U.S.-China Trade Tensions and Taiwan’s Semiconductor Nexus
Introduction
The past several years have seen U.S.-China trade frictions evolve from broad tariffs into a full-blown “tech war” with profound implications for global supply chains. In parallel, U.S.-Taiwan economic ties have deepened, even as Taiwan finds itself in a delicate position amid great-power rivalry. This report examines recent developments in U.S.-China and U.S.-Taiwan trade and tariff dynamics as of 2025, and analyzes their impact on the semiconductor industry – especially the Taiwan Semiconductor Manufacturing Company (TSMC). We explore why TSMC is strategically vital to global technology supply, AI progress, and geopolitics. The report also incorporates expert insights from Taiwan, including how Taiwanese policymakers and semiconductor executives view the shifting landscape. Key topics include new export controls, tariff escalations, supply chain realignments, and investment flows shaping the semiconductor sector.
Key Points:
U.S.-China Trade War 2.0: After the initial 2018–2019 tariff exchange, Washington has sustained and expanded tariffs on China into 2024, targeting strategic sectors like electric vehicles and semiconductor inputsreuters.comreuters.com. Beijing has retaliated not only with its own tariffs but also by restricting exports of critical materials (e.g. gallium, germanium) needed for chipsreuters.com. Tech-related measures – especially U.S. export controls on advanced chips and equipment – have become central, effectively cutting off China from leading-edge semiconductor technologycsis.orgreuters.com.
U.S.-Taiwan Trade Relations: U.S.-Taiwan trade has surged, with bilateral goods trade reaching $158.6 billion in 2024 (up 24% from 2023)focustaiwan.tw. Taiwan is now America’s 7th largest trading partner and the largest supplier of certain high-tech goods like semiconductors and computer hardwarefocustaiwan.twglobaltaiwan.org. The two sides signed a new trade pact in 2023 under the U.S.-Taiwan 21st Century Trade Initiative, strengthening cooperation on customs, regulation, and anti-corruptionustr.gov. However, Taiwan’s growing trade surplus with the U.S. (over $73 billion in 2024) has drawn noticefocustaiwan.twglobaltaiwan.org, and U.S. “friendshoring” policies present both opportunities and challenges for Taipei.
Semiconductor Supply Chain Realignment: Escalating U.S.-China tensions are reshaping where chips are made. The U.S. is incentivizing onshore and allied-nation production (e.g. via the CHIPS Act), prompting TSMC to invest in massive new U.S. fabsreuters.com and other firms to diversify away from China. Export controls have forced Chinese companies to rely on older or domestic chip technologies, while U.S. and global firms adjust sourcing to mitigate risk. TSMC sits at the crux of these shifts – expanding abroad but keeping its cutting-edge R&D in Taiwan – as the world tries to bolster supply chain resilience without losing efficiency.
TSMC’s Strategic Importance: Taiwan’s TSMC produces over 60% of the world’s semiconductors and 92% of advanced chips (at 7nm and below)foreignpolicy.com, supplying industry giants like Apple, NVIDIA, AMD, and Qualcomm. TSMC’s unparalleled capabilities in high-end chip fabrication make it the linchpin of global tech innovation – from smartphones to cloud datacenters and artificial intelligence. Analysts warn that a disruption of Taiwan’s semiconductor output (for instance, by conflict) could cost the global economy an astounding $2.5 trillion in annual lossesforeignpolicy.com. This “silicon shield” – Taiwan’s outsized role in chip supply – is seen as both a strategic asset and a potential geopolitical flashpoint.
Taiwanese Perspectives: Taiwan’s leaders and chip executives are navigating a tightrope. They generally support measures to curb military-use technology to China, but also worry about over-decoupling. TSMC founder Morris Chang cautions that “in the chip sector, globalization is dead” and that bifurcating the supply chain will raise costs and slow innovationreuters.com. He notes a dilemma: U.S. “friendshoring” excludes Taiwan as too risky, even though Taiwan’s chip capacity has long safeguarded tech supplyreuters.com. Policymakers in Taipei tout the semiconductor industry as the “sacred mountain protecting the nation”reuters.com and a deterrent against aggression, but also fret about the industry being “hollowed out” if too much production leaves Taiwanforeignpolicy.com. This nuanced perspective underscores Taiwan’s desire to strengthen trade ties and maintain its chip leadership, while preserving its national security.
The sections below provide an in-depth analysis of these dynamics, with breakdowns of export controls, tariff impacts, supply chain shifts, and investment flows, along with expert commentary.
U.S.-China Trade and Tariff Developments (2018–2025)
From Tariffs to Tech Restrictions: The U.S.-China trade conflict began in 2018 with tit-for-tat tariffs and has since intensified, especially in the technology arena. In 2018, the Trump administration levied sweeping tariffs on about $360 billion worth of Chinese goods under Section 301, alleging unfair trade practicesreuters.com. China retaliated with its own tariffs on U.S. exports. A limited “Phase One” deal in January 2020 paused further escalation, but left most tariffs in place. By 2024, U.S. tariffs on over $300 billion in Chinese imports remained, at rates of 7.5% to 25%, covering items from consumer goods to industrial inputsreuters.com.
