U.S. Chip Tax Targets TSMC

The Storm Media Editorial, February 11, 2024

For Taiwan, as the tariff war initiated by President Donald Trump of the United States becomes unavoidable, the result is not only the inevitable growth of "U.S. Semiconductor Manufacturing Company," but the need to think beyond short-term responses. Long-term strategies are becoming even more important and necessary.

Last week, after their summit, President Trump and Prime Minister Shigeru Ishiba of Japan held a joint press conference where President Trump announced that this week he would impose "reciprocal tariffs" on multiple countries to ensure equal treatment between the United States and other nations. He then declared a 25 percent tariff on all imported steel and aluminum, which would impact Taiwan’s exports. President Trump did not explain what "reciprocal tariffs" meant or specify which countries would be on the list, but based on his past actions and the reasons behind the tariff wars, Taiwan is likely to be included.

President Trump has a strong inclination towards "mercantilism," despising trade deficits and believing that countries with trade surpluses with the United States are unfairly taking American money and even stealing American jobs. Thus, the first wave of his tariff war targeted the three countries with the highest trade surpluses with the United States: Mexico, Canada, and China (the tariffs on Mexico and Canada were delayed by a month). Therefore, the next wave of tariffs is expected to target countries such as the European Union (EU), South Korea, Japan, Vietnam, Taiwan, and even India, all of which have significant trade surpluses with the United States.

For example, the EU has a trade surplus of €158 billion (about US$165.7 billion) with the United States, Vietnam exceeds $120 billion, South Korea over $50 billion, and both Japan and Taiwan have surpluses of around $60 billion. Even India, with a surplus of just over $30 billion, might be included on the list.

As such, Taiwan is unlikely to avoid President Trump’s second wave of tariffs, especially since there is one area where Taiwan stands out globally: semiconductor manufacturing. President Trump has repeatedly accused Taiwan of "stealing" semiconductor technology from the United States, even threatening to impose a 100 percent tariff on Taiwan chips. Given the importance of the semiconductor industry and exports to Taiwan's economy, the potential impact of high tariffs on chip exports has generated significant concern.

Let’s first discuss the potential scenario of Taiwan being subjected to "reciprocal tariffs" by the United States. Based on President Trump’s actions with Canada, Mexico, and China in his first tariff war, a "reciprocal tariff" would likely mean that all Taiwanese exports to the United States would face additional tariffs. Regardless of whether the costs are absorbed by the importers or exporters, the prices of goods would increase, leading to a decrease in demand, which would ultimately reduce exports to the United States.

The extent of the impact will depend on how broadly President Trump applies the tariffs. If Taiwan's main competitors (such as South Korea) are also subject to the same tariffs, the effect would be reduced. Of course, the "best-case scenario" for Taiwan or any other country on the reciprocal tariff list would be if all countries were subject to the same tariffs, as this would eliminate competitive advantage between countries. However, this would lead to skyrocketing inflation in the United States.

Since the tariffs are a result of trade surpluses, the solution likely lies in purchasing more American products. Over 40 years ago, Taiwan did this by sending large procurement delegations to the United States to buy agricultural products, and now there is the option of purchasing more energy products. However, it is uncertain whether this would satisfy Americans. Additionally, the exchange rate of the New Taiwan dollar (NTD) could also be affected. In the past, the NTD appreciated from about 40 to 26 against the U.S. dollar due to American pressure.

However, simply increasing purchases or even allowing for currency appreciation may no longer satisfy President Trump. He is also focused on bringing back American manufacturing, which is linked to semiconductor investments, specifically the Taiwan Semiconductor Manufacturing Company’s (TSMC) investments in the United States.

Looking at President Trump’s proposed 100 percent tariff on chips, the impact seems terrifying, but the actual effect may not be as severe as expected. The American market accounts for less than 5 percent of Taiwan’s semiconductor exports, with the value at around $7 billion, which isn’t huge. More importantly, Taiwan (especially TSMC) dominates more than 90 percent of the advanced semiconductor manufacturing market, which is hard to replace. If President Trump also imposes high tariffs on South Korean chips, the impact on Taiwan will be further reduced.

However, if President Trump does impose a 100 percent tariff on Taiwan chips, the real effect would be to force TSMC to increase its investments in the United States. President Trump has previously mocked the "CHIPS Act" proposed by President Biden, calling it foolish to attract companies like TSMC to invest in semiconductor fabs through large subsidies. President Trump believes that by significantly raising tariffs, companies will be forced to invest in the United States. His obsession with investment is evident—during his first term, then-Chairman Terry Gou of Foxconn became one of President Trump’s main White House guests due to a $10 billion investment in Wisconsin, and during the U.S.-Japan summit, Japan pledged $1 trillion in investments, which greatly pleased President Trump.

While the government cannot decide whether TSMC will invest or not, TSMC will ultimately face immense pressure from the United States and President Trump to increase its investments. As a result, TSMC’s further expansion in the United States seems inevitable.

After several rounds of tariff wars under President Trump, the World Trade Organization (WTO) has been pushed to the brink of collapse, and global trade rules based on openness, freedom, and low tariffs are increasingly diminishing. Imposing tariffs on semiconductors disregards the Information Technology Agreement (ITA), and for Taiwan, a highly trade-dependent economy, this is a major warning and risk. Especially with Taiwan facing barriers in joining international trade organizations, as countries move towards protectionism, Taiwan’s exports will become even more vulnerable. Both the government and businesses must adopt stronger crisis awareness, make predictions, and formulate strategies.

From: https://www.storm.mg/article/5320984?mode=whole
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