Geopolitical Risk in Semiconductor Supply Chains: Navigating U.S.-Taiwan-China Tensions and Trump's Policy Reversal

The semiconductor industry in 2025 is a battleground of geopolitical strategy, economic leverage, and technological dominance. As U.S.-China-Taiwan tensions escalate and the prospect of a Trump-led trade policy reversal looms, investors face a complex web of risks and opportunities. This analysis examines how shifting policies, corporate strategies, and retaliatory measures could reshape global supply chains-and what it means for portfolios.

U.S.-China-Taiwan Dynamics: A Fractured Nexus

The U.S. has intensified export controls on advanced semiconductor technologies, targeting China's ability to develop cutting-edge chips for civilian and military applications. TSMC, which produces over 92% of the world's advanced chips, remains central to this conflict. However, the Biden administration's revocation of TSMC's Validated End-User (VEU) status for its Nanjing facility in China has forced the company to seek U.S. export licenses for critical equipment, slowing production and signaling a strategic shift to constrain China's semiconductor ambitions, according to a CNBC report.

Meanwhile, China has weaponized its control over critical materials like gallium and germanium, essential for chip production, imposing export bans on the U.S., as detailed in a Francesca Tabor article. These moves underscore a growing trend of economic coercion, where supply chains are leveraged as geopolitical tools.

Taiwan's role is equally precarious. While the island's $158.6 billion in bilateral trade with the U.S. in 2024 highlights deep economic ties, its refusal to commit to "friendshoring" demands-such as relocating 50% of its chip production to the U.S.-has drawn criticism from Washington. Taiwanese officials argue that such a shift would weaken its "silicon shield," a strategic asset that deters Chinese aggression by anchoring global tech innovation, according to a CNN report.

Trump's Policy Reversal: Tariffs, Deregulation, and Uncertainty

A potential Trump administration in 2025 threatens to upend the Biden-era semiconductor strategy. Key proposals include repealing the CHIPS and Science Act, imposing a 100% tariff on semiconductor imports, and renegotiating export controls to prioritize U.S. manufacturing, as outlined in a NatLaw Review analysis. These measures aim to reduce reliance on foreign production but risk destabilizing global supply chains.

For instance, Trump's 1:1 tariff policy-penalizing domestic firms for importing more chips than they produce-could force companies like Intel and TSMC to accelerate U.S. investments. TSMC's $160 billion in U.S. investments already reflect this pressure, but further reshoring could strain its global operations and increase costs, as noted in an Electropages report. Conversely, Trump's deregulatory agenda, including revoking Biden-era AI executive orders, may lower compliance burdens for tech firms, fostering short-term growth, according to a Foley analysis.

However, the administration's protectionist stance risks triggering retaliatory measures. China's embargoes on rare earth materials and gallium have already disrupted U.S. production, and further tariffs could provoke additional countermeasures. A 2024 study by the New York Fed found that export controls have reduced U.S. semiconductor firms' revenue and profitability, with indirect effects deterring new commercial relationships, as summarized in a CSIS analysis.

TSMC's Strategic Balancing Act

TSMC's position as the linchpin of global semiconductor supply chains means its decisions will amplify or mitigate geopolitical risks. The company's Nanjing plant, though contributing less than 3% of its revenue, is a symbolic and strategic target for U.S. export controls, according to the CNBC report. To navigate Trump-era policies, TSMC is reportedly forming partnerships with U.S. firms like Intel, sharing manufacturing techniques to avoid tariffs while maintaining access to Chinese markets, per an Oxford Economics assessment.

Yet, TSMC's reliance on U.S. equipment for its advanced nodes makes it vulnerable to policy shifts. The Biden administration's "AI Diffusion Rule," which restricts access to AI technologies, could further complicate TSMC's operations, particularly for its AI-chip clients, as described by Global Taiwan. Meanwhile, Trump's rhetoric accusing Taiwan of "stealing" the U.S. semiconductor industry hints at potential tariffs on TSMC's imports, adding another layer of uncertainty, according to a Forbes article.

Economic and Geopolitical Implications for Investors

The semiconductor sector's exposure to geopolitical risks demands a nuanced investment approach. Key considerations include:
1. Supply Chain Diversification: Companies investing in Southeast Asia or Mexico to avoid U.S.-China tensions may gain resilience. For example, India's emerging semiconductor hubs could attract capital as a buffer against Trump-era tariffs, per Modern Diplomacy.
2. TSMC's Resilience: While TSMC's U.S. investments are a hedge against policy risks, its global operations remain vulnerable to retaliatory measures. Investors should monitor its ability to navigate export controls and maintain its 92% market share in advanced chips, according to an Atlantic Council brief.
3. Retaliatory Measures: China's control over rare earth materials and gallium could disrupt U.S. production, particularly for firms reliant on mature-node chips. Diversifying material sourcing or stockpiling critical resources may become strategic priorities, as discussed in a ScienceDirect study.

Conclusion: A High-Stakes Game of Strategy

The semiconductor industry's future hinges on the interplay of U.S. policy, Chinese retaliation, and Taiwan's strategic calculus. A Trump-led reversal of current policies could accelerate reshoring but at the cost of higher production costs, fragmented supply chains, and retaliatory measures. For investors, the key is to balance exposure to U.S. manufacturing incentives with hedging against geopolitical volatility. As TSMC and other players navigate this turbulent landscape, the ability to adapt to shifting alliances and trade rules will determine long-term success.