Taipei heaved a temporary sigh of relief even as US President Donald Trump said that he would slap a shocking 100 per cent tariff on imports of semiconductors, the crucial components that form the backbone of Taiwan’s economy.

That is because companies that commit to making chips in the US would be exempted, according to Mr Trump, which would mean that Taiwan Semiconductor Manufacturing Company (TSMC), the crown jewel of the island’s tech industry, would likely be spared.

The firm, which is the world’s largest contract manufacturer of chips, has so far pledged US$165 billion (S$212 billion) in investment to build six state-of-the-art fabs, or semiconductor plants, in the US state of Arizona.

But while things don’t look too dire now, the impact of the tariff on Taiwan’s chip industry could yet be far-reaching.

Large clients of smaller Taiwanese chip suppliers could demand that they move some of their production to the US to sidestep the punishing duties. This could lead to a decline in Taiwan-based chip production and affect the island’s position as a key part of the global tech supply chain, say analysts.

And while Mr Trump’s latest tariff measure is part of a push to boost domestic chip manufacturing, it could lead to higher prices of electronic devices such as smartphones, which could in turn depress demand for such devices and the chips that drive them. Such an outcome would mean uncertainty for Taiwan’s semiconductor industry.

Still, on Aug 7, TSMC stocks surged nearly 5 per cent to close at a record high of NT$1,180 (S$51), reflecting investor confidence in the wake of Mr Trump’s announcement.

Officials in Taiwan were also cautiously optimistic.

Speaking to lawmakers during a parliamentary briefing on Aug 7, National Development Council chief Liu Chin-ching argued that a steep 100 per cent tariff rate would not necessarily be disastrous, even for Taiwan’s smaller chipmakers that do not have a US presence.

“Taiwan currently holds a leading position in the world (in chipmaking) and I believe that if the leader and competitors are all on the same starting line, the leader will continue to lead,” he said. The island is a global powerhouse in chipmaking, with 60 per cent of the world’s chips and almost all of the most advanced ones produced there.

But experts warned that the lack of details about how the new tariff would be applied means that it is still early days yet to assess its full impact.

“The scope and mechanism of the chip tariff remain unclear. Further developments will need to be closely monitored,” said Ms Joanne Chiao, assistant research manager at Trendforce, a Taiwanese tech research firm.

For starters, how much manufacturing a company would need to commit to the US to qualify for a tariff exemption is unclear.

It is also unknown if Mr Trump’s exemption would cover only chips produced entirely on domestic soil, or also the semiconductors that foreign companies with a US presence, such as British firm Arm, or American companies import from overseas. American chip designers such as Qualcomm typically send their designs to TSMC to be manufactured in Taiwan before the chips are imported into the US.

Moreover, more clarity is needed on whether the new tariff would apply to raw semiconductors and integrated circuits, or also chips in end devices such as smartphones and laptops.

During the first quarter of 2025, only around 4 per cent of Taiwan’s total exports of electronic components, including semiconductors, were shipped directly to the US. The vast majority of Taiwan-made chips were sent to other countries where they were assembled into consumer electronics.

Professor Julien Chaisse, an international trade expert at City University of Hong Kong, said that it would be “misleading” to think this would mean that Taiwan’s chip exports could be naturally immune to Mr Trump’s tariff measure.

“The US government doesn’t need a direct shipment to apply pressure – it can change how it interprets rules of origin,” he told The Straits Times.

“If Washington starts insisting that any product with a certain percentage of Taiwanese-made components falls under the tariff, then the effect spreads quickly,” he said.

Prof Chaisse added that Mr Trump’s tariff also posed a threat to Taiwan’s future position in the global tech supply chain.

“Larger buyers may start demanding more Taiwanese capacity be built inside the US, just to sidestep tariffs,” he said, noting that this would, in turn, drain investment from domestic expansion in Taiwan.

“This will have consequences for how Taiwan grows its chip sector over the next five years,” he added.

Ultimately, Mr Trump’s push to rebuild chip manufacturing in the US will drive up costs for everyone in the supply chain.

“A high tariff on chips would inevitably raise the price of smartphones and laptops, which would also hurt demand for electronic products,” said Ms Liu Pei-chen, an analyst at the Taiwan Institute of Economic Research. “This will bring a lot of uncertainty to the chip industry,” she added.

For now, however, Taiwan retains a major advantage – the US will still need to rely on the island for its semiconductor needs, particularly for advanced chips. Taiwan’s intricately connected semiconductor ecosystem, which was built up over decades, is not easily replicated. The island’s dominance in the sector extends to the technical prowess and efficiency among its chip engineers, which means it is not a simple matter of plonking a factory wherever one wishes.

“Even with the big investments happening in US fabs, it will take years before local production can cover demand,” said Prof Chaisse.

“In the end, this feels like pressure aimed at getting more investment from Taipei. Not because Taiwan is a threat, but because Trump wants quick wins he can point to.”

In association with Asia News Network