Even as the United States and China push their economies further apart with escalating tariffs, they share an inescapable challenge. Both depend on Taiwan for semiconductors.
And navigating that reliance could prove to be one of the trickiest policy problems both countries face in their trade war.
China and the United States both view Taiwan’s dominance of the global tech supply chain as a national security risk. In response, they have tried to boost their own capacity to make the chips they need.
But as they come to grips with how difficult it is to replicate the industry at the heart of the global tech supply chain, which Taiwan has built over decades, China and the United States are pursuing diverging approaches to their dependence on the island and its dominant chip maker, Taiwan Semiconductor Manufacturing Company.
In the United States, the Trump administration has initiated a national security investigation into chip imports that could result in tariffs on the industry. Nvidia, the American chipmaker, said Tuesday that it had been told by the government it would now need a license to sell any A.I. chips to China. President Trump has long focused on Taiwan and accused it of stealing business from American companies.
China is taking a different tack.
In a notice last week, a state-backed trade association in China issued guidance that would exempt a significant portion of advanced chips from China’s tariffs on the United States.
The reason, experts said, is that China knows it needs those chips and does not want to let its trade war with the United States get in the way.
The upshot is that many advanced chips that are designed by American companies like Nvidia, Apple, Qualcomm and AMD, but manufactured in Taiwan, will not be subject to Chinese tariffs. American companies might end up with the chips, and then sell them to Chinese companies, but for the purposes of tariffs, China will not consider such chips as originating in the United States.
That is a change from typical trade policy. The United States and other countries usually consider chips to have been made in the country where they undergo a later stage of the production process known as packaging. China will consider the location where the circuits were etched onto tiny pieces of silicon to be the place where a chip is made.
Mr. Trump, as did President Joseph R. Biden Jr. before him, is trying to persuade TSMC and other foreign chip makers to make more chips in the United States. Mr. Biden lured companies with federal grants. Mr. Trump is trying to use the threat of tariffs to coerce companies to make big investments.
China’s approach undermines the push by multiple administrations in Washington to revive U.S. chip making, said Jimmy Goodrich, a senior adviser for technology analysis at the RAND Corporation, a think tank.
“This was a clever move by China as it both dramatically reduces the tariff burden on themselves and at the same time discourages chip firms from producing chips in the United States,” he said.
He Hui, semiconductor research director at Omdia, a research firm, said China’s approach could also benefit the country’s own chip makers, like Semiconductor Manufacturing International Corporation.
Advanced semiconductors are the products of complex international supply chains.
Many American electronics companies design the chips that will power their devices and then outsource the production to chip makers like TSMC, which buy the necessary materials like silicon wafers from Japan and chemicals from China. Specialized machines to make the chips in Taiwan are bought from the Netherlands. Some chips are then sent to another country, such as Malaysia or China, for testing before they might be put into iPhones or artificial intelligence servers in Mexico or China.
Chemicals are sometimes refined in one country, blended in a second and used in production in a third, said Lita Shon-Roy, chief executive at Techcet, a chip material consultant.
All this makes it logistically complicated to impose tariffs on the industry, said Liu Pei-chen, a director at Taiwan Industry Economics Services, a think tank. “Chip making involves processing and reprocessing, assembly and reassembly, and layers of transportation.”
Most of the world’s advanced semiconductors are made in Taiwan, where chipmakers like TSMC have spent billions of dollars over four decades building up a network of factories and suppliers.
Mr. Trump had previously complained that Taiwan had gained an unfair dominance in making semiconductors. Analysts said China’s move to exempt chips made in Taiwan was an acknowledgment of just how much China’s tech relied on Taiwan.
TSMC did not respond to a request for comment.
Making a single semiconductor involves companies in multiple countries. And as Mr. Trump tries to redraw the rules of trade, each border crossing raises the prospect of tariffs, and additional costs can quickly add up. Ms. Shon-Roy said the battle between China and the United States threatened to make chips, and the consumer electronics that contained them, a lot more expensive.
“If the two largest economies in the world cannot come to an agreement, they will both drag each other down,” Ms. Shon-Roy said. “Everyone is holding their breath.”
Amy Chang Chien contributed reporting.
Meaghan Tobin covers business and tech stories in Asia with a focus on China and is based in Taipei.
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