Successive U.S. presidents have had an authoritative pulpit from which to lecture the American people and the rest of the world over the past century on how the global economy and culture should work. Donald Trump has certainly used that pulpit during his first term as leader of the free world and now in his second term, as well as the four years in between.

But in his second term, Trump has used the "Resolute" desk in the Oval Office as a negotiating table, further using the increasing threat (and now active) of tariffs as leverage to move manufacturing from outside the United States and create new jobs here. For those of us who call America home, this sounds a lot better than how globalization helped a manufacturing base that has been eroding for decades.

Since much of what ends up in the United States is made in China, Mexico, and Canada, it's no surprise that tariffs hit those regions first and hit them hard. But Trump has made clear that the tariffs will also apply to Taiwan, where much of Taiwan Semiconductor Manufacturing Company's foundry capacity is located near Taipei.

Given the world's reliance on high-end chips, most of which are manufactured and packaged in Taiwan, it's in Taiwan's best interest to spread its risk geographically in order to achieve something resembling stability in a divided world, which the company has been doing in recent years.

CEO of TSMC

Yesterday, TSMC CEO Wei Zhejia and President Trump were at the White House to outline a new investment agreement that will allow TSMC's customers to avoid the original 25% tariffs that will be further increased. Unlike Intel, Nvidia, AMD, Apple, Qualcomm, and Broadcom do not have their own foundries, and they are unhappy that their products may be sanctioned by such tariffs. In particular, these tariffs will not be static one-time events, but will worsen over time, just like software support on traditional products.

Tariffs on semiconductors are the motivation for TSMC to invest in wafer fabs in the United States, and TSMC also wants to reduce its own risks, but this is not only a one-time cost, but also an increasingly serious inflationary cost, which will inevitably lead to higher prices for smartphones and data center equipment at the end-user level, thereby driving up application costs. Nvidia, AMD, Apple, Qualcomm, and Broadcom can do nothing about the import tariffs on semiconductors except to suffer profit losses. Only TSMC can solve this problem - and a rumored acquisition of Intel's foundries is not necessarily the answer - although such an investment or acquisition might allow TSMC to expand its US presence more quickly, even though it does create a chip manufacturing monopoly for most of the world's important computing and networking engines.

It's unclear how the threatened semiconductor tariffs will be implemented. Will they add tariffs on electronic devices imported from China, Mexico, or other countries? But it's certain that a 25% tariff directly on semiconductors would be costly. North America accounts for 65% of its revenue (most of which comes from the United States), and about half of its revenue comes from so-called "high-performance computing" products, chips that use the newest two of the current manufacturing nodes.

Based on our model, TSMC's sales are expected to be about $115 billion in 2025 and $605 billion over the next four years. If you multiply all of that - about 60% of revenue comes from the United States - then revenue is $363 billion, and with a 25% tariff, it's about $91 billion. Ah, but we assume that the tariff will increase every year. Assuming an increase of 5% per year and a tariff of 40% by 2028, the United States will collect $122 billion over the next four years if the tariff is imposed at the time of manufacturing and at the manufacturing cost TSMC charges for these chips.

Finished products made with such chips would also be subject to additional tariffs. TSMC's profits would be squeezed regardless, and it would be cheaper and easier to cut a deal with Donald Trump to increase fab spending in the U.S. by $100 billion than to try to work out this thorny issue and engage in game theory.

Expect many Taiwanese executives to think about what life would be like for their families in the Arizona desert.

Adding insult to injury

Under the deal announced yesterday, TSMC is committing at least $100 billion in new capital to add three advanced foundries and two packaging plants to its facility outside Phoenix, Arizona.

"Semiconductors are the backbone of the 21st century economy - in fact, there is no economy without them - powering everything from artificial intelligence to cars to advanced manufacturing," Trump explained during a White House briefing with Wei. "We must be able to make the chips and semiconductors we need in American factories, with American technology and labor. That's exactly what we're doing. As you know, Taiwan has almost monopolized the market. I don't think the word 'almost' is the right word. They do have a monopoly. This is an amazing move by the most powerful company in the world."

Not to quibble with Trump, but Nvidia is the most powerful company in the world… and they also have a monopoly, if you mean more than 85% market share in an important market.

TSMC began investing $12 billion in its foundry in Arizona in May 2020, at the beginning of the COVID-19 pandemic. The second foundry was announced in December 2022, bringing TSMC's cumulative investment to date to $40 billion. In April 2024, TSMC said it would add a third foundry and increase its cumulative spending in Arizona to $65 billion, while the American Chips Act under President Biden provided TSMC with $6.6 billion in direct funding to help cushion all of these investments.

