Will Taiwan’s “Silicon Shield” Hold? The U.S.-Taiwan Deal and a New Phase in Economic Security Competition

Key Points

1. The United States and Taiwan reached a trade agreement on January 15, 2026, avoiding the anticipated delay linked to the U.S.-China leaders’ summit and allowing Taiwan to meet its stated goal of delivering tangible results by January.
2. The deal reflects a convergence of interests. For Washington, it advances the goal of boosting domestic semiconductor self-sufficiency through large-scale Taiwanese investment; for Taipei, it delivers tariff treatment on par with Japan and South Korea and marks deeper strategic cooperation with the United States.
3. While some in Taiwan warn of industrial hollowing-out based on the scale of U.S.–bound investment, Taiwan’s technological edge makes unlikely a significant erosion of its position as a leading hub for advanced semiconductor development and manufacturing over the medium term.

Conclusion of the U.S.–Taiwan Trade Negotiations: A Political Decision That Averted Postponement

On January 15, 2026 (U.S. time), the United States and Taiwan reached an agreement in their trade negotiations. Although Taiwan concluded its talks later than Japan (July 2025) and South Korea (October 2025), the Office of Trade Negotiations (OTN) of Taiwan’s Executive Yuan achieved the goal it had publicly articulated at the end of 2025: delivering “concrete results by January.”

During the negotiation, speculation circulated that a U.S.–Taiwan agreement might be postponed until after the U.S.–China leaders’ meeting scheduled for April 2026. The conclusion of the agreement has, at least for now, dispelled those concerns.

Laying the Groundwork for Raising U.S. “Semiconductor Self-Sufficiency”

What, then, does this agreement mean for the United States and Taiwan in practice? Drawing on statements by officials from both sides, this section examines its implications.

From the U.S. perspective, the agreement has been hailed as a significant step toward restoring American leadership in semiconductor manufacturing. This assessment rests primarily on three commitments the United States secured from Taiwan. First, Taiwanese semiconductor and high-tech firms—including TSMC’s existing USD 100 billion plan—have agreed to invest a total of approximately USD 250 billion in the United States. Second, to support these investments, Taiwanese authorities will provide credit guarantees amounting to USD 250 billion. Third, a bilateral angreement was reached to establish joint industrial parks in the United States aimed at fostering industrial clusters (Figure 1).

Secretary of Commerce Lutnick has repeatedly emphasized the goal of raising U.S. semiconductor self-sufficiency to 40 percent in order to reduce national security vulnerabilities. He has characterized the current agreement as “an important step” toward achieving this strategic objective, underscoring its significance within Washington’s broader economic security agenda.

What Taiwan Secured: Strategic Gains Beyond Market Access

From Taiwan’s perspective, the Lai administration has presented the agreement as delivering four strategic gains.

First, the agreement improves competitive conditions through a reduction in reciprocal tariffs. At present, Taiwan is subject not only to most-favored-nation (MFN) tariffs but also to a 20 percent reciprocal tariff. Under the agreement, this reciprocal tariff will be reduced to 15 percent. In addition, for products with an MFN tariff rate of 15 percent or less, the MFN tariff will be eliminated, while for products with an MFN tariff rate exceeding 15 percent, only the MFN tariff will apply. As a result, Taiwan has secured tariff treatment equivalent to that accorded to Japan and South Korea. Unlike Japan and South Korea, Taiwan has not previously concluded a free trade agreement (FTA) with the United States, and the Lai administration therefore regards the acquisition of “Japan- and South Korea–equivalent” treatment as a major economic achievement. The administration also emphasizes the political significance of the United States extending treatment to Taiwan on par with that given to its formal “allies,” Japan and South Korea.

Second, with regard to additional tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (import restrictions justified on national security grounds), Taiwan also succeeded in securing preferential treatment comparable to that granted to other countries. In particular, for Taiwanese semiconductor firms investing in the United States, duty-free quotas for these additional tariffs will be set at up to 2.5 times planned production capacity during the factory construction phase, and up to 1.5 times actual production capacity after operations commence. Even for production exceeding these thresholds, the most preferential Section 232 tariff treatment will be applied to semiconductors manufactured by these Taiwanese firms. Moreover, Taiwan obtained assurances that raw materials, machinery and equipment, and components required for factory construction and operation in the United States will be exempt from both Section 232 additional tariffs and reciprocal tariffs. Taiwan is the first economy to have secured such far-reaching conditions in the semiconductor sector.

Third, the agreement includes a commitment to jointly establish “Taiwan-model industrial parks” in the United States. By providing Taiwanese firms with preferential access to land, water, electricity, infrastructure, and tax incentives, the U.S. government aims to lower the barriers for Taiwanese companies to participate in U.S. supply chains.

Fourth, the agreement promotes mutual investment in high-tech sectors and the establishment of a strategic partnership within the global AI supply chain. The Lai administration emphasizes that, by jointly creating a two-way investment mechanism and combining it with financial support, Taiwan and the United States can leverage their industrial complementarity strengths to expand into global markets. In particular, the Lai administration places high value on deepening cooperation in security-critical fields such as semiconductors, AI, defense technologies, information security and monitoring, next-generation communications, and biotechnology.

