Can Washington really force Taiwan to share its chip dominance? Taipei says no

Taiwan has flatly refused a proposal reportedly floated by the United States that would see half of its semiconductor production relocated to American soil. Officials in Taipei said that such a plan was never part of ongoing trade talks and underscored that the island would not compromise its strategic control over the world’s most advanced chipmaking capacity. The decision signals how semiconductors remain at the heart of global geopolitics and exposes the limits of Washington’s ability to reshape supply chains through tariff negotiations and subsidies.

Taiwan’s Vice Premier Cheng Li-chiun, who is leading the island’s tariff negotiations with Washington, stated that the negotiating team had “never made any commitment to a 50-50 split on chips” and clarified that the matter was not even raised in recent discussions. The firm denial was prompted after U.S. Commerce Secretary Howard Lutnick suggested that America should aim to manufacture half of the chips it needs domestically, implicitly requiring Taiwan to shift capacity away from home. Taipei responded swiftly to ensure that global markets, investors, and political partners understood its red lines.

Why did the United States push for a 50% chip production relocation from Taiwan?

The United States has consistently argued that its dependence on Taiwan Semiconductor Manufacturing Company (TSMC) poses a national security risk. More than 90 percent of the world’s most advanced logic chips come from Taiwan, meaning that a supply disruption caused by natural disaster, geopolitical conflict, or trade dispute could paralyze critical industries such as defense, automotive, artificial intelligence, and consumer electronics. Washington policymakers have long voiced concern that such concentration is unsustainable.

Secretary Lutnick framed the issue in simple terms, saying that America needs to secure “half the chips we use” from domestic sources. While the U.S. has already invested billions under the CHIPS and Science Act to encourage new fabrication facilities, progress remains slow. Industry analysts estimate that the cost of producing chips in the U.S. is four to five times higher than in Taiwan due to labor expenses, real estate, environmental regulation, and fragmented supplier ecosystems. Recruiting enough semiconductor engineers is another bottleneck. This explains why Washington sought to accelerate progress by pressing Taiwan to relocate part of its production base.

For American officials, such a plan would deliver three objectives at once: reduce dependence on Taiwan, create high-tech jobs at home, and counter the growing technological influence of China. However, the 50-50 proposal immediately ran into the reality of Taiwan’s long-standing industrial policy and its reluctance to part with the most advanced manufacturing capabilities that form the cornerstone of its economic and geopolitical leverage.

How has Taiwan built its global semiconductor dominance and why is it unwilling to compromise?

Taiwan’s leadership in semiconductors is the result of decades of patient investment, state support, and corporate innovation. The establishment of TSMC in 1987 pioneered the pure-play foundry model, allowing fabless design firms like NVIDIA, AMD, and Qualcomm to outsource their production. Over the years, TSMC perfected yields, invested in cutting-edge lithography, and built a dense cluster of suppliers and R&D institutions. This ecosystem, sometimes called the “silicon shield,” gave Taiwan both economic resilience and geopolitical insurance.

Taiwan’s N-1 policy is central to its strategy. Under this rule, any fabrication facilities built overseas must lag at least one generation behind the most advanced nodes produced domestically. This ensures that the island maintains technological leadership even as it expands abroad. For example, the multibillion-dollar TSMC facilities in Arizona are crucial for U.S. supply chains but deliberately limited to less advanced nodes. Taipei has also resisted transferring extreme ultraviolet (EUV) capabilities overseas, preferring to guard its leadership in the most sensitive technologies.

Officials argue that relocating half of Taiwan’s output would not only weaken the island’s comparative advantage but also fracture the supply chain ecosystem. Semiconductors depend on thousands of specialized suppliers, chemicals, and precision equipment manufacturers, many of which are tightly clustered in Hsinchu Science Park and other Taiwanese hubs. Attempting to replicate this ecosystem wholesale in the United States would be prohibitively expensive and logistically complex. In short, Taiwan views Washington’s 50-50 idea as impractical and strategically risky.

What are the trade and tariff implications of Taiwan’s refusal?

