US strikes deal with Taiwan to cut tariffs, boost chip investment

TAIPEI/WASHINGTON – Taiwan vowed on Jan 16 to remain the world’s “most important” artificial Intelligence (AI) chipmaker after reaching a trade deal with the US that will reduce tariffs on the island’s shipments and increase Taiwanese investment on US soil.

Taiwan is a powerhouse in chip production – a critical component of the global economy – but the US has pressed for more of the technology to be made on its own soil.

The agreement, the US Commerce Department said, “will drive a massive reshoring of America’s semiconductor sector”.

Under the deal, Washington will lower tariffs on Taiwanese goods to 15 per cent from a 20 per cent “reciprocal” rate aimed at addressing US trade deficits and practices it deems unfair.

Taiwanese Premier Cho Jung-tai praised negotiators on Jan 16 for “delivering a well-executed home run”.

“These results underscore that the progress achieved so far has been hard won,” he added.

Taiwan’s dominance of the chip industry has long been seen as a “silicon shield” protecting it from an invasion or blockade by China – which claims the island is part of its sovereign territory – and an incentive for the US to defend it.

But the threat of a Chinese attack has fuelled concerns about potential disruptions to global supply chains, increasing pressure for more chip production beyond Taiwan’s shores.

“Based on current planning, Taiwan will still remain the world’s most important producer of AI semiconductors, not only for Taiwanese companies, but globally,” Taiwanese Economic Affairs Minister Kung Ming-hsin assured reporters on on Jan 16.

Production capacity for the advanced chips that power AI systems will be split about 85-15 between Taiwan and the US by 2030 and 80-20 by 2036, he projected.

China’s Foreign Ministry said it “resolutely opposes” the deal.

“China consistently and resolutely opposes any agreement... signed between countries with which it has diplomatic relations and the Taiwan region of China,” ministry spokesman Guo Jiakun said, urging Washington to abide by the “one China” principle.

‘New, direct investments’

The deal will need approval from Taiwan’s opposition-controlled Parliament, where lawmakers have expressed concerns that it could undermine the country’s chip dominance.

Ms Cheng Li-wun, a lawmaker and chairwoman of the Kuomintang party, which advocates closer ties with Beijing, criticised the deal.

She said that increasing Taiwanese investment in US chip production capacity risked “hollowing out” the island’s economy.

Sector-specific tariffs on Taiwanese auto parts, timber, lumber, and wood products will be capped at 15 per cent, while generic pharmaceuticals and certain natural resources will face no “reciprocal” duties, the US Commerce Department said.

Meanwhile, Taiwanese chip and tech businesses are set to make “new, direct investments totalling at least US$250 billion (S$322 billion)” in the US to build and expand capacity in areas like advanced semiconductors and artificial intelligence.

Taiwan will also provide “credit guarantees of at least US$250 billion to facilitate additional investment by Taiwanese enterprises” into the US semiconductor supply chain, the department added.

Taiwan’s government said the new tariff will not stack on top of existing duties, which had been a major concern for local industries.

“Of course it’s good that the reciprocal tariff has been lowered to 15 per cent – at least it puts us on a par with our main competitors, South Korea and Japan,” said Mr Chris Wu, sales director for Taiwanese machine tool maker Litz Hitech.

“(But) given the company’s single-digit profit margins, there is no way we can absorb the tariff for US customers,” he added.

TSMC

More than half of Taiwan’s exports to the US are information and communications technology products – including semiconductors.

“The objective is to bring 40 per cent of Taiwan’s entire supply chain and production, to domestically bring it into America,” US Commerce Secretary Howard Lutnick told CNBC.

“We’re going to bring it all over, so we become self-sufficient in the capacity of building semiconductors,” he added.

The announcement did not name specific companies, but the deal has major implications for Taiwanese chipmaking titan TSMC, the world’s largest contract manufacturer of microchips used in everything from Apple iPhones to Nvidia’s cutting-edge AI hardware.

“As a semiconductor foundry serving customers worldwide, we welcome the prospect of robust trade agreements between the United States and Taiwan,” TSMC said in a statement on Jan 16.

“Strengthened trade relations are essential for advancing future technologies and ensuring a resilient semiconductor supply chain.”

Mr Lutnick said TSMC had bought land and could expand in Arizona as part of the deal.

“They just bought hundreds of acres adjacent to their property. Now I’m going to let them go through it with their board and give them time,” he said.

Taiwanese producers who invest in the US will be treated more favourably when it comes to future semiconductor duties, the US Commerce Department said.

A day earlier, US officials held off on imposing broader chip tariffs, instead announcing a 25 per cent duty on certain semiconductors intended for export – a key step in allowing Nvidia to sell advanced AI chips to China. AFP