In February 2025, Taiwan President Lai Ching-te (賴清德) outlined for the first time his vision for a “non-Red supply chain” (非紅供應鏈) that could be established among democratic societies to maintain technological leadership across a range of strategic sectors—and thereby reduce the geoeconomic leverage of the People’s Republic of China (PRC). President Lai reemphasized this strategy in a May interview, in which he unsurprisingly highlighted the semiconductor industry as a priority target for the creation of a non-Red supply chain. While Lai has not yet turned this grand vision—which, given the depth of PRC engagement in critical supply chains and their overall complexity, may be difficult to operationalize—into specific policy steps, this framing reflects an astute, timely strategy to advance shared economic security objectives. The exaggerated nature of the PRC’s reaction (with the State Council’s Taiwan Affairs Office [國台辦] asserting that Lai’s initial February announcement alone amounted to a step toward Taiwan independence that could “harm and destroy” the country) implies a recognition of the value of supply chain leverage to the PRC. The PRC’s supply chain leverage has only become more apparent in light of reporting that US concerns regarding PRC restrictions on rare earth exports were one of the primary motivations behind Washington pursuing a trade ceasefire this summer.
Since PRC participation in any stage of a supply chain can pose risks to economic resilience, this comprehensive vision of a non-Red supply chain is necessary. For instance, if the PRC is removed from drone supply chains—but remains the primary supplier for the raw materials that are used in their batteries—the reduction in PRC leverage is minimal. Of course, this is not to say that every supply chain in a critical sector needs to be fully decoupled from the PRC. Such a goal is unrealistic and unnecessary. Rather, Taiwan and its democratic partners simply need to establish sufficient non-Red supply chains in critical sectors so as to deter the PRC from using its leverage coercively, and to mitigate the risks of disruption in case of a crisis or conflict. Following the PRC’s 2010 effort to coerce Japan by restricting rare earth exports, Tokyo significantly reduced its reliance on PRC rare earths within a few years—and unsurprisingly, the PRC has refrained from further attempts to target Japan in this way.
The Logic and Value of Taiwan-US Supply Chain Cooperation
While other countries including Japan have taken steps towards diversification, Taiwan remains the obvious candidate for pioneering a non-Red supply chain. Firstly, the country possesses significant situational awareness regarding the PRC and its industrial policies—ironically, due in part to the fact that cross-Strait economic linkages remain relatively prevalent, but also as a result of the Taiwanese government’s efforts to monitor risks emanating from the PRC. While governments have found it difficult to comprehensively map even a limited set of critical supply chains—as evidenced by the Biden Administration’s abortive supply chain reviews—Taiwan is arguably better equipped than any country to achieve this.
Secondly, Taiwan has a unique set of experiences as well as preexisting policies capable of protecting its supply chains and preventing undue reliance on the PRC. Its bans on government procurement of PRC components appeared earlier, and were broader, than those of many other democratic governments. Taiwan has also launched a so-called “Drone National Team” indigenous drone development program, which aligns with the non-Red supply chain concept. Taiwan maintains strong, up-to-date legal frameworks to defend against PRC efforts to enhance its position in key supply chains through talent recruitment, economic espionage, and subsidies. The Taiwanese government pairs these frameworks with active enforcement measures to ensure that the policies are effective, such as a strong export control regime. These measures have been stress-tested over recent decades, during which the PRC has invested heavily in trying to carve out a place in leading-edge semiconductor fabrication. However, the PRC has decidedly failed in its efforts to dethrone Taiwan and TSMC, the latter of which has (regardless of export controls) deliberately kept its PRC-based fabs several technology generations behind.
Finally, Taiwan’s innovation system and economic structure is well-suited to counter PRC strengths and carve out a competitive niche for non-Red supply chains. While Taiwan’s labor market is certainly not as cost-competitive as the PRC’s, the country’s relatively low wages allow it to remain efficient in manufacturing. Taiwan has also begun to build a strong startup ecosystem, allowing it to diversify and respond to supply chain trends. Additionally, the Taiwanese government’s long history of effective industrial policy aimed at achieving “catch-up” (which is related to but distinct from industrial policies that target frontier R&D) could provide a roadmap for seeking to wrest back a role in supply chains currently dominated by PRC firms. The strength of Taiwan’s National Science and Technology Council (NSTC, 國家科學及技術委員會)-administered science parks as catalysts—not only of innovation, but also of actual manufacturing ecosystems and interlinked supply chains—represents a clear example of Taiwan’s advantages.
