Donald Trump wants Taiwan to pay for U.S. protection: Why that should worry tech investors

The island nation, which China views as its sovereign territory, is the number one manufacturing hub for cutting-edge semiconductors like the Nvidia H100 graphic processors that powers generative AI data centers used by the likes of Microsoft, Google, Amazon as well as Elon Musk’s Tesla and his latest startup xAI. 

But Beijing’s threat of invasion or naval blockade has investors worried. Last year, Warren Buffett sold his entire stake in the country’s leading chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), to avoid any unnecessary risks.

In an interview with Bloomberg Businessweek, Trump only heightened those risks by likening America to an insurance provider for the country: “I think Taiwan should pay us for defense.”

Making such a statement publicly tells rivals like China that the country’s political winds are shifting, inviting them to exploit the weakness.

Together with speculation the Biden administration, trailing Trump in key swing state polls, is weighing whether to tighten export controls of advanced semiconductor equipment further, chip stocks took a beating during Wednesday’s trading.

The Philidelphia semiconductor index fell 7% in the session.

Taiwan’s TSMC irreplaceable for Nvidia

Taiwan’s security is so important to Nvidia and, by extension, the Big Tech companies it supplies because Nvidia—unlike Intel—never sought to fabricate its own chips. 

Instead, Nvidia founder Jensen Huang—a Taiwan native—outsourced production to so-called foundries like TSMC.

Founded in 1987 by former Texas Instruments executive Morris Chang, TSMC grew into the largest foundry in the world.

It is the sole provider of Nvidia’s AI training chips and cannot be replaced since it possesses the most advanced form of miniaturization on the market.

As a result, even though TSMC does not design AI chips, its unique stranglehold on supply has seen it ride the same AI wave as Nvidia.

Earlier this month, it became the first East Asian company to break through the $1 trillion market cap threshold.

On Thursday, the company hiked its revenue forecast after robust quarterly results.  

Resentment at Taiwanese industry’s success

The island’s semiconductor industry is so vital to U.S. interests that researchers with the Army War College have explored scorched-earth scenarios advocating the demolition of its chip fabs in the event of an invasion to prevent them from falling into the hands of the Chinese. 

In his interview with Bloomberg, however, the publication reported that Trump was, at best, lukewarm about standing up to Chinese aggression, in part because he resented Taiwan chipmakers that outcompeted their U.S. peers. 

“Why are we doing this?” the real estate magnate asked at his Florida home in Mar-a-Lago. “How stupid are we? They took all of our chip business.”

His implicit threat that the security umbrella could be withdrawn at any time under a new Trump administration is reminiscent of a stance taken during the campaign by his then-opponent, Vivek Ramaswamy, who promised to defend Taiwan in the event of an invasion only until the U.S. could make the chips itself.

Taipei downplays Trump comments

In private, this could send a powerful message to lawmakers in Taipei that they need to further open their market to key U.S. imports like pork, which was until recently banned over America’s continued use of a controversial additive called Ractopamine.

When asked on Wednesday about Trump’s demand for the country to pay up, Taiwan’s head of government sought to lower temperatures by saying it was stepping up to meet the growing military needs.

“Taiwan has steadily strengthened its defense budget and adjusted the conscription serving period,” premier Cho Jung-tai told reporters, adding the country is “willing to take on more responsibility” on security issues. 

After heavy losses, shares in Nvidia and Tesla, as well as TSMC’s U.S.-listed ADR shares, are expected to open higher on Thursday when trading begins. 

But this issue may not go away as long as Trump maintains the U.S. alliance with Taiwan is transactional only.

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