Back in February, as the world was beating a path to Taiwan’s door for help to tackle a global chip crisis, the Taiwanese health minister got into a scrap with China over Covid-19 vaccines.

The Chinese government had used political pressure to derail Taiwan’s plan to purchase five million doses directly from Germany’s BioNTech SE, he suggested, rather than via a Chinese company that held the rights to develop and market the BioNTech-Pfizer Inc. vaccine across the states of China, Macau, Hong Kong, and Taiwan. Chinese Foreign Ministry spokeswoman Hua Chunying retorted that Taipei “should stop hyping up political issues under the pretext of vaccine issues.”

Three months later, Taiwan is paying the price for a lack of vaccines, as only about 1% of its population is vaccinated so far. With a surge in cases, Taiwan might have to disrupt the chip industry that dominates the local economy and which is critical to an already-squeezed global supply of semiconductors.

That’s a link made by the head of Taiwan’s office in New York, who warned of “logistical problems” without access to more shots. Yet by warning of more chip shortage and shunning vaccines from China if Taiwan can’t source enough doses elsewhere, the world’s biggest economies will see this as an even greater incentive to make investments that may erode Taiwan’s competitive edge in semiconductors over the long term.

Taiwan’s predicament illustrates its strategic yet vulnerable position amidst the U.S.-China tensions. Separated by a 177-kilometer wide strait, Taiwan is regarded as a province by Beijing and President Xi Jinping’s key goal is its conquest for historical and ideological reasons. The U.S. is an ally of Taipei’s democratic government and a big buyer of its exports, dominated by chips produced by the world’s leading provider of cutting-edge semiconductors, Taiwan Semiconductor Manufacturing Company (TSMC).

The onset late last year of chip shortages that have hobbled industries from consumer electronics to automobiles had looked to give Taipei global leverage. TSMC holds 56% of the so-called foundry business of manufacturing chips designed by customers including Apple Inc. and Qualcomm Inc.

But Taiwan has suffered a sudden reversal of fortunes as the second-wave of the pandemic comes just as a drought triggers power outages. This has increased the economic uncertainty and created a slump in what was the world’s best-performing stock index in the four years to January.

As governments from the U.S. to Europe and Japan seek to spur production at home, the very source of Taiwan’s recent geopolitical clout — its dominance of the market for cutting-edge chips — is under attack. 

“I think we’ve become too dependent on Taiwan and Korea, that’s the point, we need a more balanced global supply chain,” Pat Gelsinger, chief executive officer of Silicon Valley’s Intel Corp., said in an interview, according to Bloomberg. The U.S. and Europe should act “more aggressively” to counter the “imbalance” of Asia’s lead in manufacturing semiconductors that are mostly consumed in the west, he said.

Intel is a rival but Gelsinger isn’t the only voice making for uncomfortable listening in Taiwan. The current United States Secretary of Commerce Gina Raimondo said this month that while the Biden administration is working with the Taiwanese government and TSMC to address the chip shortage, it’s also looking to reduce U.S. dependence on Taiwan. TSMC is in the process of building a new fabrication facility in the state of Arizona, in the U.S.

Republicans Michael McCaul and Tom Cotton have called on the administration to engage with Taipei to do more to “mitigate the risk of Taiwanese companies providing services and technologies to entities of concern,” a reference to Chinese state-backed companies with links to the military, as they believe that Taiwan is a backdoor to China by enabling tech transfers.

Taipei is working to draft a new export control list targeting technologies with military use, to tighten curbs on exports to China, according to Bloomberg’s sources, and raise the penalty for violations.

That’s after Alchip Technologies Ltd’s stock fell in April when the Washington Post reported that it supplied chips to Phytium, a People’s Liberation Army-affiliated entity. 

The Taiwan government has now become more vigilant towards the possibility of Chinese companies ramping up efforts to recruit Taiwanese engineers. Last month the Cabinet met to discuss how to prevent the outflow of local talent and the Ministry of Labor instructed local job-search websites to remove ads recruiting Taiwanese citizens to work for China, particularly in the chip industry.

Companies and headhunters can be fined as much as NT$500,000 ($17,890) for advertising such jobs and NT$5 million ($178,900) for facilitating local engineers’ employment with Chinese companies on the mainland, ministry official Huang Chiao-ting said. Job search site 1111 said it has removed close to 3,000 job listings. Investigators have visited the local offices of four Chinese companies, including Bitmain Technologies Ltd, within the last two months to look into allegations they recruited engineers illegally.

“By more aggressively investigating Chinese companies’ efforts to poach Taiwanese engineers, we hope we can help prevent potential trade secrets leaking to China should local talent get hired away,” said Judy Chen, a spokeswoman for the Hsinchu District Prosecutors Office. She declined to name the other companies probed.

Members of the ruling Democratic Progressive Party are considering amending the law to boost penalties for intellectual property theft. Lawmaker Chao Tien-lin is proposing life sentences for those found guilty of economic espionage, a crime not currently on the statute books in Taiwan.

“Taiwan needs to win trust from its partners and help prevent China from building a supply chain from stolen technology,” Chao said in comments provided by his assistant.

Whether it’s enough to diminish concerns of the U.S. government may become clearer with the publication of President Joe Biden’s review of the semiconductor supply chain. The 100-day review is due to conclude on June 4 but there is bipartisan support to build U.S. chip making, and Taiwan is in the crosshairs.

“Taiwan dominates semiconductor manufacturing, and one company, Taiwan Semiconductor Manufacturing Company, virtually controls the market,” Senator John Cornyn, a Texas Republican who introduced the CHIPS for America Act to boost U.S. production, said on the Senate floor this month.

Recently, what has also come into question is the sustainability of Taiwan’s industry after it suffered power outages this month, focusing attention on environmental factors including uncertainty over future electricity supply and water shortages for power and water-hungry chip plants.

Taiwan can potentially overcome the virus outbreak as well as the power and water shortages, showing its companies “can still satisfy global demand by manufacturing mostly in Taiwan without any issue,” said Arisa Liu, a researcher at the Taiwan Institute of Economic Research.

In the short term that will require vaccines, most likely from Europe or the U.S. 

According to Chunhuei Chi, a former health-policy adviser in Taiwan who is now director of the Center for Global Health at Oregon State University, “many politicians in Taiwan urged the Taiwanese government to use microchips as leverage” for vaccines.

While the government is reluctant to use that leverage explicitly, “if the U.S. is concerned about the supply of chips from TSMC, the U.S. would have incentives to provide Taiwan with vaccines to make sure production will not be disrupted by this outbreak,” he said.

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