What Is at Stake in Taiwan’s Ban on Huawei and SMIC?

Taiwan’s decision yesterday to add Chinese tech giants Huawei and SMIC to its trade blacklist marks a formal, and forceful, alignment with U.S. policy. The move, which tightens loopholes and raises the stakes for any Taiwanese firm supplying the two blacklisted companies, is more than a symbolic gesture. It’s the latest salvo in a deepening global tech war where the unassuming island has become the geopolitical center, all because of one company: Taiwan Semiconductor Manufacturing Co. (TSMC).

This single firm has become a critical chokepoint in the global economy, and Taiwan’s latest move reinforces its pivotal role in the escalating battle for technological supremacy between the U.S. and China.

How did TSMC become so important?

TSMC’s dominance is the result of a multi-decade industry shift. Historically, major tech companies like Intel and AMD designed and manufactured their own chips. However, as technology advanced, the cost and complexity of building state-of-the-art fabrication plants, or “fabs,” skyrocketed. A leading-edge fab today can cost north of $30 billion to build, a prohibitive expense for all but a few.

This dynamic gave rise to the “foundry” model, pioneered by TSMC. Instead of designing its own chips, TSMC focused exclusively on manufacturing chips for others. This allowed fabless companies like Nvidia and Apple to focus on chip design while outsourcing the incredibly capital-intensive manufacturing process. The model was a wild success. Today, TSMC manufactures roughly 90% of the world’s most advanced chips and holds around 60% market share of the entire foundry industry, which rises to around 67% for advanced nodes below 7nm.

Why is the U.S. targeting China's chip industry?

The U.S. views control over the semiconductor supply chain as a matter of national security. The goal of its sweeping export controls, first escalated in 2019, is to hamper China’s military modernization and slow its progress in artificial intelligence, a field where advanced chips are the most critical resource. This strategy has been described as “weaponized interdependence,” where the U.S. leverages its influence over chokepoints in the global supply chain to achieve geopolitical goals.

ASML, the Dutch company with an absolute monopoly on the essential Extreme Ultraviolet (EUV) lithography machines needed to make cutting-edge chips, is one such chokepoint. The U.S. exerts control over ASML's sales to China, in part because ASML acquired a U.S. firm, Cymer, for its EUV light source technology, and through international agreements like the Wassenaar Arrangement. This prevents China from acquiring the tools needed to build its own advanced fabs.

The other critical chokepoint is TSMC itself. By restricting TSMC and other foundries from producing advanced chips for companies like Huawei, the U.S. can effectively cut off China from the world's most powerful silicon, regardless of where the chips were designed.

What does this mean for China's AI ambitions?

Cut off from the global supply of top-tier chips, China has been forced to accelerate its push for self-sufficiency. Huawei is at the forefront of this effort, developing its own Ascend series of AI processors to compete with Nvidia. While its individual chips are less powerful due to manufacturing limitations, Huawei has focused on system-level innovation. Its CloudMatrix 384 system, for example, connects 384 of its Ascend 910C chips with high-speed optical networking. Analysts suggest the system is more powerful than Nvidia's comparable rack system in some circumstances, though it consumes significantly more power.

Nvidia CEO Jensen Huang has called Huawei a “formidable technology company” that is “not sitting still.” Indeed, China stunned Washington in 2023 with the Mate 60 smartphone, which contained a sophisticated 7-nanometer chip made by SMIC, demonstrating that China’s domestic capabilities were advancing despite sanctions. However, major hurdles remain. Beyond the hardware, Nvidia’s biggest advantage is its CUDA software ecosystem, a proprietary platform that developers have used for nearly two decades to build AI applications. China’s equivalent, Huawei's CANN, is playing a desperate game of catch-up.

How are global companies caught in the tech decoupling?

This technological decoupling has put immense pressure on global companies. Nvidia has been forced to create significantly downgraded chips, like the H20, specifically for the Chinese market to comply with U.S. export controls. The restrictions have come at a steep cost; the company recently took a $5.5 billion charge on H20 inventory after the U.S. tightened the rules again in April 2025. Jensen Huang has been vocal, arguing that the controls are a “failure” that only serve to bolster Chinese competitors like Huawei by ceding a $50 billion AI market to them.

ASML has also seen its potential revenue curtailed by the restrictions on sales to China. Its stock has struggled since mid-2024 as investors weigh the impact of U.S. export controls and the risk of China succeeding in developing its own domestic lithography industry. While Chinese firms like SiCarrier are still years behind, the pressure from Washington has lit a fire under Beijing’s domestic efforts.

Where does the chip war go from here?

In response to supply chain vulnerabilities, the U.S. and its allies are pushing to diversify manufacturing. The CHIPS Act has provided billions to incentivize companies like TSMC and Intel to build new fabs in the U.S. TSMC is currently building massive new facilities in Arizona and has also expanded into Japan and Germany. Intel is also investing heavily to regain its manufacturing edge.

However, onshoring advanced manufacturing is a monumental task. The culture that makes TSMC so efficient—from its top engineering graduates to an intense work ethic where employees rush to the fab after an earthquake without being called—is difficult to replicate. Furthermore, the core R&D for next-generation processes remains concentrated in just three places: Hsinchu, Taiwan (TSMC); Hillsboro, Oregon (Intel); and Pyeongtaek, South Korea (Samsung). A new fab in Arizona is still dependent on the knowledge and continuous innovation flowing from these R&D hubs.

Taiwan’s decision to formally blacklist Huawei and SMIC doesn’t change the game overnight, but it solidifies the battle lines. It signals a deeper commitment to the U.S. technology sphere and tightens the screws on China’s access to the world’s most critical technology. This move reinforces the bifurcation of the global tech world, forcing China to invest hundreds of billions in building a parallel, and for now inferior, ecosystem, while the U.S. doubles down on its strategy of controlling the chokepoints.

Reference Shelf:

Taiwan Adds China’s Huawei and SMIC to Export Control List (Reuters)

Why Huawei Can Only Make 200,000 AI Chips a Year (ARPU)

How Chip Stacking Became Huawei's Weapon in the AI War (ARPU)

Why ASML and TSMC Are the Chokepoints in Global Chipmaking (ARPU)

Nvidia CEO Urges US to Ease AI Curbs After China ‘Failure’ (Bloomberg)