Insights Series: Why Taiwan is Critical for the U.S. Economy

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Insight from:

Erika D. Trujillo, Co-Founder & Managing Director at SEIA

Speaking with friends and family over holiday dinners is a great opportunity to get a feel for what people are thinking and feeling about politics - for better or for worse. One thing that stood out to me this year were the continued misconceptions related to the importance and role of Taiwan in western economies, especially for the United States. So as we all boldly go into 2026, I thought it was worth briefly setting out the key points explaining why Taiwan is such a critical topic not just to national security, but also simply for the S&P 500.

Beyond Political Symbols: Taiwan and the S&P 500

The U.S. Economy currently rests on the shoulders of a few tech giants, and at the centre of this surprisingly fragile constellation lies Taiwan, a small island nation whose advanced semiconductor sector has become one of the world’s most critical economic chokepoints. As a result, the economic significance of losing access to Taiwanese chip production, or seeing it materially disrupted, would have immesurable ramifications for the broader U.S. economy.

The S&P 500’s Growing Concentration:

Independent analyses indicate that seven technology companies, namely Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta and Tesla (collectively known as the magnificent seven), have driven more than 50% of the S&P 500’s gains in certain recent periods, despite making up only one-third of the index by market capitalisation.

The original purpose of the S&P 500 was to offer broad diversification—a way for investors to gain exposure to the overall U.S. economy while diluting the impact of any single company, sector or theme. In theory, gains and losses across 500 firms should offset one another, smoothing volatility and reducing idiosyncratic risk. The increasing concentration amongst the magnificent seven therefore undermines that logic.

As a result, investment diversification becomes more of a facade, and instead of spreading risk, the index sits on only one market narrative

This is further amplified by the interconnected business between these companies, as well as their sharing similar technologies, suppliers and growth assumptions. As a result, investment diversification becomes more of a facade, and instead of spreading risk, the index sits on only one market narrative: AI-driven growth powered by advanced semiconductors.

So what about Taiwan?

What binds these seven tech companies isn’t just their size or concepts, but a shared reliance on computational horsepower. Across cloud services, consumer hardware and AI model training, demand for the most advanced semiconductors is economically insatiable.

Taiwan’s semiconductor industry, led by Taiwan Semiconductor Manufacturing Company (TSMC), accounts for a significant share of global manufacturing capacity of the advanced chip production on which U.S. tech giants rely. According to recent trade and industrial data, Taiwan accounts for over 60% of global semiconductor foundry revenue and more than 90% of leading-edge chip manufacturing, meaning the most advanced logic chips that power AI accelerators and high-performance computing.

In 2024, the island’s semiconductor sector generated over $165 billion in revenue, representing a significant portion of its economic output. Independent industry data show that Taiwan’s largest foundry, Taiwan Semiconductor Manufacturing Company (TSMC), holds over 53% of global 2-nanometer chip capacity, ahead of competitors including Samsung and Intel.  Such advanced nodes are foundational to training and serving large AI models, as well as powering flagship consumer devices and infrastructure servers.

Importanlyt, this market dominance is growing, with approximately 22% year-on-year growth  in 2024, underscoring the rapid pace of demand and the industry’s deepening role in global value chains. 

Fabricating and scaling advanced fabs takes years and highly specific expertise, and the technology leadership entrenched in Taiwanese facilities remains difficult to replicate quickly. Efforts to diversify semiconductor manufacturing—through initiatives such as the U.S. CHIPS and Science Act and new facilities in Arizona—are significant, but they only address long-term capacity with functional production expecations in decades. Even with such robust policy incentives, the global advanced chip ecosystem will likely remain concentrated in Taiwan for the near future.

What Would Happen if Taiwan’s Output Were Disrupted?

The hypothetical loss of Taiwan’s semiconductor capacity could have wide ranging and innumerable impacts.

1. Immediate Supply Constraints:

   These chips are not fungible commodities that can be instantly sourced elsewhere. If Taiwanese production slowed or stopped, companies using advanced silicon—especially for cloud infrastructure and AI platforms—would face acute shortages. This would massively slow product rollouts and raise costs.

   
   

   In scenarios of significant Taiwanese production disruption, U.S. Interantional Trade Commission Models suggest that U.S. logic chip prices could rise by as much as 59%.

2. Repricing of Growth Expectations:

   Investors price markets on future earnings, often underpinned by narratives about AI-driven growth resulting in their high company valuations. Reduced access to the most advanced semiconductors would dampen those expectations. With the Magnificent Seven constituting a significant share of the S&P 500’s implied growth, valuation multiples could compress, dragging the broader market indices downward.

3. Broader Financial Conditions:

   A shock concentrated in mega-cap tech stocks can quickly spread causing investment to contract, tightening credit conditions and slowing economic momentum across the U.S. economy.

4. National Security Implications:

   Aside from the direct market impact in focus here, these chips would also dramatically impact the U.S. military industrial base and ability to leverage strategic technologies for national security, as well as drive innovation in other key market sectors.

Taiwan’s semiconductor industry is therefore not merely a critical supply line; it is the structural foundation of the current tech-driven economy and modern digital infrastructure. This reliance exposes broader financial and macroeconomic vulnerabilities, as well as the challenges of isolationsit thinking when understanding foreign affairs.

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