How Taiwan’s Chip Industry Navigates US Industrial Policy and Export Controls

This article was originally published by Global Taiwan Institute in its weekly newsletter, The Global Taiwan Brief, Vol. 10, Issue 5. Used with permission. To get the Global Taiwan Brief in your inbox every week, subscribe at globaltaiwan.org/subscribe. Lery Hiciano is a recent graduate from National Chengchi University’s International Master’s in Asia-Pacific Studies, based out of Taipei, Taiwan.

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Introduction

Taiwan’s relationship with the United States, and its role in geopolitics more broadly, is inextricable from that of the semiconductor industry—and more specifically, Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司). The chip shortage of 2021 put TSMC and chips at the center of debates around supply chains and equipment shortages, and made Taiwan a mainstream headline topic. TSMC, in its singular role at the apex of global semiconductor production, accounts for more than 90 percent of the world’s advanced semiconductor manufacturing capacity. In 2022, the Biden Administration continued the Trump Administration’s use of export controls, and placed the Foreign Direct Product Rule (FDPR) at center stage of the ongoing US effort to limit China’s technological advancement—especially in semiconductor capabilities. Those 2022 rules were expanded in 2023, and have once again received two major updates as Biden’s term ended and Trump returned to the presidency.

Despite Taiwan’s importance to the semiconductor industry and its geopolitical situation vis-à-vis China, Taiwan’s role in semiconductor export control efficacy, and what those chips mean for Taiwan, are often overlooked. The multilateral trade agreements that the United States has with Japan and the Netherlands do not include Taiwan. Moreover, China’s retaliatory measures in response to export controls usually skip targeting Taiwanese firms. Yet the past, present, and future status of export controls could have major ramifications for Taiwan, US-Taiwan relations, and US geopolitical goals.

What Are Export Controls and What Have Been Their Effects in Taiwan So Far?

Legally, export controls limit Taiwan’s economic freedom by giving the United States more leverage over the types of economic activity in which Taiwanese firms can engage. Using FDPR, any finished product that uses a certain amount of US technology is subject to export control jurisdiction, regardless of the place where it was made. An expert once described the situation as US technology “contaminating” whatever it is placed in, giving the United States jurisdiction over huge swaths of international supply chains. [1]

Although TSMC does operate subsidiaries in China, the fabs in China are kept several generations behind TSMC’s most advanced designs, and the company has received permission from the United States to continue exports permanently, ensuring that those fabs can continue to operate. In other words, these fabs are not relevant or a threat to the export control regime or the broader geopolitical balance of power. As Taiwan is included within the first tier (inner-group, partner country designation in the United States’ latest export control regulations), it is unlikely for these fabs to expand or receive technological advancements that are substantial enough to impact the broader landscape—now that rules limit the amount of production possible outside of tier one nations, and TSMC’s subsidies from the CHIPS Actprevent the company from expanding manufacturing in China.

TSMC moved quickly to cut off Huawei and other entities blacklisted by the US government, but given that international demand so far outweighs supply, the company has avoided financial damage from following US demands. Its services are so in demand that it has raised prices and recorded all-time highs in net profit as well as market capitalization.

Beyond TSMC, most Taiwanese semiconductor firms either do not make products that meet export control thresholds, or else they have received permission to continue business as usual— meaning that Taiwanese exports to China have grown in the years following the initial export control restrictions. This may be partly explained by Chinese firms stockpiling technology in case it is one day restricted; but overall, the close alignment between the United States and Taiwan on this issue has not imposed major material financial costs on Taiwanese firms.

What Happened at the End of 2024 and Beginning of 2025 that Will Materially Impact this Dynamic? 

Two major pieces of US legislation, one in December 2024 and another in January 2025, will have major ramifications on this industry moving forward. The former is the 2024 expansion of the export control rules—which, like those in 2022 and 2023, makes the “small yard, high fence (小院高牆)” approach first put forward by US National Security Advisor Jake Sullivan larger and taller. Amongst the many changes, the new laws expanded controls to include high-bandwidth memory (HBM) chips (not just processing units), and lowers the de minimis thresholds for the FDPR, thereby ensuring that much of the industry remains subject to US jurisdiction. Previously, US restrictions only targeted finished products that met FDPR thresholds (such as NVIDIA’s AI accelerators), but these new rules aim to cut Chinese firms off from the intermediary technology that many have stockpiled over the last three years.

The January 2025 rules, known as the “AI Diffusion Rule,” were immediately controversial upon announcement—but they have yet to go into effect. NVIDIA called the regulations a “regulatory morass,” and accused them of weakening US global competitiveness and its technological advantage. Moor Insights & Strategy Founder, CEO, and Chief Analyst Patrick Moorhead called them “unprecedented.”

