure, when economic integration and the benefits of joint research and development created unprecedented engagement between Taiwan and the mainland. Remarkably, this conciliatory period took place at a time when the People’s Liberation Army (PLA) modernized at an extremely rapid pace.

Underpinning the PLA’s modernization drive was the need to fight and win wars under “informationized” conditions, a posture advocated by the late Chinese leader Jiang Zemin two decades ago. Along with burgeoning demand in civilian commercial supply chains, the PLA has developed a colossal appetite for the most sophisticated semiconductors. Ironically, while Taiwan’s semiconductor industry may have served as a Silicon Shield against Chinese aggression, it has also helped transform the PLA into a modern fighting force.

Digital China, a recent reportby the Pacific Forum think tank in Honolulu, highlights growing concern in the U.S., Europe and the Indo-Pacific about China’s technology policies under President Xi Jinping. The report tracks Mr. Xi’s strategy over the past decade and its acceleration during the Covid-19 pandemic. The report concludes that Digital China is designed to give China a competitive edge over the West through the digital transformation of rules, institutions and infrastructure.

President Xi seeks to challenge what he views as a hegemonic global system anchored to the status quo with Taiwan’s semiconductor industry at its heart. This has deep implications for great power competition, China’s development and the norms that underpin the international rules-based system. Notably, President Xi is pursuing innovation not only to foster Beijing’s rise, but also to challenge the West. The Pacific Forum report further observes that this strategy is a litmus test for China’s ability to nurture digital innovation.

In early March, China’s state media reported that a national effort is taking off to boost China’s semiconductor industry and attract foreign talent. China’s Global Times reported on March 3 that Chinese Vice Premier Liu He had examined integrated circuit companies, chairing a symposium where he called for the mobilization of national resources in the industry’s development, and vowing to recruit foreign experts to achieve technology breakthroughs.

Vice Premier Liu’s mobilization call heralds renewed initiatives within the recent National People’s Congress, where President Xi gave another boost to the domestic semiconductor industry. The nomination of key figures in China’s semiconductor sector as delegates to the Congress and the China National People’s Consultative Conference underscores a shift in emphasis in recent years away from internet entrepreneurs.

Facts & figures

Tight bonds, high tensions

To counter tightening sanctions by the U.S., a campaign to rejuvenate the Chinese semiconductor sector has emerged. Sanctioned company Yangtze Memory Technologies Co. (YMTC) received a $7 billion capital boost from state-backed investors, nearly doubling its registered capital to over 105 billion yuan ($15 billion).

Taiwan’s centrality in semiconductors has prompted the U.S. and its allies to also develop countermeasures. The offshoring of TSMC production lines to the U.S. is a hedge against possible threats to the semiconductor fabrication base in Taiwan.

Taiwan’s political opposition, the Kuomintang (KMT), has suggested that a brain drain to places like the U.S. state of Arizona is damaging the country’s Silicon Shield. A new TSMC production line opened by President Joe Biden in Phoenix has already been described as a “Little Taiwan.” Opposition legislator Chiu Chen-yuan recently raised concerns that Taiwan’s semiconductor industry was being hollowed out. Rupert Hammond-Chambers, the president of the Taiwan-U.S. Business Council, has also warned that international investors exiting Taiwan could increase the likelihood of an attack by China.

Taiwan’s Economic Affairs Minister Wang Mei-hua countered that TSMC has a “complete supply chain in Taiwan,” difficult to replicate, and that the most advanced technology would remain on the island.

This debate mirrors the geopolitical divide that may force Taiwanese companies to choose sides between China or democracies. Will they embrace the next phase of Digital China or diversify through offshoring in Japan, the U.S., Europe and the Association of Southeast Asian Nations?

Facts & figures

Tensions rise in Asia-Pacific

Scenarios

If the mainland were to attack Taiwan – either with an amphibious invasion or with a missile barrage – TSMC could cease operations, possibly permanently, depending on the nature of the war. Given both U.S. and Chinese dependence on TSMC’s chip fabrication capabilities, and Taiwan’s current dominance, world supply chains in high-tech goods would be heavily damaged for several years.

China’s economy would also suffer, but any decision to force Taiwan to unify with the mainland would ultimately be driven by politics, not economics. Given the integrated nature of TSMC’s production capabilities in the U.S. and Europe, a global recession in the semiconductor market and a wider economic slowdown would ensue.

Some worry about China specifically targeting Taiwanese semiconductor plants to disable the island’s ability to make chips altogether. In this unlikely event, China’s ability to produce silicon chips would have to approach parity with TSMC’s. It would also have to be supported by an intricate and secure independent supply chain. U.S. and Taiwanese war games have reportedly played out scenarios that envisage the sabotage of fabrication plants and the evacuation of specialist engineers to offshore production facilities.

