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China and the United States: From Taiwan to the chip wars, a geopolitical story


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Marta Alonso

Professor of Finance School of Economics

In recent months geopolitics has gained momentum. From the crisis of Russia's invasion of Ukraine in February 2022 to Chinese President Xi Jinping 's recent advertisement (following Nancy Pelosi's visit to Taiwan) not to renounce force for the reunification of China, the International Office have become fraught with tension.

Taiwan, core topic in U.S.-China relations

For four decades, successive Republican and Democratic administrations in the United States have debated a military entrance in defense of Taiwan if China were to challenge its freedom. Today, however, most countries, including the U.S., do not recognize Taiwan as an independent sovereign country, ceding sovereignty recognition to the People's Republic of China. Only fourteen countries maintain diplomatic relations with Taiwan.

Chinese censorship considers that there are three T's that cannot be talked about: Taiwan, Tiananmen and Tibet.

Taiwan is the archipelago to which Chinese Nationalists defeated by the Communists in 1949 fled. Later, after the breakup of China and the Soviet Union, the U.S. saw an opportunity to build bridges and supported the principle of One China, a stance that has benefited the eastern country, especially in economic and commercial aspects. one ChinaThe U.S. has benefited the East, especially in economic and trade aspects.

In 1972, as part of diplomatic efforts to strengthen relations with Mao Zedong's China, the U.S. government under Richard Nixon pledged not to challenge the idea that Taiwan is part of China and expressed its desire for a peaceful settlement among the Chinese themselves. On January 1, 1979, the United States and the People's Republic of China established diplomatic relations, which led to the severance of U.S. relations with Taiwan.

In April of the same year, the U.S. congress passed the Taiwan Relations Act, whereby the United States made available to the island the defense articles and services necessary to enable it to maintain its self-defense capability.

In August 2022, Democratic Congresswoman and Speaker of the U.S. House of Representatives Nancy Pelosi visited Taiwan, despite China's civil service examination to that trip, accelerating tensions between the two powers.

Earlier this summer, the Chinese government stated in a statement that its one-China policy is what ensures stability and peace in the Taiwan Strait.

Xi Jinping, towards his third term in office

It is no coincidence that the Chinese government is interested in making its power felt now that President Xi Jinping's third term in office is about to begin.

Xi, also University Secretary of the CPC, has protected his authority by eliminating reforms introduced by Deng Xiaoping to limit the issue of terms to a single re-election.

In these years the Chinese leader has surrounded himself with the elites, whom he has benefited and placed in positions of power. In addition, corruption has expanded, something that tends to happen in countries that grow very rapidly.

Four decades ago, Deng eloquently explained that market liberalization would bring negative externalities:

"When you open the windows, flies come in."

Now, Xi Jinping has used state-owned enterprises to create a new model of Economics globally.

The semiconductor war

Although investment in China continues to grow, GDP growth is the lowest in decades.

China-US-Taiwan tensions have led major international banks to adjust their business risks in China.

Chinese companies cannot finance themselves in the U.S. market without first disclosing their legal and financial structure and transparently explaining the risks to investors.

But the main battlegrounds of the economic war between China and the United States are in trade and, above all, in the technology industry.

The chip war will mean a change in the supply chain with considerable economic effects.

Until now, it was common for U.S. technology companies to design their chips in the country but bring their production offshore.

The Biden administration passed the CHIPS Act, which limits semiconductor exports and increases subsidies toward the domestic semiconductor industry. Earlier, in 2019, the Trump administration announced that Huawei posed "a threat to the national security of Americans."

China is also seeking technological independence. Chip manufacturing is highly capital intensive and heavily subsidized by the government. The startup Pengxiwei IC Manufacturing Co. (PXW), which has come to Huawei's aid and is itself subsidized by the local government in Shenzhen, has purchased land the size of thirty soccer fields for its semiconductor factories. All these changes in the supply chain will have considerable economic consequences.

The new globalization

Globalization has brought with it unexpected paradoxes. The thesis that assumed that its extensive economic networks would reduce power conflicts between governments has result been a myth. States use information and the power they have over business and trade as weapons to impose their ideology, questioning the benefits of globalization, changing supply chains and endangering the stability of institutions.