The dispute is unfolding in parallel with ongoing tariff negotiations between the two governments. Taiwan currently faces a 20 percent tariff on chip exports to the United States and has been pressing for relief. Taipei recently offered to purchase $10 billion in U.S. agricultural goods over four years as part of a broader trade package. By tying tariff discussions to semiconductor relocation, the U.S. hoped to increase leverage. But Taiwan’s categorical refusal makes it clear that chips cannot be bargained away for tariff concessions.

Taiwan’s stance will likely force both sides to seek compromise. Instead of a hard 50-50 relocation, a more realistic outcome could involve hybrid models such as incremental capacity shifts, joint ventures in less advanced nodes, and co-financed projects that preserve Taiwan’s sovereignty over its most advanced production. Such arrangements would allow Washington to claim progress toward supply chain security without undermining Taipei’s strategic autonomy.

How does this affect TSMC (TWSE: 2330, NYSE: TSM) and investor sentiment?

Investors are closely monitoring developments around TSMC, the crown jewel of Taiwan’s economy and one of the world’s most valuable semiconductor companies. On the Taiwan Stock Exchange, the company trades under ticker 2330, while its American depositary receipts trade on the New York Stock Exchange under TSM. Despite geopolitical headwinds, analysts have continued to assign strong buy ratings to TSMC, citing its technological leadership and unmatched customer base. Recent price targets suggest moderate upside potential, though volatility has increased as investors digest the political risks.

Institutional sentiment remains divided. Foreign institutional investors (FIIs) have maintained significant exposure to TSMC due to its role in artificial intelligence, cloud computing, and high-performance computing markets. Domestic institutional investors (DIIs) in Taiwan, meanwhile, see the stock as a strategic national asset and continue to support it. However, should Washington escalate its pressure or link tariffs more explicitly to semiconductor relocation, some investors may shift to a cautious hold stance until policy clarity emerges. Analysts generally agree that TSMC’s valuation now carries a premium for political and supply chain risks, in addition to its technological leadership.

Could U.S. pressure intensify despite Taiwan’s rejection?

It is highly likely that the U.S. will continue to push for expanded domestic chip capacity, whether through direct negotiation with Taiwan or by incentivizing other allies such as South Korea and Japan. Washington could link tariff exemptions, subsidies, or defense procurement contracts to semiconductor commitments. Policy proposals circulating in Congress already suggest tightening reshoring mandates and tying subsidy access to specific production ratios. If enacted, these could put further strain on TSMC’s U.S. operations and complicate Taiwan’s negotiating position.

Yet Washington faces limits. Building advanced fabs in the U.S. has proven more challenging and costly than anticipated. TSMC’s Arizona project has already experienced delays and cost overruns, underscoring the difficulties of transplanting Taiwan’s ecosystem abroad. Any attempt to forcibly extract a 50-50 relocation risks backfiring, both economically and diplomatically. For now, Taiwan’s refusal has set the tone: strategic autonomy will not be compromised under external pressure.

What does the future look like for U.S.–Taiwan semiconductor diplomacy?

The likely outcome of this standoff is a pragmatic compromise. Taiwan may expand its U.S. investments selectively, focusing on mature nodes or specialty applications, while reserving cutting-edge technologies at home. Tariff negotiations could yield concessions in exchange for incremental cooperation rather than wholesale relocation. Both sides understand that total self-sufficiency is neither realistic nor efficient in the semiconductor industry. Instead, regional hubs and allied coalitions will form the backbone of future supply chains.

For investors, the key metrics to watch are tariff decisions, U.S. subsidy structures, and any shifts in Taiwan’s N-1 policy. TSMC’s capital allocation strategy in the U.S. will also provide clues about the balance between political pressure and economic logic. In the broader context, the standoff underscores that semiconductors have become the central battlefield of 21st-century geopolitics. Taiwan’s firm “no” to a 50-50 deal has reaffirmed its sovereignty, signaled the limits of U.S. leverage, and ensured that any future partnership will be on terms that respect Taipei’s autonomy.