Key Takeaways:
The U.S. Department of Commerce has directed TSMC to halt advanced chip shipments to China after finding a TSMC chip in a Huawei AI processor, aiming to curb Chinese access to critical technology.
Despite the U.S. seeking to enhance domestic chip manufacturing, it will still depend heavily on TSMC for advanced semiconductor needs due to Taiwan’s production capabilities.
The CHIPS Act is likely to persist under strong bipartisan Congressional support, ensuring continued U.S. funding for domestic semiconductor production.
China faces challenges in building its own semiconductor capabilities under U.S. sanctions, particularly in acquiring the high-tech equipment necessary to compete with TSMC and U.S. tech firms.
KSG assesses that this ultimately reduces the deterrence of a Chinese invasion of Taiwan.
Overview
On November 9th, it was reported that the U.S. Department of Commerce (DOC) ordered Taiwan Semiconductor Manufacturing Company (TSMC) to halt shipments of advanced chips to Chinese customers. KSG consultations confirmed this. The order, which went into effect on November 11, was issued after TSMC discovered one of its advanced chips in an AI processor made by Huawei, a Chinese telecommunications company currently under strict U.S. sanctions.
Although China and the U.S. are developing their own domestic semiconductor foundries, both countries depend on Taiwan’s semiconductor industry. TSMC produces over 90% of the world’s most advanced logic chips and accounted for about 62% of the global semiconductor foundry market share in 2024 .
Forward Look:
U.S. Semiconductor Market Outlook
KSG assesses that the incoming Trump administration is likely to focus on bolstering U.S. domestic capabilities. Although President-Elect Trump criticized the CHIPS Act in August, he will struggle to overcome bipartisan support in Congress. KSG assesses that Trump will be less outright and comprehensive in his aversion towards the CHIPS Act, placing less emphasis on foreign firms like TSMC and Samsung, instead funnelling support towards US-based semiconductor manufacturers particularly Intel, along with GlobalFoundries, Micron and Texas Instruments.
Furthermore, KSG assesses the Trump administration is likely to target TSMC and Intel’s presence in China due to potential security risks and continue to place sanctions on China in efforts to stay ahead of Chinese chip manufacturing capabilities. Trump’s Cabinet selections of Mike Waltz and Elise Stefanik as National Security Advisor and Ambassador to the UN, along with an expected pick of Marco Rubio for Secretary of State, form a team that will likely produce hawkish policy in regards to China, with the semiconductor sector being no exception.
China Semiconductor Market Outlook
KSG assesses that China will struggle to produce advanced chips domestically under the pressure of U.S. sanctions. The Biden administration’s 2022 export controls regarding Chinese access to semiconductor technology have left China facing a shortage of semiconductor manufacturing equipment. KSG assesses that as a result of this, China will likely struggle to match the superiority and manufacturing capacity of the U.S and Taiwan until it is able to import or produce the necessary equipment domestically.
KSG assesses that China may be likely to further weaponize their mineral export restrictions if the Trump administration implements harsher sanctions on its semiconductor sector. Given China’s control of over half the minerals the U.S. deems critical, the U.S. may be forced to make concessions in the semiconductor technology race, rather than bear the burden of antagonizing China and losing access to essential materials, particularly given China’s near-monopoly of processing capabilities. The Trump administration will need to balance its containment strategy towards China throughout his presidency, possibly being forced to recalibrate U.S. supply chains for certain critical minerals. Increased cooperation with Australia, Chile, Argentina can likely be expected. The U.S. is likely to try and bolster U.S. influence among southern African countries depending on the scope and severity of expanded Chinese export controls on critical minerals. KSG wargaming concluded that the U.S. is unlikely to have success in increasing its influence there, given the strong position China currently maintains.
Cross-Strait Relations
KSG assesses that China’s response to TSMC’s expected compliance with U.S. demands will be to retaliate with sanctions aimed at harming Taiwan’s economy, paired with a likely increase in Chinese military activity in the Taiwan Strait over the coming months. KSG assesses that these retaliatory responses will have little effect.
KSG developed the hypothesis several months ago that an occurrence such as this ban of TSMC chips into China would change Beijing’s calculus for invading Taiwan. A strong deterrent factor for Beijing was the self-caused disruption of the flow of chips from Taiwan to China. This deterrent will now be heavily diminished. In addition, Beijing now has more to gain from the invasion of Taiwan by potentially seizing the means of production which it currently cannot access. KSG will focus intelligence collection on confirming if the hypothesis concerning Beijing’s decision calculus shift has come to pass.