Taiwan should step up efforts to negotiate tax exemptions or a reduced tax rate on semiconductors and chip manufacturing equipment with the US, as the impending levies under Section 232 of the Trade Expansion Act are expected to have a greater impact on Taiwan’s economy than the 20 percent “reciprocal” tariff, particularly given that 80 percent of Taiwan’s exports to the US last year were affected.
The economic impact is expected to intensify, as taxes on chips and chip manufacturing tools could reduce shipments from next year, particularly as exports to the US continue to grow rapidly.
Last month, exports to the US surged 87.4 percent year-on-year, reaching a record US$15.52 billion, driven by growth in semiconductors and artificial intelligence (AI)-related applications, mainly servers, Ministry of Finance data showed. In the first five months of this year, the US accounted for 26.8 percent of exports.
The US Department of Commerce is scheduled to announce the results of its investigations into sectors deemed critical to national security, including semiconductors, pharmaceuticals and critical minerals, in the next few weeks. The semiconductor levies could be substantial, ranging from 25 to 100 percent, as US President Donald Trump has indicated, in efforts to reshore more chip manufacturing.
During the Commerce Department’s probes, about 20 items, ranging from semiconductors and graphic cards to servers, were exempted from taxes, while networking products and printed circuit boards were subject to a 10 percent import tax, the Ministry of Economic Affairs said.
The impact could be substantial if import tariffs on semiconductors are based on their place of origin, as a majority of advanced chips, particularly those produced by Taiwan Semiconductor Manufacturing Co (TSMC), are shipped to the US from Taiwan. That includes 3-nanometer, 4-nanometer, as well as the new-generation 2-nanometer chips used in premium electronics such as iPhones and AI servers.
In a letter to the Commerce Department, TSMC said that tariffs or other restrictive measures on US imports of end products and semi-finished goods could reduce the profitability of its US customers and increase production costs, which would lower demand for their products and TSMC’s chips. Major TSMC clients such as Nvidia Corp, Advanced Micro Devices Inc and Apple Inc could be affected.
Tariffs on semiconductor equipment could further elevate chip manufacturing costs in the US, as some equipment TSMC procures from US suppliers, such as Applied Materials, would still be subject to levies, as the machines are not manufactured in the US, TSMC said earlier this month.
“Diminished demand could create uncertainty around the timeline for the construction and operation of our Arizona fabs,” TSMC said in the letter.
In addition, tariffs on semiconductors and semiconductor manufacturing tools could upend global chip supply chains, as chip equipment and related suppliers face growing pressure to establish new production lines in the US to avoid levies.
As the tariff negotiations are conducted on a bilateral basis, Taiwanese trade representatives should be well-prepared and develop compelling proposals to secure the best terms, as the semiconductor industry is a key pillar of the nation’s economy. Simply matching tax rates with Taiwan’s peers, such as South Korea and Japan, might not be enough.
Some officials from the Ministry of Economic Affairs believe this could suffice for Taiwan’s semiconductor companies, given their technological competitiveness and resilience, but — TSMC excluded — most semiconductor-related firms in Taiwan struggle to compete with their Asian counterparts and a favorable tax rate would improve their competitiveness.
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