US strikes deal with Taiwan to cut tariffs, boost chip investment

TAIPEI: Taiwan vowed on Friday (Jan 16) to remain the world's "most important" AI chipmaker, after reaching a trade deal with the United States that will reduce tariffs on the island's shipments and increase Taiwanese investment on US soil.

Taiwan is a powerhouse in producing chips - a critical component in the global economy - but the US wants more of the technology made there.

The agreement "will drive a massive reshoring of America's semiconductor sector", the US Commerce Department said.

Under the deal, Washington will lower tariffs on Taiwanese goods to 15 per cent, down from a 20 per cent "reciprocal" rate meant to address US trade deficits and practices it deems unfair.

Taiwanese Premier Cho Jung-tai praised negotiators on Friday for "delivering a well-executed home run" following months of talks.

"These results underscore that the progress achieved so far has been hard-won," Cho said.

Taiwan's dominance of the chip industry has long been seen as a "silicon shield" protecting it from an invasion or blockade by China - which claims the island is part of its sovereign territory - and an incentive for the US to defend it.

But the threat of a Chinese attack has fuelled concerns about potential disruptions to global supply chains, increasing pressure for more chip production beyond Taiwan's shores.

"Based on current planning, Taiwan will still remain the world's most important producer of AI semiconductors, not only for Taiwanese companies, but globally," Taiwanese Economic Affairs Minister Kung Ming-hsin assured reporters on Friday.

Production capacity for the advanced chips that power artificial intelligence systems will be split about 85-15 between Taiwan and the United States by 2030 and 80-20 by 2036, he projected.

"NEW, DIRECT INVESTMENTS"

The deal will need to be approved by Taiwan's opposition-controlled parliament, where lawmakers have expressed concern about the potential for Taiwan to lose its chip dominance.

Sector-specific tariffs on Taiwanese auto parts, timber, lumber and wood products will also be capped at 15 per cent, while generic pharmaceuticals and certain natural resources will face no "reciprocal" duties, the US Commerce Department added.

Meanwhile, Taiwanese chip and tech businesses are set to make "new, direct investments totalling at least US$250 billion" in the US to build and expand capacity in areas like advanced semiconductors and artificial intelligence, the department said.

Taiwan will also provide "credit guarantees of at least US$250 billion to facilitate additional investment by Taiwanese enterprises", it said, adding that this would support the growth of the US semiconductor supply chain.

Taiwan's government said the new tariff will not stack on top of existing duties, which had been a major concern for local industries.

"Of course, it's good that the reciprocal tariff has been lowered to 15 per cent - at least it puts us on par with our main competitors South Korea and Japan," said Chris Wu, sales director for Taiwanese machine tool maker Litz Hitech.

But, given the company's single-digit profit margins, "there is no way we can absorb the tariff" for US customers, he said.

TSMC

More than half of Taiwan's exports to the US are information and communications technology products - including semiconductors.

"The objective is to bring 40 per cent of Taiwan's entire supply chain and production, to domestically bring it into America," US Commerce Secretary Howard Lutnick told CNBC.

"We're going to bring it all over, so we become self-sufficient in the capacity of building semiconductors," he added.

The announcement did not mention names, but the deal has key implications for Taiwanese chipmaking titan TSMC, which last year pledged to spend an additional US$100 billion on US plants.

Frenzied demand for AI technology has sent profits skyrocketing for the company, the world's biggest contract maker of chips used in everything from Apple phones to Nvidia's cutting-edge AI hardware.

"As a semiconductor foundry serving customers worldwide, we welcome the prospect of robust trade agreements between the United States and Taiwan," TSMC said in a statement on Friday.

"Strengthened trade relations are essential for advancing future technologies and ensuring a resilient semiconductor supply chain."

Lutnick said TSMC has bought land and could expand in Arizona as part of the deal.

"They just bought hundreds of acres adjacent to their property. Now I'm going to let them go through it with their board and give them time," he told CNBC.

Taiwanese producers who invest in the US will be treated more favourably when it comes to future semiconductor duties, the US Commerce Department said.

A day prior, US officials held off imposing wider chip tariffs, instead announcing a 25 per cent duty on certain semiconductors meant to be shipped abroad - a key step in allowing US chip giant Nvidia to sell AI chips to China.