US President Donald Trump’s administration wants to push chipmakers to reach a 1:1 domestic-to-import ratio — otherwise, companies could face tariffs on foreign-made electronic devices based on the number of chips they contain. This major shift in US semiconductor strategy could pose a severe challenge for Taiwan Semiconductor Manufacturing Co (TSMC), as it effectively requires that its US and Taiwan plants maintain pace with each other with regard to production capacity and manufacturing processes.
From the perspective of economist Adam Smith’s The Wealth of Nations, this essentially marks a resurgence of mercantilism. While the motivation is understandable, the approach contradicts the principle of comparative advantage. It would be difficult to implement in the short term and could ultimately prove detrimental to the US.
Over the past 30 years, China has leveraged cheap labor and government subsidies to become the “world’s factory,” drawing manufacturing and job opportunities away from the US. The US middle class has stagnated, and industrial towns are gradually declining. Trump’s voter base is made up of these groups that have been abandoned by globalization, so it is not difficult to understand why he aims to bring manufacturing back to the US.
However, semiconductors differ from traditional industries. They operate within a globally integrated system — they require lithography machines from the Netherlands, materials from Japan, are manufactured in Taiwan and designed in the US. Each part of this system is indispensable, and forcibly severing any of these links would inevitably harm efficiency.
The Wealth of Nations tells us that a nation’s wealth comes from specialization and free trade. The US’ comparative advantage lies in design and its market, while Taiwan’s lies in manufacturing and yield. If a forced 1:1 domestic-to-import ratio were imposed, it would effectively mitigate the value of specialization. The result would not be increased security for the US, but soaring costs, reduced efficiency and weakened industrial competitiveness. This is the mercantilism that Smith criticized — excessive government intervention, replacing market mechanisms with slogans and ultimately wasting societal resources.
Taiwan should engage in diplomatic negotiations to seek a transition period of five to 10 years so as to avoid immediate punitive tariffs. It should also promote a model based on technological equivalence rather than a strict 1:1 split in capacity, allowing US-based plants to focus on military and security-related needs.
Taiwan should also diversify and actively expand into Europe, Japan, India and Southeast Asia to reduce overreliance on the US.
Lastly, the nation must strengthen research and development efforts by investing in artificial intelligence, quantum chips and new materials to maintain Taiwan’s irreplaceable status in the global industrial chain.
Taiwan must rely on the US for national defense. Therefore, semiconductors and military affairs should be linked — this is the language of diplomatic negotiations.
TSMC’s investment in building plants in the US is not just an economic move, but a strategic signal reassuring US security concerns. Taiwan holds a substantial annual trade surplus with the US, and could thus consider increasing its arms and equipment purchases to balance this, thereby turning an economic surplus into a strategic investment. This approach would both ease US concerns over trade imbalances and secure more stable military cooperation to jointly face the challenges posed by China.
Trump’s 1:1 domestic-to-import ratio policy on semiconductors reflects US anxiety over China’s rise and the loss of its domestic manufacturing industry. While the motivation behind it is reasonable, the approach contravenes the economic principles presented in The Wealth of Nations and would be difficult to sustain long-term.
Taiwan must demonstrate wisdom by preserving its efficiency and comparative advantage, exchanging defense procurement and cooperation for US security commitments. Taiwan is not only the core of the global chip supply chain, but also a democratic front line. Only by reaching an economic and military consensus with the US could the two countries jointly face the challenges presented by China.
Hsiao Hsi-huei is a freelance writer.
Translated by Kyra Gustavsen
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