Taiwan is a global chip manufacturing hot spot, home to companies like Taiwan Semiconductor Manufacturing (TSM -2.08%), which fabricates chips used in nearly every high-end technology. TSMC is a vital supplier to the artificial intelligence (AI) computing power arms race, and slapping a tariff on products that come from Taiwan could be a big hurdle for domestic AI companies to clear.

So, could a tariff from the United States wreck Taiwan Semi's stock? Let's take a look.

Understanding the goal is key to knowing how Taiwan will get out of tariffs

As of this writing, there are only rumors of tariffs coming to Taiwan, and no particular action has been taken. But that hasn't stopped Taiwan from getting ahead of the train. Its government has stated that it will assist companies that want to relocate to the U.S. and help them find economic partners.

This is likely a clue as to what President Donald Trump wants from Taiwan: to move its most lucrative businesses to the U.S.

Trump hasn't been shy about commenting on wanting to kick-start American chip manufacturing, but it seems like it may come at the cost of choking out the current chip industry leader, Taiwan Semiconductor. Trump has proposed up to a 100% tariff on Taiwan chips, which would make it very expensive to utilize Taiwan chips.

But I think Trump is looking for a further commitment from companies like TSMC to move manufacturing to the U.S., which Taiwan Semi is already doing. Its Arizona fabrication facility is already operational, and it is working on building a second and third fabrication facility in Arizona. This is a key point, and it could be a way for TSMC to wiggle out of these potential tariffs.

Regardless, if tariffs are enacted on Taiwan, the stock will likely sell off in a knee-jerk reaction. If that happens, investors should use every opportunity to load up on TSMC shares, as its chips are vital to nearly everything in the computing realm.

TSMC's chips are vital for products

Taiwan Semi's chips are used in products ranging from iPhones to Nvidia GPUs. These companies can't just flip a switch and use a different chip, as years of development work are involved. This protects TSMC from competition and will also save it if tariffs are enacted.

Taiwan Semi's CEO, C.C. Wei, has a great bead on the chip industry and has enough insight to project that Taiwan Semi's revenue will grow at a 20% compound annual growth rate (CAGR) over the next five years. He said that in the middle of January, knowing fully that Trump was coming into office with intentions of enacting tariffs.

As a result, I don't think there's any reason why investors should panic over the potential for tariffs to come into play. While it could shock the stock for one day, I think that will be a great buying opportunity, as TSMC is a best-in-class chip fabricator, which is a long-term boost.

The stock also has some of those fears priced into it, trading for 23 times forward earnings.

TSM PE Ratio (Forward) data by YCharts

I think that's a very reasonable price to pay, and investors should consider scooping up shares on any weaknesses. TSMC will be fine regardless of what happens with tariffs, as it is in a vital position within the chip industry.