Last December, at the unveiling of a new semiconductor plant in Arizona, U.S. President Joe Biden triumphantly declared that “American manufacturing is back, folks.” Yet to some in attendance, the event was not a cause for celebration.
The Arizona plant belongs to Taiwan Semiconductor Manufacturing Company (TSMC). TSMC founder Morris Chang is a revered figure in Taiwan for making the island a technological powerhouse—but he is also one of the most outspoken critics of Biden’s plan to reinvigorate the U.S. semiconductor industry. In recent months, Chang has sounded the alarm that Taiwan’s chip sector is being “hollowed out” at the expense of its security. But unable to resist lush financial incentives and diplomatic pressure from Washington, TSMC and Taiwanese authorities approved the new Arizona plant.
Chang’s concerns reflect a brewing Taiwanese anxiety about the U.S. policies reshaping the global semiconductor industry. The new measures—which include billions of dollars in federal subsidies and an expanded basket of export controls—are intended to secure U.S. supply chains and keep U.S. technologies out of China’s hands. But to officials in Taiwan, the moves paint a worrying picture for the future of an industry they believe has helped keep the threat of a Chinese invasion at bay.
Led by TSMC, Taiwanese foundries supply more than 60 percent of semiconductors and 92 percent of the world’s most cutting-edge chips. This dominance has made the island a strategically valuable chokepoint in the semiconductor supply chain. A recent study commissioned by the U.S. State Department found that a disruption to Taiwan’s chip industry caused by a hypothetical Chinese blockade would cause a staggering $2.5 trillion in annual losses to the global economy.
While this uniquely concentrated supply chain is causing unease in foreign capitals and corporate boardrooms, to Taiwan’s leaders, it is one of the island’s most important geopolitical assets. Taiwan’s chip industry has come to be known as a “silicon shield”—the idea that global reliance on Taiwan’s chipmakers keeps the island safe from a Chinese military invasion.
The silicon shield theory holds that semiconductors offer Taiwan a dual layer of protection. First, because China’s own technology sector remains heavily dependent on Taiwan’s foundries, Chinese Communist Party (CCP) leaders will be forced to consider both the economic and military costs of an invasion—a consideration that may tip the cost-benefit calculations in favor of restraint. Despite a growing ecosystem of world-class technology design firms (including Baidu and Alibaba) and a massive government program pushing domestic production, China has failed to establish a competitive chip-manufacturing base. Until Chinese firms find an alternative to Taiwanese suppliers, the fate of Beijing’s economic development objectives remains tied to peace and stability across the Taiwan Strait.
The second layer lies in the dependence of third parties—including major economies such as the United States, Japan, and the European Union (EU)—on Taiwan’s semiconductor industry. These countries have an important material stake in preserving Taiwan’s autonomy. In addition to moral, strategic, and political rationales to defend Taiwan, the need for advanced chips helps ensure that protecting Taiwan’s foundries—and, by extension, the island’s sovereignty—remains a vital interest for much of the world.
Some analysts suggest that China’s reliance on TSMC serves less as a protective shield and more as a lure, potentially incentivizing CCP leaders to assert control over the company to gain dominance over the strategic technology supply chain. But in reality, TSMC’s manufacturing capabilities rely on a variety of critical inputs that are predominantly supplied by U.S. and U.S.-allied firms. Even if Taiwan’s chipmakers survived an invasion, their continued operation would be severely compromised as Washington and its allies would almost surely respond by withholding inputs.
It is impossible to measure exactly how much—if any—influence the silicon shield truly has on Chinese President Xi Jinping and the CCP’s strategic planning toward Taiwan. The more important point is that Taiwanese officials and industry leaders clearly believe in the theory.
In a 2021 article in Foreign Affairs, Taiwanese President Tsai Ing-wen explicitly named the island’s semiconductor industry as “a ‘silicon shield’ that allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains.” Taiwan’s economy minister, Wang Mei-hua, has likewise alluded to the importance of semiconductors in deterring conflict, stating that the industry “appears to be connected to our national security.” And Taiwanese industry leaders also hold this view. Chang recently told 60 Minutes that “because our company provides a lot of chips to the world, maybe somebody will refrain from attacking.”
The Biden administration is aware of the importance of semiconductor manufacturing to U.S. national security. In November 2022, Commerce Secretary Gina Raimondo referred to chips as “ground-zero” in the emerging U.S. strategic competition with China. The dilemma for both U.S. and Taiwanese policymakers is that key facets of the U.S. semiconductor strategy are directly in conflict with Taiwan’s efforts to protect its silicon shield. These misaligned interests threaten to undermine the close cooperation between the two required to effectively deter Chinese coercion.