One of the reasons the Biden administration offered the $6.6 billion bait is that TSMC's three wafer fabs in Arizona have created about 6,000 permanent and relatively high-paying jobs, 20,000 construction jobs during the foundry construction phase, and TSMC expects to create tens of thousands of additional indirect supplier jobs. Trump directly wielded the tariff stick at the main users of TSMC's foundry services and the people who drive its processes and profits, who happen to be in the United States. Trump humorously pointed out that the US government did not spend a penny to get $100 billion from TSMC.

Interestingly, TSMC has stopped complaining about the US labor force and the high cost of doing business here compared to Taiwan. Trump said yesterday that when the three wafer fabs are put into production, about 40% of the high-end chips sold worldwide will be made in the United States and will create 20,000 to 25,000 jobs.

Of course, it will take time for these wafer fabs to increase their production capacity. The first fab, which opened four years ago in Arizona, is now in mass production using the N4 process, with output comparable to the N4 fab in Taiwan. The second fab, which opened in 2022, will be dedicated to the N3 process and is expected to be operational in 2028, and the third fab will use the N2 process for etching and will be operational by the "end of this century," TSMC said.

We believe that TSMC will speed up the commissioning of the third foundry and will similarly try to get the fourth, fifth, and sixth foundries operational more quickly. Say, before the end of Trump's second term. But no one has said anything about this. Wei Jianjun did say - and this is important - that TSMC will produce the most advanced AI chips in the United States and will also add an R&D center in Arizona to these six foundries and two packaging centers.

This is indeed important because TSMC will spread its brain trust across two geographical locations, again reducing its risk. Now we need to start looking at the other scenarios that still exist.

One last thing: It's important to put this $100 billion investment in perspective. TSMC is spending $30.45 billion and $29.76 billion on capex in 2023 and 2024, respectively, and a few weeks ago said 2025 spending would be $40 billion. TSMC will increase spending by an average of $25 billion per year over the next four years, but it's not clear if that's truly incremental spending or if it's being shifted from Taiwan to the U.S. If capex falls back to an average of $30 billion per year, then we know that nearly all of TSMC's spending is shifting to the U.S., and if it stays around $40 billion per year, then the U.S. will still account for two-thirds of capex. It won't be long before the U.S. has as much advanced foundry capacity as Taiwan.

Actual capex spending in the U.S. and Taiwan will tell us how worried TSMC is about the assumed tariffs.

US still considering imposing tariffs on Taiwan

Taiwan Semiconductor Manufacturing Co., the world's largest producer of advanced computer chips, said Monday it plans to invest $100 billion in the United States to fund five new manufacturing plants in Arizona. TSMC CEO Wei Zhejia shared the news at the White House with U.S. President Donald Trump, who described making chips in the United States as an "economic security issue."

"By making chips here, he doesn't have to pay tariffs," Trump told reporters, referring to Wei Zhejia and TSMC. But the deal does not end discussions within the Trump administration about potentially imposing tariffs of up to 100% on TSMC and other Taiwanese chipmakers, according to a person familiar with the matter. One version of the plan would involve imposing import tariffs not only on Taiwanese chips themselves but also on electronic devices that contain them, such as Apple iPhones, the person said.

The White House and Commerce Department did not immediately respond to requests for comment. TSMC declined to comment. In January, Trump told House Republicans that "in the not too distant future, we will be imposing tariffs on foreign-made computer chips" in order to "move production of those necessities back" to the United States.

The broad chip tariffs that the Trump team has been considering have never been implemented in the past, and the unique way the semiconductor supply chain works raises serious questions about their effectiveness as a trade policy. Higher tariffs could also increase costs for technology companies in many countries and make a range of finished products more expensive for Americans.

"TSMC might make a little less money, the fabless companies that design the chips might make a little less money, and the end companies that actually sell the chip assembly products might also find their product margins squeezed," said Chris Miller, a history professor at Tufts University and author of "The Chip Wars."

It would also be an extremely difficult and possibly impossible task for the U.S. government to actually enforce the tariffs, experts say. The semiconductor industry is so fragmented and global that companies could use many potential workarounds to circumvent the tariffs. "I expect the industry to push back quite a bit on these tariffs. It's not just the chip industry, it's probably more about the companies that use the chips," Miller said.

No matter how high the tariffs are, there are two main reasons why U.S. tariffs on Taiwanese chip imports may not have much of an impact and may not succeed in increasing U.S. manufacturing as Trump hopes.

First, TSMC chips are not typically imported into the U.S. individually, making it difficult to tax them directly. For example, when TSMC makes iPhone chips for Apple, those smartphones are typically assembled in factories in China or India. When they finally reach U.S. customs, they are taxed as electronic devices from those two countries.

