1. Trump's Semiconductor Tariff Threats
Earlier this year, shortly after United States President Trump began his second term in office, he threatened to impose tariffs of up to 100% on imported semiconductor chips. Trump criticized the ineffectiveness of the Biden administration's incentive-driven semiconductor policy, particularly the CHIPS and Science Act,Footnote 1 and subsequently announced his intention to significantly raise tariffs on imported chips to encourage semiconductor manufacturers, especially the Taiwan Semiconductor Manufacturing Company (TSMC), to expand production in the US and strengthen domestic advanced chip manufacturing capabilities.Footnote 2 At the same time, the Trump administration made public demands, regardless of whether formal negotiations had started, attempting to rescue the US chipmaker Intel, particularly its foundry division Intel Foundry Services (IFS), by pressuring TSMC to partner with Intel.Footnote 3 These recent developments confirm our observation that international trade liberalization in semiconductors, and the core concept of globalization itself,Footnote 4 is now deeply entangled with geopolitical complexities.
On 2 April, Trump announced new tariff measures on imports from various countries, ranging from 10% to 50%. Many semiconductor-related products are not covered by the reciprocal tariff because the administration ‘is looking into doing a further investigation to see where tariffs may or may not be appropriate on semiconductor chips or the downstream components’.Footnote 5 On 13 April, Trump said there is no ‘exception’ for those semiconductor-related products. ‘They are just moving to a different tariff bucket … in the upcoming national security tariff investigations’.Footnote 6 As of this writing, the US Commerce Department has formally initiated national security investigations into semiconductor imports under Section 232 of the 1962 Trade Expansion Act, assessing whether they pose a threat to US national security.Footnote 7
Regardless of what new measures targeting semiconductors are introduced, early signs suggest that the Trump administration will expand the US–China trade war into a broader effort to restore US semiconductor manufacturing. While the specifics remain unclear, this piece will focus on how the increased tariff threats on the global semiconductor industry may affect semiconductor manufacturing ecosystems. In March 2025, TSMC announced plans to expand its investment in advanced semiconductor manufacturing in the US by an additional $100 billion. Adding to its ongoing $65 billion investment in Phoenix, Arizona, TSMC's total US investment is now projected to reach $165 billion.Footnote 8 With three new fabrication plants, two advanced packaging facilities, and a major research and development (R&D) center, this expansion stands as the most significant single foreign direct investment in US history. Does the assumption that a 100% tariff on semiconductors has ‘compelled’ Taiwanese companies to establish additional foundries in the US overestimate the importance of tariffs when chip manufacturers decide where to set up their chip foundries?
2. Semiconductor Trade Disputes in the IEL Context
A historical review of the US–Japan semiconductor disputes suggests a sense of déjà vu, as the ongoing tensions appear to follow a recurring pattern from the 1980s, now playing out in a modern context.Footnote 9 The Japan–Trade in Semiconductors case, which sought to address US concerns regarding Japanese semiconductor dumping and restricted access to Japan's market, was triggered by the EEC's challenge to a bilateral arrangement between Japan and the US. The 1986 US–Japan arrangement required Japan to monitor semiconductor export prices to prevent dumping abroad and to facilitate greater access for foreign semiconductor firms in the Japanese market.Footnote 10 The EEC argued that Japan's measures, in particular, government-led monitoring and administrative guidance on export prices,distorted international trade and violated various GATT rules, including Most-Favored-Nation treatment (Article I) and prohibitions against export restrictions (Article XI).Footnote 11 This case became a landmark in clarifying that even ‘voluntary’ or ‘non-binding’ government actions, when they restrict exports, can violate GATT Article XI. The Panel found that Japan's system of third-country market monitoring, though officially described as ‘administrative guidance’ of a soft law nature, effectively pressured Japanese companies to restrict exports and raise prices abroad.Footnote 12
Why does a trade dispute from the 1980s still evoke a sense of déjà vu amid today's semiconductor tariff tensions? As Gantz noted in the early days of the WTO, the US–Japan semiconductor dispute presents several unique dimensions.Footnote 13 First, the 1986 bilateral Semiconductor Agreement between the two countries functioned as a suspension agreement for parallel US antidumping actions against Japanese Dynamic Random Access Memories (DRAMs). In other words, the US imposition of antidumping duties served as the ‘threats’ behind the bilateral negotiations.Footnote 14 Second, Japanese firms overwhelmingly relied on the US markets to export their products.Footnote 15 The ‘success’ of the US in the talks was mainly due to the leverage of its critical role in the electronics market for Japanese firms.Footnote 16 Third, while there was clear evidence of market access restrictions in Japan, many of these trade barriers were not readily actionable under GATT rules. In other words, the US government showed a marked willingness to pursue its perceived national interests, even if doing so risked violating GATT obligations.Footnote 17
The unilateral tariff approach the US is pursuing today in semiconductor trade appears to echo the strategies employed in the 1980s. Notably, during the first two decades of the WTO, when the rules-based system remained largely effective, major disputes involving DRAMs primarily focused on trade remedies, particularly antidumping and countervailing measures.Footnote 18 These cases demonstrate that, within the WTO framework, governments–at least some–opted to address (unfair) trade practices in the DRAM sector through multilateral dispute settlement mechanisms, signaling a relative shift from unilateral or politically driven strategies toward a more rules-based, multilateral model. Regrettably, after three decades of efforts to establish a ‘rules-based’ WTO system, the pre-WTO semiconductor dispute between the US and Japan has once again become a valuable reference point in a world where US unilateral actions are resurging.