With respect to these outcomes, an investment cooperation memorandum of understanding (MOU) was signed in the investment field as part of the current agreement. Meanwhile, a broader “U.S.–Taiwan Trade Agreement” covering tariffs, non-tariff barriers, trade facilitation, economic security, labor protection, environmental protection, and the expansion of government procurement is currently undergoing legal review. The Taiwanese government explains that it plans to sign this agreement with the United States within the coming weeks and subsequently submit it to the Legislative Yuan (the equivalent of a national parliament) for deliberation.

Concerns over the “Silicon Shield”

Following the U.S.–Taiwan agreement, voices have emerged within Taiwan expressing concern that the country’s so-called “silicon shield”—the deterrent effect derived from its semiconductor industry—may be weakened. The core question is whether greater U.S. semiconductor self-sufficiency, resulting from the relocation of production facilities to the United States, could diminish Washington’s willingness to defend Taiwan. One factor fueling these concerns is Secretary of Commerce Lutnick’s remark that 40 percent of Taiwan’s semiconductor supply chain and production would be shifted to the United States during his term, that is, by January 2029.

In addition, while the appropriateness of such comparisons is subject to debate, critics have pointed out that the scale of Taiwan’s agreed U.S.-bound investment and credit guarantee framework totals USD 500 billion—equivalent to 62.6 percent of Taiwan’s GDP—far exceeding the corresponding figures for Japan (12.9 percent) and South Korea (19.4 percent). Moreover, unlike Japan and South Korea, whose U.S.-bound investments are spread across a range of industries, U.S. industrial attraction efforts toward Taiwan are concentrated on the semiconductor sector. This concentration has led to growing concern that Taiwan’s semiconductor industry could face hollowing out.

However, the likelihood that Taiwan’s position as a hub for advanced semiconductor manufacturing will decline significantly remains low. First, judging from the progress of TSMC’s Arizona facilities, it would be physically difficult to shift 40 percent of production capacity to the United States within just a few years. TSMC’s first Arizona plant (4-nanometer) entered mass production at the end of 2024, while its second plant (3-nanometer) is scheduled to begin mass production in the second half of 2027. By contrast, construction of the third plant has only just begun, and the fourth plant is still at the stage of applying for construction permits. While TSMC has suggested accelerating construction in Arizona, the company is simultaneously proceeding with the construction of advanced semiconductor fabs in Taiwan.

Second, U.S. wages and electricity costs are higher than those in Taiwan. For U.S. technology firms—the primary customers—it is also undesirable to sharply increase procurement of higher-cost U.S.-made semiconductors. Moreover, the United States faces challenges in terms of the depth of talent and supplier ecosystems related to semiconductor manufacturing. For these reasons, the most advanced semiconductors are likely to continue to be developed and manufactured in Taiwan. In fact, TSMC Chief Financial Officer Wendell Huang has stated that while decisions on expanding investment in the United States will be based on customer demand, the most advanced process technologies will remain in Taiwan.

Taiwan’s Minister of Economic Affairs, Ming-Hsin Kung, has likewise presented a projection that even in 2030, 85 percent of advanced semiconductors at 5 nanometers or below will be produced in Taiwan, conveying the message that concerns about hollowing out are overstated. While it remains uncertain whether production will in fact conform to this forecast, it is difficult to imagine that Taiwan’s importance from the perspective of Japan’s economic security would decline sharply in the short term.

Residual Uncertainty Going Forward

Even after the conclusion of the agreement, uncertainty over the future trajectory of U.S.–Taiwan economic relations remains.

First, Secretary of Commerce Howard Lutnick has suggested that if Taiwan fails to meet its target of USD 250 billion in investment in the United States during his term, the United States could impose a 100 percent tariff on Taiwanese semiconductors. Pressure on Taiwanese firms is therefore likely to persist.

Second, the overall framework of additional tariffs on semiconductors and related products under Section 232 of the Trade Expansion Act of 1962 has yet to be fully clarified. Depending on how these measures are ultimately designed and implemented, the impact on Taiwan’s semiconductor industry could vary significantly.

Third, the Lai administration is a minority government, and close attention will be needed to whether the U.S.–Taiwan trade agreement will be approved promptly by the Legislative Yuan (Taiwan’s parliament). Although the specific contents of the agreement have not yet been made public, concerns have already been voiced in Taiwan regarding the potential effects of increased imports of U.S. livestock products and genetically modified crops on farmers and food safety, as well as the impact of greater market access for automobiles on employment and income. There is also criticism that Taiwan committed to large-scale investment in the United States at an early stage despite the possibility that the U.S. Supreme Court could rule reciprocal tariffs to be illegal.

Fourth, as noted previously, the U.S.–China leaders’ summit scheduled for April could also shape U.S.–Taiwan relations. If U.S.–China tensions were to ease, economic relations across the Taiwan Strait—where many Taiwanese firms are engaged in contract manufacturing for U.S. companies—could also change. Conversely, if U.S.–China relations were to become more strained once again, the United States could exert even stronger pressure on Taiwan to align more closely with U.S. export controls and other economic security measures targeting China.

While this agreement represents a major milestone, many developments remain that could shape Taiwan’s economic security environment. These developments will require continued close monitoring.

* The content of this article represents the author’s personal views and does not represent the views of any organization, including the author’s affiliated organization.* See the related report, “U.S.–Taiwan Trade Negotiations and Taiwan’s Future: Implications for Japan”

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