Tariff Review and New Hikes: Rather than rolling back tariffs, the Biden administration conducted a statutory four-year review and chose to retain and even raise some duties in strategic sectors. In September 2024, the U.S. Trade Representative finalized tariff increases aimed at China’s high-tech and industrial capacityreuters.com. Notably, a 100% import duty on Chinese electric vehicles was imposed, targeting China’s state-subsidized EV industryreuters.com. Similarly, tariffs on certain solar panels were raised to 50%, and new 25% duties were set on critical minerals and components like lithium batteriesreuters.comreuters.com. For semiconductors, the USTR determined that a 50% tariff on specific Chinese semiconductor products – including silicon wafers and polysilicon – would begin in 2025reuters.com. These actions underscore Washington’s intent to protect “strategic industries” from China’s industrial policies, even at risk of higher supply chain costs. (Industry groups have warned such steep tariffs could disrupt supply chains without clearly curbing China’s tech ambitionsreuters.comreuters.com.) At the same time, the U.S. did approve a few tariff exclusions (e.g. on certain machinery inputs) to ease pain for domestic manufacturersreuters.com.
Beijing’s Retaliation: Beijing has responded to U.S. pressure with its own measures, though China’s options (given the trade imbalance) are more limited. China maintained tariffs on tens of billions of dollars of U.S. goods (from agriculture to automobiles) instituted during the trade war. More strikingly, China began weaponizing its control over critical raw materials. In mid-2023, after Washington tightened chip export controls, China announced export licensing requirements on gallium and germanium – obscure but vital minerals for semiconductor and military applicationsreuters.com. Then in December 2024, China outright banned exports of gallium, germanium, and antimony to the United States, citing national security, just one day after a new round of U.S. chip sector sanctionsreuters.com. This ban, aimed squarely at the U.S., highlighted an escalating tit-for-tat: China signaled it is willing to cut off supplies of niche materials where it has dominance (it produces ~90% of global gallium and germanium) as leveragereuters.comreuters.com. Beijing simultaneously tightened oversight on exports of graphite (critical for EV batteries) to the U.S.reuters.com. These moves have raised concerns that China could next target other resources (like rare earths or battery metals), injecting new uncertainty into high-tech supply chainsreuters.com.
Ongoing Dialogues: Despite tensions, U.S. and Chinese officials have sporadically resumed talks to manage the economic relationship. Late 2023 saw a flurry of diplomatic engagement – including meetings between Presidents Biden and Xi – which helped stabilize sentiment but produced few concrete rollbacks of trade measures. Neither side has fully backed down: the U.S. frames its actions as security-driven, and China portrays its countermeasures as defensive. As of 2025, the U.S.-China trade relationship is defined by persistent frictions, with tariffs remaining largely intact and new barriers emerging around technology. The stage is set for a protracted rivalry, in which trade policy is tightly intertwined with national security goals.
(See next section for a detailed look at technology export controls, which have become a centerpiece of U.S.-China economic tensions.)
Technology Export Controls and “Chip War” Escalation
While tariffs grab headlines, export controls on technology have arguably become the most consequential front in U.S.-China trade tensions. The United States has moved aggressively to deny China access to cutting-edge semiconductors, equipment, and know-how that could advance Beijing’s military and AI capabilities. These measures, spearheaded by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), directly affect companies like TSMC and define the new tech supply chain landscape.
U.S. Export Controls – Timeline of Major Actions:
2019: The U.S. placed Huawei and other Chinese tech firms on the Entity List, barring U.S.-made components and software without a license. In 2020, Washington expanded the Foreign Direct Product Rule (FDPR) to cut off Huawei’s access to semiconductors made with U.S. tools (even if produced overseas). This forced foundries like TSMC to halt advanced chip orders for Huaweitaipeitimes.comtaipeitimes.com.
October 2022: The Biden administration announced sweeping new controls aimed at “choking off China’s access to the future of AI and high-performance computing”csis.org. These rules broadly ban the export to China of advanced graphics processors (GPUs) and AI accelerator chips, defined by certain performance thresholdscsis.org. For example, Nvidia’s A100 and H100 data-center AI chips (crucial for training AI models) fell squarely under the bancsis.org. The rules also prohibit exports of cutting-edge semiconductor manufacturing equipment to China – especially the tools needed to make sub-14nm logic chips or advanced memorycsis.org. Crucially, these restrictions apply not just to U.S. exporters but globally via the FDPR: any chip made with U.S.-origin technology or software is coveredcsis.orgcsis.org. This dramatically extended America’s export control reach to foreign fabs like TSMC. The immediate impact was to freeze Chinese chipmakers at roughly generation-old technology – e.g. barring access to extreme ultraviolet (EUV) lithography needed for 7nm-and-below process nodes.
October 2023 Update: The U.S. tightened the 2022 rules after noticing companies adapting. In October 2023, Commerce closed loopholes by expanding the chip performance criteria and adding new restricted chip models. Notably, Nvidia’s specially tailored China-only chips (A800 and H800), which were slower versions of the A100/H100 to skirt 2022 rules, were explicitly brought under the banreuters.comreuters.com. The rule updates also restricted advanced AI chips for not just training but also inference and added certain memory components (like high-bandwidth memory, HBM) to the controlled listcsis.orgcsis.org. Furthermore, dozens of Chinese firms involved in AI chip R&D or chip fabrication were added to the Entity List to prevent them from obtaining even older-generation tech through third partiescsis.org. These steps underscored a U.S. commitment to continually tighten tech export screws as China seeks workarounds.
Late 2024 “Bombshell” Controls: In December 2024, as one administration ended, BIS rolled out another significant expansion of chip controlscsis.org. The new measures targeted AI-specific memory chips (ensuring China cannot easily acquire advanced memory to pair with processors)csis.org, further broadened the FDPR’s scope, and created a novel “Restricted Fabrication Facility” rule to govern any new fabs in Chinacsis.orgcsis.org. The U.S. also carved out incentives for allies like Japan and the Netherlands, rewarding them for aligning their own export rules with Washington’scsis.org. (Indeed, U.S. diplomacy succeeded in 2023 in getting the Netherlands to bar ASML from selling even advanced DUV lithography machines to China, not just EUV toolscsis.org.) By early 2025, the U.S. had constructed a formidable multi-layered regime of chip export controls intended to stymie China’s progress in AI chips and advanced node semiconductor manufacturingcsis.org.