Three main scenarios are worth watching.

One is that war is coming. Former U.S. deputy national security advisor Matt Pottinger has recently dismissed the idea that Taiwan’s Silicon Shield would deter China. Rather, he argues that Taiwan’s coveted preeminence in semiconductors serves as a casus belli for hardliners in Beijing. In this scenario, the temptation to seize Taiwan’s semiconductor sector and achieve digital hegemony would only embolden Beijing to invade the island. This is the second most likely scenario and accepts the premise that China and the U.S. are preparing for war before 2027.

Another is that cooperation will prevail. Richard Cronin, in a Stimson Centre study of Taiwan’s Silicon Shield, has suggested that the U.S. could lift some sanctions and export bans against China in return for a commitment from Beijing to adopt a less threatening posture. This scenario would require the Digital China strategy to become a more cooperative than competitive gambit. This is the least likely scenario. China has continued to build its missile arsenal targeting Taiwan and has consistently refused to discuss military deescalation with Taiwan.

There may be a third way for Taiwan to mitigate the conflict with China and keep the digital golden goose: accepting Mr. Xi’s Digital China vision (with security caveats) while also spreading semiconductor production lines around the globe. This would perpetuate Taiwan’s crucial role in the global economy and help ease tensions in the Taiwan Strait. This is the most likely scenario.

(Source: Gis Reports Online)

The Associated Press

Key Indian opposition leader Rahul Gandhi has lost his parliamentary seat after a court found him guilty of defamation over his remarks about Prime Minister Narendra Modi’s surname and he was disqualified from the lawmaking body, a parliamentary statement said on Friday.

Gandhi, who represented a constituency in southern Kerala state as a member of the Congress party, was disqualified from his membership in the lower house of Parliament from March 23, the date of his conviction, the statement said.

Indian parliamentary rules say that a member loses his or her seat if convicted of a crime and sentenced to two or more years in prison.

A court in the western city of Surat sentenced Gandhi to two years in prison on Thursday in the defamation case. But he won’t go to jail immediately because the court granted him bail for 30 days to file an appeal against the verdict. If an appeals court sets aside Gandhi’s conviction, he can get his seat back.

Gandhi briefly visited the Parliament on Friday morning.

Several opposition leaders blocked proceedings in Parliament on Friday and later tried to march to the president’s palace in support of Gandhi, holding a sign that read: “Democracy in danger.”

‘”We fought British, we will fight RSS/Modi,” read other placards they carried. The RSS, or Rashtriya Swayamsevak Sangh, is the ideological mentor of Modi’s Hindu nationalist Bharatiya Janata Party.

“The country is witnessing a rule of autocracy,” said A. Raja, an opposition lawmaker.

Police blocked the demonstrators with barricades outside Parliament and whisked them away in buses to a nearby police station. They are expected to be freed later Friday.

The case against Gandhi dates back to an election rally in 2019 when he said: “Why do all thieves have Modi as their surname?” In the speech, he went on to name fugitive Indian diamond tycoon Nirav Modi, banned Indian Premier League boss Lalit Modi and Narendra Modi.

Narendra Modi is not related to either of the other two.

The defamation case was filed by a leader of the ruling Bharatiya Janata Party in western Gujarat state. The complainant, Purnesh Modi, said Gandhi’s comments had “defamed the entire Modi community.”

Modi is a common last name in western Gujarat state.

Mallikarjun Kharge, president of the Congress party, said Gandhi would appeal the verdict in a higher court and called Modi’s government “cowardly and dictatorial.”

After the verdict, Gandhi wrote on Twitter: “My religion is based on truth and non-violence. Truth is my God, and non-violence the means to get it.”

Gandhi is one of India’s main opposition leaders and he will most likely go up against Modi when the prime minister seeks a third term in 2024.

Also Friday, 14 political parties filed a petition in India’s top court alleging that Modi’s government was misusing government investigation agencies against opposition leaders for alleged financial crimes.

Abhishek Manu Singhvi claimed that 95% of probes by government agencies are against opposition leaders.

The Supreme Court said it will take up the petition on April 5.

(Source: NPR)

Jessie Yeung, CNN

For the past decade, China has lent massive sums to governments across Asia, Africa and Europe, growing its global influence through its Belt and Road infrastructure megaproject and becoming one of the world’s biggest creditors.

Now, a new study says Beijing has also become a major emergency rescue lender to those same countries, many of which are struggling to repay their debts.

