The Economist: Why Trump’s MAGA AI ambitions will be still tied to Taiwan

At first glance, American chip manufacturing looks to be experiencing a renaissance.

The CHIPS Act, a $US50 billion ($79b) package of subsidies and tax breaks introduced by the Biden administration, has encouraged a flurry of investment.

Intel, a once-mighty American semiconductor firm, plans to spend $US100b on chip-making factories (known as fabs) across four states.

Samsung, a South Korean electronics giant, is likewise pouring $US37b into semiconductor facilities in Texas. And TSMC, Taiwan’s chip-making champion, is investing $US65b in three leading-edge fabs in Arizona, the first of which is already producing chips.

Look closer, though, and progress is shakier.

Samsung has delayed the opening of its new Texas from late 2024 to some time next year. The firm reportedly plans to cut global investment in chip manufacturing by more than half in 2025 as it struggles to compete with TSMC in the production of advanced chips.

Intel is in an even worse position. Analysts worry that it is falling behind on rolling out its “18A” production process, which it was relying on to close the gap with TSMC in leading-edge chipmaking.

Profits have evaporated, debts are piling up and speculation is growing that the firm could be broken up. Broadcom, a fabless chipmaker, is said to be interested in Intel’s design division, while Mr Trump has reportedly sounded out TSMC for a possible joint venture to salvage Intel’s manufacturing operations.

That leaves the Taiwanese firm as the lynchpin of America’s effort to produce advanced chips domestically. TSMC is increasingly in a league of its own. SemiAnalysis, a research firm, forecasts that the chip-maker’s revenue will rise by 25 per cent this year, compared with growth in the mid-to-high single digits for the industry as a whole.

Sales of the firm’s AI chips are expected to double. Meanwhile, TSMC continues to upgrade its manufacturing technology every two to three years and churn out ever smaller chips, while also expanding capacity. It is planning $US38-42b of capital expenditures in 2025, a 41 per cent jump from last year. Claus Aasholm, a semiconductor analyst, reckons TSMC has the capacity to “carry this AI revolution for the next two years alone”.

Yet on current projections nearly all of TSMC’s production of advanced chips will remain in Taiwan until well after the end of Mr Trump’s second term. Bloomberg Intelligence, a research group, estimates that around 3.5 per cent of the firm’s leading-edge capacity will be in America by the end of this year. Even by 2030, when all of TSMC’s American fabs are operational, the figure will be only around a tenth.

Mr Trump has derided the CHIPS Act as wasteful, but the stick of tariffs — which he prefers over the carrot of subsidies — may not have much effect. Few chips are sent directly to America. Last year semiconductor exports to the country amounted to just $US82b, according to Bernstein, a broker, compared with total global sales of $US628b.

Instead, most chips destined for America travel elsewhere first, to be fitted into server racks or smartphones. Even if elaborate measures were taken to apply levies to semiconductors embedded in other products, customers of leading-edge chips tend to focus less on cost than capability, which may make them willing to bear higher tariffs.

Another Trumpian tactic may be to encourage TSMC to produce more in America as part of a wider deal with Taiwan’s government. Taiwan has long viewed its semiconductor industry as a “silicon shield”, guaranteeing protection from America and its allies against a Chinese invasion.

That is why in the past it has required TSMC to keep production of its most advanced semiconductors at home. This year the company will begin manufacturing two-nanometre (nm) chips in Taiwan, even whizzier than the 4nm ones it is making in Arizona.

Recently, perhaps in an effort to appease Mr Trump, Taiwan’s government has eased those restrictions. TSMC for its part may well announce more investments in America, and could even go along with Mr Trump’s plan to help resuscitate Intel.

Crossed wires

Even then, any additional production in America would be a long time coming. Exyte, an engineering firm, estimates that a fab in America takes around 38 months to be ready for production — about twice as long as in Taiwan. CC Wei, TSMC’s boss, has complained about the sluggish pace, saying that when building a fab in America, “every step requires a permit”.

Building new fabs is also costly. TSMC has been awarded $US6.6b in grants and $US5b in loans under the CHIPS Act, but setting up a fab is far more expensive than that. Brian Potter of the Institute for Progress, an American think-tank, estimates that in the late 1960s they cost about $US30m in today’s money to build and equip. TSMC’s newest fabs in Arizona, by contrast, will cost around $US20b each.

A further problem is that AI chips require advanced packaging to integrate several components, known as chiplets. Although TSMC plans to build an advanced-packaging facility in Arizona, for now nearly all of its capacity is in Taiwan. That means that AI chips made in America will have to be shipped back to Taiwan for packaging. No matter how much American politicians yearn for semiconductor self-sufficiency, their AI ambitions will still depend on Taiwan and its chipmaking champion.