Taiwan once again puts TSMC at the center of a debate blending economics, national security, and geopolitics. According to reports from specialized media, the Taiwanese government is considering , with a very specific idea on the table: allowing outside of the island only nodes two generations behind the most advanced that TSMC currently has in commercial production.
In practice, this proposal — known in various circles as the N-2 rule or “N+2” (the key is the gap of two generations) — would significantly complicate TSMC’s expansion strategy in the United States and other allied countries. And it would do so at a particularly delicate moment: as Washington accelerates its semiconductor reindustrialization and the global landscape becomes tense due to the technological rivalry between the U.S. and China.
What is the “two generations behind” rule and why does it matter?
The logic of the rule is simple to explain, though complex to implement: if TSMC’s most advanced node in Taiwan is “N,” then factories abroad could only operate, without special permissions, with technology N-2 (two generations less advanced). If today’s industrial leadership is associated with processes at 3 nm, the foreign threshold would generally be around 5 nm and 7 nm, which remain vital for much of today’s electronics but no longer represent the cutting edge.
The innovation is not just in the criterion but in the change in rigor. Historically, Taiwan has managed restrictions to prevent its “advanced manufacturing recipe” from being replicated elsewhere. Tightening to two generations would reinforce this principle at a time when the world is trying to double production capacity to reduce supply risks.
The background: preserving the “silicon shield” amid geopolitical pressure
Taiwan’s justification hinges on a concept that has been circulating in international politics for years: the so-called “silicon shield”. The idea is that the island’s central role in producing advanced chips increases global interest in its stability and security. If a substantial portion of cutting-edge manufacturing moves abroad, that strategic leverage diminishes.
It is no coincidence that, in December, voices from the Taiwanese government publicly insisted that production of the most advanced chips must stay within the country. The discussion extends beyond industry: Taiwan has been adjusting export controls on dual-use technologies for months, aligning with the growing securitization of the tech supply chain.
United States, Arizona, and TSMC’s schedule: the point of friction
The potential impact can be understood by looking at Arizona, where TSMC is building a fabrication complex (Fab 21) intended to become a symbol of the U.S. industrial shift. According to industry-published plans, the complex involves different phases, with technologies increasing in sophistication.
This is where friction appears: if the U.S. aims to produce nodes ever closer to the technological frontier, and Taiwan decides that foreign entities can only be “two steps behind,” the result could be a regulatory slowdown affecting timelines, investments, and commercial commitments.
For TSMC, the dilemma is equally clear: the company seeks proximity to strategic clients, diversification of geographic risk, and responsiveness to demand (especially related to Artificial Intelligence). But Taiwan wants the core of the most sensitive knowledge and production to stay on home soil.
The key nuance: 5 nm and 7 nm are not “old,” they are business
In public debate, the conversation is often simplified: “2 nm is the future, 7 nm is the past.” The industrial reality is more nuanced. Processes like 5 nm and 7 nm remain crucial nodes for many chips that drive the market: from mobile components and servers to a variety of high-performance solutions where the balance of cost, performance, and availability is just as important as nanometer figures.
Therefore, an N-2 rule wouldn’t block all external expansion but could change its nature: more capacity and volume at mature nodes, with more cutting-edge activity concentrated in Taiwan.
Collateral risks: fragmented supply chain and “replication” policies
One underlying concern is the domino effect. If Taiwan tightens controls to safeguard its advantage, other countries might respond with similar measures on equipment, materials, software, or even talent. The result would be a more fragmented supply chain, with higher costs and less flexibility.
Furthermore, the debate occurs at a stage where technological restrictions are already part of foreign policy. Over the past year, Taiwan has continued refining its export and foreign investment regulations based on national security criteria. Meanwhile, the U.S. and allies have expanded controls on critical technologies to contain China’s capabilities in advanced semiconductors. In that context, the “two generations behind” rule fits as another piece of the same puzzle: technology is now managed not just as a market but as power.
What could happen now
In the short term, the key is political and regulatory: if the Taiwanese government makes this rule a formal standard, TSMC would need additional approvals to transfer more advanced processes abroad. That would open two pathways: either adjust external plans to what is permitted, or negotiate exemptions on a case-by-case basis based on strategic interests and international commitments.
In either scenario, the underlying message is the same: Taiwan is not debating a technical detail. It is deciding how much technological frontier it’s willing to export and what cost — economic and diplomatic — it’s willing to pay to maintain that advantage within its borders.
Frequently Asked Questions
What exactly does the N-2 (or “two generations behind”) rule mean in semiconductors?
It means that a factory abroad could only produce with process technologies that are two generations behind the most advanced node TSMC has available commercially in Taiwan, unless specifically approved by the Taiwanese government.
What nodes would be affected today by a “two generations” restriction if TSMC leads with 3 nm?
Generally, the limit would be around 5 nm and 7 nm as the nodes that could be deployed abroad with fewer restrictions, while the more advanced ones would require additional permissions.
How might this measure impact TSMC’s expansion in Arizona and chip production in the U.S.?
It could slow down or increase costs for deploying advanced nodes in the U.S. if Arizona’s schedule moves too close to the technological frontier Taiwan aims to reserve.
Why does Taiwan want to keep the most advanced chips on the island?
The official argument centers on national security, industrial leadership, and the protection of sensitive technology, as well as preserving Taiwan’s strategic role in the global semiconductor supply chain.