Taiwan – What Everyone Should Know

Published on March 02, 2021, 10:59 pm
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Taiwan is the most important source of conflict between America and China. It is also a major source of investment opportunities. Consider the following.

The Global Tech Economy depends on Taiwan. Taiwan Semiconductor Corporation (TSMC) in particular. The majority of major American semiconductor companies, including Apple, Nvidia, Qualcomm and Applied Materials rely on TSMC (along with Samsung) to manufacture their chips. But there are so many Taiwanese tech firms including chip manufacturing foundries UMC and Wistron, Apple smart phone assemblers Foxconn and Pegatron and chip designer Media Tek.  Taiwan is teeming with tech on a level comparable to Silicon Valley and Israel. If somebody dropped a bomb on Taiwan and wiped out all the tech firms, the world economy would come to a halt.

China will never give up its claim that Taiwan  is part of China. Would America give up Hawaii to separatists? Did Abraham Lincoln let the South secede? The American China hawks see China as governed by an evil, globally aggressive Communist dictatorship. I would pose the following hypothetical (highly improbable) scenario. Suppose the Communist regime was replaced by some democratic regime more to the liking of the China hawks. Would China then give up its claim on Taiwan? I would argue NEVER. In its thousands of years of history, Chinese dynasties rise and fall over hundreds of years. The “Communist dynasty” is in a rising phase and is reasserting what it believes—and most Chinese believe – is China’s rightful place in the world. A non-Communist Chinese dynasty would assert the same. No self-respecting Chinese—Communist or no—is going to give up Taiwan.

If America pushes China far enough, China will attempt to invade Taiwan. The Trump Administration pushed China very hard. It went out its way to offend China by sending high level diplomats to Taiwan as if it were a sovereign country. It also stepped up arms sales to Taiwan. But the most egregious American act from the Chinese viewpoint has been the embargoes on semiconductors. In particular, Taiwan Semi was prohibited from making chips for Huawei thus torpedoing that company’s smart phone business. This embargo was carried out by America abusing the role of the dollar as a reserve currency. If Taiwan Semi did not obey American commands, it would be cut off from the use of the dollar. Thus China was prohibited from buying essential semiconductor chips from a company headquartered in one of what it considered its own provinces. Semiconductors are essential for China’s modernization efforts. One is reminded of the US/UK embargo of oil and other commodities to Japan before WWII. The Japanese felt cornered and worried about its military running out of fuel and supplies. The result was the Japanese attack on Pearl Harbor and the British Empire in Asia. A disaster for Japan. And a disaster for the US and the UK. Further restrictions on Taiwanese chip exports to relieve the current global chip shortage would be an additional irritant to China.

If China invades Taiwan and America chooses to intervene, it is possible China would win. In 1949 when the Communists took over China, the new regime did not have a navy. Then in 1950 during the Korean War the American Seventh Fleet stood guard in the Taiwan Straits. But things are different today. China has satellites, aircraft carriers, missiles, etc. – a whole panoply of modern weapons. And with Taiwan it has the home court advantage. Don’t confuse the Chinese military with the third world military like that of Iraq’s that rolled over with shock and awe. The US has not formally committed to intervening in response to a Chinese attack on Taiwan. But if it does intervene the outcome is far from certain. Recently, the esteemed futurologist George Gilder predicted the Chinese would sink the American carriers and win. (He also predicted the war for Taiwan would not go nuclear. I wonder about that.) Is Gilder right and China would win? We don’t want to find out. 

Taiwan’s value is its brains. Suppose China did succeed in taking Taiwan by force. What is valuable in Taiwan is brains. And they may all leave after a Chinese invasion. Taiwan isn’t Kuwait where the prize was a natural resource. The prize is smart people. Military force is not the solution from either the American or Chinese perspective.

The losing regime retreats to Taiwan—It is déjà vu all over again. In China’s thousands of years of history sometimes things recur. Jiang Jeishi’s (Chiang Kai-shek’s) losing Guomindang government was not the first to flee to Taiwan. In 1644 the Manchu Qing seized control of the country. They were to stay in power until 1912. Remnants of the defeated incumbent Ming dynasty fled south. In the process they took over Taiwan which had been occupied by the Dutch. It took about forty years but in 1683 the Qing government took control of the south including Taiwan. Sound familiar? Of course at that time there was no Seventh Fleet to interfere.

The best near term solution for the Taiwan problem is the status quo. In other words no solution. The Taiwan problem at this time is insoluble in any permanent sense and is “a can that should be kicked down the road.” The status quo recognizes that there is one China—the People’s Republic– and Taiwan cannot declare independence. But Taiwan remains a democratic entity. Continuation of the status quo rests on three factors. First, the majority of the people of Taiwan apparently do not want to be part of the People’s Republic of China. Second, the Chinese government firmly believes Taiwan should be part of China. Third both the US and China have a huge interest in Taiwan’s technological and commercial infrastructure and productive capacity. The US should cease imposing embargos on Taiwanese exports to China. The US and China have a common interest in maintaining the Taiwan tech powerhouse.

Longer term the growing industrial and military power of China will require some type of one country, two systems approach. Save China’s face, save Taiwan’s freedom.

Author, speaker, analyst and editor for The Dismal Optimist, a global macro economic blog.