Taiwan's Chip Dominance Now Central to U.S.-China AI Competition

The artificial intelligence competition between the United States and China has created an uncomfortable reality for Washington: America's ability to lead in AI depends almost entirely on semiconductor supply chains located in Taiwan, the self-governed island that Beijing claims as its own territory.

This dependency is reshaping the strategic importance of Taiwan for the United States far more than it is for China, according to analysis from the Council on Foreign Relations. While Beijing's interest in Taiwan has long been driven by political objectives tied to national reunification, Washington now faces a concrete economic and technological vulnerability.

The supply chain bottleneck

Taiwan's role in the AI hardware ecosystem is difficult to overstate. Nvidia's next-generation Vera Rubin platform relies on 150 supply chain partners based in Taiwan. AMD's competing Helios AI system depends on Taiwanese companies including Advanced Semiconductor Engineering and Siliconware Precision Industries. OpenAI turned to Taiwan Semiconductor Manufacturing Company (TSMC) to produce Jalapeño, its first in-house AI chip developed with Broadcom.

Efforts to reshore advanced chip manufacturing to the United States may not move quickly enough to matter. President Trump has set a goal for the U.S. to account for 50% of chip manufacturing by 2029, citing TSMC's Arizona investments. However, the rapid pace of AI development, combined with physical constraints including labor and water shortages, means American manufacturing capacity is unlikely to reduce Taiwan dependence before the U.S.-China AI competition reaches a critical phase.

China's narrowing advantage gap

The urgency has intensified as China appears to be closing the AI capability gap. The July release of the Kimi K3 model by Chinese startup Moonshot AI surprised observers in Washington and Silicon Valley. Open-weight Chinese models are emerging as competitive, lower-cost alternatives at a moment when enterprises are discovering the substantial costs of deploying AI solutions.

Experts now measure the U.S. lead in AI not in years but in months, though the true gap remains difficult to assess. Some analysts argue China's position would be stronger with access to more computing power, making steady chip supply from Taiwan critical to maintaining any American advantage.

Meanwhile, Chinese regulators are already considering tighter controls that would prevent domestic companies like Huawei, Alibaba, and ByteDance from using overseas foundries, including TSMC, to produce advanced chips. This suggests Beijing is preparing to build its AI industry without Taiwanese manufacturing capacity.

Why it matters

The AI race fundamentally changes what's at stake in the Taiwan Strait for Washington. A conflict that disrupts Taiwan's chip production would directly threaten American economic leadership and technological superiority. The question facing policymakers is stark: How long could the U.S. AI industry maintain its lead if Taiwan's semiconductor manufacturing went offline?

This creates both risk and leverage. The Council on Foreign Relations recommends Washington make explicit to Beijing that any move on Taiwan carries consequences for the broader U.S.-China relationship, including trade and technology cooperation. Domestically, policymakers should frame Taiwan's security in economic terms that resonate with voters and businesses rather than abstract appeals to democracy.

The analysis also calls for joint U.S.-Taiwan tabletop exercises to prepare for disruption scenarios and develop contingency plans to mitigate risks to the American technology industry.

The details were first reported by Sherry Hsiao, a former intern in the LEAD AI program at the Council on Foreign Relations, in an article published on the organization's website.