Taiwan: taking center stage

12/05/2020_The island of Taiwan has long been the most sensitive issue in US-China relations and is likely to take center stage in 2021. Taiwan is one of those potentially explosive topics that has never exploded and therefore isn’t much in the news. The dispute over the island’s fate has remained deadlocked for so long that Taiwan’s quandary has often been overshadowed by seemingly more-urgent troubles, such as North Korea’s nuclear ambitions, the reunification on the Korean peninsula or the border tensions between India, Pakistan and China.

For a lot of Europeans Taiwan is still relatively unknown territory. I speak from personal experience when I say some of them mistakingly believe Taiwan has been a part or a province of communist China. Others still confuse Taiwan with Thailand, no kiddin’. There is little awareness of the economical and technological importance of the island with its 23 million people and its unique and rather bizarre international status.

History of Taiwan

History shows that Taiwan (‘Formosa’) was not originally part of mainland China. The original inhabitants were aboriginal tribes and people with polynesian and malaysian roots. Before the Ming dynasty (1368–1644 AD), the island had little or no ties with mainland China. The Portuguese and the Dutch colonized Taiwan during the 16th to 17th centuries, and only under the Qing (1644–1911 AD) was the island retained forcefully as a protectorate. It was during the 17th Century that the Han Chinese gradually formed the majority of the population.  Taiwan has had a very complex and cloudy status historically, underlined by a legacy of local opposition to (Han-) Chinese rule.

Map copyright © VOA, refer https://www.voanews.com/press-freedom/taiwan-accredits-surge-foreign-reporters-some-fleeing-china

While both the Chinese communists under Mao and the nationalists (Kuomintang) under Chiang Kai-shek eventually came to claim that Taiwan was part of China, neither side highlighted or zoomed in on this topic until the end of World War II when Japan, which had colonized the island since 1895, got defeated. The Japanese empire gave up control of Taiwan but never formally handed it to any country. The nationalists fled to Taiwan in 1949 to create the Republic of China (ROC) after the communists under Mao won the civil war on the mainland and proclaimed the People’s Republic of China (PRC). Both governments claimed to represent ‘the true China’. During the Cold War the West built close ties with the ROC, which was even admitted as a permanent member of the UN Security Council, while communist China increasingly descended into isolationism under the chaotic and catastrophic policies of Mao.

Taiwan’s ambiguous international status

The status of Taiwan became a prominent issue when the PRC started to open up to the West. Beijing refused to establish diplomatic relations with countries that would (continue to) recognise the ROC. To circumvent the problem, the West opted for a socalled one China-policy, acknowledging that there was/is only one sovereign state under the name China, as opposed to the idea that there are two states, the PRC and the ROC, while also acknowledging that Taiwan was/is part of a single China. The West however did never agree to the PRC claims that Taiwan is an inalienable part of the PRC.

When the Western governments established diplomatic relations with the PRC, the ROC consequentially lost its international recognition in addition to its seat in the UN: Western countries have acquiesced in only maintaining unofficial ties to the Republic of China ever since. In this way the West could build relations with the PRC and the ROC simultaneously, while aiming for a peaceful reunification under a one country, two systems approach. Obviously Taiwan’s situation can’t really be called a matter of fairness as its international status has intentionally been kept vague. Yet the growing power and importance of the PRC and its determination to prevent international recognition of Taiwan as a sovereign entity are the realities in which the island has found itself for decades.

Taiwan Relations Act

As such, the international status of Taiwan has remained unresolved. Taiwan has evolved from a military dictatorship into an economically vibrant democracy, with a world-class high tech industry and the seventh largest economy in Asia and 22nd-largest in the world by purchasing power parity despite not officially being recognized as a sovereign state. An amazing feat. For its military protection it has relied on the assurances of the US under the socalled Taiwan’s Relations Act of 1979 issued by the US Congress, stating that “the United States shall make available to Taiwan such defense articles and defense services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capacity as determined by the President and the Congress.” For Taiwan the perennial question is: how firm is the American commitment to protect the island?

The PRC developed from a one party state with a backward economy into a one party surveillance state with an ever stronger economy thanks to its socalled open-door policy, the admittance to the WTO, the entrepreneurial skills of the Chinese people and the Western business community’s eagerness to conquer the vast China market. Several countries and companies have become dependent on this market for their economic growth. Meanwhile President Xi has reshaped the Communist government by accumulating more power than any other leader since Mao himself. He has become President for life, comporting himself as a globalist on the international stage, whilst constantly feeding his audience at home with fiercely nationalistic messages and propaganda. Constitutional democracy and universal values such as human rights have been discarded as “false ideological trends” by comrade Xi.