Chinese Response and Adaptation: China has vehemently protested these controls, filing disputes at the WTO and accusing the U.S. of “technological containment.” In practice, Chinese firms have pivoted to develop workarounds and domestic alternatives. For instance, Huawei in 2023 unveiled a smartphone (Mate 60) powered by a 7nm chip produced by China’s SMIC, a surprising feat given the sanctions. Analysts noted, however, that SMIC likely repurposed existing equipment and that producing at scale without EUV is challenging. China is also investing billions (via state-backed funds) into indigenous chip equipment, lagging chipmakers, and homegrown EDA software. Yet catching up in semiconductors remains an uphill battle if isolation from global technology persists. As a retaliatory measure, China has tightened its own export controls on tech – for example, implementing license requirements on advanced drone technologies and AI algorithms and banning certain Chinese critical infrastructure operators from buying Micron’s memory chips (announced May 2023) in retaliation for U.S. actions. These moves, while limited in impact, signal that China is willing to impose costs on U.S. companies in return.
Impact on Global Firms (TSMC Case Study): The export controls have put companies like TSMC in a complex position. TSMC relies on U.S.-made equipment (from firms like Applied Materials, Lam Research) and EDA tools, so it must comply with U.S. rules even when manufacturing in Taiwan. Since 2020, TSMC has ceased accepting orders from blacklisted Chinese customers like Huaweitaipeitimes.comtaipeitimes.com. The foundry has continued supplying less-advanced chips to Chinese clients, but the new rules cap those at relatively mature technology. A recent incident illustrates the fine line TSMC walks: In 2023, a TSMC-made AI chip for a Chinese startup (Biren/Sophgo) was found to match the design of a Huawei chip, raising red flagsreuters.comreuters.com. In 2025, U.S. authorities were reportedly investigating this and considering a punitive fine over $1 billion on TSMC for an alleged export control violation if those chips indeed reached Huaweireuters.comreuters.com. Taiwan’s government defended TSMC as a law-abiding company and noted TSMC had proactively notified the U.S. when it discovered a Huawei-linked chip in 2023taipeitimes.comtaipeitimes.com. The episode underscores that export controls carry serious enforcement teeth – penalties can be up to twice the value of the transactions in violationreuters.com – and even the world’s top chipmaker must meticulously ensure its products are not diverted to barred end-users.
In summary, export controls have effectively erected a new tech trade Iron Curtain between China and the most advanced semiconductors. This is forcing a partial decoupling of the global chip ecosystem: China is stuck with older-generation or domestically made chips for now, while the U.S. and its allies fortify their dominance in leading-edge chip R&D and production. However, this strategy is a double-edged sword, as industry veterans like Morris Chang warn – fragmenting supply chains can increase costs for everyone and slow the spread of chip innovationsreuters.comreuters.com. The next sections explore how these policies are reshaping the semiconductor industry’s geography and economics.
U.S.-Taiwan Trade Relations Amid Geopolitical Tensions
Taiwan’s economy is deeply entwined with both China and the United States, but recent trends show a clear shift bringing Taipei and Washington closer economically. As the U.S.-China trade war prompted supply chain reorganization, Taiwan has in many ways been a beneficiary. At the same time, Taiwan faces the challenge of maintaining its export-led growth while preserving its strategic high-tech advantages.
Surging Bilateral Trade: Trade between the U.S. and Taiwan has grown dramatically in the past two years. In 2024, U.S.-Taiwan goods trade reached $158.6 billion, a 24% jump from 2023focustaiwan.tw. Taiwan moved up to become America’s 7th largest trading partnerfocustaiwan.tw. More notably, the United States is now the single largest market for Taiwan’s exports, eclipsing China. In 2024, Taiwan exported about $111.4 billion in goods to the U.S. (23.4% of its total exports), compared to $97.0 billion to mainland China (20.4%)globaltaiwan.orgglobaltaiwan.org. This is a remarkable change from a decade ago, when China (including Hong Kong) imported far more from Taiwan than the U.S. did. The shift is partly due to trade war effects and “re-shoring” – Taiwanese companies have been moving some production out of China to avoid U.S. tariffs and instead shipping directly from Taiwan or Southeast Asia to the U.S.focustaiwan.tw. Taiwan’s government also launched policies encouraging firms to invest at home, which boosted production for exportfocustaiwan.tw. Another driver is booming U.S. demand for tech hardware: the majority of Taiwan’s exports to America are electronics – notably computers, peripherals, and semiconductorsglobaltaiwan.orgglobaltaiwan.org – fueled by pandemic-era digitization and recent AI-related spending.
21st Century Trade Initiative: In the absence of formal diplomatic relations (and hence no traditional free trade agreement), Taipei and Washington forged the U.S.-Taiwan Initiative on 21st Century Trade in 2022 to deepen economic ties. Under this framework, the two sides negotiated a series of focused trade agreements. The first agreement, signed in June 2023 and entering into force in 2024, covered areas like customs facilitation, good regulatory practices, anti-corruption measures, and small business supportustr.gov. It aimed to streamline trade and signal a commitment to high standards. By early 2025, talks were ongoing for a second agreement addressing agriculture, labor, and environment, among other issuesustr.gov. While these pacts are narrow in scope (far from a full free trade deal), they are strategically significant, marking the first bilateral trade agreements between the U.S. and Taiwan in decades. They help institutionalize economic cooperation and can be expanded over time. Taiwanese officials see this as bolstering Taiwan’s international economic status and reducing its over-reliance on China’s marketglobaltaiwan.orgglobaltaiwan.org.
