Will Tariffs on TSMC Work?

U.S. President Donald Trump recently announced plans to impose new tariffs on Taiwan’s semiconductor industry, specifically targeting companies like TSMC that manufacture chips abroad for U.S. tech giants such as Apple, Nvidia, Qualcomm, and AMD. President Trump argues that high tariffs—ranging from 25% to even 100%—would pressure these firms to move production back to the United States rather than relying on overseas factories.

There are two main arguments for such a tariff:

• The U.S. should protect its own semiconductor manufacturing business

• TSMC could avoid this tariff by building more plants in the U.S. So, instead of a subsidy that incentivizes TSMC to build plants in the U.S., President Trump will use the tariff as a punishment for NOT building plants in the U.S., hopefully reaching the same effect — more chip factories in the U.S.

Here, we examine each of those arguments one by one and point out what to take caution of.

Argument 1: The U.S. should protect its own semiconductor manufacturing business

President Trump claims that major American tech companies have shifted chip production almost entirely to Taiwan, which he says accounts for about 98% of the global semiconductor market. He believes imposing tariffs would spur domestic manufacturing and lessen the need for government subsidies like those in the Chips and Science Act.

Part of this claim is definitely true, the U.S. tech companies did shift chip production to Taiwan. The chip industry in Taiwan began with the Technical Advisory Committee at the Industrial Technology Research Institute (ITRI) made a deal with RCA for a 10-year technology transfer agreement that stipulates a $2.5 million technology transfer fee and a $1 million technology licensing fee in 1976. Then, later in 1987, the ITRI established TSMC. TSMC’s founder, Morris Chang, spent 25 years at Texas Instruments—and thus brought extensive semiconductor manufacturing and management experience from TI. The experience at TI gave Chang deep insight into chip manufacturing processes, supply chains, and management. (A side story: apparently Morris Chang suggested doing a foundry when he was at TI but his idea was not accepted. Otherwise, it would have been Texas SMC instead). In 2021, Taiwan’s chip manufacturing industry occupied 64% of the global market and for advanced process technology under 7nm, TSMC has almost the whole market.

Now, is it practical to protect the U.S. semiconductor manufacturing business? Sometimes people think “country A gave country B the technology. Now A wants it back. Country A just needs to take it. That’s all.” However, the reality is that chip manufacturing requires long-term dedication. The semiconductor industry has a relatively low turnover rate, meaning it takes a long time for new product generations or innovations. It not only requires a huge amount of money but also a persistent effort at fostering talent. Yes, the U.S. once led this industry, but after outsourcing it to Taiwan for over three decades, it is not super easy to take back.

One piece of evidence for this claim is the important personnel in TSMC. The founder of TSMC, Morris Chang, studied at Harvard and MIT and then joined TI in 1958. The second, third, and fourth generations of high-ups in TSMC are listed below:

The Second Generation of High-ups at TSMC

The Third Generation of High-ups at TSMC

The Fourth Generation of High-ups at TSMC

These figures show that leadership at TSMC is now being nurtured in Taiwan instead of the U.S. Wang Ying-lang, Liao Yung-hao, and Chang Zong-sheng all graduated from Taiwan’s universities, and pretty much immediately joined TSMC upon graduation. This means that the chip manufacturing experts (professors, engineers, etc.) are now concentrated in the little island of Taiwan and they are nurturing the next generation of experts. These network effects are hard to break - almost every talented 20-year-old engineer in Taiwan wants to work at TSMC and has access to many mentors. If the U.S. is serious about re-shoring semiconductors, they have to be prepared for a long-term investment in a similar network.

I believe in the U.S.’s potential to achieve anything. However, it is not going to be a quick fix. If the US wants to re-shore, it needs to tackle the problem seriously for decades and do more than put a quick tariff on TSMC. U.S. firms will have to learn from TSMC and potentially collaborate just like TSMC did in the 1970s and 80s.

Argument 2: the U.S. could force TSMC to build more factories in the U.S. by punishing it for not doing so.

“The only way you’ll get out of this is to build your plant —if you want to stop paying the taxes or the tariffs— you’ll have to build your plant right here in America,” Trump added. “That’s what’s going to happen at record levels.”

This argument is more valid. Having such an important sector almost entirely concentrated in Taiwan is a major geopolitical risk.

However, the core problem is that TSMC’s supply of factories is not very elastic in response to tarrifs. Why not?