The new laws categorize every country in the world into three groups, with only the first group—made up of 18 key allies and partners—facing no restrictions on their access to chips. The law seeks to close loopholes, such as Chinese companies’ using data centers operated by third party firms outside of China’s borders. Interestingly, these laws also apply to the software behind the AI models, known as “weights,” which until now have escaped scrutiny. Furthermore, the law allows for countries in the other tiers and firms from those countries to be afforded higher thresholds for imports, exports, and computational power, if those entities obtain “National Verified End User Status.” It is a bold attempt by the US government to re-position itself as the leader in the technological sphere of influence—by withholding access to what many consider the next technological breakthrough only for countries that abide by its rules.

The AP has cited government officials to describe the new law as part of efforts to maintain America’s “six to 18-month advantage” in the AI space—a far cry from the 4-5 years that many originally envisioned when the Biden Administration first expanded export control laws. While this number is disputed, in August 2024 media outlets speculated that China had closed the gap to just two to three years. The controversy over this became loud enough that Taiwan’s National Science and Technology Council (國家科學及技術委員會) Minister Wu Cheng-wen (吳誠文) had to provide an explanation to the Legislative Yuan about it.

US efforts to lessen dependence on Taiwanese semiconductor manufacturing, part of the justification behind legislation such as the CHIPS and Science Act and a key talking point regarding US industrial policy, has yet to fully bear fruit. TMSC’s new Arizona plant, while successfully onshoring manufacturing that was long-ago lost to Asia, does not fundamentally reorient the semiconductor industry’s supply chain or decrease American reliance on Taiwanese expertise. In the same vein as a warning from TSMC’s chairman that an invasion would render TSMC not operable due to the facility’s connection to the outside world, it is equally difficult to imagine a world in which TSMC’s US fabs can operate without inputs from the main facilities in Taiwan.

Taiwan recently lifted restrictions on TSMC’s ability to manufacture leading-edge chips outside of Taiwan: no longer requiring that such production stay 1-2 generations behind domestic manufacturing, which also aligns with the American government’s goal of onshoring more capacity. However, much of the company’s research and development (R&D) and its leadership, will remain in Taiwan, to say nothing of the fact that TSMC remains subject to Taiwanese laws. Furthermore, TSMC being allowed to expand its capacity to meet the needs of US high-technology industries enlarges the moat the company has built for itself, making it even less likely that a US competitor like Intel could ever hope to catch up. Despite the lifting of restrictions—and despite Taiwan’s current minister of the economy saying that “times have changed”—TSMC’s international investments will remain a political issue on the island moving forward. During the elections at the end of 2022, Kuomintang (KMT, 國民黨) politicians complained about the Democratic Progressive Party (DPP, 民主黨) “gifting” the company to the United States.

Intel, nominally TSMC’s competitor, just fired its engineering-focused CEO Pat Gelsinger, who had promised to invest heavily into R&D and to challenge TSMC by manufacturing chips on behalf of other firms. The board’s surprise decision to fire him has led to widespread reportsthat the price tag on these investments, and the long time-horizon before they bore fruit, were unbearable for investors. Not only that, rumors abound that Intel may spin-off its chipmaking business—perhaps to a consortium including TSMC—who would then be charged with managing their former rival’s manufacturing facilities. That alone would have been unthinkable a month ago, let alone two years ago when the CHIPS Act was first passed.

Two years ago, Intel was the number one beneficiary of future funding under the CHIPS Act, and the poster child for the US foray into industrial policy as practiced in East Asia. Now, the firm seems to be doing an about-face and foregoing the billions in subsidies in return for a higher margin business model—one that, while financially sound, undermines the American government’s broader objectives and makes TSMC stand out even more in the sector. While President Trump states that the government’s goal is to onshore manufacturing, lessen dependence on outside stakeholders, and reduce trade deficits, Taiwan and TSMC are not mere pawns that will go along with such an exercise blindly.

Looking to US allies outside of Taiwan, in the semiconductor industry there are three that take priority: the Netherlands (home to ASML), Japan (home to several firms that are vital intermediaries in the supply chain), and South Korea (home to Samsung, SK Hynix, and several other key intermediary firms). Industry lobbying in the United States has pointed to Korean firms as a weak link in the semiconductor export control regime, claiming that overly strict export laws would result in Korean companies benefiting from continuing trade with China while American firms lose revenue. Furthermore, HBM chips, vital for AI breakthroughs, are only made in three companies in the world—Samsung, SK Hynix, and US-based Micron—meaning that South Korea is a vital lynchpin for the industry moving forward. Samsung’s failures in the increasingly crucial HBM space are widely publicized, and if the firm fails to catch up in this sector, it potentially concentrates another key aspect of the semiconductor supply chain in one source, outside US borders. Despite South Korea’s inclusion in the first tier of the “AI Diffusion Rule,” future Korean governments may be more amenable to China, and much less willing to go along with US export controls if they result in domestic firms falling behind Chinese competitors.

