WASHINGTON, USA – The US and Taiwan clinched a trade deal on Thursday, January 15, that cuts tariffs on many of the semiconductor powerhouse’s exports, directs new investments in the US technology industry and risks infuriating China.

The deal deepens the Trump administration’s ties with Taipei at a critical time as China ratchets up pressure on the island, which it views as its own, and Washington has worked to avoid an all-out trade war with Beijing.

Under the long-negotiated deal, Taiwanese chipmakers like TSMC 2330.TW that expand US production will be charged a lower tariff on semiconductors or related manufacturing equipment and products they import into the US and can import some duty-free. Broad tariffs that apply to most other Taiwanese exports to the US will fall from 20% to 15%.

Generic pharmaceuticals, aircraft components, and “unavailable natural resources” will face a 0% tariff, the Commerce Department said. The US also committed that Taiwan will be treated no worse than anyone else should chips tariffs be increased later, according to Taiwan.

In exchange, Taiwanese companies will invest $250 billion to increase production of semiconductors, energy and artificial intelligence in the US That includes $100 billion already committed by TSMC in 2025, with more to come, according to US Commerce Secretary Howard Lutnick.

Taiwan will also guarantee an additional $250 billion in credit to facilitate further investment, the Trump administration said.

Lutnick said in an interview on CNBC on Thursday that the objective was to bring 40% of Taiwan’s entire chip supply chain and production to the US He said that if they did not build in the US, the tariff was likely to be 100%.

Boost for chipmakers’ major suppliers

The boost in chip production will likely provide more business for TSMC’s major suppliers, including major chip manufacturing toolmakers such as ASML ASML.AS, Lam Research LRCX.O and Applied Materials AMAT.O.

It should also provide a boost to smaller suppliers of chemicals and materials, such as Sumitomo Corp 8053.T and DuPont spinoff Qnity Electronics Q.N.

Many of those firms have long had a presence in Arizona due to Intel’s INTC.O major operations there, but they have expanded facilities with TSMC’s arrival in the state, where it is enlarging an existing manufacturing plant.

Shares of chip company Nvidia NVDA.O, which depends on TSMC for manufacturing, rose more than 2%, keeping most of its gains from earlier in the day. Intel shares were modestly lower.

Depository receipts and shares of ASML, Lam, Applied Materials and Qnity rose about 4% to 6%.

National security issue

Washington has grown increasingly impatient with its reliance on computer chips from abroad, especially an island in China’s sights.

Semiconductors were invented in the US, many are designed there and it remains a top importer of them for everything from consumer gadgets to AI chatbots and advanced weaponry. But many of the most cutting-edge chips are manufactured abroad, especially in Taiwan. Intel and South Korea’s Samsung Electronics 005930.KS are also expanding US production capacity.

TSMC announced its Arizona factory in 2020, during US President Donald Trump’s first term, and expanded it under his Democratic successor Joe Biden.

As it expands further, TSMC risks overspending on a high-flying industry, running into labor and skill shortages, navigating tricky politics around foreign worker immigration and shifting business away from Taiwan at a time of immense geopolitical vulnerability for the island.

China views Taiwan as its own territory, a position Taipei rejects. Washington has formal diplomatic ties with Beijing, but maintains unofficial relations with Taiwan and is the island’s most important arms supplier.

“Look, they need to keep our president happy, right,” said Lutnick told CNBC, referring to Taiwan. “Because our president is the key to protecting their country.”

Expansion in US

Under the agreement, chipmakers that expand in the US will be able to import up to 2.5 times their new capacity of semiconductors and wafers with no extra tariffs during an approved construction period. Preferential treatment will apply to chips that exceed that quota.

Dan Hutcheson, vice-chair of technology analysis firm TechInsights, said the deal was likely to drive higher demand in the chipmaking supply chain as Taiwanese firms build US operations.

Trump on Wednesday imposed a 25% tariff on certain AI chips, such as the Nvidia H200 AI processor. But the rule includes broad exemptions for those used in US data centers and leaves most other chips untouched, for now.

TSMC reported a forecast-smashing 35% jump in fourth-quarter profit earlier on Thursday. CEO C.C. Wei said the company was applying for permits in Arizona to begin construction on a fourth factory and the first advanced packaging plant.

Tariffs on auto parts, timber, lumber and wood products from Taiwan will total no more than 15% under the new deal, which Taipei said was subject to review in Taiwan’s parliament.

The US Supreme Court is expected to rule soon on the president’s authority to impose broad tariffs without congressional approval. It is not clear how the Taiwan or other trade deals Trump struck would change if the court rules many of his tariffs unconstitutional. – Rappler.com