Disclaimer: This article was written in January 2025, and therefore some information may be outdated, and events mentioned may have developed further.
Taiwan is one of the world’s top producers of semiconductors, manufacturing about 90% of the global supply of advanced computer chips. Its biggest manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC), ranks as the ninth-most valuable business in the world. This “silicon shield” gives Taiwan significant leverage in navigating the complex geopolitical landscape between the U.S. and China. As tensions rise, Taiwan’s semiconductor industry finds itself at the heart of geopolitical pressure, with its pivotal role becoming a key factor in global security and technology.
In a 16th July 2024 interview with Bloomberg Businessweek , then U.S. Republican candidate Donald Trump voiced concerns about U.S.-Taiwan relations and Taiwan’s semiconductor industry. When asked if he would defend Taiwan against China if re-elected in November, Trump suggested that Taiwan should compensate the U.S. for its protection, stating that Taiwan was “stealing” American’s semiconductor jobs and that it was the U.S. that needed protection from Taiwan. Then on The Joe Rogan Experience podcast, he again criticized the U.S. Chips Act and threatened to impose tariffs on Taiwanese chips if he became president.
This criticism isn’t new. Trump first argued in 2023 that the U.S. should have imposed tariffs on Taiwan’s semiconductor exports. Trump’s comments triggered declines in TSMC’s share price on both occasions. More importantly, it raised concerns about the future of U.S. – Taiwan relations and America’s role in the Asia-Pacific.
Semiconductor: Tiny Powerhouse Shaping Global Security and Modern Life
Semiconductors are at the heart of modern life, powering everything from home electronics to transportation, communications, clean energy systems, and AI technologies. Beyond commercial and daily applications, they hold immense strategic importance for national security.
In military contexts semiconductors have long been essential for communication and, with advances in sensing and data processing, now play a crucial role in enhancing the computing power of modern defense systems. As semiconductor technology progresses, its impact on defense capabilities and strategies is set to be transformative, reshaping the future of military power and global security. Such significance makes the ability to produce semiconductors critically important.
Mapping a Semiconductor Global Supply Chain
Driven by strong growth and lower costs in emerging countries, a significant economic power shift from West to East. It is also the case for the semiconductor industry. Historically, the sector was highly concentrated in the West. However, Western including the U.S., have limited government investment in semiconductors. The Department of Defense and DARPA (Defense Advanced Research Projects Agency) have made only modest and specialized investments in specific technologies. In contrast, Asian governments have heavily invested in their semiconductor industries. There is no surprise that this crucial sector shifted to East Asia after briefly transitioning through Japan, then to Taiwan.
While much of the semiconductor value chain is concentrated in East Asia, it is far from monopolized by any single region. The semiconductor supply chain is highly complex and spans multiple continents, with different regions specializing in various stages of production. No one country dominates this industry. The supply chain can generally be divided into three main components: design, manufacturing (including wafer fabrication, assembly, and testing), and the equipment and materials necessary for production. Each region plays a distinct and specialized role. This fragmentation of expertise and specialization creates interdependence among regions and makes each component irreplaceable
Overall, the global chip value chain, which includes design, manufacturing, and the relevant inputs, is still largely controlled by the U.S. and its allies, including Japan, South Korea, and the Netherlands. However, China has adopted a military-civil fusion strategy to reduce its dependency on the global supply chain, focusing on self-sufficiency in semiconductor production.
Bringing More Chips Back to America
Regardless of Trump’s remarks, the U.S. has actively sought to reduce its reliance on East Asia’s complex semiconductor supply chain. In 2022, the Biden administration passed the CHIPS and Science Act, aimed at revitalizing domestic semiconductor manufacturing and enhancing supply chain security. This bipartisan legislation marks a significant step in reshoring chip production and decreasing dependency on overseas suppliers.
Biden’s policies primarily target China’s advancements in chip development as part of a broader U.S. security strategy using “carrots” and “sticks”. Beyond merely blocking Chinese companies from obtaining advanced chips, the new restrictions bar the sale of SME and prohibit U.S. personnel from working for Chinese chip companies. Additionally, these policies aim to reshore semiconductor production by providing subsidies to incentivize companies to strengthen advanced semiconductor manufacturing in the U.S.
