Trump's stance on Taiwan could potentially be devastating for the US economy

• Former President Trump's remarks about Taiwan have raised uncertainty within the chip industry.

• Trump in a recent Bloomberg Businessweek interview said Taiwan should pay the US for its defense.

• Taiwan's semiconductor dominance could make a supply-chain disruption perilous for the US economy.

Former President Donald Trump during a recent interview with Bloomberg Businessweek waded into the US-Taiwan relationship head-on, arguing that the East Asian democracy should pay America for its protection.

"I think Taiwan should pay us for defense," Trump said in the interview published on Tuesday. "You know, we're no different than an insurance company. Taiwan doesn't give us anything."

"Taiwan is 9,500 miles away," he continued, highlighting its significant distance from the US. "It's 68 miles away from China."

The remarks are stunning in that Trump — should he win a second term in the White House — could upend the longstanding diplomatic relationship between the US and Taiwan.

China continues to view Taiwan as a breakaway province. But Taiwan has long defended its right to self-rule, away from the grips of Beijing.

Trump's stance could have major implications for Taiwan's dominance in semiconductor chip manufacturing should any potential conflict arise between Taiwan and China. And such a scenario would likely have a cataclysmic effect on the US economy should the global chip supply chain be disrupted.

The semiconductor influence

Taiwan manufactures more than 60% of the world's semiconductors and produces about 92% of the globe's advanced semiconductors, according to Foreign Policy.

And Taiwan's microchip production is anchored by the Taiwan Semiconductor Manufacturing Company, or TSMC, a global powerhouse.

A study authorized by the US State Department found that any temporary halt to Taiwan's chip production from a Chinese blockade could result in roughly $2.5 trillion in annual losses globally, according to the Financial Times.

It's the sort of impact that would surely reverberate for years.

Trump in his Bloomberg Businessweek interview alleged that Taiwan "took" America's microchip business and claimed they they'd gotten rich by doing so.

"How stupid are we?" he asked the publication.

The ex-president's remarks are significant because the US has a vested interest in preserving strong ties in the Indo-Pacific region given the disproportionate impact that Taiwan has on the US economy.

The chips manufactured in Taiwan are used in everything from cell phones and electric vehicles to microwaves and manufacturing equipment. It's a reality that has made many US policymakers even more cognizant of the huge role that Taiwan plays in America's economic vitality.

Becoming a major chip player once again

The CHIPS and Science Act, which was passed by Congress and signed into law by President Joe Biden in 2022, was crafted to boost semiconductor manufacturing in America. The law set aside $39 billion in manufacturing incentives for chip production in the US.

Biden heavily pushed the legislation as a way to bolster supply chain resilience while also keeping the US competitive against China.

The Biden administration recently floated using a stringent trade restriction known as the foreign direct product rule to block China from utilizing advanced chipmaking tools, according to Bloomberg.

CJ Muse, the senior managing director at Cantor Fitzgerald, told CNBC that "the potential for more restrictions is real."

"The intent is really to limit China's ability to build leading-edge semiconductors, and I think that the efforts the Department of Commerce and BIS [Bureau of Industry and Security] have put through have done that," he said.

A recent report released by the Semiconductor Industry Association revealed that America's share of global chip manufacturing is set to increase to 14% by 2032. Currently, the US has a 10% share, reflective of years of manufacturing operations being sent offshore — which put the country at a competitive disadvantage.

But the US still faces an uncertain future regarding chip production should Trump sit in the White House again, as fears have risen of supply chain disruptions in a potential conflict involving Taiwan.

After Trump's latest remarks about Taiwan and the potential for tighter trade curbs on China, global chip stocks fell, with notable declines for Nvidia, TSMC, and Qualcomm, among others.

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