Taiwan has enacted a strategic new law that effectively bars its crown jewel, TSMC (Taiwan Semiconductor Manufacturing Company), from exporting its most advanced chip manufacturing technologies—including its upcoming 2nm process—to overseas facilities.
This move significantly impacts U.S. ambitions to localize cutting-edge semiconductor fabrication and underscores Taiwan’s effort to safeguard its geopolitical and technological edge.
What the New Law Says: The “N-1” Rule
At the heart of this restriction is the newly revised Industrial Innovation Act, which introduces an “N-1” policy. This rule mandates that any semiconductor manufacturing technology deployed abroad must be at least one generation behind what is currently allowed for production in Taiwan.
In practical terms:
- TSMC’s 2nm (N2) and upcoming 1.6nm (A16) nodes must remain in Taiwan.
- Overseas fabs—including the $100 billion facilities under construction in Arizona—will only produce chips based on 3nm or older nodes.
This policy ensures that Taiwan remains the epicenter of the world’s most sophisticated chipmaking capabilities.
Why Taiwan Is Doing This
Taiwan’s move is both strategic and geopolitical. Often referred to as the island’s “silicon shield,” its dominance in semiconductor manufacturing is seen as a deterrent to military aggression from China and a vital leverage point in global trade and security discussions.
Key reasons for the restriction include:
- National security: Ensuring that Taiwan retains control over its most sensitive technologies.
- Geopolitical leverage: Maintaining its essential role in the global tech supply chain.
- Economic resilience: Avoiding brain drain or tech leakage to other countries through joint ventures.
The law also gives Taiwan’s Ministry of Economic Affairs veto power over overseas expansions and joint ventures, requiring TSMC and other chipmakers to secure approval for any moves that involve sensitive technology.
What It Means for the U.S.
This legislation complicates U.S. efforts to become more self-reliant in chip production. While the CHIPS and Science Act has earmarked billions to bring semiconductor manufacturing stateside, the lack of access to TSMC’s most advanced nodes means that:
- Arizona fabs will trail behind their Taiwanese counterparts in technological capability.
- U.S. defense and AI sectors, which crave cutting-edge chips, may still need to rely on imports from Taiwan.
- The supply chain security goals the U.S. hoped to achieve with local fabs will fall short in the near term.
TSMC’s CEO has acknowledged these limitations, citing “regulatory complexity and compliance barriers” as reasons the U.S. fabs won’t receive the 2nm node soon.
Broader Implications
This development arrives as tensions simmer between China and the West and as countries worldwide race to localize semiconductor manufacturing. It highlights a central paradox: Global demand for chips is rising, yet the most advanced production remains highly concentrated in a geopolitically sensitive region.
Taiwan’s decision reinforces its dominance in the semiconductor landscape. Despite expanding globally, it is making it clear that the crown jewels of chipmaking will not leave home soil—not even for allies.
TSMC Process Node Deployment by Region and Year
| Year | Taiwan – Process Node | USA (Arizona) – Process Node | Japan – Process Node | Europe – Process Node |
|---|---|---|---|---|
| 2023 | 3nm | 5nm | 12nm | N/A |
| 2024 | 2nm (pilot) | 4nm | 12nm | N/A |
| 2025 | 2nm | 3nm | 6nm | N/A |
| 2026 | 1.6nm (A16) | 3nm | 6nm | 22nm / 28nm |
| 2027 | 1.4nm (planned) | N/A | N/A | 22nm / 28nm |
Key Takeaways
- Taiwan’s new laws prevent TSMC from producing 2nm chips overseas until the technology matures domestically.
- TSMC’s U.S. facilities will operate at least one generation behind Taiwan’s most advanced semiconductor manufacturing capabilities.
- Taiwan maintains its competitive advantage in chipmaking despite TSMC’s $100 billion investment in overseas facilities.
Overview of the New Taiwanese Law
Taiwan has implemented a significant law restricting the export of TSMC’s most advanced semiconductor technologies to foreign facilities, including those in the United States. This regulation aims to maintain Taiwan’s technological edge while balancing international business relationships.
Key Provisions of the Law
The new Taiwanese law specifically restricts exports of TSMC’s most advanced process technologies, allowing only one generation older technology to be deployed abroad. This creates a clear technological gap between domestic and foreign production capabilities.
Under this regulation, Taiwan’s government now has the right to block deals related to technology transfers that might compromise national interests. The law specifically targets “cutting-edge nodes” – the most advanced semiconductor manufacturing processes.
The legislation also addresses TSMC’s substantial foreign investments, including the planned $100 billion investment in US facilities. These investments will now face greater scrutiny and limitations regarding which technologies can be implemented.
- Taiwan’s new law prevents TSMC from producing its most advanced chips (2nm and smaller) outside the country.
- U.S. fabs will be limited to older nodes, even as billions are invested domestically.
- The move bolsters Taiwan’s security posture and geopolitical influence through technological supremacy.
- It marks a critical juncture in the global chip war, where technological leadership and national security are now tightly intertwined.
