As Taiwan became the predominant manufacturer of semiconductors, Western governments became frightened and moved to “de-risk” from the vulnerable island that China claims. Taiwan’s leading semiconductor manufacturer TSMC responded by building multi-billion dollar foundries in Arizona, Kyushu, and Dresden.
But if the goal is to end dependence, the diversification drive is doomed. Taiwan’s semiconductor ecosystem extends far beyond wafer foundries. It includes advanced packaging, materials, substrates, and the dense network of suppliers — all of which remains anchored on the island. Taiwan is no longer a “one-trick pony”; it has become a multi-layer platform almost impossible to replicate.
Consider TSMC’s investment in Arizona. It includes leading-edge fabs producing cutting-edge chips. Yet trade reporting and industry sources note that the technologies required to “package” chips, such as Chip-on-Wafer-on-Substrate, remain in Taiwan. Packaging lines on the island are fully booked, with long lead times.
Even as TSMC adds some packaging in Arizona, future expansion of packaging centers sits in Taiwan. The upshot? Most American-made wafers will continue to depend on Taiwan-based processes, suppliers, and know-how.
“The United States has become the dominant destination for new semiconductor foreign direct investment,” notes Jalal Bagherli (the former CEO of Dialog Semiconductor, for whom I once had the honor of working). But there’s “an important nuance to note: even with huge investment flows, no country can operate a fully self-sufficient semiconductor supply chain.”
Taiwan’s “silicon shield” used to be described in terms of TSMC’s share of foundries. Today, it is better understood as a broad ecosystem: design, wafer fab, advanced packaging, substrates, materials, equipment, and a deep pool of engineering talent. It’s what Harvard Business School professor Michael Porter dubbed “clusters” in his book, “Competitive Advantage of Nations.”
In Porter’s analysis, geographic concentrations of companies with specialized suppliers created competitive advantage: Northern Italy’s footwear and fashion brings together leather tanners, specialized machinery manufacturers, fashion designers and trade schools. California’s wine cluster encompasses the University of California Davis’s world-class oenology department, with Napa and Sonoma grape growers and specialized equipment suppliers, all close by.
The same holds for Taiwan’s silicon shield. Semiconductors account for a double-digit share of Taiwan’s GDP and the majority of exports; the island’s economy and security are intertwined with the world’s need for its chips, but the world’s dependence is now on the whole stack, not just fabs.
Taiwan is not standing still, either. It is diversifying, not diluting — broadening its base. Programs such as the IC Taiwan Grand Challenge bring together startups and research teams from around the world to work on AI chips, packaging, and manufacturing. The fourth batch attracted 209 teams from 38 countries. Winners include UK-based Oculi, showing that Taiwan is positioning itself as an open innovation hub rather than a closed foundry island.
The US and Europe can build fabs and subsidize packaging lines, but they cannot recreate the depth of suppliers, materials expertise, and process know-how that exists in Taiwan. Even ambitious targets — such as moving a large share of Taiwan’s semiconductor supply chain to the US — are realistically about risk mitigation and political leverage, not about independence from Taiwan. In practical terms, any shock to Taiwan —military, political, or natural — would still send shock waves through the global chip supply chain.
The right response is not to pretend that Taiwan can be replaced, but to double down in Taiwan as a systemic partner: support its advances in packaging, testing, and artificial intelligence system integration, and align export controls and industrial policy so Taiwanese firms can keep accessing Western tools, capital and customers.
Washington and Brussels should back two-way startup links: joint accelerators, more cross-border design programs, and pathways for Taiwanese firms to work with US and European AI chip startups before China-linked supply chains capture them. The US and Europe need to accept that reality and reinforce Taiwan’s resilience and role as a core pillar of the democratic semiconductor alliance.
Christopher Cytera CEng MIET is a senior fellow with the Tech Policy Program at the Center for European Policy Analysis and a technology business executive with over 30 years of experience in semiconductors, electronics, communications, video, and imaging.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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