3. Can Tariffs Shift Fab Locations?
At the White House TSMC investment announcement in March 2025, US Secretary of Commerce Howard Lutnick openly stated that TSMC was increasing its investment in the US to ‘avoid the tariffs’ that the company ‘would have to suffer’ if it were not based in the US.Footnote 19 Does it make economic sense to believe that tariffs alone could reshape the landscape of the semiconductor industry?Footnote 20 Tariffs were intended to be used as a negotiating tactic. However, to what extent can semiconductor tariffs serve as a form of policy whiplash, pressing foreign companies to relocate their operations in response to sudden policy changes? This paper argues that, alongside tariff threats, several equally–if not more–compelling factors are influencing TSMC's decision to invest in the US. The three key angles – supply chain resilience, government relations, and technological advancement- are explored below.
3.1 Supply Chain Resilience
Founded in 1987 and rising alongside the ‘fabless revolution’, TSMC has become into the world's largest pure-play foundry. Foundries develop advanced manufacturing processes that integrate billions of transistors into tiny chips. This division of labor between foundries and fabless companies has facilitated the growth of tech firms like Qualcomm and NVIDIA that focus solely on designing chips for technologies, including 5G, AI, and autonomous driving. TSMC distinguishes itself as the largest pure-play foundry that does not design its chips, thereby avoiding competition with its customers.Footnote 21
The company once attempted to expand its manufacturing presence in the US but with limited success. In 1996, TSMC partnered with three customers to establish WaferTech, an 8-inch wafer fabrication plant in Washington State. The goal was to strengthen customer relationships through local production, and, notably, the investment proceeded without government subsidies or political pressure. However, production costs in the US turned out to be about 50% higher than in Taiwan, leading Morris Chang to later describe the effort as ‘a wasteful and ultimately futile exercise’.Footnote 22 The investment in Washington back then was primarily aimed at serving customers locally. Similarly, TSMC's expansion in Arizona will not be taken lightly or driven solely by political pressure without strong customer backing.Footnote 23 After all, the company must carefully weigh challenges such as a limited skilled local semiconductor manufacturing workforce, cultural and language gaps on the fab floor, and higher costs due to strict environmental and safety regulations.Footnote 24
However, apart from a few DRAM manufacturers, nearly all of TSMC's major customers are based in the US.Footnote 25 Driven by strong demand for high-performance logic chips from fabless customers such as Apple, Qualcomm, NVIDIA, and AMD,Footnote 26 TSMC today captures more than 67% of the global foundry market and accounts for well over 90% of the world's production of the most advanced semiconductors.Footnote 27 Such a concentration of supply sources has raised concerns about geopolitical risks among customers, including America's leading companies in AI and technological innovation. TSMC has had to respond by supporting efforts to diversify supply chains and reduce downstream risk exposure.Footnote 28 For example, in Apple's case, nearly all its chips are manufactured in Taiwan, naturally prompting concerns about geopolitical vulnerabilities. As a result, supply chain diversification and resilience, which are increasingly demanded by TSMC's key customers, have become essential to its strategic direction. TSMC's recent announcement to increase US investment underscores its commitment to supporting these key customers by strengthening the semiconductor ecosystem and associating with the AI supply chain. This strategic focus also explains why TSMC declined proposals from Qatar and other Middle Eastern countries eager to develop their AI and semiconductor industries. Although several Middle Eastern nations have demonstrated strong interest and offered generous incentives for TSMC to set up local fabs, the region does not yet host major customers critical to TSMC's core business. In short, TSMC emphasized that its investment is largely driven by customer demand to advance the geographic diversification of its manufacturing operations, and this rationale appears well-founded.Footnote 29