Tariff Policies: Unlike the punitive tariffs applied to China, U.S. tariffs on Taiwanese goods have generally remained low under MFN (Most-Favored Nation) status, especially for technology products (many high-tech goods are zero-tariff under the WTO Information Technology Agreement). This favorable access, combined with Taiwan’s high-quality manufacturing, has contributed to the export surge. However, the political winds shifted with the U.S. change in administration. In early 2025, the new U.S. leadership under President Trump signaled a tougher stance even toward allies with large trade surpluses. In late March 2025, Washington unexpectedly announced a 25% tariff on imported autos, auto parts, and computers, and even threatened a broad 32% tariff on all other imports from Taiwanglobaltaiwan.org. This move, quickly dubbed a negotiating tactic, caused market jitters. Within a week, the U.S. granted exemptions for critical categories – computers, smartphones, and semiconductors were carved out from those tariffsglobaltaiwan.org – and scaled back the blanket Taiwan tariff to 10% temporarilyglobaltaiwan.org. Global markets lost trillions in value during that scareglobaltaiwan.org, underscoring how vital Taiwan’s tech shipments are. While the situation was in flux (and bilateral negotiations were anticipated to avert a trade rift), it highlighted a reality: Taiwan’s huge trade surplus with the U.S. (over $73 billion in 2024) could become a point of contentionglobaltaiwan.orgglobaltaiwan.org. U.S. policymakers, focused on manufacturing revival, want to ensure America isn’t overly dependent on any single foreign source – even a friendly one – for critical goods.
Supply Chain Collaboration: On a more positive note, the U.S. and Taiwan are also collaborating to strengthen supply chains in key sectors. Besides semiconductors (covered in the next section), this includes electric vehicle batteries, telecommunications, and medical supplies. The concept of “friend-shoring” – sourcing from trusted partners – works in Taiwan’s favor as it is a trustworthy supplier of advanced technology. For instance, Taiwan has been investing in the U.S. (TSMC’s Arizona fabs, Formosa Plastics expansions, etc.), and conversely U.S. firms are investing in Taiwan’s high-tech sectors. Both governments have launched dialogues on supply chain security (especially after the 2021 semiconductor shortages). In 2022, Taiwan was invited as a partner in the U.S.’s Indo-Pacific Economic Framework (IPEF) supply chain pillar discussions (albeit not officially, due to political sensitivities). All these efforts indicate that Taiwan is viewed as a critical node in U.S.-centric supply networks, particularly for semiconductors, and there is mutual interest in keeping those networks robust.
In summary, U.S.-Taiwan trade ties are stronger than ever, buoyed by strategic necessity and shared economic interests. Taiwan has capitalized on U.S.-China frictions to grow its U.S.-bound exports, especially in tech. Yet it must navigate carefully: it welcomes U.S. support and markets, but also seeks to avoid new frictions (like sudden tariffs) with its largest customer. This balancing act extends into the heart of Taiwan’s economy – the semiconductor industry – which we examine next.
Implications for the Semiconductor Industry and Supply Chain Shifts
The semiconductor sector has been front and center in these trade tensions, resulting in significant supply chain shifts and realignments of investment flows. Companies and governments are restructuring the geography of chip manufacturing to manage risk and meet policy goals. Below we detail how trade policies are reshaping the industry, with a focus on TSMC’s role and response.
TSMC’s Global Expansion Under Pressure: TSMC, as the world’s leading contract chipmaker, has traditionally concentrated its fabs in Taiwan. But geopolitical pressures and customer demands have prompted an historic change in strategy – TSMC is spreading its manufacturing footprint internationally. In late 2020, under U.S. encouragement, TSMC agreed to build a major fab in Arizona. Construction began in 2021–2022, and by late 2022 the project was highlighted by President Biden as proof that “American manufacturing is back”foreignpolicy.comforeignpolicy.com. Initially, TSMC committed $12 billion for a 5-nanometer process fab. That plan has since grown dramatically: TSMC is now investing $40 billion to establish two fabs in Arizona (one 4nm, one 3nm) by 2026, and in early 2025 it further announced a fresh $100 billion investment to build five additional chip facilities in the U.S. over the coming yearsreuters.com. This astonishing pledge – which includes multiple advanced fabs, an R&D center, and packaging facilities – shows how vital the U.S. market and government support have become. It was reportedly spurred by a mix of incentives (e.g. $6.6 billion in U.S. federal grants for Phoenix productionreuters.com under the CHIPS Act) and pressure (President Trump even claimed he warned TSMC of up to 100% tariffs on its chips if it didn’t expand in Americareuters.comreuters.com).
TSMC is also investing in Japan, another U.S. ally keen to bolster local chipmaking. With hefty subsidies from Tokyo, TSMC joined with Sony and Denso to build a $8.6 billion fab in Kumamoto, Japan, set to produce 22–28nm chips (older nodes useful for auto and industry) by 2024–2025. Plans for a second Japan fab for 5nm have been discussed as well. Europe has courted TSMC (Germany in particular) to establish a plant, though TSMC has been hesitant without sufficient incentives and a strong talent base there. The key point is that the semiconductor supply chain is undeniably diversifying away from its heavy concentration in East Asia. By 2025, for the first time, TSMC will have cutting-edge production outside Taiwan – a significant supply chain shift.