Washington seeks to incentivize the return of semiconductor fabrication to the United States, which has seen its share of global chip manufacturing fall from 37 percent in 1990 to 12 percent today. Last August, Biden signed into law the CHIPS and Science Act of 2022, which provides $52 billion in federal subsidies for global chip manufacturing firms to build fabrication facilities (also known as fabs) on U.S. soil, among other things. The subsidies have already sparked a boom in investment in U.S. chip manufacturing from leading firms such as Intel, Samsung, TSMC, and Micron.
The underlying objective of U.S. re-shoring—reducing the vulnerability of the semiconductor supply chain to potential shocks—necessarily comes at the cost of Taiwan’s dominance over chip manufacturing. Raimondo has repeatedly made clear that a major goal of the CHIPS Act is to reduce the United States’ “untenable” reliance on Taiwan’s chipmakers, arguing instead that “we’ve got to make those in America, period.”
While TSMC’s absolute fabrication capacity is projected to grow significantly over the next decade thanks to increasingly favorable business environments in the United States, EU, and Japan, the share of advanced chips produced within Taiwan will likely gradually decline. For many in Taiwan, this receding dominance undermines the core logic of the silicon shield: As the United States and its major strategic partners grow less reliant on Taiwan’s fabs, protecting the island may no longer be a critical economic security imperative.
Perhaps of greater risk to Taiwan in the short term is the second facet of U.S. semiconductor policy: the unprecedented expansion of export controls targeting China’s advanced chip sector. Announced by the Commerce Department’s Bureau of Industry and Security (BIS) on Oct. 7, 2022, these new controls restrict China’s ability to purchase or manufacture high-end chips using a regulatory mechanism called the foreign direct product rule (FDPR). FDPR provides the U.S. government with extraterritorial jurisdiction to prevent even non-U.S. companies from doing business with China if their products contain U.S.-origin technology.
Given that TSMC relies heavily on U.S. inputs in its manufacturing process, the new rules allow Washington to block the firm from fabricating advanced artificial intelligence (AI) chips for Chinese buyers. These services make up just a fraction of TSMC’s business, but for China’s emerging AI and supercomputing industries, the loss of access to TSMC’s cutting-edge chips will likely prove devastating.
The more Chinese firms lose access to advanced chips produced in Taiwan, the less reliant China will be on TSMC. With its advanced chip supply already limited, Chinese leaders may calculate that the cost of losing access to Taiwanese fabs is no longer a relevant concern. Experts have suggested that U.S. pressure may even be approaching Beijing’s “unknown red lines.” The rules are also likely to add urgency to China’s long-standing effort to develop a self-sufficient chip industry that no longer relies on Taiwanese or Western chokepoints.
Taiwan’s precarious geopolitical position and dependence on the United States for military support mean that its leaders are relatively restrained in their public criticisms of U.S. policy. Governments of other U.S. partners—including Singapore, Japan, South Korea, and the Netherlands—have been less coy about their irritation with Washington’s hard-line approach. But even in lieu of public admonitions, actions by Taiwan’s government and industry show a clear line of resistance.
In a statement following the U.S. Congress’s passage of the CHIPS and Science Act, Taiwan’s economy minister declared that “Taiwan’s key position in semiconductors will not be shaken.” This sentiment is reflected in Taiwan’s hesitancy to allow its most advanced technologies to move overseas. While TSMC has acquiesced to intense pressure from U.S. industry to build the advanced fab in Arizona, by the time the plant begins full-scale production in 2024, it will be a generation behind the firm’s more cutting-edge fabs in Taiwan.
Taiwan’s government has also stepped in to protect its companies from “unreasonable” information requests from the U.S. government. In 2021, for example, the island’s economy ministry supported TSMC’s decision not to share sensitive information with Washington after the White House requested details about the global semiconductor shortage.
Still, Taiwan’s ruling Democratic Progressive Party has come under fire domestically for allowing the “de-Taiwanization” of the island’s chip sector. As the opposition Kuomintang party looks to build on its recent electoral success and reclaim power in the upcoming 2024 presidential elections, candidates may capitalize on the issue to contrast themselves as defenders of Taiwanese industry and strategic independence. Chinese media outlets have already sought to play up these nascent signs of discontent in Taiwan, an effort that is likely to continue to intensify as the elections near.
U.S. officials should publicly acknowledge Taiwanese concerns and emphasize that the United States aims to augment, not fully replace, Taiwan’s role in the global semiconductor supply chain. The Biden administration can also highlight its efforts to support Taiwan’s self-defense capabilities and ongoing U.S.-Taiwan trade talks to demonstrate its continued commitment to Taiwan’s security and prosperity. At a moment when the fragile cross-strait equilibrium is facing unprecedented challenges, neither the United States nor Taiwan can afford to allow rifts to grow in their relationship.
Aidan Powers-Riggs is a writer and analyst based in Washington.