U.S. Commerce Secretary Howard Lutnick sent shock waves through Taipei when he declared in late September that Washington could not guarantee that it would defend Taiwan unless the island agreed to a 50-50 split of its semiconductor production with the United States. The concept of a “silicon shield”—the idea that global dependence on Taiwan’s chips enhances its security—has long shaped perceptions of Taiwan’s strategic value to the world. Lutnick’s blunt statement flipped that logic: Far from being a shield, Taiwan’s dominance of semiconductor production was cast as a liability for the United States.
Many U.S. think tank analysts and policy experts often assess the threat to Taiwan’s silicon shield through an external lens, focusing on Beijing’s accelerating push for semiconductor self-reliance and the Taiwan Semiconductor Manufacturing Company’s (TSMC) diversification into overseas markets such as Arizona.
However, the true fragility of the silicon shield lies not in Arizona or Beijing, but within Taiwan’s own borders: the lack of institutionalized alignment between Taiwan’s government and TSMC, a private firm. Formally, the Taiwanese government holds 7.69 percent of TSMC shares, represented on the company’s 10-member board through the National Development Fund. The position appears more symbolic than impactful, offering the appearance of government participation in key decisions but little real influence over TSMC’s business direction or alignment with government priorities.
The administration of President Lai Ching-te fully recognizes TSMC’s central role in Taiwan’s survival, yet it has continued to defer to the company’s business decisions. Taipei has repeatedly approved unprecedented new overseas investments by TSMC and framed them only after the fact as being beneficial to Taiwan’s interests, rather than steering them to align coherently with Taiwan’s national security agenda. While compromises between business interests and state interests are inevitable, the current balance tilts heavily toward TSMC’s commercial logic.
In former President Tsai Ing-wen’s 2021 Foreign Affairs commentary, she framed semiconductors as a strategic asset for Taiwan to own a defensive buffer against supply chain coercion as well as an anchor of Taiwan’s irreplaceable role in global economic interdependency. Wu Jieh-min, a prominent researcher at Taiwan’s Academia Sinica, reframed this as “silicon shield 2.0,” arguing that TSMC’s overseas diversification is embedding Taiwan in a codependent economic security relationship with the democratic world.
However, industry leaders have remained largely ambivalent about these narratives. TSMC’s then-Chairman Mark Liu stated explicitly in a 2023 New York Times interview that semiconductors would not factor into China’s calculus on whether to invade Taiwan. His comments reflected TSMC’s determination to keep the firm above politics. While the government has signed off on it after the fact, the company’s long-term strategy of global expansion should be understood as being aimed at securing market access, ensuring sustainable supply chain resilience, and optimizing shareholder value—not as a form of national deterrence.
Earlier this year, for instance, TSMC grabbed global headlines when it announced historic commitments to increase its total investment in the United States to $165 billion. The company framed the decision as a way to reduce supply chain risk, secure long-term contracts with major clients such as Apple and Nvidia, and hedge against potential U.S. tariffs on Taiwan-made chips.
But straightforward commercial logic alone cannot justify TSMC’s initial expansion to Arizona, announced in 2020, or its subsequent investment announcements. Despite far higher capital expenditures and operating costs than Taiwan fabs, TSMC proceeded under U.S. pressure to “pick a side,” proving its commitment to the United States’ push for a more secured onshore supply chain.
Trump 2.0 has further sharpened this dynamic. The administration has used unpredictable tariff threats to pressure Taipei into closer alignment with Washington, amid fears that Trump could recalibrate U.S. strategic ambiguity toward Taiwan as part of a broader deal with China.
The push to bring TSMC’s production onshore appears to be driven less by economic logic than by U.S. concerns over long-term supply chain security. The United States also does not seem to have fully acknowledged the political sensitivities that such a move has stirred in Taipei. And at TSMC’s headquarters in Hsinchu, decisions are seemingly coming in response more to U.S. demands than Taiwan’s own interests.
This absence of alignment and internal consensus leaves no clear limits on how far TSMC’s decisions might drift from government direction in the future—a vulnerability that undermines the very credibility of the silicon shield.
By law, the Ministry of Economic Affairs has authority to block investments worth more than 1.5 billion new Taiwan dollars (about USD $50 million) if they are deemed contrary to Taiwan’s national interest. This covers every TSMC overseas investment, but the government has never invoked this power.
The reasoning is clear. Halting a U.S. fab construction outright would be politically untenable. Blocking investments risks directly straining ties with the United States, and Washington would likely interpret the move as deviating from its long-standing expectations for Taiwan to align closely with its development priorities. It could also create the perception of a rift between Taipei and TSMC—one that might alarm markets and investors, triggering fears of direct political interference in the company’s operations. The government’s tendency, therefore, had been to approve TSMC’s requests and later frame them as consistent with Taiwan’s national security.