Supply Chain Resilience vs. Efficiency: These moves are driven by the quest for resilience. The U.S. and allies learned during the pandemic – and again when China conducted military drills around Taiwan in 2022 – that over-reliance on one region for critical chips is a vulnerability. Thus, policies are prompting a rebalancing: the U.S., Europe, Japan, and others are together pouring hundreds of billions into new semiconductor fabrication capacitysemiconductors.org. The U.S. CHIPS and Science Act (2022) alone provides $52 billion in chip manufacturing incentives. The EU’s Chips Act allocates €43 billion to reach 20% global share by 2030. India, too, announced $10 billion for semiconductor fabs. This huge capital reallocation marks a turning point – experts note that global chip capacity is shifting toward a more distributed model, after decades of consolidating in Taiwan, South Korea, and Chinastatista.comstatista.com.
However, this push for resilience comes at a cost. Building redundant or distributed capacity can reduce economies of scale. TSMC’s Morris Chang has bluntly stated that running fabs in multiple countries will entail higher costs and potentially higher chip pricesreuters.comreuters.com. Indeed, TSMC’s Arizona fab has experienced delays and cost overruns (partly due to unfamiliar construction culture and a shortage of skilled workers in the U.S.), leading TSMC to bring over more Taiwanese engineers. Some analysts warn that duplicating fab infrastructure dilutes the efficiency that comes from clustering in Taiwan – where an entire supplier ecosystem and talent pool exists. Despite these concerns, national security and supply security arguments are prevailing, and the industry is adapting to a new normal where just-in-time is tempered by just-in-case.
Impact on China’s Semiconductor Ambitions: For China, the supply chain shifts have been painful. Chinese chip firms can no longer freely access top-tier manufacturing at TSMC or Samsung for their designs, nor easily import the best equipment. This has accelerated China’s drive to build a self-sufficient chip ecosystem. China is investing heavily in “legacy” 28nm and 14nm fabs which are not blocked by export controls, aiming to supply chips for autos, IoT, and other markets. By one projection, China could have 40% of global capacity for mature-node chips by late this decaderhg.com. Meanwhile, Chinese tech giants like Alibaba, Baidu, and Huawei are tweaking chip designs to use slightly less advanced processes that domestic fabs can handle, and stockpiling critical components where possible. We are effectively seeing a bifurcation of the semiconductor value chain: a U.S.-led sphere that controls the cutting edge, and a Chinese sphere trying to build up competence in less advanced (but still important) chip technologies. Some supply chain rerouting is also occurring via third countries – e.g. Chinese companies using facilities in Singapore or Taiwan (for older nodes) to manufacture chips that can still be sold globally without restriction. This decoupling is not absolute, but the trend is toward two parallel technology ecosystems if tensions persist.
Other Industry Players: It’s not just TSMC reacting. Samsung (South Korea) has also been pulled into the fray – it is investing $17 billion in a new fab in Texas and considering additional U.S. fabs to appease American customers and policymakers. Intel, the lone U.S. advanced logic chipmaker, has received government support to build new fabs in Arizona and Ohio, aiming to regain process leadership and offer foundry services (even to the U.S. Department of Defense). In Taiwan, smaller foundries like UMC stay focused on their niche (specialty processes), though UMC too announced a new fab in Singapore to diversify. GlobalFoundries, a U.S.-headquartered foundry, is partnering with allies (e.g. a joint venture with STMicro in France) to add capacity in Europe. On the supply side, equipment makers from the U.S., Japan, and the Netherlands are aligning export policies, effectively choosing sides and leaving Chinese fabs to rely on secondary markets or nascent domestic tool suppliers.
Supply Chain “De-Risking” Examples: Many downstream tech companies have also adjusted their manufacturing strategies:
Apple – a major TSMC customer – started to move some device assembly out of China to India and Vietnam, and is closely monitoring Taiwan’s situation. While chip fabrication for Apple (its A-series and M-series chips) remains at TSMC in Taiwan, Apple has multi-sourced more components and built inventory buffers to guard against disruptions.
Electronics OEMs (HP, Dell, etc.) – have shifted more manufacturing to Taiwan, Thailand, or Mexico for products bound for the U.S., to avoid China tariffs. Some Taiwanese electronics contract manufacturers (e.g. Foxconn, Pegatron) expanded factories in Vietnam, India, and Mexico to serve U.S. clients tariff-free.
Automotive – The car industry, hit hard by chip shortages, is now working directly with chipmakers to secure supply. Some carmakers supported TSMC’s decision to build capacity in Japan (for auto-grade chips) to diversify away from solely Taiwan-based output.
AI start-ups and cloud companies – U.S. AI firms like OpenAI or Google are mindful that their crucial AI accelerators (GPUs/TPUs) depend on TSMC’s Taiwan fabs. This has led to discussions about strategic stockpiling of AI chips and efforts to ensure TSMC’s overseas fabs (like Arizona) can eventually produce the chips needed for Western AI needs, providing a backup to Taiwan.
In essence, the entire semiconductor supply chain is being rewired in real time to balance efficiency with geopolitical risk. Goods and capital flows that once optimized cost and speed now also factor in politics and security. Investment flows are following suit: venture capital in the U.S. is pouring into semiconductor start-ups (design, materials, equipment) given the strategic emphasis, while U.S. authorities are moving to restrict outbound investment into Chinese semiconductor venturescarnegieendowment.org. In 2023, the U.S. Treasury announced a program to screen and limit U.S. investments in Chinese semiconductor, quantum, and AI companieswhitecase.com. This unprecedented step (final rules slated for 2025) aims to prevent American money and expertise from indirectly fueling China’s tech rise.
