Taiwan Faces Dilemma Over Semiconductor Strategy and Security
Taiwan’s government is grappling with the implications of its semiconductor industry as U.S. Commerce Secretary Howard Lutnick recently indicated that the United States could not guarantee its defense of the island unless Taiwan agreed to share its semiconductor production in a 50-50 split with the U.S. This stark warning has raised concerns in Taipei about the strategic value of the island’s semiconductor dominance, which had previously been viewed as a protective “silicon shield” enhancing Taiwan’s security.
Historically, Taiwan’s position as a key player in global semiconductor manufacturing has underpinned perceptions of its strategic importance. However, Lutnick’s comments shifted that narrative, suggesting that Taiwan’s control over semiconductor production could actually serve as a liability for the United States. Analysts and policy experts in the U.S. often assess the external threats to Taiwan’s silicon shield, particularly focusing on Beijing‘s push for semiconductor self-reliance and Taiwan Semiconductor Manufacturing Company (TSMC)’s expansion into international markets, including a significant investment in Arizona.
The real vulnerability, however, stems from a lack of alignment between Taiwan’s government and TSMC, a private entity. Officially, the Taiwanese government holds a 7.69 percent stake in TSMC, represented on the company’s ten-member board via the National Development Fund. This arrangement appears more symbolic than impactful, as it provides limited influence over the firm’s strategic direction. While the administration of President Lai Ching-te acknowledges TSMC’s critical role in Taiwan’s economic survival, it continues to defer to the company’s business decisions.
Taipei has frequently approved TSMC’s unprecedented overseas investments, framing them post-factum as beneficial to national interests rather than proactively aligning them with Taiwan’s security agenda. The current dynamic heavily favors TSMC’s commercial interests over state priorities. In a commentary for Foreign Affairs in 2021, former President Tsai Ing-wen positioned semiconductors as a strategic asset, vital for Taiwan’s defense against supply chain coercion and as a cornerstone of its global economic role.
Yet, industry leaders like TSMC’s former Chairman Mark Liu have expressed skepticism towards these narratives. In a 2023 interview with the New York Times, Liu stated that semiconductors would not influence China’s decisions regarding Taiwan, reflecting TSMC’s intention to remain politically neutral. While the Taiwanese government has endorsed TSMC’s expansions, the company’s long-term strategies appear primarily driven by market access, supply chain stability, and shareholder value rather than as instruments of national defense.
Earlier this year, TSMC made headlines with a commitment to increase its total investment in the U.S. to $165 billion. The firm framed this decision as a measure to mitigate supply chain risks and secure long-term contracts with major clients such as Apple and Nvidia. However, the logic behind TSMC’s initial expansion to Arizona, announced in 2020, cannot be fully explained by commercial considerations alone. The U.S. has pressured TSMC to “pick a side,” reinforcing its commitment to an onshore supply chain.
The political landscape has become increasingly complex, especially with the potential for a shift in U.S. strategy under a new administration. The Biden administration has used unpredictable tariff threats to encourage Taiwan to align more closely with U.S. interests, raising concerns in Taipei about the erosion of its silicon shield and bargaining power.
The lack of clear alignment between TSMC’s business decisions and Taiwan’s governmental priorities raises questions about the future direction of both entities. The Taiwanese Ministry of Economic Affairs holds the legal authority to block investments exceeding 1.5 billion new Taiwan dollars (approximately USD $50 million) if deemed against national interests. However, this power has never been invoked, primarily due to the political implications of obstructing U.S. investments.
The Taiwanese government has consistently approved TSMC’s requests for overseas expansions, framing these decisions as consistent with national security interests after the fact. The project in Arizona serves as a prime example of this reactive approach, where the government’s narrative was constructed only after the deal was finalized, indicating that Taipei is responding rather than proactively shaping TSMC’s strategic decisions.
This disconnect has intensified divisions within Taiwan’s political landscape. The opposition Kuomintang (KMT) party has criticized the Lai administration for allowing TSMC to dictate policy, fueling public fears that U.S. pressure could undermine Taiwan’s semiconductor security. Beijing has sought to exploit these tensions, suggesting that U.S. pressure on TSMC signals an eventual abandonment of Taiwan.
While there is some level of coordination between the government and TSMC, the agenda is largely influenced by TSMC’s business needs rather than Taiwan’s security concerns. The decision to expand operations in Arizona reflects a business strategy shaped by U.S. political pressures and TSMC’s reliance on American electronic design automation software, which is critical for its operations.
The U.S. interest in TSMC’s investment began prior to the current geopolitical climate. In 2016, the U.S. International Trade Administration invited TSMC to consider building fabs in America for risk diversification, but the plan was ultimately abandoned due to high projected costs. As geopolitical pressures grew and U.S. reliance on TSMC increased, the company found itself compelled to respond to American demands.
Although TSMC’s Arizona facilities have not yet crossed a national security threshold for Taiwan, their approval without established guidelines raises concerns about the influence of external pressures on the firm’s strategic direction. Earlier this year, the Legislative Yuan amended Article 22 of the Industrial Innovation Act to introduce the “N-1” rule, limiting overseas facilities of Taiwanese chipmakers to producing chips one generation behind those manufactured in Taiwan. This legal framework serves to link advanced technology with national security.
The relationship between TSMC and Taiwan is reciprocal; TSMC relies on Taiwan’s infrastructure for talent, research, and development. The company’s advanced technology remains primarily within Taiwan, where its unique ecosystem supports its innovation. Replicating this environment abroad necessitates considerable investment and time, suggesting that Hsinchu will continue to be central to TSMC’s operations.
To retain its semiconductor dominance and bolster its geopolitical standing, Taiwan must ensure that corporate decisions align with national security needs. As Washington seeks to localize more semiconductor production, it must acknowledge that Taiwan’s leadership in this sector is crucial for its own strategic leverage.
Taiwan need not nationalize TSMC or undermine its business model, but the government must take a more assertive role in guiding the company’s decisions. Increased transparency in the relationship between TSMC and the government is vital. By clarifying how corporate strategies align with national security objectives, Taiwan can strengthen its democratic processes and enhance its security posture in a challenging geopolitical landscape.