• First of all, the cost of making chips is way higher in the U.S. than in Taiwan. Right now, TSMC makes plants in the U.S. and Japan. However, engineers earn roughly 3 times as much in the U.S. than in Taiwan on average. On the contrary, Japanese engineers earn roughly 1.5 times as much as Taiwanese engineers. Not to mention lower-skill workers who earn even less in Taiwan.

  With this high cost, it is questionable whether it is cheaper to just pay the tariff or build more factories in the U.S. From the beginning, it is more likely that TSMC chose to build plants in the U.S. to circumvent geopolitical risks than simply to avoid shipping costs.

• Second, the U.S. is not giving a high subsidy compared to Japan, the other destination of TSMC’s overseas expansion. According to Taipei Times, “Japanese Minister of Economy, Trade and Industry Ken Saito said that the Japanese government would grant ￥732 billion (US$4.98 billion) to JASM to build the second fab in Kumamoto. Along with a subsidy of ￥476 billion ($3 billion) for the first fab in Kumamoto, the Japanese government’s total grants to TSMC would top ￥1.2 trillion ($8 billion).” On the other hand “TSMC is set to secure more than US$5 billion in federal grants to support its investments in Arizona, much lower than the subsidies planned by Japan.” Japan gave TSMC a higher subsidy with a lower cost of hiring labor. It is more difficult to build a TSMC factory in the U.S. as a result.

TSMC Arizona

• Third, the U.S. working culture is very different from Taiwan’s. TSMC engineers do not have a work-life balance at all. An anonymous comment on Glassdoor says: “The working hours could be very long sometimes for an engineer. Average working hours is 8:30 till 20:00~21:00. When abnormal things happen in the Fab, you might need to work till 23:00 for 2 or more weeks.” Former Executive Vice President & Co-Chief Operating Officer Chiang Shang-yi also said that TSMC’s employees, whether day or night, are always willing to stay at the company, put in overtime, and work through the night without a word of complaint. He once even joked with foreign friends, “Because Taiwanese men all serve in the military, they’re used to being woken up at two or three in the morning for guard duty. Working the night shift at TSMC is just like standing guard—compared to Westerners, they can endure more hardship and show greater willingness to sacrifice.”

  As a result, it is a challenge for TSMC managers to organize the American engineers. Naturally, one way to solve it is to import Taiwanese engineers. I myself have noticed how many more Taiwanese restaurants have opened up in Phoenix when I went back there. Indeed, of around 2200 employees at the TSMC plant in Arizona, half are from Taiwan. Of course, TSMC claims that this percentage will decrease in the future as mass production is more on track.

The above are all the reasons why it is difficult for TSMC to build plants in the U.S. That is also why mass production is delayed from 2024 to 2025, given that TSMC rarely breaks its promises on production. But then why is TSMC making factories in Arizona at all now? Their primary motivation is

1. Geopolitical: They understand the risk from China and do not want to put all their eggs on the Taiwanese island.

2. Energy use Constraints: TSMC already uses about 8% of energy in Taiwan. Moreover, energy use is expanding by about 20-30% at each new generation. Starting factories in new countries is particularly appealing from an energy perspective, especially the U.S. which has cheap energy in relative abundance.

Overall, tariffs give some incentive to TSMC to build more factories in the US, but the incentives are fairly weak compared to the larger forces at play. Unless President Trump is planning extremely large tariffs - they likely won't move the needle for TSMC on factory location (but this might cause low motivation for Taiwanese engineers). Other levers, like subsidies and geopolitical promises, may get more return on investment.

Conclusion

To conclude, while we understand some of the motives behind the U.S. government's adding tariffs on TSMC, we think there are considerable cautions it should take. One policy that the U.S. could take is a combination of the carrot and the stick — while continuing to subsidize TSMC and promoting the positive image of TSMC in the U.S., also threatening to add tariffs if TSMC does not build enough plants in the U.S.

Taiwan has tried to build plants in the U.S. WaferTech and Foxconn were precedents. But their results were not ideal. If TSMC in Arizona also fails, it will be a harsh blow to Taiwan, as TSMC is the most successful company in Taiwanese history. So if the U.S. really wants to have more semiconductors in the U.S., perhaps the highest return thing is to make sure the Arizona plant performs well. We certainly hope TSMC will succeed in the U.S., making a win-win for both countries.

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Other references that are not already linked in the article

Lin, H. (2023). The Light on the Chip Island. Zao An Caijing. https://www.amazon.com/dp/B0CPHV67H9