As the Lai Administration continues to attempt to turn its non-Red supply chain vision into a reality, obvious areas for Taiwan-US cooperation have emerged. It is a positive sign that some of the earliest acknowledgements from Taiwanese officials—the Ministry of Foreign Affairs’ (MOFA, 外交部) inclusion of the concept in a written report to the Legislative Yuan (LY, 立法院) and a comment from Minister of National Defense (國防部部長) Wellington Koo (顧立雄) on bilateral drone cooperation—have recognized that Taiwan’s efforts will inherently benefit from alignment with the United States. Firstly, the United States remains Taiwan’s largest geopolitical supporter, second-largest export market, and a key partner in advanced technology sectors. Secondly, both the US and Taiwanese governments have prioritized the semiconductor and drone sectors.
Priority Sectors for Cooperation
As noted above, Taiwan has already taken a number of steps to maintain a non-Red supply chain in semiconductors, and US-Taiwan export control cooperation is likely to continue to expand in this area. However, research shows that Chinese firms maintain central roles downstream of Taiwan and the United States in the area of assembly, test, and packaging (ATP). While ATP is traditionally a relatively low-value add sector, it is nevertheless necessary to turn even the most advanced chip from a useless piece of silicon into a functioning product. Therefore, reliance on the PRC for ATP creates vulnerabilities. As advanced ATP becomes increasingly important economically and technologically—as a way to increase chip performance as “bleeding-edge” chips begin to run into physical size limitations—US-Taiwan cooperation in reshoring ATP and developing advanced onshore capabilities is a prime area for cooperation.
Moreover, while the PRC’s investments into leading-edge semiconductor manufacturing have largely fallen short, the country has made such strides in the legacy semiconductor space that worries are being raised about overcapacity—a problem that has led to the complete destruction of non-Red supply chains in other sectors such as solar panels. While overcapacity has not spread to the entire legacy chip market, it is clear that the PRC has advanced significantly in this sector and is now a meaningful global competitor. Given the economic importance of legacy chips (evidenced by the massive costs associated with their supply chain disruption during the COVID pandemic), the security and privacy risks that could be associated with PRC-made legacy chips embedded in consumer products, and the key role of legacy chips in Taiwan’s overall semiconductor ecosystem, it is clear that preserving non-Red legacy chip supply chains is also a key priority.
While Taiwan has maintained a leading, central role in semiconductor supply chains—despite the PRC’s influence in specific stages—the drone sector is fundamentally different. The dominance of PRC firms, particularly DJI (大疆創新), means that the establishment of a non-Red drone supply chain will require a much more expansive effort to scale production within Taiwan, claw back market share, maintain cost competitiveness, and achieve innovative breakthroughs. The United States has unveiled a number of measures to restrict the importation of PRC drones—and faces challenges in ensuring that beneficial drone uses are not disrupted by these bans. The upshot is that the United States will soon have a large commercial drone market that is open to new entrants—potentially including the rapidly-expanding Taiwanese drone industry. Ensuring that US policy promotes market access for these new entrants—while simultaneously ensuring that entrants’ production is not reliant on PRC-manufactured components—would go a long way toward fostering a non-Red drone supply chain.
In the military drone space, the Defense Innovation Unit’s Blue UAS Cleared List provides another obvious opportunity for Taiwanese firms seeking to establish non-Red supply chains for the booming domestic and export markets. While PRC drones and components have made their way to both sides of the Russia-Ukraine war, Taiwan’s support for Ukraine also provides an opportunity for the two countries to pursue innovation, drawing on Ukraine’s wartime experience and industrial cooperation. Given the continued deepening of Russia-China defense industrial cooperation, particularly in drones, Ukraine is one of the few countries more incentivized to support the creation of a non-Red drone supply chain than Taiwan.
