Washington's Nightmare: Why America's AI Future Is Stuck On A Small Island Near China

On Tuesday, significant concerns were raised about the potential impact on the U.S. tech industry if a geopolitical flashpoint disrupted Taiwan’s semiconductor exports, threatening to choke off a critical supply line powering everything from artificial intelligence and cloud computing to consumer electronics and defense systems.

The island, along with Taiwan Semiconductor Manufacturing Co. Ltd., produces the vast majority of the world’s advanced semiconductors, and any disruption could severely affect American companies that rely on the chipmaking giant’s supply chain.

The New York Times reports that despite efforts by both the Biden and Trump administrations to encourage U.S. chip production, the tech sector remains heavily reliant on Taiwanese semiconductors. This dependency poses a risk to the global economy, especially as tensions rise with China’s military activities near Taiwan.

U.S. Policy Efforts Show Limited Shift in Chip Sourcing

Efforts to increase domestic chip manufacturing have seen mixed results. Former President Biden’s administration offered substantial financial incentives, while President Trump employed tariffs to push for local production. However, these strategies have not significantly shifted the industry’s sourcing habits.

As reported by The New York Times, the Semiconductor Industry Association commissioned a report in 2022, which warned that a blockade on Taiwan could trigger an economic crisis surpassing the 2008 recession. The report suggested that U.S. economic output could drop by 11%, while China’s could decline by 16%.

Despite these warnings, many U.S. tech companies have been slow to act. The reluctance to shift away from Taiwanese chips is partly due to cost concerns, as chips made in the U.S. are significantly more expensive. Additionally, Taiwan’s manufacturing capabilities are currently unmatched, making a transition challenging.

The U.S. government continues to push for increased domestic chip production, with plans to spend $200 billion on semiconductor plants by 2030. However, even with these investments, the U.S. is projected to hold only 10% of the global semiconductor market share, similar to its position in 2020.

Global Investors Treat Taiwan As AI Safe Haven

At the same time, markets have treated Taiwan’s chip-heavy ecosystem as a key beneficiary of the AI buildout even as investors worry about broader disruption and policy risk, Bloomberg reported on Wednesday.

Overseas investors bought a net $2.77 billion of Taiwan equities on Tuesday, Bloomberg data showed the biggest one-day foreign buying spree since December 2005, and extended foreign inflows to a sixth straight session.

Investors piled into Taiwanese chip names while global equities wobbled after a Citrini Research report stoked fears of AI-driven disruption, with market participants favoring chipmakers viewed as core infrastructure for the AI boom.

Vey-Sern Ling of Union Bancaire Privee said Taiwan sits at the center of the global AI supply chain, and its companies and stock market will keep benefiting as long as investors view artificial intelligence as transformative and essential to the future.

TSM’s Expanding Weight in Taiwan’s Equity Benchmarks

That flow has coincided with Taiwan Semiconductor’s growing dominance of Taiwan’s market benchmarks.

Bloomberg noted the contract chipmaker now represents about 45% of the Taiex index, roughly triple its weighting a decade ago, and the stock has climbed about 30% this year.

TSM Price Action: Taiwan Semiconductor shares were up 0.94% at $389.37 during premarket trading on Wednesday. The stock is trading at a new 52-week high.

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