Silicon Island: Assessing Taiwan’s Importance to U.S. Economic Growth and Security

The Issue

Taiwan remains a critical partner to U.S. economic interests given its contributions to global advanced technology supply chains. Taiwan’s inputs in the semiconductor supply chain have enabled U.S. companies to maximize their productive efficiency. As the next administration considers how to manage the United States’ relationship with the island nation, officials will need to remember that the partnership has been, and will remain, a feature of supporting U.S. national security. Sound U.S. economic security policy should aim to balance taking advantage of Taiwanese investment to onshore critical and emerging technology (CET) capabilities, while ensuring the island can secure its own domestic ecosystem and make investments in other countries with comparative advantages the United States does not possess.

Questions about how best to support U.S. economic growth and security via engagement with partners and allies are set to dominate the foreign policy conversation in the coming months. Taiwan will be a central focus of this conversation given China’s continued claims to the island and its importance to supply chains for critical and emerging technologies (CETs), particularly semiconductors. Campaign trail commentary on the U.S.-Taiwan relationship varied widely. On the left, the 2024 Democratic Party platform included a call to “remain steadfast in America’s commitment to peace and stability across the Taiwan Strait consistent with the U.S. One China policy—guided by the Taiwan Relations Act, the three Joint Communiques, and the Six Assurances.” On the right, former president Donald Trump recently questioned the high price tag of military support for Taiwan and the island’s commitment to U.S. economic security goals.

The Taiwan engagement strategies of a second Trump administration have not been fully articulated and will likely continue to evolve. Within that context, this brief from the CSIS Economics Program and Scholl Chair in International Business assesses Taiwan’s importance to U.S. economic growth and security, particularly its role in supporting U.S. CET industries. The authors conclude that Taiwan’s commercial ecosystem is inextricably embedded in a web of globalized supply chains and industries fundamental to U.S. economic stability and prosperity—from consumer electronics to automotives to key military and dual-use applications, including artificial intelligence (AI).

At the center of this web of supply chains sits Taiwan’s domestic semiconductor industry, a linchpin of the global electronics ecosystem and a key source of manufacturing capacity and innovation that is important to U.S. businesses and consumers alike. Taiwan’s role in semiconductor manufacturing supports U.S. economic growth and leadership in CETs, making the island an indispensable partner in the global trade landscape. Conversations about future U.S. engagement with Taiwan must consider the interdependence between the two leading technology ecosystems and the mutual benefits of a continued robust U.S.-Taiwan trade relationship.

The U.S.-Taiwan Semiconductor Relationship

Supply chains for semiconductor fabrication and distribution are among the most complex, specialized, and globalized in the world. Producing the chips that power the world’s devices involves a wide range of technological and commercial capabilities ranging from multi-billion-dollar clean rooms in advanced manufacturing facilities (fabs) to world-leading software development in Silicon Valley. After manufacture, semiconductors flow into every electronic system on the globe, touching almost all the world’s supply chains—including smartphones, computers, data centers, automotives, telecommunications infrastructure, manufacturing equipment, aircraft, and munitions.

The development of several critical U.S. industries and national champions is linked to Taiwan’s success in CETs. Taiwan’s semiconductor industry began with the 1976 transfer of chip manufacturing technology by Radio Corporation of America (RCA) to Industrial Technology Research Institute (ITRI), a Taiwanese government-backed organization that eventually birthed the key chip companies Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC). While the growth of the Taiwanese chip industry relied, in part, on U.S. companies and innovation, this dependency would go both ways. When U.S. chip designers struggled to access domestic semiconductor fabrication capacity in the 1990s, TSMC helped fill the gap by pioneering the “pure-play foundry” model, exclusively offering contract manufacturing for other companies’ designs. U.S. firms leveraged TSMC’s growing fabrication capacity and expertise to develop U.S. leaders in “fabless” chip design (e.g., Nvidia) and in consumer electronics like smartphones (e.g., Apple). In other words, the two economies have been closely linked, growing in tandem for over 30 years, and Taiwan has been a key contributor to U.S. technological advancements.