From another perspective, focusing on the supply chain's upstream, TSMC relies on a global network to source a wide range of specialized inputs, particularly from the US, Japan, and Europe. TSMC heavily depends on its upstream suppliers for equipment and materials, many of which are US-based. This has allowed the US to leverage and potentially weaponize upstream supply chains to influence TSMC's investment locations. This also sheds light on TSMC's strategic investments in Japan since 2021 and in Europe since 2023, although only a fraction of its US investment. The Kumamoto fab strengthens TSMC's position by deepening integration with Japan's ecosystem of optical materials and semiconductor equipment suppliers, which are critical to its manufacturing process. Similarly, the fab in Germany reinforces ties with ASML, the Dutch lithography leader whose tools are indispensable for advanced chip production.Footnote 30 These investment decisions reflect TSMC's strategic alignment with key upstream suppliers. After all, it is ultimately market forces and the structure of the supply chain ecosystem that shape TSMC's strategic decisions.
3.2 Government Relations
The looming antitrust investigation is another critical factor. As Trump openly stated, ‘semiconductors are the backbone of the 21st-century economy … without the semiconductors, there is no economy … powering everything from AI to automobiles to advanced manufacturing … Taiwan pretty much has a monopoly on that market … They do have a monopoly.’Footnote 31 At the crux of the matter is whether TSMC's dominant share of the global foundry market places it at risk of becoming the subject of an antitrust investigation in the US? Note that US antitrust laws, particularly the Sherman Act, apply to foreign conduct that is intended to have, and does in fact have, a substantial effect within the US.Footnote 32 Cases involving foreign companies and the extraterritorial application of US antitrust law suggest that firms operating primarily outside the US, but engaging significantly in US commerce should be mindful of the potential enforcement actions available to US competition authorities.Footnote 33
Nevertheless, antitrust enforcement in the US, which was handled mainly by the Department of Justice Antitrust Division and the Federal Trade Commission, is based on market behavior rather than investment amount. Even if TSMC builds more fabs and creates US jobs, it does not legally shield the company if authorities believe it engages in anticompetitive conduct. However, weakened ties with the White House could leave TSMC more vulnerable to regulatory scrutiny. As ‘Chip War’ author Miller rightly pointed out, TSMC's increased investment in the US could mitigate the US government's concerns about TSMC's market dominance by ‘entering a partnership with the new US administration’.Footnote 34 Therefore, strengthening ties with the Trump administration becomes another critical consideration.
This intention is also reflected in TSMC's recent comments in response to the US Department of Commerce's Section 232 investigation, which underscore that the Arizona project is intended to involve close cooperation with the US government at the federal, state, and local levels.Footnote 35 By serving key American customers, aligning with US industrial policy objectives, and supporting security priorities, TSMC helps reduce both the economic and political incentives for aggressive antitrust action against it. Political actors are less likely to champion antitrust measures that could undermine domestic employment, technological leadership, or major investment flows. Deepening its US footprint thus positions TSMC more advantageously to shape the regulatory environment in its favor. In any event, expanding investments in the US creates a network of American ‘stakeholders’. The more American firms have skin in the game, the greater the resistance within the US system to disruptive legal actions against TSMC.
3.3 Technological Advancement
High-tech companies today are working on two fronts: harnessing massive computing power to address AI challenges, while simultaneously developing algorithms that reduce the need for heavy computation.Footnote 36 If this trend continues, it is possible that in the coming years, the demand for AI hardware, including advanced chips, may not be as strong as initially anticipated. Arguably, this could lead to adjustments in hardware procurement plans and chip production orders.Footnote 37
In this context, the decision to establish an R&D center in the US likely reflects broader strategic considerations. TSMC's expansion encompasses plans for three new fabrication plants, two advanced packaging facilities, and a major R&D center.Footnote 38 For the company, the new research center is expected to open new research directions, particularly in areas where the US maintains technological leadership. For decades, TSMC's competitive advantages have centered on large-scale manufacturing and exceptional yield rates. However, as noted by its former R&D director, TSMC often adheres to a ‘hard work makes perfect’ mindset,Footnote 39 placing greater emphasis on effort than on innovation. With the expansion of R&D operations in the US, TSMC's focus will naturally extend toward frontier technologies, developed in collaboration with leading universities and research institutions.
