The race for artificial intelligence (AI) supremacy is heating up, and the U.S.-China trade war is at its core. President Donald Trump’s aggressive tariffs aim to block China’s access to advanced AI chips, but Taiwan Semiconductor Manufacturing Company (TSMC), the world’s top chipmaker, warns it’s nearly impossible to fully enforce these restrictions. According to an April 21, 2025, Ars Technica report, TSMC’s 2024 annual report highlights the challenges of controlling chip distribution in complex global supply chains. Meanwhile, China is rapidly developing its own chipmaking giants like SMIC and Huawei, posing new challenges to U.S. policies. Let’s break down why this matters, explore TSMC’s concerns, and dive into China’s growing alternatives in a way that’s easy to understand.
Why TSMC Is Key to the AI Chip Race
TSMC, a $514 billion company based in Taiwan, produces most of the world’s AI chips, powering products from Nvidia, Apple, AMD, and Qualcomm. These chips are the backbone of AI technologies, from self-driving cars to advanced computing systems. However, TSMC’s 2024 report admits a critical issue: it can’t fully track how its chips are used after they leave its factories. This lack of oversight makes it hard to stop chips from reaching restricted entities, like Chinese companies under U.S. sanctions.
For example, in October 2024, TechInsights found a TSMC-made chip, originally produced for Nvidia, inside Huawei’s Ascend 910B AI processor. This discovery raised red flags about possible violations of U.S. export controls. TSMC quickly alerted U.S. and Taiwanese authorities, stating that one of its customers’ chips may have been diverted to a restricted entity. Despite cooperating with investigations, TSMC emphasized there’s “no perfect solution” to prevent such incidents. This vulnerability in the supply chain is a major hurdle for Trump’s goal of cutting off China’s access to advanced technology.
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Trump’s Tariff Strategy and TSMC’s Worries
To reduce U.S. reliance on foreign chips, Trump has pushed for hefty tariffs on imports, including semiconductors. In 2025, he proposed a 25 percent tariff on all chip imports to boost domestic production. Additionally, he threatened TSMC with a 100 percent tariff unless it builds more factories in the U.S. TSMC responded by announcing a $100 billion investment for five new U.S. factories, a deal celebrated with Trump at the White House. However, TSMC’s report warns that tariffs could raise costs for chip-based products, reduce demand, and hurt its business.
Moreover, Trump’s criticism of the CHIPS Act, a $280 billion law from 2022 that funds U.S. chipmaking, adds uncertainty. TSMC has received $6.6 billion from the act to build three Arizona factories, but Trump’s threats to alter or cut funding could disrupt these plans. On top of that, TSMC faces a potential $1 billion fine from a U.S. probe into chips supplied to China-based Sophgo, which ended up in Huawei’s AI hardware. These pressures highlight the delicate balance TSMC must strike in a tense trade environment.
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Chinese Alternatives to TSMC: SMIC and Huawei Step Up
While TSMC grapples with U.S. restrictions, China is building its own chipmaking powerhouses to bypass reliance on foreign suppliers. Two key players are Semiconductor Manufacturing International Corporation (SMIC) and Huawei, both making strides in advanced chip production.
- SMIC: China’s largest chipmaker, SMIC, has made significant progress despite U.S. sanctions. Reports from 2024 indicate SMIC is producing 7-nanometer chips and even experimenting with 3-nanometer processes, rivaling TSMC’s capabilities. While SMIC’s output is smaller than TSMC’s, its advancements show China’s determination to achieve chip self-sufficiency.
- Huawei: Once known for smartphones, Huawei has pivoted to chip design and AI hardware. Its HiSilicon division develops chips like the Ascend series, which compete with Nvidia’s AI processors. Huawei’s ability to source TSMC-made chips through third parties, as seen in the Ascend 910B case, underscores its resourcefulness. Additionally, Huawei is partnering with domestic foundries like SMIC to produce its designs locally.
China’s government is pouring billions into its semiconductor industry, aiming to close the gap with TSMC. By November 2024, TSMC halted production of 7-nanometer or smaller AI chips for Chinese clients due to U.S. pressure, but SMIC and Huawei are filling the void. China’s Ministry of Foreign Affairs has pushed back against U.S. restrictions, urging an end to “unwarranted attacks” and signaling confidence in its tech ambitions.
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Why Blocking China Is So Hard
TSMC’s report explains why completely stopping China from getting AI chips is a tough task. Global supply chains are intricate, with chips often passing through multiple companies before reaching their final destination. Third parties can skirt sanctions by rerouting chips, as seen in the Huawei case. Additionally, China’s growing domestic chip industry reduces its dependence on TSMC, making U.S. export controls less effective over time.
Furthermore, the global demand for AI chips is skyrocketing, and TSMC remains the go-to supplier. Restricting its operations could disrupt the entire tech industry, raising costs for everything from smartphones to AI data centers. TSMC also warned that China’s restrictions on raw materials for chips could drive up prices, adding another layer of complexity.
What This Means for the Future
The U.S.-China trade war is reshaping the semiconductor landscape. Trump’s tariffs may push companies like TSMC to build more U.S. factories, but they also risk inflating costs and slowing innovation. Meanwhile, China’s investment in SMIC and Huawei signals a future where it may not need TSMC at all. This shift could weaken the impact “[of] U.S. sanctions and challenge American dominance in AI technology.
For now, temporary exemptions on smartphone, computer, and chip tariffs, announced on April 12, 2025, offer relief to companies like Apple and Nvidia. However, Trump’s ongoing probes into chip imports keep the industry on edge. Industry groups like SEMI are calling for careful policy decisions to avoid harming the global tech ecosystem.
Final Thoughts
TSMC’s warning shines a light on the challenges of controlling AI chip flows in a connected world. While Trump’s tariffs aim to limit China’s tech growth, TSMC’s supply chain limits and China’s rising alternatives like SMIC and Huawei complicate the mission. As the AI race accelerates, the stakes are higher than ever. Will the U.S. succeed in slowing China’s progress, or will China’s homegrown chipmakers change the game? Only time will tell, but one thing is clear: the global semiconductor industry is in for a bumpy ride.
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