On the flip side, China is redoubling incentives for foreign companies that bring needed technology – for instance, offering tax breaks for semiconductor investments and urging Taiwanese firms to maintain their operations in China. Yet, the looming threat of conflict or sanctions makes many businesses wary of deepening China ties in sensitive sectors. Taiwan, meanwhile, is striving to keep its firms competitive: the government has restricted certain advanced investments in China (for example, barring any transfer of 5nm and below process technology offshore9meters.com) and is increasing R&D subsidies and workforce training at home to secure its semiconductor crown.
TSMC: Strategic Keystone for Tech, AI, and Geopolitical Stability
Amid these upheavals, TSMC stands out as a company of singular importance, often described as the “world’s most important chipmaker.” Its strategic value extends well beyond its corporate or economic footprint – it has become a cornerstone of innovation and a linchpin in geopolitical strategy.
Global Tech Supply Chains Depend on TSMC: TSMC’s dominance in the semiconductor foundry market means that countless industries rely on it. The company holds around 55–60% of the global foundry market share, more than the next several competitors combinedmoomoo.com. In cutting-edge nodes (5nm, 3nm), TSMC’s market share exceeds 90%, since only Samsung competes in this space at allforeignpolicy.com. Practically speaking, this means if you use any modern electronic device, you are likely using chips made by TSMC. For example, every new iPhone’s processor is made at TSMC; so are the CPUs and GPUs powering advanced laptops, the chips in many high-end cars, and the microcontrollers in IoT gadgets. In data centers, the prevalence is just as high – processors from AMD and Apple, and GPUs from NVIDIA, all source from TSMC’s fabs. Even U.S. defense systems use TSMC-made chips for certain AI, communications, and sensor applications. This deep entwinement makes TSMC a single point of failure in the tech ecosystem: any significant disruption to TSMC’s operations would ripple across global production of electronics, automobiles, telecommunications equipment, and more. The 2021 semiconductor shortage gave a small taste of this reliance (when extended lead times at TSMC and others hampered auto manufacturing worldwide), but a larger-scale interruption would be exponentially more severeforeignpolicy.com.
Enabler of AI Advancement: The current revolution in artificial intelligence – from large language models to advanced analytics – is built on computing horsepower that TSMC enables. Training AI models requires massive numbers of top-tier GPUs or AI accelerator chips. TSMC manufactures the vast majority of these AI chips: NVIDIA’s A100, H100, and newer GPUs (integral to AI research and cloud computing) are produced by TSMC; Google’s Tensor Processing Units (TPUs) for AI are made by TSMC; specialized AI chips for startups (Graphcore, Cerebras, etc.) also rely on TSMC. It is not an exaggeration to say that without TSMC’s ability to fabricate high-density, high-performance chips, progress in AI would slow. When the U.S. restricted exports of those AI chips to China, it implicitly highlighted how advanced and scarce that capability is – essentially only TSMC (and to a lesser extent Samsung) can make them at needed scale. For the U.S. and allies, maintaining access to TSMC’s cutting-edge capacity is critical to staying ahead in the AI race. Conversely, China’s AI ambitions are thwarted in part because they cannot yet replicate TSMC’s 5nm/3nm process technology domestically, limiting them to less efficient chips for AIcsis.org. This disparity in chip prowess translates to a disparity in AI capability, underlining TSMC’s role as a strategic asset in the contest for AI supremacy.
Geopolitical Leverage – The “Silicon Shield”: Taiwan’s leadership often refers to the semiconductor sector as a “silicon shield.” The concept is that Taiwan’s indispensable role in the global economy – chiefly through TSMC – acts as a deterrent against military aggression by Chinathediplomat.comthediplomat.com. The logic: if conflict disrupts TSMC, the world (including China) would suffer a catastrophic economic blow, so all sides have a stake in preventing war. Indeed, a U.S. State Department-commissioned study found that a Chinese blockade or invasion that halts Taiwan’s chip output could cause $2+ trillion in annual global economic lossesforeignpolicy.com. This interdependence could make Beijing think twice about an attack, knowing it would destroy the jewel (TSMC) it might seek to acquire and wreak havoc on China’s own tech industries that rely on TSMC’s output. It also virtually guarantees that the U.S. and other nations would intervene to secure Taiwan, to protect their own economies from semiconductor collapsethediplomat.comthediplomat.com. Thus, TSMC is indirectly a security guarantor for Taiwan – a unique case where a commercial company has geopolitical importance.
However, Taiwanese experts also caution that this “shield” is a double-edged swordthediplomat.comthediplomat.com. As academic Wu Jieh-min observes, Taiwan’s chip prowess might increase Beijing’s temptation to control Taiwan, because absorbing TSMC would leapfrog China’s tech positionthediplomat.comthediplomat.com. Moreover, the U.S. may not want to be too dependent on Taiwan; in fact, U.S. efforts to diversify chip production (like urging TSMC’s Arizona fab) could be seen as weakening Taiwan’s silicon shield by reducing the world’s immediate reliance on the islandforeignpolicy.comforeignpolicy.com. Taipei is thus walking a fine line – it brandishes its semiconductor importance as a strategic asset, yet worries that if it loses that monopolistic importance (say, if multiple 3nm fabs exist outside Taiwan by late 2020s), its deterrent value diminishes. This concern was voiced by none other than TSMC’s founder Chang, who warned that excessive offshoring of Taiwan’s chip capacity could undermine Taiwan’s securityforeignpolicy.com.