Between 2008 and 2021, China spent $240 billion bailing out 22 countries that are “almost exclusively” Belt and Road project debtors, including Argentina, Pakistan, Kenya and Turkey, according to the study published Tuesday by researchers from the World Bank, Harvard Kennedy School, Kiel Institute for the World Economy and the US-based research lab AidData.

Though China’s bailouts are still smaller than those provided by the United States or the International Monetary Fund (IMF), which regularly makes emergency loans to countries in crisis, it has become a key player for many developing countries.

Beijing’s rise as an international crisis manager looks familiar: The US has taken a similar strategy for nearly a century, offering bailouts for high-debt countries such as those in Latin America during the 1980s debt crisis, the report said.

“We see historical parallels to the era when the US started its rise as a global financial power, especially in the 1930s and after World War 2,” it said.

But there are differences, too.

For one, China’s loans are far more secretive, with most of its operations and transactions concealed from public view. It reflects the world’s financial system becoming “less institutionalized, less transparent, and more piecemeal,” the study said.

China’s central bank also doesn’t disclose data on loans or currency swap agreements with other foreign central banks; China’s state-owned banks and enterprises do not publish detailed information about their lending to other countries.

The research team instead relied on annual reports and financial statements of other countries that have agreements with Chinese banks, news reports, press releases and other documents to compile their dataset.

“Much more research is needed to measure the impacts of China’s rescue loans – in particular, the large swap lines administered by the PBOC (People’s Bank of China),” said Brad Parks, a co-author of the study, in a blog post by AidData. “Beijing has created a new global system for cross-border rescue lending, but it has done so in an opaque and uncoordinated way.”

China’s loans

In 2010, less than 5% of China’s overseas lending portfolio supported countries in debt distress, according to the report.

By 2022, that figure had soared to 60% – reflecting Beijing’s ramping up of rescue operations and stepping away from the infrastructure investments that had characterized its Belt and Road campaign in the early 2010s, it said.

Most of the loans were made in the last five years of the study, from 2016 to 2021.

Of the $240 billion in total bailout loans, $170 billion came from the PBOC’s swap line network – meaning agreements between central banks to exchange currencies. The other $70 billion was lent by Chinese state-owned banks and enterprises, including oil and gas companies.

Most of the countries drawing from China’s swap lines were deep in financial crisis, with problems exacerbated by the Covid-19 pandemic, the report found.

For instance, Argentina defaulted in 2014 and 2020 after struggling for decades with its national debt. Meanwhile, Pakistan saw its currency crash as foreign exchange reserves dwindled.

Sri Lanka also borrowed money from China in 2021 – before its economic and political crisis boiled over the following year, with basic goods like fuel and medicine rationed and crowds taking to the streets in violent protests.

But China’s bailouts don’t come cheap. The PBOC requires an interest rate of 5%, compared to 2% for IMF rescue loans, the study said.

And most of the loans are extended to middle-income countries considered more important to China’s banking sector, whereas low-income countries get little to no new money and are offered debt restructuring instead.

“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” said study co-author Carmen Reinhart in the AidData post.

Belt and Road Initiative

For a decade, Beijing’s Belt and Road Initiative has poured billions of dollars into infrastructure projects each year: paving highways from Papua New Guinea to Kenya, constructing ports from Sri Lanka to West Africa and providing power and telecoms infrastructure for people from Latin America to Southeast Asia.

First announced in 2013 under Chinese leader Xi Jinping, the initiative has been seen as an extension of the country’s sharp ascent to global power.

As of March 2021, 139 countries had signed up to the initiative, accounting for 40% of global GDP, according to the Council on Foreign Relations, a US think tank. BRI has reached nearly $1 trillion in Chinese investment, according to China’s foreign ministry.

But funding shortfalls and political pushback have stalled certain projects, while others have been marred by environmental incidents, corruption scandals and labor violations.

There is also public concern in some countries over issues like excess debt and China’s influence. Accusations that Belt and Road is a broad “debt trap” designed to take control of local infrastructure, while largely dismissed by economists, have sullied the initiative’s reputation.

CNN has reached out to PBOC for comment.

In January, Chinese Foreign Minister Qin Gang rejected the accusations of China creating a “debt trap” in Africa, a major recipient of Belt and Road investments.

In a statement citing Qin, the ministry claimed “China has always been committed to helping Africa ease its debt burden,” and pointed to Beijing’s debt relief agreements with a number of African nations.

Qin defended BRI again earlier this month, calling it a “public good.”

“China should be the last one to be accused of the so-called debt trap,” he said, blaming US interest hikes for worsening debt in developing countries.