How TSMC Preserves Its Edge Amid Geopolitical Pressures
Taiwan’s semiconductor industry is crucial at the center of the U.S.-China geopolitical struggle. TSMC’s immense influence in the global supply chain acts as a strategic “silicon shield” for the island. However, U.S. restrictions on China present challenges for TSMC, given its significant business with Chinese customers and factories based in China. TSMC responds by halting the sale of advanced chips to Chinese-affiliated companies and personnel. At the same time, it has continuously invested in building new facilities and hiring American workers to staff them.
U.S. policy shows subtle signs of aiming to gradually decouple from TSMC leadership in the semiconductor industry. Concerns intensified when Trump accused TSMC and Taiwan of “stealing,” a choice of words that stirred debate and unease in Taiwan. His comments suggest a strategy of using TSMC as a bargaining chip in exchange for U.S. military protection, raising concerns about the future of U.S.-Taiwan relations, as he is now back at the White House. TSMC stock price experienced a sudden drop after the news of Trump winning the election.
(Official White House Photo by Oliver Contreras). Source: Wikimedia Common, The White House, 16th November, 2023. (Public Domain)
Despite this pressure, TSMC’s unique position grants it substantial bargaining power. One key advantage is its ability to set prices, which serves as a vital bargaining tool in response to actions that may threaten its interests. A recent example is Intel’s loss of a 40% discount on TSMC’s latest chips after CEO Patrick Gelsinger’s remarks about Taiwan’s tenuous relations with China, which reportedly offended TSMC. TSMC’s ability to adjust pricing terms, as illustrated by the recent case with Intel, underscores the strategic leverage it holds within the semiconductor industry. This flexibility in setting prices gives TSMC considerable influence over its client relationships—an advantage that proves valuable in the broader U.S.-China technology rivalry.
Even if TSMC faces tariffs or reduced subsidies, the intertwined nature of the global semiconductor value chain ensures its resilience. Tariffs would likely drive up the overall cost of chips, a burden that could ripple across industries and ultimately affect the U.S. This interconnected dependency explains why TSMC’s stock price recovers quickly, despite political shocks like Trump winning the election. Investors recognize the enduring demand for TSMC’s critical role in the supply chain. The future of TSMC is increasingly intertwined with Taiwan’s broader strategic considerations.
Diversifying the Semiconductor Supply Chain?
In response to global supply chain challenges and the U.S.’s demand. TSMC has been expanding its footprint beyond Taiwan. Alongside its factory in Arizona, the company is investing nearly $9 billion in a plant in Japan and establishing its first European site in Dresden, Germany.
Meanwhile, emerging markets like India, the Philippines, Vietnam and Saudi Arabia, are vying for roles in the semiconductor ecosystem. India, for instance, launched an ambitious initiative in 2021. Offering substantial subsidies to attract investment and develop a domestic semiconductor industry. However, entry into the complex and capital-intensive semiconductor value chain poses significant challenges for these latecomers. The current global semiconductor network remains heavily dominated by the U.S., particularly in high-end design and technology. Geopolitical alignment limits the ability of emerging players to acquire the advanced knowledge and technologies needed to climb the value chain. Although Chinese investment could offer an alternative, it risks entangling these countries in a complex geopolitical landscape dominated by U.S.-China tensions, complicating their path to independence in this critical sector.
The Road Ahead: TSMC’s Strategy in a Shifting Political Landscape
Whether under Biden or Trump, U.S. policy towards the Taiwan-China Strait shares a common thread of strategic caution. However, Trump’s inclination to frame alliances in transactional terms places Taiwan’s semiconductor sector squarely within his security calculus. Despite uncertainties surrounding a Trump presidency, many experts remain confident in TSMC’s resilience. Its pricing power, coupled with unmatched expertise and technological capabilities. Ensuring its critical role within the global supply chain while adapting to geopolitical shifts.
To Learn More About:
- “Strengthening the Global Semiconductor Supply Chain in an Uncertain Era”, Semiconductor Industry Association (SIA)/Boston Consulting Group (BCG), April 2021.
- “United States – China Semiconductor Standoff: A Supply Chain Under Stress”, Jeremy Mark & Dexter Tiff Roberts, Atlantic Council Geoeconomic Centre, March 2023.
- “TSMC founder Morris Chang: Taiwan is indispensable in global chip industry”, Kwangyin Liu, Common Wealth Magazine Group, 15 March 2023.
- “CHIPS Act threatens to hollow out Asian Semiconductor Industry”, East Asia Forum, 26 Nov 2023.
- “Chips and Challeneges: Southeast Asia and India’s Semiconductor Manufacturing Crossroads”, Helen Chiang, IDC, 30 Sept 2024.
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