U.S. markets open in 8 hours 26 minutes
  • S&P Futures

    -2.25 (-0.05%)
  • Dow Futures

    +22.00 (+0.06%)
  • Nasdaq Futures

    -27.50 (-0.17%)
  • Russell 2000 Futures

    +3.00 (+0.17%)
  • Crude Oil

    +0.06 (+0.08%)
  • Gold

    +3.60 (+0.17%)
  • Silver

    +0.05 (+0.19%)

    +0.0020 (+0.19%)
  • 10-Yr Bond

    0.0000 (0.00%)
  • Vix

    -0.06 (-0.46%)

    +0.0016 (+0.12%)

    -0.1130 (-0.08%)
  • Bitcoin USD

    +229.69 (+0.61%)
  • CMC Crypto 200

    +7.23 (+0.92%)
  • FTSE 100

    +30.29 (+0.41%)
  • Nikkei 225

    +11.07 (+0.03%)

Pelosi's Taiwan trip shows US and China aren't ready to fight over 'third rail' of chips

The entire semiconductor industry seemed to be holding its breath as Nancy Pelosi’s plane made its final approach to Taipei this week. Some in the sector now appear to be exhaling.

The dramatic slate of responses from China to the House Speaker's visit has notably sidestepped the chip issue — signaling that both the U.S. and China hope to keep Taiwan's valuable semiconductor factories humming no matter what else happens in the coming weeks and months.

“I think both the U.S. and China are starting to become a bit more pragmatic when it comes to semiconductors,” Sarah Kreps, a professor and director of the Cornell Tech Policy Lab, told Yahoo Finance this week.

After a couple years of pandemic and supply chain issues, she noted, “Chips have become almost a third rail that these two countries do not want to mess with.”

TAIPEI, TAIWAN - AUGUST 03: Speaker of the U.S. House Of Representatives Nancy Pelosi (D-CA), left, poses for photographs with Taiwan's President Tsai Ing-wen, right, at the president's office on August 03, 2022 in Taipei, Taiwan. Pelosi arrived in Taiwan on Tuesday as part of a tour of Asia aimed at reassuring allies in the region, as China made it clear that her visit to Taiwan would be seen in a negative light. (Photo by Handout/Getty Images)
Speaker Nancy Pelosi with Taiwan's President Tsai Ing-wen at the president's office on August 3 in Taipei. (Getty Images) (Handout via Getty Images)

And the signals sent by the two nations seem to bear that out.

To be sure, the chances of a military confrontation continue to escalate with Beijing Thursday dramatically firing missiles near Taiwan as part of "military exercises." The country also reacted on the economic front by blocking selected imports like citrus, fish, and other foods from Taiwan. Still, China has notably said it will continue allowing semiconductor imports from Taiwan.

‘There is still a ton of uncertainty’

Taiwan is a leader in worldwide semiconductor chip production, especially advanced chips coveted by businesses in both the U.S. and China. The Taiwan Semiconductor Manufacturing Company (TSM) is the world's biggest semiconductor company with its products powering electronics around the world.

But implications for the company could still be forthcoming.

"As we know, [Chinese president] Xi Jinping was incredibly unhappy with this visit [and] there is still a ton of uncertainty around the future of Taiwan,” Futurum Research principal analyst Daniel Newman, a close watcher of the industry, told Yahoo Finance.

But he added Wednesday that “there are sort of two debates that are taking place” around the conflict with the first focusing on semiconductors and the second centering on “the role for everything else.”

HSINCHU, TAIWAN - 2021/09/22: A person walks past a TSMC (Taiwan Semiconductor Manufacturing Company) logo at the Taiwanese semiconductor contract manufacturing and design company building in Hsinchu. (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)
A Taiwan Semiconductor Manufacturing Company building in Hsinchu in northern Taiwan. (Walid Berrazeg/SOPA Images/LightRocket via Getty Images) (SOPA Images via Getty Images)

Pelosi’s visit also came just days after lawmakers in the U.S. passed the CHIPS and Science Act of 2022, which includes a provision sending $50 billion to semiconductor companies.

The CHIPS Act represents the largest effort in years to spur U.S. chip manufacturing and attempt to reverse decline of the U.S.’s role in semiconductor manufacturing. U.S. chip manufacturing has fallen from nearly 40% of worldwide output in 1990 to 12% today, according to the Semiconductor Industry Association. The situation is even worse with the world’s most advanced logic semiconductors, 100% of those were manufactured overseas in 2019.

President Joe Biden is set to sign the bill in a White House ceremony next Tuesday. However, experts say the effects — in the form of newly built fabrication plants inside the U.S. — are years away.

“The CHIPS act in itself isn't really going to do anything for our supply chain problem for at least two years,” Newman says.

The process of rebuilding U.S. manufacturing capability in the space will be slow, he said, stressing: "We need to walk before we run.”

‘Strengthening both our economies’

While the CHIPS Act might not solve the shortage immediately, observers have noted that the final shape of the bill is less likely to spark confrontation with China than earlier versions. While prior iterations of the bill aimed directly at China and its trade practices, the final bill focuses on boosting U.S. capabilities.

The soon-to-be law is also notable for allowing foreign companies to claim a piece of that $50 billion, if they put it towards new manufacturing or design within the United States.

Pelosi brought up that aspect of the CHIPS Act repeatedly during her Taipei visit, noting how her key economic takeaway from the trip, in addition to working towards a new framework for trade, was how ”our CHIPS and Science Act will go a long way to strengthening both our economies.”

During a press conference with President Tsai Ing-wen of Taiwan, she argued that the CHIPS Act will help the U.S. and Taiwan to “to increase our relationships” in the face of China's aggression.

Industry leaders in Taiwan have already signaled an interest in more investment inside the U.S. GlobalWafers is eying a $5 billion facility in Texas, and the Taiwan Semiconductor Manufacturing Company is considering at new facilities in Arizona.

But Kreps notes that Pelosi and other U.S. policy makers should remember that “Taiwan has options other than the U.S.” for new semiconductor plants in the years ahead — notably in places like Singapore, which was another stop of Pelosi's tour this week.

“I think the U.S. cannot be complacent and expect that Taiwan has inelastic interest,” she notes. “So the Pelosi visit probably helps shore up the view that the relationship is win-win and should continue.”

Ben Werschkul is a Washington correspondent for Yahoo Finance.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit.