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

Taiwan is among the largest manufacturers of crucial chips and houses the world's largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC)

Shortly after Nancy Pelosi's official visit to the island nation of Taiwan on Tuesday, tensions between China and Taiwan have risen. On Thursday, China started military exercises around Taiwan . Also, following Pelosi's visit, 27 Chinese jets entered Taiwan's air defence zone, and 22 of them crossed the median line separating the two countries.

Suspected drones reportedly flew above the Kinmen islands on Wednesday night. Taiwan, according to Reuters, fired flares to drive them away.

According to Reuters, Taiwan's defence ministry also said that its website suffered cyber attacks and went offline temporarily on Thursday. Pelosi, the first US speaker to visit the country in 25 years, flew out on Wednesday.

China had warned the US of possible 'consequences' if Pelosi visited the country.

What makes Taiwan so important?

During the Covid-19 pandemic, the world faced a major shortfall in the supply of semiconductor chips. These chips are used in almost every electronic device, from computers and mobile phones to even cars' brakes.

The shortfall was due to the supply-demand mismatch. The demand was pushed up by the work-from-home rule as it required more electronic devices. However, the supply of the chips could not go up accordingly. The mobility bottlenecks added to the woes of the semiconductor companies.

Taiwan is among the largest manufacturers of these crucial chips and houses the world's largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC). The country meets over 60 per cent of the total semiconductor demand globally.

TSMC alone accounts for over 50 per cent of the total market share in the semiconductor foundry market. It has some of the biggest tech companies as its clients, including Apple, NVidia and Intel.

Both China and the USA are working on improving their capacities to manufacture semiconductors to reduce dependency on imports 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 chipmaking gear, worth $18.7 billion and $29.6 billion, respectively, according to industry body Semiconductor Manufacturing International Corp (SEMI). The demand for equipment in China rose 58 per cent.

On the other hand, the US passed the CHIPS Act in July to boost domestic semiconductor manufacturing and research capabilities. The act set aside $52 billion to be used for the same.

According to the World Semiconductor Trade Statistics (WSTS), the Americas region is expected to see the fastest growth in the semiconductor market. Compared to Asia Pacific's growth of 13.9 per cent, the Americas are expected to grow by 22.6 per cent.

Both countries are racing 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 for the global economy and geopolitics.