The AI boom is further cementing the paramountcy of Taiwanese chipmakers, but risks are rising in a volatile international trade environment.

As the world’s leading producer of semiconductors, Taiwan is embracing the artificial intelligence boom – and its microchips have never been in higher demand.

Indian market intelligence firm Astute Analytica estimates that the global AI chips market was valued at US$39 billion in 2024 and is expected to grow about 36% annually to 2033, when it will exceed US$500 billion.

Investor expectations about artificial intelligence’s broad productivity-enhancing capabilities are driving the soaring demand for AI chips. Some investors are also betting on the arrival of artificial general intelligence (AGI), typically defined as “a general-purpose AI system that can do almost all cognitive tasks a human can do,” in the not-too-distant future.

To be sure, an AGI hype machine is in full swing. Still, as Christian Guttman, a longtime AI researcher and vice president of the Swedish AI Society, wrote in a March 26 LinkedIn post: while AI is advancing rapidly, “there’s also no doubt” that AGI remains far from reality.

Even if AGI remains elusive, Taiwan stands to benefit significantly from companies’ rapid adoption of more practical AI applications, from chatbots and transcription services to predictive maintenance and process automation.

Taiwan Semiconductor Manufacturing Technology Co. (TSMC), the world’s largest contract chipmaker, has already emerged as one of the biggest winners in the AI era. In the fourth quarter of 2024, TSMC posted a record quarterly profit of NT$374.68 billion (US$11.4 billion) in large part due to demand for its advanced AI chips. Last year was its best year ever in terms of revenue as the company posted NT$2.9 trillion in sales.

TSMC’s hot streak has continued this year. In the January-March period, it reported record first-quarter sales of NT$592.64 billion (US$18.51 billion) up 16.5% year-over-year. Strong demand for advanced chips used in high-performance computing devices was a key factor in TSMC’s impressive performance, analysts say.

TSMC’s leadership in advanced processing and chip packaging technologies has been a major factor in Taiwan’s central role in the global AI chip supply chain. Most importantly, the Hsinchu-based company manufactures and packages Nvidia’s graphics processing units (GPUs), which are currently the most widely used AI chips worldwide.

“This manufacturing expertise represents Taiwan’s greatest strength in the AI chip ecosystem,” says Cheng Kai-an, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).

Another reason Taiwan is crucial to the AI chip supply chain is its companies’ leading role in server production, says Frank Kung, an analyst at the Taipei-based market intelligence firm TrendForce.

Speaking at an event in Taipei in April, Young Liu, chairman of Hon Hai Precision Industry Co. (also known as Foxconn), noted that Taiwanese contract manufacturers account for 90% of the global AI server market, with Foxconn alone holding a 40% share of global AI computing.

“We have discussed with many countries the issue of building AI data centers and related supply chains, and have talked with Minister of Economic Affairs J.W. Kuo about helping our Taiwanese peers expand their businesses in these countries,” he was quoted as saying by Taipei Times.

Intensifying headwinds

While market fundamentals for Taiwan’s AI chipmakers remain strong, they now face the most challenging global trade environment since the financial crisis of 2008–9. Chief among their concerns is the risk that tariffs imposed by the Donald Trump administration could, in the short term, erode margins and reduce sales – and, in the longer term, force costly adjustments to their supply chains.

Overall, the tariffs appear to have caught many companies off guard. During Trump’s first term, Taiwan largely avoided major levies, and TSMC’s recent pledge to invest another US$100 billion in its Arizona fabrication complex had been warmly received in Washington.

Nonetheless, Taiwan faces a universal 10% U.S. tariff, with semiconductor exemptions for the time being, and a potential 32% “reciprocal tariff,” first announced in early April but paused for 90 days to allow time for negotiations.

To cushion the impact of the tariffs, the administration of President Lai Ching-te has proposed a special budget of up to NT$410 billion, including financing assistance for companies, measures to stabilize the job market, and electricity subsidies. But while it’s a helpful gesture, the financial buffer cannot address the unpredictable ripple effects of the tariffs.

