Are U.S. high-tech manufacturers dangerously dependent on Taiwan as a source of semiconductors?

The raw numbers suggest that the answer is yes. Taiwan accounts for around 65% of global semiconductor supply, and nearly 90% of the smallest and most sophisticated chips. And one Taiwan-based semiconductor producer, Taiwan Semiconductor Manufacturing Co. (TSMC), is alone responsible for 55% of the world’s supply. That’s a more dominant position than OPEC commands in oil production.

The U.S. has only recently begun to wake up to the fragility of its semiconductor supply chain. The tariffs wars with China were the first sign of trouble, followed by the destabilization of multiple economies by Russia’s invasion of Ukraine, and the surge in demand for cars, video games and other high-tech products in the wake of the COVID-19 pandemic.

The CHIPS and Science Act, proposed by the Biden Administration and enacted into law in August, is intended to bolster U.S. domestic research, development and production of semiconductors. And efforts by private industry toward that goal are already underway. Recently announced ventures include a $40 billion plan by Micron to build memory manufacturing in the U.S., extension of a partnership between Global Foundries and Qualcomm for domestic semiconductor production, and similar plans by Intel, Texas Instruments, Samsung Foundry and even TSMC, which recently completed construction of a $12 billion manufacturing facility in Phoenix, Arizona.

Don’t expect the balance of power in global chip production to alter significantly anytime soon, however. “Taiwan is and will remain, as far as we can tell, one of the leading producers of chips in the world,” says Anthony Rapa, partner and lead of the National Security Team of Blank Rome LLP. “For that reason, Taiwan continues to be viewed as a global crown jewel of semiconductor production.”

Even with passage of the CHIPS Act, there’s a way in which the U.S. doesn’t want to jeopardize its dependence on Taiwan. The Biden Administration is reportedly considering the imposition of further controls on exports of certain high-tech products, including advanced computing chips, to China. To do that successfully, Rapa says, it needs “local compliance and cooperation around the world, including in Taiwan.”

“Over the last few years,” Rapa says, “the role of Taiwan has been very important in terms of complying with U.S. export-control laws. It matches up with U.S. national security priorities vis-a-via China.”

For its part, Taiwan seems eager to retain strong trade and production ties with the West. In September, Taiwan president Tsai Ing-wen said she looks forward to producing “democracy chips” in partnership with the U.S.

"In the face of authoritarian expansionism and the challenges of the post-pandemic era, Taiwan seeks to bolster cooperation with the United States in the semiconductor and other high-tech industries," Tsai said.

Can the U.S. simultaneously restrict high-tech exports to China while sharing sensitive intellectual property with Taiwan? “Taiwan is treated differently in terms of licensing requirements,” says Matthew Thomas, a partner with Blank Rome. For the moment, there doesn’t seem to be much concern that advanced technology deployed in Taiwan would leak to mainland China, despite the fact that a number of companies in Taiwan have manufacturing facilities there. In such cases, Rapa says, U.S. export controls would cover more than the first port of call, to embrace the entire lifecycle of a product.

Rapa notes that the U.S. is attempting to put together a multilateral coalition for semiconductor production — a so-called Chips 4 Alliance that would include Japan, South Korea and Taiwan. But progress toward that end has been slow, with private companies based in those countries unwilling to share trade secrets with giant TSMC, let alone American manufacturers that might be keen on ramping up domestic production of semiconductors. The prospective members of such a club are also worried about alienating China, on which they depend for a broad range of critical raw materials.

Any major shift in semiconductor sourcing patterns will take time. In the short term, Thomas says, U.S. manufacturers can only diversify supply as much as possible, to lessen the potential impact of a disruption in Taiwanese factories.

What producers seem not to be overly worried about right now is China invading Taiwan, and bringing global high-tech production to a standstill. “I don’t know if I subscribe to the thesis that the situation at this moment is especially volatile,” Thomas says. “Talking to people in Taiwan, we didn’t hear from anyone a sense of extraordinary alarm.” 

Rapa concurs. “I’m not aware of any sort of blaring sense of urgency from a national security perspective that we have to immediately diversify away from Taiwan, expect in the sense that generally speaking, the U.S. wants to bolster its domestic industry and have a secure supply chain when it comes to semiconductors.” 

Still, with all of the crises that have plagued supply chains over the past three years, high-tech manufacturers can’t afford to be complacent. Rapa believe those events have indeed served as a wakeup call about the fragility of supply lines. “There’s an across-the-board awareness regarding the need to have [both] domestic and globally diversified supply chains,” he says.