The U.S. shouldn’t make its semiconductor policy all about China

Under the Biden administration, the U.S. has taken a maximalist approach to containing China’s technological rise. In October last year, Washington imposed controls on advanced semiconductor exports to China, and in December, blacklisted an additional 21 Chinese companies in the chip sector. Since 2021, the American government has also successfully pressured Taiwanese chip giant Taiwan Semiconductor Manufacturing Company (TSMC) to open manufacturing facilities (or “fabs”) in the U.S. — a move that has ignited concerns about fairness and feasibility among the company’s employees.

Through these actions, the Biden administration has explicitly abandoned the previous U.S. approach to critical technologies — to stay “a couple of generations ahead” — for one that aims to gain “as large of a lead as possible,” in the words of the national security adviser, Jake Sullivan. This approach, aimed at curtailing China’s technological and economic rise, overlooks the interests of U.S. allies and partners — most significantly, those of Taiwan, where over 90% of advanced chips are manufactured.  

The United States’ push towards decoupling has been evident in its efforts to onshore and friendshore chip production, through relocating supply chains to domestic soil and proposing the “Chip 4” alliance with Taiwan, South Korea, and Japan. This shift — set into motion by former president Donald Trump’s government and continued under Biden — threatens the success model of Taiwan’s semiconductor manufacturers, such as TSMC, the world’s largest and most profitable chipmaker. It also forces Taiwan’s semiconductor industry, key to the island’s prosperity, into difficult trade-offs that pit its short-term success against its long-term survival. 

Until 2020, two major advantages allowed Taiwan’s semiconductor industry to achieve uncontested dominance: its insulation from political interference, and open access to global research and development. While Taiwan’s chip industry grew out of a government-led initiative, it was overseen by technocrats and engineers concerned primarily with technological development: solving technical and scientific challenges, rather than rewarding political allies or building new tools for the country’s military and security services. 

Thanks to the globalized manufacturing systems and open trade landscape of the 1990s and 2000s, TSMC introduced the secret to its success: a “pure-play foundry model.” This model meant that TSMC’s sole role was to produce chips for “fabless” companies — it allowed them to compete with industry giants such as Intel and Samsung. Smaller firms could then focus on specialized components of the supply chain, such as manufacturing, design, and software, making the industry both diverse and efficient. Taiwan’s chipmakers mastered the art of packing tens of millions of transistors onto a silicon chip the size of a fingernail, allowing computers to grow faster, smaller, and more powerful. The island, and the rest of the world, benefited.

But by focusing on semiconductor indigenization, the U.S.’ strategy threatens the success model of Taiwan’s chip companies, which is highly dependent on an open global economy. In 2020, when the Trump administration blocked shipments of semiconductors to Chinese telecommunications giant Huawei and its semiconductor design subsidiary HiSilicon, TSMC was forced to end its business with HiSilicon — its second-largest customer, accounting for up to 15% of TSMC’s annual revenue. 

For the Trump administration, the measures achieved their goal of stifling the success of Chinese companies: In 2021, Huawei’s revenues fell by 29% and HiSilicon’s profits plummeted by 81%. But TSMC, dependent on U.S. inputs for a range of critical technologies, also suffered considerable financial losses. The company was forced to reckon with a new reality: the ramped-up tech competition between the U.S. and China has transformed the industry, cutting TSMC off from the advantages that had once allowed it to thrive. 

Even the Taiwanese government’s increased investment into research, development, and innovation will not compensate for the losses that result from the forced decoupling with China’s tech sector. (Industry experts estimate that U.S. chip firms’ revenue could see losses as high as 37%.) Late last year, C.C. Wei, TSMC’s CEO, said that export controls “destroy productivity and efficiency gained under globalization,” and “reduce [the] benefits offered by a free market.”

U.S. chip controls against China have also forced countries in Asia and Europe to walk an extremely difficult line; American partners have been consistently reluctant to follow the export restrictions. In late March, after Japan and the Netherlands joined the U.S. in a tacit agreement, Tokyo added advanced semiconductor manufacturing equipment to its export control list, making these materials more difficult for China to access. 

It would be unrealistic to expect the U.S. to watch from the bench as China overtakes it militarily and economically. From a national security standpoint — the primary (if not the only) perspective through which American lawmakers view China — the country is the adversary that could catch up to the U.S. in semiconductors and other technologies. But in its attempts to cut off China, the U.S.’ policies threaten the vitality of its own industry and the strength of its alliances. 

Fortunately, the U.S. has the tools to at least slow down this slide toward fragmentation — if it chooses to use them. For example, the State Department, which has been allocated $100 million annually over five years under the CHIPS Act, could set up regular dialogues with key players from allied countries’ governments and industries, creating room for compromise on policies, and consensus on final decisions and public messaging. 

The Congress could also allocate more funding to the Department of Commerce so it has the tools to monitor the often unpredictable repercussions of export controls, and mitigate their disruptive effects on the fragile global chip ecosystem. Most crucially, Washington should give Taipei a seat at the table when it comes to multilateral semiconductor strategy like its proposed Chip 4 alliance, even if such a partnership means foregoing some opportunities to harm Beijing’s economy.

To better protect the interests of the U.S., and its partners like Taiwan, the Biden administration should instead focus its efforts on an affirmative agenda centered on pulling themselves up by their bootstraps, rather than using them to choke China — and harming the interests of American allies in the process.