On September 23, Taiwan’s Ministry of Economic Affairs announced that it would restrict exports of semiconductors to South Africa. The announcement came amid a year-long diplomatic spat between Taiwan and South Africa over the relocation of the Taipei Liaison Office, Taiwan’s de facto embassy in the country, from Pretoria, the administrative capital, to Johannesburg. The South African government’s request was viewed as a move to downgrade South Africa-Taiwan relations and was likely due to Chinese pressure on Pretoria.
Two days after the announcement, the Ministry of Economic Affairs rescinded the export restrictions after South Africa requested further negotiations regarding the relocation of the Liaison Office.
The incident was not the first time the Taiwanese government has placed export restrictions on its semiconductors. In 2022, Taipei joined the United States and its allies in sanctioning Russia, preventing the export of chips to the country after it invaded Ukraine. However, the episode with South Africa marks the first time that Taiwan has actively and unilaterally utilized its unique position in the global semiconductor supply chain to engage in economic coercion and advance its own diplomatic interests.
Taiwan, as a leading foundry hub, currently manufactures around 60 percent of semiconductor chips worldwide, and 92 percent of advanced logic chips – chips under 10 nanometers critical for “paradigm-shifting technologies” such as quantum computing and artificial intelligence – as well as wide-ranging consumer products including consumer electronics like smartphones. The majority of these chips are made by Taiwan Semiconductor Manufacturing Co. (TSMC).
Details are still scarce about why Taipei agreed to pause the export restrictions. It could be a sign of Taiwan’s uncertainty in weaponizing its most valuable product. The mere threat of cutting off semiconductor supplies is a potent action. It is particularly notable that South Africa agreed to restart negotiations, given that Taiwan only exported around $4 million worth of the products on the restricted goods list to South Africa last year.
The episode highlights the potential for Taipei to engage in economic coercion through the use of semiconductor exports. To date, Taiwan has not used the negative tools of economic statecraft, including sanctions and export restrictions, heavily. When it does, Taipei usually acts in alignment with its allies or with the international community. For instance, despite not being a member of the United Nations, Taiwan currently adheres to sanctions implemented by the U.N. Security Council.
When it comes to unilateral relationships, Taiwan has traditionally preferred to use economic inducements to win over other countries, employing so-called “dollar diplomacy” through investments, foreign aid, and even, on occasion, bribes. However, as China’s economic and geopolitical influence surged in the late 20th and early 21st centuries, Taiwan’s efforts to utilize economic inducements to achieve recognition have been increasingly stymied. In 2023, after Honduras switched its diplomatic recognition from China to Taiwan, then-Taiwanese president Tsai Ing-wen remarked that Taipei would “no longer engage in a meaningless contest of dollar diplomacy with China.”
In more recent years, Taiwan has emphasized a value-based approach to diplomacy. By emphasizing its record on human rights, democracy, and protections for minorities and marginalized groups, Taiwan has positioned itself as a “good global citizen.” Through this strategy, Taiwan aims to gain recognition, or at least establish relatability, through its soft power.
Even as Taipei relies on positive forms of statecraft, its economic position opens up the possibility of more coercive measures. Taiwan’s dominance in chip fabrication gives it critical economic leverage over friends and foes alike. More importantly, unlike many manufactured goods, substitutes for the semiconductors that Taiwan produces are extremely limited. In the short term, it is unlikely that countries targeted by export restrictions would be able to find alternative suppliers that meet their semiconductor needs in both quality and quantity. From an economic sanctions perspective, this makes export restrictions on semiconductors particularly formidable.
With its foray into leveraging chips for coercion, Taiwan has opened the door to a new option for its economic statecraft, signaling a willingness, however tentative, to use sticks, in addition to carrots, to safeguard its foreign policy interests. While it promises to be a potent tool of coercion, Taipei must exercise caution in weaponizing its influence over semiconductors. Lessons could be drawn from other countries’ use of export restrictions, particularly in critical minerals.