Geopolitical technology war

Mijngroeve.nl has extensively described how the socalled ‘US-China tradewar’ has in fact been a battle for technological dominance with serious geopolitical consequences, refer f.e. https://www.mijngroeve.nl/history/america-first-vs-china-first/ and https://www.mijngroeve.nl/history/taiwan-and-holland-sandwiched-in-the-geopolitical-technology-war/ Under Trump it grew into a rowdy clash of ‘America first versus China first’. Taiwan has been drawn into this clash as it harbors crucial players in the semiconductor supply chain, such as the world’s #1 pureplay foundry TSMC (annual revenue >$40B) and #3, UMC (>$5B annual revenue), whose customers are located in the US, Europe and the PRC.

TSMC is the undisputed leader in the foundry business, having f.e. surpassed Intel in technology development and offering the most advanced technology portfolio, enabling the production of the most sophisticated chips used in telecom networks, automotive, A.I., IoT etc. All major Western electronics companies are (in)directly supplied by TSMC. Even Huawei, China’s telecom giant, has been dependent on the Taiwanese foundry. TSMC is a prime customer for Dutch equipment vendor ASML. TSMC’ success story is on par with the Microsofts and Apples of this world, yet internationally far less known as it isn’t a consumer brand or household name.

TSMC has, in other words, what the PRC desperately wants and needs: leading edge technology and the best wafer manufacturing facilities in the world. It is Chairman Xi Jinping’s stated goal to make China self reliant in semiconductor production and overturn the Chinese dependency on foreign chips. Xi’s problem: China does not have very advanced fabs, equipment and technology processes, which are key to the further modernization of its society and army.

Even worse, its domestic #1 foundry SMIC, which is trailing TSMC by several technology nodes, is about to be put on the American blacklist for alleged ties with the Chinese military, meaning all supplies of semiconductor equipment by American vendors could be cut off. How is Xi ever going to reach his goal to become self-reliant by 2025 and build a world leading semiconductor industry if other Western semiconductor (equipment) companies would be forced to turn their back on China too?

Xi’s high-tech ambitions are under severe strain: even China’s frontrunning company Huawei will face enormous difficulties in developing future 5&6G network systems after TSMC and the American chip vendors have stopped the supply of their indispensable chips in observance of the latest American export restrictions issued this year.

Taiwanese know-how

The CCP has tried to realize Xi’s goals by attracting Taiwanese engineers to come and work on the Chinese mainland for Chinese high-tech companies and by using their expertise to upgrade China’s own fabs and industry. Lured by attractive salaries thousands of Taiwanese engineers have moved to China over the past decade. To better serve the Chinese market TSMC and UMC did also agree to set up joint-ventures in China, transferring their technology processes to the mainland, though the Taiwanese government made sure the most advanced process would never be exported.

Another CCP policy has been to employ high-level Taiwanese executives to support the PRC’s efforts to build its own semiconductor industry. Two remarkable examples: Dr. Sun, ex-UMC CEO, who joined China’s state-owned Tsinghua Unigroup, the driving force behind China’s semiconductor modernization plans, and who was recently appointed as president and CEO for the Wuhan Xinxin Semiconductor Manufacturing (XMC) fab. The other: Chiang Shang-Yi, former TSMC COO and longtime right-hand man of TSMC founder, CEO and Chairman Morris Chang, who became SMIC boardmember in 2016 and was appointed as CEO of Wuhan Hongxin Semiconductor Manufacturing Company (HSMC) in 2019.

Taiwanese execs

These moves of high level Taiwanese executives to Chinese fabs were notable in view of Xi’s rise to power and his objective to make China the dominant force in high-tech and in the context of his aggressive posture towards Taiwan, even threathening to take the island by force if the Taiwanese population would not agree to “a peaceful re-unification”. Xi has presented himself to his domestic audience as the ultimate defender of China’s national interests and the man who will make China and its army great again, who will realize the China dream: to create the ‘Greater China’, which will dominate the world. refer https://www.mijngroeve.nl/history/van-kemenade-china-inc/ and https://www.mijngroeve.nl/history/the-unravelling-of-the-china-dream/

What has been the motivation for these Taiwanese execs to help build Xi’s dream? Was it purely the money or a strong conviction of being able to make a valuable contribution to regional stability by co-operating in China’s development? Or an implicit political statement in favor of a (peaceful?) re-unification of Taiwan with communist China? Or a deepfelt wish to restore China to its former glory and give it ‘its rightful place’ in history?

These execs were never questioned about their motives nor did their career moves generate a lot of discussion in Taiwanese society, until recently that is. Xi’s unilateral overthrow of ‘the one country two systems’ approach for Hong Kong and the escalating geopolitical technology war between the US and China are having a serious impact on Taiwan and could make it much more precarious for Taiwanese execs to move to mainland Chinese competitors in the future.