TSMC’s Arizona expansion is a telling example. While the Democratic Progressive Party (DPP) government has consistently framed the project as bolstering Taiwan’s national security by dispersing risk and deepening economic interdependence, this narrative emerged only after the deal was struck—a sign that Taipei was reacting to, rather than shaping, the strategic terms of TSMC’s overseas expansion. This was likely aimed at managing public skepticism and heading off political attacks from opposition parties.
This misalignment has also intensified divisions in Taiwan’s domestic politics. The Kuomintang (KMT) party has accused the Lai administration of letting TSMC set the agenda while stoking public fears that U.S. pressure could erode Taiwan’s silicon shield and reduce its bargaining power. Beijing has sought to capitalize on these tensions, framing U.S. pressure on TSMC as proof that Washington will one day abandon Taiwan.
There’s certainly some degree of coordination between the government and TSMC. But Taipei has few bargaining chips to play in its negotiations, and the agenda is being set by TSMC’s business needs, not Taiwan’s security worries. The Arizona expansion was a calculated business decision primarily driven by TSMC, shaped by U.S. political pressure and the company’s intrinsic dependence on U.S. electronic design automation software: a critical component that allows TSMC’s customers to design the chips that it custom makes for client needs. U.S. firms Synopsys and Cadence, which together control more than 80 percent of the global market, are indispensable partners. Whether the expansion to Arizona served Taiwan’s geopolitical interest was never the company’s concern.
U.S. interest in TSMC investment predates Trumpian geopolitics. Back in 2016, the U.S. International Trade Administration invited TSMC to consider building fabs in the United States for risk-dispersion purposes. TSMC responded positively and even scouted potential locations, motivated in part by its reliance on the U.S. market, which then accounted for about 75 percent of its revenue, according to a source who spoke on condition of anonymity. Yet the plan was abandoned: Projected costs were 40 percent higher than Taiwan’s baseline in 2016, climbing to 70 percent higher by 2018, with overall expenditures expected to more than double. At the time, strategic decisions remained guided primarily by cost efficiency and business fundamentals, in a geopolitical climate where supply chain vulnerabilities were not securitized.
Costs once kept TSMC anchored at home, but when geopolitics shifted, U.S. pressure and dependence on American technology forced the company’s hand. Crucially, the Arizona complexes have not yet crossed a national security red line for Taiwan. But their approval, absent clear guidelines, is a reminder of how easily commercial logic and foreign pressure can steer TSMC in directions that may one day collide with Taiwan’s security interests.
Taipei has, however, demonstrated its ability to implement boundaries. Earlier this year, the Legislative Yuan amended Article 22 of the Industrial Innovation Act to introduce the “N-1” rule, which limits overseas facilities of Taiwanese chipmakers to producing chips one generation behind their most advanced process in Taiwan fabs. In effect, though receiving discontent from the Trump administration, TSMC is now legally barred from producing its cutting-edge 2-nanometer chip in Arizona. The revision serves as a crucial precedent that links possession of advanced technology as inseparable from national security.
The relationship between TSMC and Taiwan is more reciprocal than often assumed: TSMC depends on Taiwan as much as Taiwan depends on TSMC. For all its global reach, TSMC still relies fundamentally on Taiwan for talent, research and development, suppliers, and the infrastructure that sustains its leading capacity. Built on decades of industrial policy, it continues to draw strength from Taiwan’s unique ecosystem—thousands of specialized small-to-medium enterprises, an engineering culture of speed and precision, and a workforce trained to push processes toward perfection, which makes it incredibly challenging to replicate Hsinchu abroad.
Its most advanced process technologies remain concentrated at home under the N-1 rule, while overseas fabs lag about two to three years behind current advances and are limited to older nodes. Replicating Taiwan’s ecosystem abroad requires not only massive capital but also engineers, suppliers, and years of yield refinement. For the foreseeable future, Hsinchu will remain the beating heart of TSMC’s innovation—a reality that gives Taipei far more leverage than it has so far dared to exercise.
The end goal of maintaining Taiwan’s dominance in the semiconductor supply chain and the strength of the silicon shield is clear: to expand Taiwan’s space to maneuver for its own survival amid the intensifying U.S.-China rivalry. Therefore, it is crucial that government and industry align corporate decisions with national security needs rather than leaving them to diverge unchecked. At the same time, as Washington seeks to onshore more of the advanced semiconductor supply chain for national security reasons, it must also recognize that Taiwan’s dominance in global chipmaking is the linchpin of its geopolitical bargaining power.
This is not a call for nationalization. TSMC should not and cannot be turned into a state enterprise. Nonetheless, the government must stop treating TSMC’s decisions as untouchable. No one voted for TSMC, yet its decisions increasingly shape Taiwan’s future.
To maintain both domestic confidence and international credibility, Taipei must increase transparency in how it interacts with TSMC and explain clearly to the public how corporate decisions align with national security goals. Without such openness and a clearer role for the state, Taiwan risks leaving its fate too closely tied to corporate decisions. By building transparency into its dealings with TSMC and asserting a firmer role in aligning business with national security, Taiwan will strengthen both its democracy and its deterrence.