The critical minerals supply chain shares important characteristics with that of semiconductors. Critical minerals are also not easily substitutable, and their supply chains are highly concentrated at two stages: refining and processing. This makes the critical minerals supply chain especially vulnerable to supply shocks. Further, since the early 2020s China has utilized its chokehold position in this supply chain for leverage, most recently imposing restrictions on its rare earth exports in what was viewed as a response to U.S. tariffs.
Due to these vulnerabilities, countries have worked to diversify their critical minerals supply chain through securing alternative sources or turning inward. The United States has been active in investing in critical mineral ventures, both at home and abroad, as well as participating in ventures such as the Minerals Security Partnership. Similarly, the United Kingdom is restarting discussions of a trade deal with Greenland to secure access to the region’s rare earth elements in an effort to diversify away from Chinese critical minerals.
Attempts to diversify the critical minerals supply chain predate China’s usage of critical minerals export bans as coercive leverage. The U.S., for instance, finalized the Canada-U.S. Joint Action Plan on Critical Minerals Collaboration in 2020. These earlier efforts were driven by the economic importance of critical minerals, including their integral roles in advancing energy technology and their centrality to national security.
Cognizant of the vulnerability induced by highly concentrated production of chips, which are of crucial importance in national security and economy, governments such as the U.S., EU, the U.K., etc. have also taken steps to ensure the resiliency of their semiconductor supply chains. Due to Taiwan’s precarious geopolitical position, the threat of a potential supply chain shock is even more pronounced.
With the episode with South Africa, Taiwan has signaled that it is at least interested in exploring the use of semiconductor exports as coercive leverage to achieve foreign policy goals. Just as China’s use of export restrictions on its critical minerals has supercharged concerns about the resiliency of the critical minerals supply chain, this action could further heighten other nations’ concerns about the security of the semiconductor supply chain and hasten already active efforts to diversify away from Taiwanese manufacturers.
Although Taiwan still currently dominates chip fabrication, the competition in chip manufacturing has been increasing. In July, Samsung secured a multi-year deal with Tesla to produce the next generation of AI chips, which will be used in the car company’s driving hardware suite, establishing itself as TSMC’s strongest competitor.
Diversification away from Taiwan is not pre-ordained, however. Taiwan’s dominance in semiconductor fabrication, earned through decades of investment in infrastructure, talent, and research and development, is still difficult to usurp. Furthermore, and more critically, Taiwan has and would undoubtedly continue to work hard to maintain the majority of semiconductor production domestically. The semiconductor industry not only contributes to around 14 percent of the island’s GDP, but also provides a crucial geostrategic advantage. The potential economic fallout from disruptions in semiconductor fabrication provides Taiwan with the “silicone shield.” The shield serves as an incentive for other countries to intervene in the event of Chinese aggression.
Politicians and Taiwanese citizens alike recognize the centrality of the semiconductor industry to Taiwan’s national security. A poll carried out earlier in the year by the Foundation for the People found that over 80 percent of the Taiwanese surveyed believed that the semiconductor industry is Taiwan’s “Guardian Mountain,” and over 60 percent agreed that the industry provides a “silicon shield” that would induce intervention in the event of a Chinese invasion of the island. Because of this, despite intense pressure from the United States, Taiwan has thus far rejected more drastic proposals to move or invest in semiconductor production in North America, including a recent proposition to split chips production “50-50” with the U.S.
It is still too early to tell what, if any, impact this dispute between Taiwan and South Africa will have. If Taiwan’s goal was to signal its willingness to use export restrictions as deterrence, then the signal has been received. In the future, however, as tempting as it is to utilize semiconductor export restrictions to achieve foreign policy goals, and as effective as the tool may be, Taiwan must also be mindful of the pitfalls that come with such coercive policies. Export restrictions, like other instruments of economic sanctions, can be overused. When that happens, Taiwan may find its coercive leverage diminished, as targeted countries find workarounds or, even more concerningly, diversify away from Taiwanese semiconductor chips. It is therefore vital to use such coercive leverage cautiously and with a clear objective in mind.