Strategic Motivations Behind the Regulation
Taiwan’s primary motivation appears to be strengthening its “silicon shield” – the strategic advantage created by its semiconductor industry that provides geopolitical protection. By keeping the most advanced technologies exclusively in Taiwan, the country maintains its position as indispensable to global tech supply chains.
National security concerns feature prominently in the legislation. Taiwan aims to prevent its most valuable intellectual property from being relocated, which could potentially weaken its technological advantage and strategic importance.
The law represents a delicate balancing act between allowing TSMC to expand globally while ensuring Taiwan retains its competitive technological edge. The government has promised that the most advanced semiconductor technology will not be moved to the US under new investment deals.
Immediate Impact on Semiconductor Manufacturing
The immediate effect is that TSMC’s foreign facilities, including those in the US, will only be able to produce chips using technology that is at least one generation behind Taiwan’s domestic capabilities. This creates a two-tier manufacturing system within TSMC’s global operations.
Companies relying on cutting-edge semiconductor technology will need to source their most advanced chips directly from Taiwan rather than from TSMC’s foreign facilities. This maintains Taiwan’s position as the essential hub for leading-edge semiconductor production.
The regulation affects the expected output of TSMC’s planned and existing foreign facilities, particularly regarding which products can be manufactured at which locations. Manufacturing plans for various nodes must now be reassessed according to the new regulatory framework.
Implications for TSMC and U.S. Operations
Taiwan’s new export restrictions create significant challenges for TSMC’s American operations. The policy changes affect technology transfers, manufacturing capabilities, and long-term investment plans.
Limitations on Advanced Technology Transfers
Taiwan’s strengthened “silicon shield” policy now restricts exports of TSMC’s most advanced process technologies, allowing only one generation older to be deployed abroad. This creates a permanent technology gap between TSMC’s Taiwan and U.S. facilities.
American plants will operate at least one node behind Taiwan’s cutting-edge fabs. For example, if 2nm is the latest in Taiwan, U.S. operations might be limited to 3nm or 4nm technologies.
This limitation impacts high-profile TSMC customers like Apple and Nvidia, who rely on the most advanced nodes for their leading products. These companies may need to maintain dual-sourcing strategies, using Taiwan for cutting-edge chips and Arizona for less advanced components.
The restrictions also complicate TSMC’s ability to fulfill the Biden administration’s goal of bringing the most advanced chip manufacturing to the U.S.
The Arizona Plant and Supplier Relationships
TSMC’s Arizona expansion faces complex supplier challenges under the new regulations. The company must establish relationships with local suppliers while maintaining its Taiwan-based supply chain for advanced processes.
Key equipment suppliers must now navigate dual regulatory environments. ASML, Applied Materials, and other tool makers must comply with both U.S. and Taiwanese restrictions.
Some U.S. businesses will continue depending on TSMC chips made in Taiwan for the foreseeable future, even as Arizona facilities expand. This creates a two-tier customer system based on technology needs.
The restrictions also mean TSMC must develop modified manufacturing processes specifically for U.S. operations. This increases operational complexity and potentially raises costs.
Effects on Investment and Supply Chain
Despite restrictions, TSMC plans to expand its U.S. investment to $165 billion, including three new fabrication plants and two advanced packaging facilities. This massive investment demonstrates TSMC’s commitment despite the technology limitations.
The investment helps TSMC avoid potential tariffs on Taiwan-made chips, providing financial incentives that partially offset technology restrictions. This creates a complex cost-benefit scenario for the company.
CHIPS and Science Act funding becomes more crucial to make the economics work. Without the most advanced nodes, U.S. plants need additional incentives to remain competitive.
The bifurcated manufacturing strategy creates redundancies in TSMC’s global supply chain. Engineering teams, equipment purchases, and material sourcing must be coordinated across multiple regulatory environments.
Geopolitical and Industry-Wide Repercussions
Taiwan’s decision to restrict exports of TSMC’s most advanced process technologies has triggered significant shifts in global semiconductor dynamics. These restrictions are reshaping international relations, supply chains, and corporate strategies across the tech industry.
U.S.-China Competition and National Security Concerns
The new Taiwanese law intensifies the already heated technology rivalry between the United States and China. By creating a legal framework for the “N-1” technology restriction, Taiwan has bolstered its “silicon shield” strategy that leverages its semiconductor dominance for geopolitical protection.
Beijing views these restrictions as partly influenced by U.S. pressure, further straining cross-strait relations. Chinese companies like Huawei, already facing U.S. sanctions, now encounter additional barriers to accessing cutting-edge chip technology.
National security agencies in Washington have expressed concerns about advanced chips reaching China for artificial intelligence applications. The Pentagon specifically worries about AI capabilities that could enhance Chinese military systems.
Meanwhile, Chinese firms like Sophgo are accelerating domestic chipmaking efforts in response, though they remain several generations behind TSMC’s leading technology.