Policy Steps to Promote Cooperation
To effectively progress toward non-Red supply chains, several macro- and micro-level policies enhancing US-Taiwan technology cooperation are necessary. First and foremost, a trade deal that sets the tariff rate as low as possible will improve the economic viability of continued linkages between Taiwanese and US supply chains. While persistent US tariffs on key economic partners are disruptive and regrettable, Taiwan must recognize that the Trump Administration is intractable on this subject—and will need to maintain its flexibility to compromise on key domestic non-tariff barriers to mitigate the impacts of US tariffs on the overall economic relationship. Moreover, in light of the Trump Administration’s sectoral exemptions on duties for a large proportion of imports from Taiwan, Taipei may seek further exemptions in exchange for efforts to establish non-Red supply chains in critical industries.
Investment commitments have emerged as central components of the deals announced between the Trump Administration and other trade partners. Taiwan should similarly seek to leverage investment commitments to accomplish shared policy goals. While the topline magnitude of an investment commitment will likely matter more politically to the Trump Administration than the specific terms, targeted investments could play a critical role in building out non-Red supply chains—whether by allowing for increased production of critical inputs, opening up access for Taiwanese companies to the Blue UAS list, or addressing specific chokepoints in the semiconductor supply chain. The inherently greater role for the Taiwanese government in shaping these investments provides a unique opportunity to achieve industrial policy goals, and the Lai Administration should therefore ensure that the Ministry of Economic Affairs (MOEA, 經濟部), NSTC, and other stakeholders develop a priority list of potential investments for Taiwanese government negotiators. Such a list should include information on the investments’ strategic significance to the United States. This will allow negotiators to overcome any investment-specific roadblocks—such as obstacles related to obtaining permits (a persistent challenge for the semiconductor industry given the major investments and already long timelines needed to establish a single fab), the Committee on Foreign Investment in the United States (CFIUS), or others.
However, even if these investments are announced, another key obstacle must be overcome to ensure that Taiwanese investments into the United States can be cost-competitive: double taxation. Taiwan remains the largest US trading partner that lacks a formal double taxation agreement, meaning that Taiwanese companies face a significant additional tax burden. While US Congressional politics are never simple—particularly when it comes to Taiwan—the Taiwanese government has emphasized to the Trump Administration the importance of concluding such an agreement. Indeed, a measure to eliminate double taxation passed the US House of Representatives by a 423-1 margin this year. The Trump Administration should encourage the US Senate to pass the House bill immediately after the finalization of any trade deal.
Besides these broad steps, sector-specific measures must also be implemented. In particular, mapping of the relevant supply chains is critical. While this will ultimately require information-sharing from the private sector, examining customs data can provide a first indication of where chokepoints or vulnerabilities might exist. Extending this process down through various layers of component suppliers is complicated but necessary in order to foster non-Red supply chains rather than just non-Red primary suppliers. Sector-specific R&D funding—perhaps stemming from NSTC or US National Lab funding—to address specific areas in which PRC firms maintain a competitive advantage would also be beneficial. For the semiconductor industry, access to remaining CHIPS Act funds could facilitate investments smaller than those that are fab-scale—for instance, in advanced ATP or production of critical inputs. In the drone space, ensuring Taiwanese firms have access to the Blue UAS list is the clear priority.
To ensure that non-Red supply chains become an industrial reality rather than a political slogan, it is also wise to start small: working first to remove reliance on the PRC in a limited number of priority sectors, rather than attempting a comprehensive, wide-reaching purge. The complexity of global supply chains means that reshaping them—and in particular removing PRC linkages in an era in which PRC manufacturing firms have become increasingly internationalized—is commensurately complex. The need for continued political attention to ensure that vulnerabilities are not just shuffled around, but solved, means that there is an inherent limit to how broadly Lai’s vision can be implemented. Moreover, starting with a small number of sectors whose concerns can be effectively managed will increase private sector buy-in in future efforts—and will also provide lessons and learnings that can allow the process to improve over time.
The main point: President Lai Ching-te has outlined a broad vision for “non-Red supply chains.” Taiwan-US cooperation and investment in the drone and semiconductor sectors, coupled with requisite policy support, could effectively operationalize this vision and mitigate the risks emanating from the PRC.
