The U.S.-China disputes regarding Taiwan are not only causing political tensions but also posing risks to tech giants like Nvidia. The concentration of advanced semiconductor manufacturing in Taiwan has raised concerns about the vulnerability of the supply chain if China were to blockade or invade the island. In response, the U.S. CHIPS and Science Act has been introduced, which aims to encourage semiconductor manufacturers to relocate to America through $52 billion in subsidies.
However, the legislation is unlikely to achieve its objective and may even weaken Taiwan’s most important industry, further threatening the island’s security. The semiconductor industry is highly specialized, with companies around the world focusing on different aspects of the supply chain. While Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) specializes in contract manufacturing, other important parts of the ecosystem include U.S. companies like Advanced Micro Devices Inc., Nvidia Corp., and Qualcomm Inc., as well as companies in the Netherlands, Japan, and Britain.
This specialization allows each part of the supply chain to focus on what it does best, improving overall efficiency and capacity. However, it also makes the industry vulnerable to supply shocks. The problem is particularly acute in Taiwan due to China’s territorial claims on the island. As a result, both the U.S. and Japan have offered large subsidies to TSMC to relocate, with TSMC planning to build new facilities in Japan and Phoenix, Arizona.
While the facility in Japan is progressing as planned, the Phoenix project is already behind schedule, and fewer suppliers have plans to locate there. TSMC’s previous experience in Camas, Washington, where it struggled to find skilled workers and faced higher production costs than in Taiwan, casts doubt on the success of the Phoenix facility. The fundamental issue is that the U.S. lacks workers with the necessary skills for semiconductor manufacturing.
The CHIPS Act, despite its $52 billion subsidies, is unlikely to create a self-sustaining semiconductor ecosystem in Phoenix. Industrial policy can work under the right circumstances, as seen in Taiwan’s success in focusing on its existing strengths in manufacturing. However, the availability of free money risks shifting TSMC’s focus from innovation to securing subsidies, potentially harming its customers and suppliers, most of which are U.S. firms.
Furthermore, TSMC may reduce its investments in capacity in Taiwan, making the industry less resilient to demand shocks. There is also a risk that another company replaces TSMC as the leader in advanced semiconductor manufacturing. Many in Taiwan view the CHIPS Act as an attempt by the U.S. to grab Taiwan’s technology, leading to a sense that the U.S. does not truly care about Taiwan’s security.
Ultimately, if Taiwan’s economy and security are undermined, it would harm America’s own national security. The CHIPS Act is poorly designed and is likely to cause long-term damage to TSMC and Taiwan’s economy. A wiser approach for the U.S. would be to commit to defending Taiwan and building capacity in countries like Japan, where operations are less likely to damage TSMC’s business.
In conclusion, the U.S.-China disputes regarding Taiwan pose risks to tech giants like Nvidia. The concentration of semiconductor manufacturing in Taiwan has led to concerns about the vulnerability of the supply chain. While the CHIPS Act aims to encourage manufacturers to relocate to the U.S., it is unlikely to achieve its objective and may weaken Taiwan’s industry. The lack of skilled workers in the U.S. poses a significant challenge, and the subsidies may shift TSMC’s focus away from innovation. It is crucial for the U.S. to adopt a strategy that protects its economic security while strengthening Taiwan’s security at the same time.
