Earlier this month, Taiwan's biggest chipmaker reportedly took a step that sparked discussion around the world: holding its first board meeting on American soil.

The event would be a symbolic move by Taiwan Semiconductor Manufacturing Co. (TSMC), a sign of the company's commitment to manufacturing microchips in the United States. And its timing could not have been better.

Just days before, US President Donald Trump had railed against Taiwan's world-beating semiconductor factories, complaining that they "took our chip business away" and warning "we want that business back".

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To push chipmakers to shift production to the US, Trump has threatened to slap tariffs of 25 per cent on shipments of foreign-made semiconductors - and introduce even higher duties if necessary.

Taiwan is in the US president's crosshairs because of its dominance of global chipmaking. The island accounted for 76.8 per cent of the world's wafer production, packaging and testing in 2024, according to the Taiwan Semiconductor Industry Association.

Given that advanced chips underpin everything from artificial intelligence to advanced weaponry, the US' reliance on Taiwan is a strategic vulnerability. It is also expensive.

Taiwan's trade surplus with the US surged to a record US$64.8 billion last year, according to government data. And unless action is taken, it is likely to continue to grow as artificial intelligence drives a boom in demand for cutting-edge chips.

This year, the production value of Taiwan's locally made semiconductors is forecast to reach NT$6 trillion (US$183 billion), up 16.5 per cent year on year, according to the government-run Industrial Technology Research Institute.

But the prospect of steep US tariffs is now forcing companies across Taiwan to make a difficult decision: set up expensive new American factories, or look for other ways to cope with the higher duties.

Policymakers and businesses in Taiwan have taken pains to show they are responding to Trump's agenda in recent weeks, with TSMC playing a leading role.

The world's largest contract chipmaker has invested heavily to set up a new plant in Arizona, which recently started producing the firm's advanced 4-nanometre chip. TSMC says the facility will begin making even more cutting-edge products by 2028.

On February 14, Taiwan's leader William Lai Ching-te pledged to step up government support for Taiwanese companies to increase their investment in the US, and to strengthen communication with Washington on semiconductors to allay Trump's "concerns".

According to Allen John Ku, director of the government-run Start-up Island Taiwan programme, TSMC's Arizona project is "just the start".

In reality, Taiwanese companies have already increased their investments in the US electronics industry over the past few years, as they seek to align with Washington's agenda, Moody's Analytics noted earlier this month.

Taiwan's largest chipmakers, such as TSMC and United Microelectronics Corporation (UMC), have "sufficient capability" to fan production into the United States, said Brady Wang, a Taipei-based analyst with the tech research firm Counterpoint.

In January, UMC agreed a deal with Silicon Valley-based component designer Intel to "collaborate" on developing a chipmaking process in the US to serve what they called "high-growth markets".

However, Taiwan's many smaller chipmakers would find it relatively expensive to run fabs in the United States, analysts said. Land and labour can be prohibitively expensive.

"While establishing a fab in the US could provide a way to circumvent tariffs, the financial feasibility of such investments remains a key concern," said Cheng Kai-an, a senior industry analyst with the Market Intelligence & Consulting Institute in Taipei.

Any company looking to set up foundries to make wafers in the US would need to be confident there is sufficient available skilled labour, a stable supply chain, long-term client demand and, ideally, government incentives, Cheng said.

"Chip manufacturing is extremely capital intensive," said Michael Yang, senior director for semiconductors at the tech analysis firm Omdia.

"For foundries that don't have a scale comparable to the top four or five, it's quite difficult to make such a large investment, regardless of location."

Jmem Technology, a start-up that designs integrated circuits for cybersecurity computations, does not expect the chip industry to recalibrate if Trump imposes tariffs, said Kiki Chen, a marketing manager at the company.

The Taipei-based firm, which has raised US$6 million in capital, predicts the tariffs would have a "limited impact" on its business, because it designs specialised chips and has wide-ranging partnerships, Chen said.

"Our core technology focuses on ... high-value-added products driven primarily by technological innovation rather than price competitiveness," she said. "As a result, tariff adjustments are unlikely to significantly affect market demand for our solutions."

Jmem has a customer base spanning Asia, Europe and the US, meaning that it is not dependent on a single market, Chen added. "Even if tariffs impact the US market, we can leverage other markets to maintain overall business stability," she said.

For overseas governments, taxing specific chips made in Taiwan would be a challenge anyway, because Taiwan's foundries often manufacture IT devices for branded customers in different countries, Wang of Counterpoint said.

Many chip firms in Taiwan say they plan to keep the bulk of their production onshore to take advantage of the island's mature supply chain and enduring talent networks. Two of Jmem's co-founders, for example, met as classmates at a Taiwanese university.

"This alumni community base really helps a lot of these Taiwanese founders get off the ground," said Ku, the director of Start-up Island Taiwan.

Despite its US investment, TSMC continues to see Taiwan as a "vital ecosystem" for semiconductor manufacturing due to its local talent and decades-old factory construction partners, said Nina Kao, a company spokeswoman.

Many key equipment and materials suppliers for advanced semiconductor manufacturing are based in Taiwan, she added.

TSMC plans to start construction on two new fabs in the Taiwanese port city of Kaohsiung this year.

The company's 2nm and 3nm chipmaking technology lack "viable alternatives" around the world, Ku said. If the US imposes tariffs, it may galvanise TSMC to invest more in research and development, ensuring "continued reliance on Taiwan".

Meanwhile, Taiwan is attracting a wave of investment from Western companies, which reduces the need for Taiwan's firms to respond to US demands.

American microprocessor designer AMD and Dutch chipmaking equipment maker ASML have committed to establishing facilities inside a new hi-tech cluster for AI-related projects in southern Taiwan, Ku said.

The Taiwan government has said it would spend US$1 billion per year over the next half-decade to build infrastructure for the cluster.

American companies see the risk of doing business in Taiwan as lower now than two years ago, Dan Silver, chairman of the American Chamber of Commerce in Taiwan, told the Post in January.

Even if tariffs hit Taiwan's chips, the concentration of talent and supply chains on the island is so high that chip industry investors "must include Taiwan", Ku said.

"It doesn't show they're tempted to do it elsewhere," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2025. South China Morning Post Publishers Ltd. All rights reserved.