If the EU would restore relations and multilateral cooperation with the US under Biden, a more united Western front in limiting the PRC’s access to Western technology could emerge, making Xi’s China fab dreams look more and more like an illusion. Could the latest news about XMC fab plans having gone up in smoke -with the Taiwanese CEO Shang Yi seeking refuge in the USA (!)-, be a forebode of what’s awaiting China’s semiconductor industry in the coming year(s)?….The Tsinghua group is said to be in serious financial troubles too…

TSMC & UMC

TSMC and UMC have started to take note of the changing geopolitical circumstances. As mentioned, TSMC has completely stopped its shipments of advanced chips to Hi-Silicon/Huawei. Next it has committed to build and operate an advanced semiconductor fab (5nm process) in Arizona after Trump and the US Congress got very worried by the American dependence on TSMC’ fabs in Taiwan, located in that highly volatile South China Sea region. The foundry has also decided to put extensive security protocols in place in its China fabs, in response to growing concerns of the American and Taiwanese government over Chinese spying. While TSMC currently has no intention to stop its operations in China, it simultaneously is very mindful of the great importance of protecting its reputation in the US as a fully reliable supplier.

UMC has recently settled a business espionage lawsuit brought by the U.S. Department of Justice (DOJ) by agreeing to pay a $60M penalty. As described in mijngroeve.nl before, the DOJ prosecuted an intellectual property theft case against UMC and Chinese memory manufacturer Fujian Jinhua Integrated Circuit Co Ltd (JHICC) in 2018, charging UMC with helping JHICC in an attempt to illegally acquire DRAM manufacturing technology from U.S. chipmaker Micron Technology Inc. No doubt the American and Taiwanese authorities have had intensive communication behind the scenes on how to deal with this sensitive case. The Taiwanese government surely doesn’t want its industrial giants to be perceived or depicted in the US as conduits for mainland Chinese spying and IP theft. Nor does it want to see these corporate giants disintegrate under American court cases and fines.

Court cases

Taiwanese prosecutors decided to launch their own probe into the alleged industrial espionage and charged UMC and three UMC employees, citing violation of Taiwan’s Trade Secrets Act for sharing the information with JHICC. After more than two years of court hearings, these employees were sentenced to several years in prison, while UMC had to pay a fine of ~$4M, as per Taiwanese court’s decision in June 2020. A related case by Micron is still running in the American courts and likely to result in a much higher fine for UMC…Ironically the JV in China has never gone into operation, whereas costing a lot of money in preparations and fines…

These court cases and related developments serve as a strong warning to Taiwanese semiconductor executives who are still pondering a career move to mainland China or whose companies are active in the Chinese high-tech market. As the geopolitical technology war between the US and China is likely to last under Biden, they had better think twice over their (personal/corporate) activities and investments in or with China. Unethical behavior could ultimately result in US and Taiwanese lawsuits and even in prison sentences.

The big unknown is what Biden’s policy towards the island of Taiwan will be. The on-going geopolitical technology war is touching upon the question of the validity of the One China policy and the benefits of the ambiquity surrounding Taiwan’s international status. As the world is gradually falling apart into two technology spheres and Taiwan is increasingly put into the spotlights, the choices and behavior of Taiwanese high-tech execs and companies will receive more American and international (media) attention.

A too cosy relationship with China could lead American Congress members to question the wisdom and benefits of offering Taiwan military protection, given the strong links between economy, technology and security. At the same time, asking democratic Taiwan to side with the US in the escalating geopolitical technology war without offering candid support for its wishes for more international visibility, could lead Taiwanese to question America’s and the West’s true commitment to uphold democracy in Asia.

One-China Policy of the West

Xi’s unilateral overturning of the ‘one country two systems’ principle in Hong Kong, does undermine the validity of the one-China approach implemented by the West since the ’70’s as well. All US Congress members have expressed great worries about Beijing’s policies in Hong Kong and its expansion of influence. In the eyes of the Chinese Chairman, the principle apparently equals to just one country, one system = the PRC = CCP = Xi.

If Xi doesn’t stick to the rule, why should the West? With Biden at the helm in 2021, the EU has expressed its strong wish to restore transatlantic ties and build stronger alliances with democratic countries in the Asia Pacific region to counter or contain China. How will this play out for the American and European approach towards Taiwan, a key pawn in the geopolitical technology war?

A week ago the Dutch Foreign ministry issued a report titled ‘a guide for the reinforcement of the Dutch and EU cooperation with partners in_Asia’, which says: “The Netherlands would benefit from closer cooperation – both bilaterally and within the EU – with the countries in the region, in particular with like-minded democracies and open market economies, which, like the Netherlands, are committed to effective multilateralism and an interest in a well-functioning international legal order.”