As U.S. companies and customers increasingly benefited from Taiwanese chipmakers’ growth, local industrial “clusters” of Taiwanese chip companies sprang up across the supply chain, including in sectors like packaging, design, materials, and electronics manufacturing services—a shift that would deepen the U.S.-Taiwan semiconductor relationship. The most notable of these clusters was Hsinchu Science Park, a midsized industrial park south of Taipei that today is home to $363 billion in semiconductor revenues by firm headquarters. Beginning in the late 1970s and taking off in the 1990s, Hsinchu attracted a growing ecosystem of semiconductor companies and expertise, facilitated by both government incentives and the symbiotic benefits of colocating chip manufacturers alongside companies offering inputs, tools, and services. Key benefits of this industrial cluster model include reduced fab downtime due to the proximity of spare parts and servicing personnel, reduced transportation and labor costs, and a concentrated pool of semiconductor industry talent able to shift fluidly between leading companies—reinforcing Taiwan’s centrality as a hub for innovation in global semiconductor supply chains.

Taiwanese companies have been critical to the development of U.S. semiconductor capabilities. For instance, part of TSMC’s success has been its partnership with Apple since 2014, in addition to its commercial deployment of extreme ultraviolet (EUV) lithography before Intel and Samsung. TMSC has also supported the United States’ advancements in AI: investments in AI data center infrastructure have boosted demand for Nvidia graphics processing units (GPUs), for which TSMC is by far the leading manufacturer. Although Intel and Samsung are investing extensively to catch up, TSMC will likely lead advanced fabrication in the near to medium term.

While TSMC is the most important Taiwanese chipmaker, the island is home to other domestic companies producing legacy (older-generation) logic chips as well as memory chips, which allow electronic devices to store information. Most notable is UMC, the world’s third-largest foundry and a key producer of legacy chips for automotive, industrial, and communications applications. Taiwan-based Nanya Technology Corporation (NTC), Winbond Electronics Corporation (WEC), and Macronix International are among the top 10 manufacturers of memory in the world. As with advanced logic chips, the Taiwanese market share in legacy and memory chips is expected to remain strong in the next decade, according to the Semiconductor Industry Association. In addition to fabrication, Taiwan is a global leader in semiconductor packaging and testing (and chip design, as well as an important player in areas like the production of wafer substrates, the base materials for chips. Key Taiwanese firms include ASE Group, a leading provider of outsourced semiconductor assembly and test (OSAT) services; MediaTek, a smartphone chipset designer; and materials suppliers such as Unimicron and Nan Ya Printed Circuit Board Corporation.

The Taiwanese semiconductor ecosystem has supported U.S. firms across the semiconductor supply chain—many of which have benefited from their operations in Taiwan, including chipmakers such as Micron, semiconductor packaging facilities for OSATs like Amkor, and capital equipment manufacturers such as Applied Materials. It has enabled U.S. firms to dominate several parts of the semiconductor supply chain, including design as well as production and licensing of core IP.

Production of Key U.S. Items

In turn, this economic relationship has supported U.S. dominance over the production of multiple critical technologies. One of these key items is perhaps the most influential piece of modern consumer technology—the iPhone. While much of the technology’s value is derived from U.S. inputs, the item still relies on third-country firms to come together—including Taiwan. The design of new iPhones starts at Apple’s headquarters in Cupertino, California. Apple develops some of its own chips and processors, which allows the company to integrate cutting-edge technologies like AI and machine learning into its devices, facilitating features such as facial recognition and augmented reality.

However, Apple depends on third-party suppliers to bring its products to life as these companies excel in their areas of expertise, particularly with integrated circuits (ICs) for sound enhancement and connectivity, which surpass Apple’s capabilities. Additionally, relying on third-party manufacturers can be more cost-effective; instead of investing in hiring designers and building the necessary infrastructure, Apple finds it more effective to source these components externally. Some of these third-party partners include other U.S. firms such as Qualcomm, which supplies multiple electronic components to Apple, including envelope power trackers, baseband processors, power management modules, and GSM/CDMA receivers and transceivers. Other third-party companies are abroad: Sony produces camera and electronic components for Apple, and Infineon makes the phone network components.

The chip in an iPhone also requires input from multiple companies. For the A12 chip, the initial design is done by Apple itself, in the United States. For chip production, Apple partners with foundries like TSMC, whose semiconductor technology Apple cannot replicate in its own facilities. Packaging and final testing will be done by another firm in yet another country—such as Amkor in, for instance, the Philippines. The A12 will then be assembled into the iPhone itself by Foxconn in China.