Global Chip Supply Chain Reconfigurations
The restrictions have prompted significant restructuring of semiconductor supply chains worldwide. Despite TSMC’s $100 billion investment in U.S. facilities, these plants will not have access to TSMC’s most advanced nodes.
Contract chipmakers in other regions are reassessing their global footprints. Some are diversifying production locations to mitigate geopolitical risks, while others are specializing in specific niches where they can maintain competitive advantages.
The European Union has responded by increasing incentives for semiconductor manufacturing within its borders. Japan and South Korea have similarly boosted support for their domestic chip industries.
Trade patterns are shifting as tariffs and export controls reshape the economics of the semiconductor industry. This reconfiguration has increased costs throughout the supply chain, with many manufacturers passing these expenses to consumers.
Impact on Major Industry Players
TSMC finds itself in a delicate balancing act between Taiwanese regulations and its global expansion ambitions. The company must navigate different regulatory environments while maintaining its technological edge. This situation has created friction with some international clients who want access to the most advanced processes.
U.S. chip designers like AMD, Nvidia, and Qualcomm face uncertainty about future access to leading-edge manufacturing. Many are developing contingency plans that include multi-sourcing strategies and redesigning chips for less advanced nodes.
Intel’s position has become particularly complex. The possible interest from TSMC in Intel’s manufacturing business has raised national security concerns in Washington.
Chinese tech giants are investing heavily in alternative semiconductor technologies. However, these efforts require time to mature, creating short-term advantages for companies with established access to advanced chips.
Frequently Asked Questions
Taiwan’s new legislation limiting TSMC’s technology transfer to foreign facilities has created significant ripples across the global semiconductor industry. This legislation specifically targets how advanced chip technologies can be deployed outside Taiwan’s borders.
What impact does the new Taiwanese regulation have on U.S.-based semiconductor manufacturing?
The new Taiwanese law restricts TSMC from deploying its most cutting-edge semiconductor technology at its American facilities. This means U.S. plants will not receive the same advanced manufacturing processes available in Taiwan.
Despite TSMC’s massive $100 billion investment in US facilities, the company faces legal barriers to transferring its latest manufacturing techniques. American semiconductor production will lag behind Taiwan’s capabilities for the foreseeable future.
U.S. manufacturing will still proceed but with slightly older technology nodes compared to TSMC’s Taiwan operations.
How does the legislation affect the international supply and distribution of semiconductor chips?
The legislation creates a two-tier system for chip distribution, with the most advanced chips remaining exclusively manufactured in Taiwan. This preserves Taiwan’s competitive advantage in the global semiconductor market.
International clients requiring cutting-edge chips must continue sourcing directly from Taiwan rather than from TSMC’s global facilities. This maintains Taiwan’s position as the epicenter of advanced semiconductor manufacturing.
The law also affects how chips can be shipped to certain markets, with the U.S. having ordered TSMC to halt shipments to China of chips used in AI applications.
In light of the new law, what changes are TSMC planning for their global production strategy?
TSMC is adapting its global strategy to comply with the new legislation while still expanding internationally. The company now focuses on producing slightly older technology nodes at its American facilities.
Taiwan’s government has explicitly promised that its most advanced semiconductor technology will not be moved to the US under the new deal. This affects how TSMC structures its global operations.
The company continues to concentrate its most advanced research, development, and production in Taiwan while using international facilities for high-volume production of mature nodes.
What measures will the U.S. government take in response to Taiwan’s restriction on advanced technology transfer to American facilities?
The U.S. government is exploring several policy options, including increased domestic subsidies for semiconductor research and development. These efforts aim to close the technology gap that Taiwan’s new law creates.
Additional investment in domestic chip design capabilities might become a priority to reduce dependence on TSMC’s most advanced nodes. The U.S. may also seek diplomatic channels to negotiate exceptions to the Taiwanese restrictions.
American officials are weighing national security implications, as advanced chip manufacturing is increasingly viewed as critical infrastructure.
How will Taiwan’s legal decision influence global semiconductor trade and technology partnerships?
Taiwan’s decision strengthens its position as the indispensable hub for advanced semiconductor manufacturing. Other countries may seek to develop similar protectionist policies for their own technological advantages.
The law will likely accelerate efforts by various nations to develop sovereign semiconductor capabilities. It may also reshape technology alliances as countries position themselves within the evolving semiconductor supply chain.
Companies dependent on cutting-edge chips must now reconsider their supply chain strategies and potentially deepen their relationships with Taiwan.
What potential implications exist for artificial intelligence and other high-tech industries relying on TSMC’s advanced chips?
AI development companies based outside Taiwan may face delays in accessing the most advanced chips necessary for training cutting-edge models. This could create competitive advantages for Taiwan-based AI development.
High-performance computing and advanced telecommunications infrastructure projects worldwide may experience timeline adjustments as they navigate the new semiconductor landscape. Some companies may need to redesign products to work with less advanced chips.
The differential access to the most advanced semiconductor technology could create new patterns of technological development, with certain innovations concentrated in regions with privileged access to Taiwan’s chips.