“Regarding AI servers, the degree of impact of tariffs remains uncertain,” TrendForce’s Kung says. “However, there are concerns that recent tariff-related issues could lead to market instability, resulting in increased costs, inflation, or weakened consumer purchasing power, which in turn may cause a decline in procurement by enterprise customers.”

In the roughly four weeks since the reciprocal tariffs were first announced, the Taiwan Stock Exchange (TAIEX) has lost nearly 10% of its value. TSMC, which makes up almost 30% of the TAIEX’s total value, has fallen about 5%.

In addition to tariffs, Taiwanese chipmakers must navigate a rapidly deteriorating U.S.-China relationship. In the AI chip sector, that means growing U.S. pressure to avoid selling anything to China that could help it gain an advantage in the two countries’ techno-industrial rivalry.

Some analysts say that Taiwan is in compliance with U.S. export controls. TSMC does not sell products using 16-nanometer or more advanced processes to China if the transistor count exceeds regulatory thresholds, as these are presumed to be for AI applications, MIC’s Cheng says. He adds that TSMC will not send any products using 16-nanometer or more advanced processes to any packaging facilities in China, either.

However, in early April, Reuters reported that TSMC could face a US$1 billion penalty to settle a U.S. export control investigation over a chip it manufactured that ended up inside a Huawei AI processor. According to the report, which cited research by the RAND Corporation, TSMC produced about three million chips in recent years that matched a design ordered by China’s Sophgo and likely found their way to Huawei.

TSMC has not commented publicly about the matter, though it did say in its annual report that it cannot fully track how its chips are ultimately used.

That announcement “is an explicit acknowledgement of the fact that chips, by their very nature, are inputs,” says J. Travis Mosier, a Washington-based semiconductor industry consultant and adjunct senior fellow at the Center for a New American Security.

Noting that “semiconductor supply chain statistics are notoriously slippery,” Mosier says he expects buyers and sellers across the ecosystem will continue to find ways to trade goods despite U.S. controls. “The real question is, can China build a globally competitive AI ecosystem by relying on the grey market and workarounds (some illicit) when it comes to procuring the most advanced AI technology?”

Staying flexible

Looking ahead, it appears increasingly likely that Taiwan’s chip sector will need to expand its presence in the United States. Regardless of tariffs, a stronger U.S. footprint would better position Taiwan to collaborate with Washington on AI – a priority for both governments. With the backing of Taiwanese and South Korean chipmakers, the United States is projected to account for about 22% of advanced logic semiconductor production by 2030, double its 11% share in 2021, according to TrendForce. TSMC is expected to play a central role in that growth.

Analysts say to keep a close eye on TSMC’s massive Arizona investment plan, which now exceeds US$165 billion. “What doesn’t get much press is what TSMC is doing to enable the advanced packaging ecosystem, not only in Taiwan, but part of its R&D and manufacturing footprint of the recently announced investments in Arizona,” says Mosier. “Expect U.S.-Taiwan AI cooperation to continue to grow in the future.”

MIC’s Cheng notes that TSMC’s new US$100 billion investment plan includes three wafer fabrication plants, two advanced packaging facilities, and one research and development center. The three fabs are expected to constitute phases four, five, and six of TSMC’s Arizona complex, likely using 2-nanometer or more advanced process technologies – critical for high-end processors and AI chips, Cheng says. The establishment of advanced packaging plants will give TSMC full capabilities for AI chip production, from manufacturing to packaging, he adds.

Meanwhile, TSMC has expressed confidence in its ability to withstand the impact of tariffs. When the company reported earnings on April 17, it maintained its bullish guidance for 2025. During an investor conference, TSMC Chairman C.C. Wei acknowledged that the tariffs had introduced new risks but said clients had not altered their business relationships with the company, suggesting that orders remain stable. The company is still forecasting annual sales growth of between 24% and 26% in 2025.

Wei added that TSMC expects sales to double in 2025 of various AI-related chips. These include graphics processing units (GPUs) used in AI training and reasoning, application-specific integrated circuits (ASICs), high bandwidth memory (HBM) controllers, and AI accelerators.