Second, tariffs can only force foreign companies to start making chips in the U.S. if it becomes cheaper to make them in the U.S. than elsewhere. But higher U.S. labor costs and the country's lack of a mature semiconductor supply chain mean it would take years or even decades to move manufacturing there, with little guarantee that such a U.S. outpost would be profitable. Faced with U.S. tariffs, it may make more sense for Taiwanese companies like TSMC to move production to a third country to avoid paying the tariffs.

But the Trump administration could choose to impose tariffs on its own chip manufacturing facilities. The tariffs could be extended to all countries or regions, effectively making U.S. production the only viable option. It could also impose tariffs on any final product that contains Taiwanese chips.

The latter idea would wreak havoc on the semiconductor industry. A smartphone might have dozens of chips inside, responsible for a range of different functions; a car might have thousands of chips. Figuring out which of those have parts from Taiwan, how much those parts should be taxed, and how difficult it would be to find alternatives would place a heavy burden on final product companies.

Semiconductor companies may be unprepared for this scenario, especially because their products have mostly been unaffected by tariffs in the past. "The global industry has never dealt with chip tariffs like this," said a Taiwanese semiconductor industry insider who has made public comments under the pseudonym Hsu Mei-hu. "It's possible in theory, but almost impossible in practice."

The policy would force companies like Apple to ask each of its suppliers about the cost of the multiple chips it uses to determine the appropriate tariff declaration amount. "After the declaration, how does customs check? If I just fill in a value, how does customs know? "Xu said.

The Biden administration has previously discussed imposing component tariffs on Chinese chipmakers to weaken the country's semiconductor industry and protect U.S. national security. But Miller said one of the main arguments against the idea is that it would be logistically difficult to implement.

Washington is definitely considering imposing component tariffs again this time, Miller said, but imposing these tariffs on Taiwanese chip imports would be more challenging because they play a broader and more important role than Chinese chips. "If you are only worried about the administrative complexity of imposing component tariffs on China, then you should be more worried about the administrative complexity of imposing component tariffs on Taiwan," he said.

TSMC has less to lose than other companies from potential U.S. tariffs because of its unparalleled influence in the industry. Currently, TSMC produces about 90% of the world's advanced chips and its production lines are running at full capacity. If Trump raises tariffs and forces TSMC to raise prices, the company may lose some orders to competitors, but experts say that is not a big problem.

But it may be difficult for TSMC's customers to find alternatives quickly. Although companies such as Samsung and Intel have already gained similar expertise in high-end chip manufacturing to some extent, it will be time-consuming, expensive and risky to move mature production processes away from TSMC factories. Therefore, American companies such as Apple and Nvidia may not choose another chip manufacturer, but continue to pay for TSMC products and eventually pass on higher costs to customers.

But other smaller Taiwanese companies engaged in chip design, manufacturing, packaging, equipment assembly and related industries cannot pass on costs to customers and are therefore more vulnerable to tariffs.

Purpose of tariffs

Arisa Liu, a researcher and director at the Taiwan Institute of Economic Research, said there is a gap between the purpose of tariffs and which companies will actually feel the pressure. "The U.S. wants TSMC to invest in manufacturing in the country - they don't have much interest in other Taiwanese companies. But these companies will feel the ripple effect," she said.

President Trump has used the threat of tariffs as a negotiating tactic many times, including when discussing TSMC and Taiwan.

TSMC's statement on Monday suggests the company can't ignore pressure from the Trump administration. "Most of TSMC's customers are American companies, the U.S. government is the most powerful government in the world, and core semiconductor technology mostly comes from the U.S.," Hsu said.

But TSMC's $100 billion investment wasn't entirely unexpected. The company already has a plant in Arizona that began production last year. There are reportedly other potential deals that don't involve tariffs, including a partnership between TSMC and Intel to help revive the struggling U.S. company. Hsu said that if TSMC can get U.S. customers like Apple, Nvidia, AMD and Qualcomm to also invest in the deal, it can achieve a high degree of control without spending too much money. She cited TSMC's joint ventures in Europe and Japan, where the company holds more than 70% of local manufacturing plants.

But working with Intel would also present challenges, Ms. Liu said. TSMC needs to worry about protecting its trade secrets and preventing Intel from becoming a powerful competitor one day, while avoiding alienating TSMC's established partners in chip design. For now, it is clear that TSMC needs to continue to find the best way to deal with the chaos of the Trump administration while protecting its own interests.

Source: Content compiled from nextplatform

Reference link https://www.nextplatform.com/2025/03/04/why-tsmc-did-a-100-billion-deal-with-trump-on-us-chip-manufacturing/

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