What the U.S.-Taiwan deal means for the island’s ‘silicon shield’

The U.S.-Taiwan deal aimed at expanding chip production capacity in the U.S. is unlikely to fully wean Washington off the island’s most advanced semiconductors anytime soon, several analysts told CNBC, leaving the so-called “silicon shield” largely intact for now.

Taiwan dominates global chip production, with the Taiwan Semiconductor Manufacturing Company producing most of the world’s advanced chips. Nearly one-third of global demand for new computing power is estimated to be fabricated in Taiwan.   

The island’s central role in the global semiconductor supply chain has made preserving its de facto autonomy — and deterring any Chinese attack — a strategic priority for the U.S. and its allies, an idea referred to as the “Silicon Shield.” Beijing claims territorial control over the democratically-governed island.

As part of a trade deal struck Thursday, the Taiwanese government promised to guarantee $250 billion in credit to its chip and technology companies to expand their production capacity in the U.S. Taiwanese companies will also enjoy higher quotas for tariff-free imports of their chips into the U.S. 

In return, Washington would lower its levies on most goods from Taiwan to 15% from 20%, and waive tariffs on generic drugs and ingredients, aircraft components and natural resources unavailable domestically.

The goal is to bring 40% of Taiwan’s entire semiconductor supply chain to the U.S., Commerce Secretary Howard Lutnick told CNBC on Thursday. But experts doubt the plan would be easy, given Taipei’s hard line on keeping its most advanced technology at home.

Taiwan’s “silicon shield” will remain strong through the end of the decade, with the world’s most critical advanced capacity concentrated on the island, said Sravan Kundojjala, an analyst at SemiAnalysis.

Taiwanese authorities restricted TSMC’s overseas fabrication plants from operating technologies at least two generations behind those developed domestically, known as the N-2 rule.

While TSMC produces its most advanced chips using 2-nanometer technology, or nodes, at home, its Arizona plant has only recently begun producing advanced 4-nanometer chips for U.S. customers, with plans to scale up to 2-nanometer and A16 nodes by 2030. 

In semiconductor manufacturing, smaller nanometer sizes mean denser transistors, which boost processing speed and improve energy efficiency.

That four- to- five-year lag ensures Taiwan retains its advantage, said Kundojjala, adding that the global economy would face a “depression-level event if Taiwan were invaded tomorrow.”

A spokesperson for China’s foreign ministry said at a news conference Friday that Beijing “firmly opposed any agreements signed between Taiwan and countries that have diplomatic relations with China,” urging the U.S. to stick to the “one-China principle.”

Wendell Huang, CFO of TSMC, told CNBC on Thursday that the company will continue developing its most advanced technologies in Taiwan due to the need for “very intensive collaboration” between its domestic research and development teams and manufacturing operations. 

“We’ll be sending hundreds of engineers back and forth [between] different sites in Taiwan. Therefore, it will stay in Taiwan when we ramp [up] the most leading-edge technology,” Huang said. 

Still, the world’s largest contract chipmaker has already pledged to invest $165 billion into chip fabrication and processing facilities in the U.S., along with a research and development lab, supplying customers such as Nvidia and Apple. 

Wu Cheng-wen, who oversees Taiwan’s National Science and Technology Council, told the Financial Times last year that it was crucial for Taiwan to keep its cutting-edge research and development at home and ensure that the domestic industry would not be “hollowed out.”

“If we move our R&D overseas, it’ll be dangerous for us,” Wu said in the interview. 

Shifting chip production away from Taiwan will be difficult, analysts said.

Taiwan’s engineering talent pipeline and production capabilities in the semiconductor supply chain, especially in advanced fabrication, are “not replicable at scale anywhere else,” said William Reinsch, a senior adviser at the Center for Strategic and International Studies. 

The lack of trained workers and higher production costs have led to delays in TSMC’s U.S. plant openings, Reinsch said, adding that the new trade deal does little to address these constraints. He expects fulfilment of the pledged investment commitments to take longer than expected and is unlikely to reach the promised level. 

“The semiconductor ecosystem cannot be relocated overnight, so the silicon shield may weaken but still exist in the near term,” said Dennis Lu-Chung Weng, an associate professor of political science at Sam Houston State University.

“The bigger question is what happens after Trump: if future U.S. administrations keep pushing for large-scale relocation, Taiwan losing its exclusive advantage becomes less a question of if and more a question of when,” Weng cautioned.

Taiwanese officials have stressed the need to diversify its economic model, encourage more industries to grow, and bolster its defense capabilities to counter China’s military pressure.

A Chinese invasion of Taiwan remains a low-possibility event, and the trade deal is unlikely to change Beijing’s calculus, said Ava Shen, a Taiwan and Chinese foreign policy expert at Eurasia Group. The mainland authorities would focus more on their military balance vis-à-vis the U.S. and the level of American defense support for Taipei, Shen said.