Taiwan Ups Defense Spending, Chips Investment to Placate Trump Tariffs
Geopolitical bargaining is the new modus operandi.
On February 7, someone asked me how Trump might approach Taiwan regarding semiconductor tariffs and how the island might respond. I said:
He will demand more investments in the US
Increase purchases of US arms
Taiwan did both. While the benefits of the first are asymmetrical to the US vis-a-vis Taiwan, the second concession is mutually strategic. For the island nation, it means a stronger posture against Xi Jinping’s unwelcome overtures of reunification.
For Trump, it means he can claim credit for boosting exports of US goods while not completely undermining the strategic integrity of Taiwan. This falls in line with his America First policies, and is a form of bargaining we are seeing in Europe vis-a-vis Ukraine and its rare earth deposits.
The proposed U.S. arms package includes coastal defense cruise missiles and HIMARS rocket systems. Taiwan is also negotiating an additional purchase from Washington valued between $7 billion and $10 billion.
Earlier this month, Trump threatened tariffs as high as 100% to pressure Taiwanese chipmakers into expanding operations within the United States. The Trump administration is leveraging tariffs as a negotiating tool, recognizing Taiwan's strategic role in global supply chains and its importance to U.S. security interests.
Taiwan’s response mirrors India’s ongoing tariff disputes with Washington—framing investment pledges and defense purchases as bargaining chips. By committing to U.S. investments and increased arms procurement, Taiwan offers Trump a domestic win, allowing him to claim victory in reshoring critical industries without escalating trade tensions.
TSMC has already invested $65 billion in three semiconductor plants in Arizona. The first is set to begin production in Q1 2025, the second remains under construction, and the third is in the planning phase. These projects are backed by $6.6 billion in CHIPS Act grants finalized in November 2024. The CHIPS and Science Act also provides a 25% tax credit for semiconductor manufacturing, which TSMC is using for its Arizona expansion. This credit applies to new fabs or expansions that meet the Act’s requirements.
TSMC wouldn’t need new legislation to secure additional tax incentives. The CHIPS Act already authorizes up to $75 billion in loans, with $5 billion proposed specifically for TSMC. Trump could use these existing mechanisms to push for further investment without congressional approval, reinforcing his narrative of bringing manufacturing back to American soil.
Taiwan also plans to introduce a special defense budget focused on precision-guided munitions, air-defense upgrades, command and control systems, reserve force equipment, and anti-drone technology, according to a source familiar with the discussions.
During his first term, Trump normalized regular arms sales to Taiwan, including multi-billion-dollar F-16 deals. The Biden administration maintained this policy, though often at lower price points.
Trump has long criticized Taiwan's dominance in the semiconductor sector, accusing the island of undermining U.S. manufacturing. On February 18, 2025, he announced plans for 25% tariffs on auto imports, semiconductors, and pharmaceuticals, with implementation possible by April 2, 2025.
In response, Taiwanese President Lai Ching-te convened a national security meeting on February 14, 2025. He pledged to expand U.S. investment, increase procurement of American goods, and strengthen Taiwan's defense spending to address Washington's concerns.
But this is not likely the last deal Taiwan will have to strike under the Trump Administration, but one of many. But c’est la vie, this is the reality of the new national-security-first global paradigm.