Beyond Semiconductors: Taiwan’s Importance to Other Supply Chains

Outside of chips, Taiwan plays a key role in several economically important supply chains. Taiwan is home to significant manufacturing capacity for U.S. clothing retailers such as Adidas and Nike, leading bicycle brands like Giant and Merida, and more niche consumer goods such as bubble tea. The Taiwanese government actively encourages foreign direct investment (FDI) through policies that keep the economy attractive to international investors. In 2021, Taiwan attracted $5.4 billion in inbound FDI, down from $9.6 billion five years prior—a 43 percent decrease—while real gross domestic product (GDP) grew by 6.2 percent. While the durability of this trend is uncertain as U.S. commercial concerns about Taiwan’s national security rise, the island is as economically integrated with the United States and its supply chains as it has been at any point in history.

Taiwan’s Value to the U.S. and Global Economy

The economic value of Taiwan to global supply chains for semiconductors and other CETs is immense. By one estimate, Taiwan fabricates nearly a third of the globe’s computing capacity each year, and U.S. companies and consumers are among the leading beneficiaries of direct and indirect trade with Taiwan’s chip sector. As mentioned, Taiwanese semiconductor companies underpinned the growth of the U.S. digital economy. This applies not only to U.S. fabless chip designers but also to U.S. companies relying on data centers, networking equipment, and other digital infrastructure, as well as any electronic systems or inputs—a vast landscape that includes e-commerce and social media giants, telecommunications companies, automakers and other manufacturers, and the entire U.S. software-as-a-service (SaaS) ecosystem.

In other words, Taiwan’s chip industry is inextricably linked to the health of U.S. industries as wide ranging as smartphones, computers, automotives, 5G, and medical equipment. This interdependency means that trade with Taiwanese semiconductor companies provides significant, hard-to-quantify knock-on benefits for the U.S. economy. According to an August 2024 report by the Congressional Research Service, Taiwan is the eighth-largest source of U.S. imports ($44 billion) and the tenth-largest U.S. export market ($40 billion), and Taiwanese exports to the United States grew 100 percent from 2018 to 2022. Direct trade statistics also underestimate interdependence: a 2022 estimate of Taiwanese supply chain relationships also showed that “23,100 U.S. companies buy directly from Taiwanese suppliers at tier-1, while more than 112,500 buy indirectly at tier-2, and over 237,500 at tier-3.” Investment also closely links the United States and Taiwan. In 2023, U.S. direct investment stock in Taiwan was $19.3 billion, while Taiwan’s direct investment stock in the United States was $15.6 billion.

Taiwan’s Role in U.S. Economic Security Efforts

Industrial Policy Partner 

Taiwan’s centrality to CET supply chains makes it a capable prospective partner in U.S. efforts to enhance economic security and growth, particularly for chips and related industries such as AI. Taiwanese companies, particularly TSMC, have been willing contributors to U.S. and allied semiconductor reshoring efforts. Despite facing domestic political pushback against its overseas expansion plans, TSMC is committing more than $65 billion of its capital to U.S. expansion, incentivized by $6.6 billion in U.S. CHIPS and Science Act funding. The foundry plans to build six U.S. fabs over the next three years, including facilities with close-to-leading-edge manufacturing processes at the 4-, 3-, and 2-nanometer (nm) levels. Outside the United States, TSMC is investing in fabs in Germany and Japan in concert with those countries’ industrial policy efforts.

This increasing geographic diversification, in part, reflects the demands of TSMC’s U.S.-focused customer base and its high degree of foreign ownership, which have created incentives—or, more aptly, pressure, alongside generous foreign government subsidies—to reduce TSMC’s asset concentration in Taiwan. Challenges such as lower access to labor and higher production costs are delaying the opening of fabs in the United States. However, assuming local markets can overcome labor challenges and that TSMC continues to bear the brunt of heightened U.S. manufacturing costs, the foundry is set to play a key role in supporting the expansion of U.S. chip manufacturing.