Dutch Foreign Ministry report

The report describes ways to counterbalance China’s growing influence in the region and expresses concerns over China’s aggression in the South China sea: “In that context, the EU must express itself more often and more strongly on developments in the South China Sea that are in conflict with the United Nations Convention on the Law of the Sea (UNCLOS). The EU could participate as an independent observer or advisor in the negotiations between China and ASEAN on the Code of Conduct on the South China Sea. The EU can also play a supporting role in the implementation of the code of conduct”

All very noble aspirations of course. Yet tellingly the report is not making any mention of the China-Taiwan (re-unification) issue nor does it name Taiwan itself as an important democracy in Asia, as the Dutch cabinet is strictly adhering to the one-China policy. But not mentioning Taiwan, doesn’t make the Taiwan issue disappear. China’s military build up in the South China sea is meant to intimidate Taiwan and probe the West’s response and resilience. Taiwan could turn into the ultimate test for Washington, The Hague and Brussels in their pledges to stronger support democracy in Asia. While Blok and Biden probably prefer to maintain/prolongue the strategic ambiquity regarding Taiwan’s international status, the effectiveness of this approach could be challenged if Xi doesn’t tone down his aggressive stance towards the island.

The DPP

The US and the EU will for the time being continue to profess support for a peaceful resolution through dialogue between Beijing and Taipei and insist on no unilateral changes in the status quo, and no provocations by either side… Yet the West can’t ignore the fact that Taiwan’s democratic society is more and more intent on charting its own course, with a greater number of its citizens critical of communist China and identifying themselves as Taiwanese, as opposed to Chinese. This tendency has filtered into Taiwan’s politics, with President Tsai Ing-wen of the DPP, the pro-independency group, having been re-elected earlier this year, whilst her party managed to keep the majority in Parliament. Though the DPP is not openly and actively advocating independence or Taiwanese sovereignty, for the party and its supporters “the one country two systems” policy still propagated by the PRC as a solution for Taiwan’s sovereignty issue has lost all of its appeal. The DPP ultimately is aiming for a seperate identity for the island.

The DPP is keen to establish closer relationships with the West and increase Taiwan’s international visibility. Will the West reciprocate by building closer ties with the island to express support for its achievements and stand by its democracy? It could become one of the major challenges for the incoming President Biden and the EU in the coming years, in particular if Xi’s frustration over his failing high-tech policies and growing international isolation would boil over.

The PRC view on the Taiwan issue

In communist China Taiwan’s status as an alleged ‘inalienable part of a historic China’, and as a lingering symbol of China’s historic victimhood, is an unquestionable article of faith and self-evident truth that resonates deeply with an overwhelming number of Chinese citizens, including overseas expats. I have not met any mainland Chinese who thinks or dares to say otherwise as it would result in being classified as unpatriotic, the greatest crime to commit in the ‘China first era’ under Xi. The CCP’s relentless propaganda machine has done its job over the past 70 years.

Taiwan will be the true test of Xi’s repeated claims for ‘a shared human destiny’ and does offer him the best chance to demonstrate his willingness to be really part of a world order based on international law and peaceful co-existence, though he has already dramatically failed this test with respect to Hong Kong. A forceful occupation by the CCP of Taiwan can therefore never be ruled out, no matter how unimaginable, risky or bloody such a communist attack may sound.

A re-unification with Taiwan would constitute the final piece in China’s attempts to overcome the legacy of its “century of humiliation”, the dark period of colonization by foreign powers which the CCP’s propaganda has never stopped reminding its population of. Such a re-unification would provide Xi the additional benefit of getting access to the world’s most advanced technology. But a peaceful re-union is unlikely anytime soon due to the very diverging political trends on both sides of the Taiwan straits.

The battle over Taiwan

As was written by Michael Schuman in The Atlantic; “If Beijing does dare to attack the island, what happens next may well determine whether China or the U.S. reigns supreme in the Pacific. Failure by Washington to stand by Taiwan would potentially unravel the Western alliance system in the region, and destroy American power along with it. The battle over Taiwan may be a Cold War relic, but it will shape the future.” (refer https://www.theatlantic.com/international/archive/2020/10/taiwan-us-china-donald-trump/616657/)

Before going to the EU and Washington, the Dutch Minister of Foreign Affairs better revisit his report on the guidelines for the reinforcement of the Dutch and EU cooperation with democratic partners in Asia and prepare a few paragraphs on the relationship with Taiwan and how to deal with the China – Taiwan (sovereignty) issue taking into account all possible scenario’s under Chairman Xi. The Dutch & EU’s inaction following Xi’s trampling of the Sino-British Joint Declaration on Hong Kong should be a stark warning and lesson learned.

Whereas the question who represents the true China has never been answered, the answer to the question who represents a democratic China shouldn’t be too difficult for even Blok to figure out. The Dutch Foreign Minister and his European colleagues must quickly come up with a way of defining a much more cautious approach to economic engagement with the non-democratic PRC, while extending ties with democratic countries – including Taiwan– around the People’s Republic.