Republican presidential candidate Donald Trump said in an interview with Bloomberg Businessweek that Taiwan should pay the United States for its defence. This statement caused a sharp drop in the shares of Taiwanese chipmaker TSMC.

"I know those people very well, I respect them, but they took about 100% of our chip business. I think Taiwan should pay for our defense," Trump said in a June 25 interview that was published on Tuesday.

"You know, we're nothing more than an insurance company. But Taiwan doesn't give us anything."

U.S.-Taiwan relations

The United States is Taiwan's most important international supporter and arms supplier, but it does not have a formal defense agreement, unlike the relationships Washington has with South Korea and Japan. However, the United States is legally obligated to provide Taiwan with the means to defend itself.

The Taiwanese government has emphasized upgrading its defenses, including the development of its own submarines, and has stated many times that the island's security is in their own hands. In response to Trump's comments, Prime Minister Cho Jung-tai said that Taiwan and the U.S. have good relations despite the lack of formal ties and that Taiwan is committed to strengthening its own defenses.

"Taiwan is gradually increasing its defense budget and demonstrating its responsibility to the international community," he told reporters in Taipei. "We are willing to take more responsibility; we are defending ourselves and ensuring our security."

US commitments

U.S. President Joe Biden angered the Chinese government with comments suggesting the U.S. would defend Taiwan if it were attacked, a departure from the longstanding U.S. position of "strategic ambiguity."

Impact on TSMC $TSM and the broader market

TSMC, the dominant manufacturer of advanced chips used in AI applications, smartphones and fighter jets, is a key player in the global economy. Any conflict over Taiwan could therefore significantly damage the global economy.

Shares of Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world's largest contract chipmaker and a major supplier to Apple $AAPL and Nvidia $NVDA, are down nearly 7% on Wednesday (US).

"Trump's comments were clearly direct. We see it as political rhetoric," said Allen Huang, vice president at Mega International Investment Service. "TSMC is an excellent company and has prevailed in the market over many competing companies in the United States."

TSMC is investing billions in building new factories abroad, including $65 billion in three plants in Arizona, yet most production will remain in Taiwan.

Taiwan also has a backlog of U.S. weapons orders worth about $19 billion, which U.S. officials and politicians have repeatedly promised to expedite.

Since 2022, Taiwan has complained of delays in deliveries of U.S. weapons such as Stinger anti-aircraft missiles as manufacturers focus on supplying Ukraine to help it fight Russian invasion forces.

In April, the U.S. Congress approved a sweeping foreign aid package that includes weapons support for the island, after Republican leaders in the lower chamber abruptly reversed course and allowed a vote on $95 billion in mostly military aid for Ukraine, Israel, Taiwan and U.S. partners in the Indo-Pacific region.

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