Limits to the U.S. Push for Indigenization

Amid these reshoring efforts, Taiwan’s domestic semiconductor industry will remain a key economic asset for U.S. commercial and government interests. This is primarily due to the limitations on shifting semiconductor manufacturing assets off the island in the near term—particularly TSMC’s most advanced chipmaking capabilities. Some of these limits are self-imposed, at least in part. For instance, Taipei has pressured TSMC to keep most of its advanced manufacturing nodes on the island, given its perceived importance in enabling Taiwan’s “silicon shield,” protecting against China’s attempts at “reunification.”

In addition, there are obstacles to moving chip production away from Taiwan altogether. Taiwan’s unparalleled concentration of personnel, expertise, infrastructure, and capital equipment makes the island indispensable to U.S. technological capabilities. Moreover, structural barriers such as higher capital costs and regulatory burdens in the United States make full-scale reshoring unfeasible. Even if the capital and regulatory constraints were mitigated, the sheer scale of Taiwan’s physical and human capital and the challenges of recreating a highly complex manufacturing process discourage moving chipmaking outside Taiwan. In other words, while countries may emulate aspects of Taiwan’s competitiveness in the semiconductor sector, the island will remain critical to global chip supply chains. There is also a broader electronics supply chain to consider: Taiwan’s position in the Indo-Pacific locates it near key hubs for electronics manufacturing, which Asia still dominates. Sound U.S. economic security policy should therefore aim to balance taking advantage of Taiwanese investment to expand CET capabilities at home while ensuring the island can secure its domestic ecosystem and make investments in other regions.

Key Taiwanese companies are already contributing to third-country chip ecosystems. TSMC has been setting up operations around the globe. The company’s investment in Germany has concentrated on establishing a “specialty technology fab.” Additionally, TSMC’s majority-owned subsidiary Japan Advanced Semiconductor Manufacturing (JASM) has revealed plans to develop 6 nm and 7 nm process technologies for applications in automotive, industrial, and high-performance computing sectors. However, JASM will also maintain production of mature node process technologies up to 40 nm. Aside from advanced fabrication, Powerchip Semiconductor Manufacturing Company (PSMC) has launched a joint venture with Tata Group to support India’s first commercial fabrication plant. The effort supports the Indian government’s strategy of encouraging production of mature nodes of more than 40 nm where it has identified more potential for growth. In short, Taiwan has undertaken significant projects propping up other nations’ advanced technology production, which would ultimately help the U.S. goal of reducing global dependence on China.

Conclusion

Taiwan sits at the epicenter of economic security considerations. Its contributions to global technology supply chains are unparalleled, and it has been a critical enabler of U.S. growth in the CET space. For the past three decades, the U.S.-Taiwan economic partnership has driven leaps forward in advanced technologies that have unlocked significant growth opportunities. However, the unique role of Taiwan—nicknamed Silicon Island—in current geopolitical tensions and potential future conflicts makes it a key point of vulnerability.

Diversifying away from that vulnerability altogether is not feasible. Taiwan’s skilled know-how and production capabilities in the semiconductor supply chain, especially with respect to advanced fabrication, are not replicable at scale anywhere else. Likewise, where diversification is possible, the United States should not aim to reshore production of all relevant inputs. The current U.S. domestic landscape has disadvantages—namely acute labor shortages and greater capital costs—that cannot be fully addressed in the short term. Allied nations such as Germany, India, and Japan have comparative advantages that should be utilized. Policymakers therefore must walk the line between propping up Taiwan’s production and defensive capabilities, encouraging its growing participation in the U.S. tech ecosystem, and supporting its investments in third nations given current gaps in the U.S. economy.

Adopting this three-pronged approach to Taiwan’s technology sector is ultimately the best way to assure U.S. economic security and should be seen as a model to approach friendshoring altogether. Balancing these three features—supporting partners’ critical sectors to mitigate their vulnerabilities, ensuring the U.S. tech ecosystem is prepared for investments, and supporting inevitable expansions into third countries that offer advantages the United States does not possess—is preferable to the current U.S. approach prioritizing reshoring to the detriment of partners’ interests.

William A. Reinsch is a senior adviser with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jack Whitney is a former intern with the Scholl Chair at CSIS.

This brief was made possible by the Taipei Economic and Cultural Representative Office in the United States (TECRO).