The lack of domestic alternatives to TSMC and other firms in allied countries means that while export controls do give the United States greater legal leverage over Taiwanese firms, they give those same firms and the Taiwanese government greater access to US technology, raise political support for pro-Taiwan policies in the United States, and ideally prevent Chinese competitors from overtaking them.

What Are the Things to Watch Out for in the Rest of the Year and Beyond?

Given uncertainties around the world, it is difficult to predict the future. For example, as manufacturing and inbound investment shifts away from China to other countries like India, ASEAN, or Mexico, that could lead to trading backlash towards them as well. A country like Vietnam, which has benefited from increased investment as companies move away from China, is now particularly susceptible to US tariff action, for example. Furthermore, given the current rhetoric from the Trump Administration, it would be incorrect to assume that Taiwan’s sole value is as the production hub of a valuable trade good. While semiconductors are important, the “silicon shield” is neither why Taiwan remains independent nor why China wishes to invade. It is also incredibly easy to project forward and assume that the current political climate has fixed global alignment in place. It was only a decade ago that Ma Ying-jeou (馬英九) and Xi Jinping (習近平) held their landmark meeting in Singapore as part of a push for Taiwan to more closely integrate with China. A repeat of that episode now seems impossible, but there is no guarantee that the status quo will remain as such in the long-term.

However, there are certain markers of progress or backsliding worth monitoring in the short term to see whether US policies are overly burdensome, and whether Taiwan is “winning” from its closer alignment with the United States. Within the semiconductor industry, Chinese targeting of firms like TSMC, UMC, or others in the sector would be a major indication of a changing dynamic. Furthermore, lower reported revenues, difficulties making further breakthroughs, or drastic drops in Taiwanese firms’ market share in China would all suggest that government policies have started to weigh down the sector. Hypothetically, if in the future, TSMC reported less than favorable growth, this would be a cause for concern— and would suggest to TSMC that growing its manufacturing and customer base in the United States at the expense of opportunities outside the US technological sphere no longer makes business sense.

If Chinese companies continue to catch up—or to leapfrog their way to relative competition with the likes of TSMC, NVIDIA, Oracle, Google, or any of the other major western tech firms—it would be difficult to maintain industry or political support for seemingly ineffective policies that cede significant amounts of global influence and market share to unrestricted competitors. The growing importance of firms like TSMC, NVIDIA, ASML, and more is also a weakness. Export controls’ ability to meet their goals rests on technological supremacy remaining within the US-led world order, which cannot be guaranteed moving forward.

The DeepSeek episode, which saw NVIDIA lose USD $600 billion in market value in one day, demonstrates that while these firms may be “too big to fail,” putting all of the proverbial eggs in one basket can backfire dramatically. Furthermore, Trump’s threat of placing tariffs on all Taiwanese semiconductors indicates that the bipartisan support Taiwan has enjoyed until now may not be a permanent condition.

The importance of Taiwan to the semiconductor industry, and in turn, the importance of the semiconductor industry to US geopolitical goals and technological development, places it at the center of Taiwan-US relations and policy. As such, it is possible to see semiconductor policy on both sides of the Pacific as a proxy for how US-Taiwan relations are developing, and how confident each side is in the other maintaining its commitments. From Taiwan’s perspective, the trade-off between US security guarantees versus economic growth from greater integration with China is a major question each presidential administration must grapple with. The regional military balance of power, US arms sales to the island, and increasingly official recognition of Taiwan’s sovereignty are all key signals of that balancing act.

The main point: Recent US export controls give the United States increasing leverage over Taiwan’s businesses, especially TSMC. Taiwan is ceding limited control of its most prized corporate jewel—betting that it can remain at the front of its field relative to competitors from China, South Korea, or the United States—in the hope that the United States will deepen its commitment to assisting the island in the face of increasing aggression from China. However, given the unpredictability of another Trump term, it is not clear whether that will happen. Moving forward, it will be important to keep an eye on several indicators— technological, political, economic, and security—in order to determine the cost and benefits of US-Taiwan engagement.

[1] Tamada, Dai, and Philippe Achilleas, eds. Theory and Practice of Export Control: Balancing International Security and International Economic Relations. Springer Briefs in Economics. Singapore: Springer, 2017, 59. https://doi.org/10.1007/978-981-10-5960-5.

(Featured photo from Taiwan Semiconductor Manufacturing Company)