Taiwan Tells Washington Its 40% Chip Relocation Goal Is 'Impossible' — And the Global Semiconductor Battle Is Just Getting Started

The U.S.-Taiwan trade deal struck in January represented a significant escalation in Washington's semiconductor onshoring ambitions. Under the agreement, Taiwanese tech companies committed to a combined $500 billion in investments and credit facilities aimed at expanding chip production on American soil. The U.S. sweetened the arrangement by reducing tariffs, waiving duties on certain goods like generic drugs and aircraft components, and granting more generous quotas for Taiwanese chip exports.

But Commerce Secretary Lutnick's rhetoric went further than the formal terms of the deal. In his January CNBC interview, Lutnick announced plans to build "giant semiconductor industrial parks in America" and declared the trade package a "$500 billion down payment" on bringing semiconductors home. He also made clear that Taiwan-based chip companies unwilling to build in the U.S. could face the 100% tariff that Trump has threatened against the sector.

Taiwan, for its part, has been willing to invest significantly abroad. TSMC, the world's leading contract chipmaker and the crown jewel of Taiwan's semiconductor industry, has committed more than $65 billion to U.S. manufacturing in recent years, with plans to expand that figure to $165 billion. But Vice Premier Cheng drew a firm line: Taiwan's international expansion is predicated on the semiconductor industry remaining "rooted in Taiwan" and continuing to grow domestically. The island's leadership views its chip prowess not merely as an economic asset but as a strategic shield — and it has no intention of giving that away.

Semiconductor analysts have broadly sided with Taiwan's assessment. The obstacles to relocating nearly half of the world's most advanced chip supply chain are not merely logistical — they are structural, economic, and deeply intertwined with decades of industrial policy.

Taiwan's semiconductor ecosystem is not a single factory or even a cluster of factories. It is an intricate web of chip fabricators, packaging and testing firms, chemical suppliers, precision equipment makers, and thousands of specialized engineers whose expertise was cultivated over generations. Replicating this in the United States would require not just building new fabrication plants, but also transplanting or recreating the hundreds of smaller companies that form the supply chain's backbone — exactly what Lutnick has called for.

But the U.S. faces acute challenges on multiple fronts. Labor shortages in advanced manufacturing have plagued American chipmaking efforts for years. Construction costs for semiconductor fabrication plants in the U.S. are estimated to be 30% to 50% higher than in Taiwan. TSMC's Arizona facilities, while progressing, have already encountered delays and cost overruns that underscore the difficulty of building cutting-edge fabs outside of Asia's established semiconductor corridors. Furthermore, Taipei has implemented its so-called "N-2 rule," requiring TSMC's overseas plants to use technologies at least two generations behind the most advanced chips being produced in Taiwan — a policy that ensures the island retains its technological edge regardless of how much capacity is built abroad.

Underlying Taiwan's resistance is a strategic calculus that extends far beyond economics. The concept of the "Silicon Shield" — the idea that Taiwan's indispensable role in global chip supply effectively deters Chinese military aggression — has become central to Taipei's security thinking. If the world's most advanced chips can only be made in Taiwan, the logic goes, then the United States, Japan, Europe, and other major powers have a direct strategic interest in defending the island against any attempt by Beijing to seize it by force.

This theory gives Taiwan a powerful incentive to keep its most advanced manufacturing at home. Moving 40% of its chip capacity to American soil would, by this reasoning, weaken the very shield that helps guarantee Taiwan's continued autonomy. It is a paradox that Washington has yet to fully reconcile: the more successful the U.S. is at onshoring chips, the less strategic incentive it may have to defend Taiwan — a reality not lost on policymakers in Taipei.

The geopolitical dimensions grew even more complex last week when TSMC announced it would manufacture cutting-edge 3-nanometer semiconductors at its second factory in Japan's Kumamoto Prefecture. The announcement, made during a meeting between TSMC CEO C.C. Wei and Japanese Prime Minister Sanae Takaichi, was hailed as a major win for Japan's economic security. It also signaled that Taiwan is diversifying its overseas investments across multiple allies — not concentrating them in the United States alone. Takaichi called the project "very meaningful from the perspective of Japanese economic security," and her cabinet has designated AI, robotics, and autonomous driving as strategically important fields that the Japanese TSMC plant will serve.

The Taiwan chip standoff is one front in a much wider struggle over who controls the critical supply chains of the 21st century. Last week, the U.S. State Department hosted its first Critical Minerals Ministerial event, bringing together allies including the UK, the European Union, Japan, India, South Korea, and Australia to discuss reducing dependence on China for the rare earths and minerals essential to chip manufacturing, electric vehicle batteries, and defense systems.

Vice President JD Vance told attendees the U.S. planned to use tariffs to prevent critical mineral prices from falling too low — a dynamic that has historically discouraged Western investment in mining. The administration also announced "Project Vault," a nearly $12 billion critical mineral reserve. These efforts reflect Washington's growing recognition that semiconductor supremacy requires control not just of fabrication but of the entire materials pipeline.

Yet the tension with Taiwan reveals the limits of a tariff-and-investment approach. TSMC's planned capital spending for 2026 is $52 billion to $56 billion — up from $40 billion last year — much of it driven by surging AI demand. The company's CEO has expressed confidence that AI-related demand from customers like Apple and Nvidia is "real," not speculative. This means Taiwan's chip industry is not shrinking or stagnating; it is expanding rapidly, making the notion of relocating a large share of it even more impractical. As TSMC invests more at home and across Asia, the gap between Washington's ambitions and industrial reality may only widen.

The question now is whether the Trump administration will accept the practical constraints Taiwan has outlined or escalate pressure through the threatened 100% tariff on chips from companies that refuse to build in the U.S. Such a move would risk severe disruption to American technology companies that depend on Taiwanese-made semiconductors — from Apple's iPhones to Nvidia's AI processors to the data center infrastructure powering the current AI boom.

Some trade analysts suggest a middle ground is more likely: continued large-scale Taiwanese investment in the U.S., perhaps reaching a significant but more realistic share of total capacity, coupled with quiet acceptance in Washington that the 40% target was always more of an opening bid than a final demand. The existing trade deal's structure — with its tariff reductions, quota expansions, and investment commitments — already represents a substantial win for U.S. industrial policy, even if it falls short of Lutnick's most ambitious rhetoric.

Meanwhile, the CHIPS and Science Act continues to provide grants and incentives for domestic semiconductor manufacturing, and TSMC's Arizona operations remain on track to begin production. But neither Washington nor Taipei wants a trade war over the very industry both sides are trying to strengthen. The challenge will be finding a framework that satisfies America's national security concerns without undermining the Taiwanese ecosystem that currently makes the world's most advanced chips possible.