China fumes as Pelosi visits Taiwan: What makes the island so important?

Shortly after Nancy Pelosi’s official visit to the island nation of Taiwan on Tuesday, tensions between China and Taiwan rose. On Thursday, China began military exercises around Taiwan. Moreover, following Pelosi’s visit, 27 Chinese aircraft entered Taiwan’s air defense zone, and 22 of them crossed the median line separating the two countries.

Suspected drones reportedly flew over the Kinmen Islands on Wednesday evening. Taiwan, according to Reuters, fired flares to chase them away.

According to Reuters, Taiwan’s Defense Ministry also said its website suffered cyberattacks and temporarily went offline on Thursday. Pelosi, the first American speaker to visit the country in 25 years, flew out on Wednesday.

China had warned the United States of possible “consequences” if Pelosi visited the country.

What makes Taiwan so important?

During the Covid-19 pandemic, the world faced a major shortage in the supply of semiconductor chips. These chips are used in almost all electronic devices, from computers and cell phones to car brakes.

The shortfall was due to the mismatch of supply and demand. The demand was increased by the work from home rule, as it required more electronic devices. However, the chip supply could not increase accordingly. Mobility bottlenecks have added to the woes of semiconductor companies.

Taiwan is one of the largest manufacturers of these crucial chips and is home to the world’s largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC). The country meets more than 60% of the total global demand for semiconductors.

TSMC alone accounts for more than 50% of the total market share in the semiconductor foundry market. He counts some of the biggest tech companies among his clients, including Apple, NVidia and Intel.

Both China and the United States are working to improve their semiconductor manufacturing capabilities to reduce the import dependency of these chips.

China has, over the years, increased its investment in the industry. In 2020 and 2021, China was the world’s largest buyer of chip-making equipment, worth $18.7 billion and $29.6 billion respectively, according to industry body Semiconductor Manufacturing International Corp. (SEMI). Demand for equipment in China increased by 58%.

On the other hand, the United States passed the CHIPS Act in July to boost domestic semiconductor manufacturing and research capabilities. The law provided $52 billion to be used for the same.

According to the World Semiconductor Trade Statistics (WSTS), the Americas region is expected to experience the fastest growth in the semiconductor market. Compared to growth of 13.9% in Asia-Pacific, the Americas is expected to grow by 22.6%.

The two countries are fighting to gain as much capacity as possible to manufacture semiconductor chips. Pelosi’s visit and China’s response show how important semiconductor chips have become to the global economy and geopolitics.