National Security Calculus: From Washington’s perspective, TSMC is both an Achilles’ heel (a critical supplier outside U.S. territory) and a crown jewel to be protected. This dichotomy has driven U.S. policy: protect Taiwan robustly to safeguard TSMC, but also onshore some of TSMC’s capacity as insurance. U.S. military planners have reportedly conducted war games that factor in securing TSMC facilities in a Taiwan conflictbloomberg.com. Additionally, there is contemplation of extreme scenarios – sometimes called the “scorched earth” strategy – where, if Taiwan were ever invaded, the fabs would be disabled to prevent them falling into Chinese handstomshardware.comtomshardware.com. (TSMC Chairman Mark Liu once reassured that “nobody can control TSMC by force – if you invade, you will render the factories inoperable,” since chip fabs depend on global supply of tools/materials and precision that vanishes in wartheregister.com.) Such statements are meant to deter any takeover attempt by emphasizing it would be fruitless.
In summary, TSMC’s strategic importance cannot be overstated. It is the beating heart of modern electronics and AI, and a fulcrum in U.S.-China-Taiwan relations. This singular position has made TSMC’s wellbeing a matter of global concern. As an American analyst quipped, “TSMC is to tech what Saudi Arabia is to oil” – except even more irreplaceable in the near term. The final section will highlight insights from Taiwanese stakeholders on how they view the road ahead, given all these dynamics.
Insights from Taiwan: Views of Policymakers and Semiconductor Leaders
Voices from Taiwan provide a grounded perspective on how the island is managing the economic and geopolitical cross-currents. Taiwanese policymakers and semiconductor executives have generally embraced their role at the center of geopolitics, while also voicing caution about the challenges ahead. Here are some key themes from expert commentary in Taiwan:
Guarding the “Sacred Mountain”: In Taiwan, TSMC is often referred to as the “sacred mountain protecting the country”reuters.com, underscoring its significance to national security and prosperity. Leaders in Taipei emphasize that maintaining TSMC’s technological edge is a paramount national interest. The government has ramped up support for STEM education, R&D, and infrastructure to ensure Taiwan remains an attractive hub for TSMC and other chip firms. There is also a consensus that Taiwan must keep the crown jewels of chip technology onshore. In 2022, Taiwan’s legislature passed measures restricting chip companies from building their most advanced nodes abroad; for example, TSMC’s future 2nm and below process facilities must be first built in Taiwan and proven at home before any overseas expansion9meters.com. This policy reflects a determination to avoid know-how leakage and to keep Taiwan indispensable to the supply chain.
Support for Export Controls (with Limits): Taiwanese officials generally align with U.S. export control goals, as Taiwan also does not want its cutting-edge chips fueling China’s military. At the same time, they are careful to maintain that Taiwanese firms follow all laws and regulations – projecting an image of a reliable, rule-of-law supplier. After news of a possible U.S. fine on TSMC for the Huawei-linked chips, Taiwan’s Economics Minister Kuo retorted that TSMC “abides by the law in every country it operates”taipeitimes.com and that the ministry had not seen evidence of wrongdoing. This defense signals that Taipei will stand up for its companies if they are penalized, but notably TSMC itself has cooperated fully with U.S. authorities (even self-reporting the potential violation)taipeitimes.com. Taiwanese experts accept the rationale of export controls so long as there is a level playing field – i.e. all ally companies (in Japan, Korea, etc.) are equally constrained, so Taiwan’s industry isn’t singled out. They also prefer clarity and advanced notice on rules to ensure compliance can be managed without undue business disruptiontaipeitimes.com.
Wary of “Hollowing Out”: A prominent concern in Taiwan is the risk of its semiconductor sector being hollowed out if too much production and talent flow overseas. Morris Chang has been especially vocal, cautioning that U.S. chip subsidy programs, while understandable, might come “at the expense of Taiwan’s security” by siphoning manufacturing abroadforeignpolicy.comforeignpolicy.com. He bluntly said that “globalization… and free trade” in chips are giving way to a focus on national security, and that this **redefinition of globalization will make chipmaking less efficient and more costly for allreuters.comreuters.com. Chang and others urge the Taiwan government to create an environment such that TSMC keeps its most critical operations at home – for example, by ensuring stable water and power supply (Taiwan has faced power outages and droughts that threaten fab operations), and by offering tax incentives to retain R&D centers. There is a push for Taiwan to remain the primary locus of innovation (even if fabs are built abroad, the process technology development should occur in Taiwan).
Optimism in Diversification: Some Taiwanese commentators see opportunity in the current geopolitical climate. By working closely with the U.S. and other democracies, Taiwan can embed itself more deeply in global supply chains beyond China. The new U.S.-Taiwan trade agreements are welcomed as they could lead to broader economic integration. President Tsai Ing-wen’s administration (2016–2024) and her successor (as of 2024, President William Lai) have actively courted investment from the U.S., Japan, and Europe, portraying Taiwan as a stable partner in high-tech manufacturing. They point out that Taiwan’s trade with Southeast Asia and India is also growing, in line with Taiwan’s “New Southbound Policy” to diversify export markets. The subtext is that Taiwan does not want to be economically hostage to any one country – neither China nor the U.S. – and seeks a balanced portfolio of trade relationships.
Maintaining Cross-Strait Balance: Despite tensions, Taiwan’s leaders have not severed trade with China – it remains Taiwan’s #2 export marketglobaltaiwan.org. Taiwanese officials and businesspeople often emphasize a need to “maintain the status quo” in cross-strait economic ties even as political ties are strained. Semiconductor executives, including those at TSMC, carefully avoid any public statements that could be seen as provocative towards China. TSMC still operates a fab in Nanjing, China (producing 28nm chips) and sells to many Chinese fabless companies (for chips above the controlled threshold). The company has complied with U.S. rules but otherwise tried to keep Chinese customer relations cordial. Taiwan’s government quietly supports this approach – continuing normal commercial exchanges with China where possible, so that economic interdependence might restrain Beijing from extreme actions. At the same time, Taiwan is investing in its defense and lobbying for international support, recognizing that economic deterrence alone may not suffice.
