Tech war tax deal with Taiwan could further isolate China as US seeks to ‘ensure own long-term supply’
- Washington is strategically trying to get Taiwan’s world-renowned chip makers to set up bases in the US, and doing so would further bind Taiwan and the US economically
- A move this month by American senators to establish the Taiwan Tax Agreement Act could further isolate mainland Chinese firms from access to hi-tech semiconductors
A US Senate bill proposing special tax breaks for Taiwanese investors would further merge the Asian island into a growing American-led tech-supply chain while further isolating and upsetting mainland China, analysts say.
On May 4, a group of US senators introduced the Taiwan Tax Agreement Act of 2023, a bill authorising President Joe Biden’s administration to reach a tax agreement with Taiwan. The senators said in a statement that an eventual treaty would help boost investment between the United States and Taiwan by cutting out double taxation.
Officials in Washington have been trying over the past few years to get companies from Taiwan’s world-renowned semiconductor sector to set up bases in the United States while steering tech firms – American as well as Taiwanese – away from mainland China as relations cool between the two powers.
A cut in taxes could inspire more Taiwanese tech firms to follow Taiwan Semiconductor Manufacturing Company (TSMC) to set up shop in the United States. In some cases, they would set up in the US to supply the giant chip maker that is building a US$40 billion compound in the state of Arizona.
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“It will broadly benefit the business between Taiwan and the US, and the recent expansion of TSMC in Arizona shall also benefit from that,” said Ben Yeh, a Taiwan-based analyst with the market research firm Canalys.
Taiwanese invested US$23.73 billion in the United States from 1952 through 2022, making the US their most popular destination after mainland China, according to Ministry of Economic Affairs data from Taipei.
TSMC makes the world’s most advanced computer chips – the engines powering many of today’s PCs and smartphones – but does not produce them offshore.
Since 2017, the US has been bolstering economic, political and military support for Taiwan, invoking the ire of Beijing, which sees self-ruled Taiwan as a renegade province that must be reunited with the mainland, by force if necessary.
Countries that have diplomatic ties with Beijing, including the US, acknowledge the existence of the one-China principle that holds Taiwan be part of China, but may not explicitly agree with it. Washington does not take a position on the status of Taiwan but opposes any attempt to take the island by force.
A taxation deal would further bind Taiwan and the US economically, in turn allowing capital, production and people to move more freely between the two, said Hu Jin-li, a professor with the Institute of Business and Management at the National Yang Ming Chiao Tung University in Taipei.
The US is trying to ensure its own long-term supply of chips, and at the same time “cripple” China’s semiconductor development, said Dexter Roberts, senior fellow with the Atlantic Council think tank’s Global China Hub.
Taiwanese firms are paying as much as 10 per cent more than Korean and Australian firms in the United States, said Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Corporate & Investment Banking in Hong Kong. They may be taxed as well in Taiwan, even if offshoring to the US.
South Korea and Australia pay less in taxes because of their free-trade deals with the US. Taiwan has no such trade pact.
By reducing the tax burden, Taiwanese suppliers can re-evaluate investments in the US that would otherwise not be considered
An erasure of extra taxes is at “the core of friend-shoring”, Garcia said.
“For the US, lowering the cost of Taiwan’s firms aligns with their policies to attract more investment and its overseas investment in friendly peers,” she said. “In short, the agreement can reduce corporate costs and facilitate mutual investment.”
Tax breaks may easily persuade semiconductor firms to invest in the United States, said Mario Morales, group vice-president of semiconductor research with market analysis firm IDC in Silicon Valley. Today, it costs 50 per cent more to do the work in the US compared with in Taiwan, he said.
“By reducing the tax burden, Taiwanese suppliers can re-evaluate investments in the US that would otherwise not be considered because of the higher cost to do business,” Morales said. “TSMC needs its supply chain to support the buildout in Arizona.”
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Taiwan-based Materials Analysis Technology plans to open an operation in Arizona to size up materials for TSMC, regardless of the local tax regime, according to interim spokeswoman Lee Yu-shin.
“We’re waiting to see whether we can get a tax break, of course, but mainly we’re going there to service a customer,” Lee said.
Taiwan Speciality Chemicals Corporation, which supplies gases and chemicals for chip-making, is weighing whether to open a US factory that could serve TSMC, a spokesman surnamed Liao said. Taxes, however, are just one concern, he said, along with “management issues” and whether the whole project is necessary.
Taiwanese investors face little risk investing in the United States if taxes come down, said Yeh with Canalys.
But Taiwan’s chip makers ultimately risk ceding too much control to the United States, said Abishur Prakash, CEO of Toronto-based advisory firm The Geopolitical Business.
“This is about America trying to build chip independence and not rely on Taiwan nor anyone else for the brains that power everything,” Prakash said. “This isn’t necessarily about a realignment of chip supply chains, but more about the creation of brand new chains that have America at the centre.”
At the same time, analysts predict, mainland China will seethe.
Officials in Beijing see the tax bill as the latest way to squelch mainland China’s development of advanced semiconductors, said Victor Gao, vice-president of the Centre for China and Globalisation in Beijing.
“It’s not a sign of free trade at all,” Gao said. “It’s a tool to prevent manufacturers in Taiwan from selling advanced chips to mainland China. The US has zoomed in on semiconductors to make it more and more difficult for China to develop advanced chips.”
In the May 4 statement, US Senator Mitt Romney said the “rising threat of China makes it important that we continue to strengthen the economic ties” with Taiwan.
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Taiwan aside, China-US relations have sputtered since 2018 over political, trade and economic issues, including US bans on selling advanced chips to China – including by foreign firms with business in the United States.
A tax-relief measure would act like “gravity that economically pulls Taiwan to the US side”, said professor Hu.
Mainland officials are likely to respond by pushing ahead with hi-tech “self-reliance”, including the development of chip-making lithography machines, Gao said. He foresees a breakthrough in about 10 years.
Reaching a deal would require formal US-Taiwan talks, bringing the two sides all the closer, Hu said. Mainland China chafes at official contacts between Taiwan and foreign governments.
“The real reason China would be outraged is … this is not 10 years ago, and tension in Taiwan Strait is so much higher,” Roberts said. “And this is the United States – its No 1 trade partner, the world’s largest economy.”