One such promising area is quantum computing. Establishing an Arizona-based R&D team could bring fresh perspectives centered on working smarter, helping to drive breakthroughs in quantum computing and AI. This strategic shift may also be an important factor behind TSMC's investment decisions aimed at accelerating the development and adoption of quantum technologies.Footnote 40
4. The Chip War Continues
To conclude, the Trump administration's actions reflect a broader strategy to address the semiconductor trade. In addition to considering the replacement of the tiered export control system established under the Biden administration with a globally coordinated licensing regime,Footnote 41 it also seeks to leverage tariffs as a means to revive domestic chip manufacturing. TSMC's plan to expand its US investment highlights the potential disruptive impact of tariffs on the semiconductor ecosystem. Nevertheless, this article argues that while tariffs can influence investment decisions, Trump overstates their effects on fab locations and supply chain diversification. Trump believes, or at least pays lip services to the idea, that tariffs are the decisive factor for chip manufacturers in selecting locations for new semiconductor fabs. However, in reality, semiconductor manufacturers weigh a complex set of factors encompassing partners in the supply chain ecosystem, potential regulatory scrutiny, technological trends, and more. Tariffs are a factor, but tariffs alone are not enough to justify expanding the fab or choosing the US over Southeast Asia, such as Vietnam or Malaysia, for a new facility.Footnote 42 The analysis above reveals that the decisive factors are supply chain resilience demanded by key downstream customers, strategic alignment with primary upstream suppliers, relations with foreign governments to prevent antitrust investigations, and future technological advancements. In short, tariffs in and of themselves may not be a determinative factor.
As the semiconductor battle continues to evolve, three critical indicators in the coming months will offer insights into the direction of US trade policy under a renewed Trump administration. First, as mentioned above, the outcome of the Section 232 investigation is expected to trigger new tariffs on national security grounds, as signaled by the recent call for public comments.Footnote 43 Should that occur, as with previous challenges to the US steel and aluminum tariffs,Footnote 44 the central question will be whether such measures fall within the scope of national security exceptions. In light of WTO jurisprudence, it appears less likely that a panel would conclude the semiconductor tariffs were ‘taken in time of war or other emergency in international relation’.Footnote 45
Second, attention should also turn to the Section 301 investigation targeting mature-node chips from China, which could significantly reshape global supply chains. Citing China's non-market policies that enable its companies to expand capacity and undercut competitors with artificially low prices, raising concerns about economic coercion and supply chain vulnerabilities, USTR has launched a Section 301 investigation into Chinese government practices aimed at building a dominant semiconductor industry, particularly the (legacy) mature-node chip sector. The investigation could lead to broader actions beyond USTR authority, reflecting growing alarm over China's projected dominance in legacy chip production by 2029.Footnote 46
Third, whether Trump will continue, modify, or abandon the Biden administration's semiconductor subsidy programs under the CHIPS and Science Act remains uncertain.Footnote 47 Biden's industrial policies, including the IRA and the CHIPS Act, emphasized incentives for both US and foreign firms. Early data suggest that the CHIPS Act is gradually contributing to US reshoring efforts. More than 90% of the allocated funding has been directed toward advanced packaging and the construction of new foundries.Footnote 48 This strategic allocation reflects the policy's core objective, which is to rebuild the domestic chip manufacturing capacity. However, as noted earlier, decades of decline driven by the rise of the fabless model cannot be reversed overnight through subsidies alone. While US firms account for approximately 46% of global chip design revenue and 72% of chip design software and licensing sales, they produce only about 7% of global logic chip foundry output.Footnote 49 As a result, most US-designed advanced chips continue to be fabricated overseas, particularly by TSMC. This context raises the question of whether and how subsidies and tariffs will work together to revive the US semiconductor industry in the years to come. Although the specifics are still unclear, Trump has repeatedly criticized the CHIPS Act, pledged to renegotiate its key provisions, urged Congress to repeal it, and begun reassessing previously approved funding.Footnote 50 Even if the CHIPS Act moves forward, its implementation is likely to be a long and complex process. These developments, despite the surrounding uncertainty, will clarify the role of tariffs and industrial policy in the next phase of the chip war.
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