Voices of Resilience: Taiwanese experts exude a certain resilience – having lived under Chinese threats for decades, they are used to navigating uncertainty. There is pride that Taiwan, through TSMC, holds a key role in the world economy. This pride was evident when Taiwan swiftly helped alleviate the auto chip shortage in 2021 under U.S. requests, showcasing its value. It is also evident in how Taiwan handled the Covid outbreak: keeping factories like TSMC running, which helped sustain global electronics production. Such experiences bolster the Taiwanese view that the world needs what Taiwan offers and that this global relevance is Taiwan’s strength. As one Taiwanese analyst put it, “Our silicon shield is not a guarantee on its own, but it gives us diplomatic leverage and a voice at the table that far exceeds our size”thediplomat.comthediplomat.com.
In conclusion, Taiwan’s insiders recognize the high stakes. They are adapting by doubling down on innovation, tightening cooperation with allies, and pragmatically managing relations with China. The overarching sentiment is that Taiwan will continue to be an indispensable player in semiconductors if it plays its hand wisely – nurturing TSMC’s dominance, engaging globally, and avoiding being caught in the middle without agency. As we move forward, their commentary suggests a cautious optimism: Taiwan has turned its precarious position into a strategic advantage, but it must continually recalibrate to keep it that way.
Conclusion
The landscape of U.S.-China trade and U.S.-Taiwan relations in 2025 is defined by tension and interdependence in equal measure. Trade and tariff battles that began with steel and soybeans have evolved into fights over silicon chips and software code. The United States, determined to maintain technological lead and supply chain security, is reshaping the rules of global trade – from tariff schedules to export blacklists – in ways that challenge decades of globalization. China is responding with its own tools, yet also faces the reality that some dependencies (like on Taiwanese semiconductors) cannot be quickly unwound. Taiwan, for its part, has emerged as both a beneficiary of trade realignments and a potential target within great-power rivalry, given its centrality in the semiconductor supply chain.
For investors and industry professionals, the key takeaways are clear: the semiconductor sector will continue to be volatile, politically charged, and strategically pivotal. Companies like TSMC are investing unprecedented sums to diversify production, even as they remain linchpins of global innovation at home. We can expect ongoing government intervention in this industry – through subsidies, export licenses, and possibly new trade agreements – as nations jockey for advantage in the “chip race.” Supply chains will likely grow more redundant and regionally segmented. This might reduce some efficiency, but it creates new investment opportunities in locales building up capacity (from Arizona to Dresden to Bangalore).
For policy experts, a central question is how to strike the right balance between national security and economic efficiency. The U.S.-China tech decoupling will not be absolute; managing a partial decoupling without severe global disruption is the challenge. Export controls will need constant refinement to address technological shifts (as seen by the 2023–24 updates), and tariff policies must consider unintended consequences on inflation and allies. Meanwhile, supporting partners like Taiwan through inclusive economic initiatives and security assurances will remain critical. Taiwan’s own perspective, as highlighted, is that of a pragmatic actor leveraging its strengths while hedging against risks.
In the coming years, the trajectory of U.S.-China relations – whether towards stabilization or further confrontation – will heavily influence the semiconductor ecosystem. Any easing of tensions could see selective relaxation of tariffs or joint frameworks on tech standards. Conversely, a slide into deeper rivalry could even more tightly constrain semiconductor trade and raise the specter of conflict over Taiwan. Stakeholders should monitor signals such as WTO case outcomes, new rounds of entity list designations, progress of U.S.-Taiwan trade talks, and Taiwan’s 2024 election aftermath for clues on direction.
One constant, however, is the strategic indispensability of TSMC and the Taiwanese semiconductor cluster. In 2025 and beyond, as AI, 5G/6G, and quantum computing advance, the world will only become more chip-centric. Ensuring those chips keep flowing is in every nation’s interest. In many ways, TSMC’s fortunes will serve as a barometer of U.S.-China-Taiwan relations: if TSMC thrives, it likely means a precarious peace and cooperation is holding; if TSMC struggles, it could indicate dangerous turbulence on the horizon. Investors, engineers, and policymakers alike would do well to keep their eyes on this critical bellwether.
Sources:
Reuters – Biden administration’s tariff review outcome (Sept 2024)reuters.comreuters.com
Reuters – China’s retaliation with mineral export ban (Dec 2024)reuters.comreuters.com
CSIS – Summary of 2022/2023 U.S. export controls on semiconductorscsis.orgcsis.org
Reuters – Nvidia export curb updates (Oct 2023)reuters.com
CSIS – Analysis of Dec 2024 chip controls (“eight major actions”)csis.orgcsis.org
Reuters – TSMC potential fine for Huawei-linked chips (Apr 2025)reuters.comreuters.com
Taipei Times (CNA) – Taiwan minister on TSMC export control compliance (Apr 2025)taipeitimes.comtaipeitimes.com
USTR – U.S.-Taiwan 21st Century Trade first agreement (June 2023)ustr.gov
Focus Taiwan (Taiwan Govt) – 2024 U.S.-Taiwan trade statistics reportfocustaiwan.twfocustaiwan.tw
Global Taiwan Institute – Analysis of early 2025 U.S. trade policy shiftsglobaltaiwan.orgglobaltaiwan.org
Foreign Policy – “Silicon shield” and U.S.-Taiwan semiconductor policy (Feb 2023)foreignpolicy.comforeignpolicy.com
Reuters – TSMC’s Morris Chang on de-globalization (Mar 2023)reuters.comreuters.com
The Diplomat (Taiwan scholar Wu) – Dual-edged nature of Taiwan’s silicon shield (Sep 2024)thediplomat.comthediplomat.com