TSMC’s two recent trade theft cases against its former employees, implicating U.S. chipmaker Intel and Japanese semiconductor equipment supplier Tokyo Electron (TEL), have led to some head scratching as to why Taiwan would target the firms of its two closest partners.
Taiwan is in the midst of negotiating a trade deal to secure favorable tariff rates with a mercurial U.S. administration. TSMC has already pledged $100 billion in U.S. investments to stay in President Donald Trump’s good graces, and it would seem like a blunder to potentially embarrass Intel, the U.S. national champion for reshoring chip manufacturing and 10 percent owned by the U.S. government. One U.S. investor quoted in the Financial Times said the investigations were “not a good look for Taiwan,” as it could be seen as undermining “US efforts to revive its chip manufacturing industry.”
However, TSMC’s trade theft cases should not be taken for more than they are: the company’s pursuit of protecting its legitimate intellectual property interests and Taiwan’s trade theft protection system working as it should.
Policymakers should instead focus on the bigger issue: Taiwan must update its export control framework to more comprehensively address the flow of technologies to adversaries instead of solely relying on U.S. export controls.
Taiwan’s commitment to strong allied commercial partnerships to secure its economic resilience and supply chains remains unchanged. Deeper allied integration while protecting Taiwan’s core economic strengths is vital for the island’s survival as China pushes for chip dominance across the whole supply chain from printed circuit boards to mature chips.
The TEL and Lo Wei-jen cases should not be interpreted as anything more than TSMC protecting its legitimate IP interests. The key legal instrument involved is the National Security Act, which criminalizes the theft of national core critical technology (NCCT) trade secrets. The original Trade Secrets Act (TSA) was modeled after the U.S. Economic Espionage Act and Japan’s Unfair Competition Prevention Act; it did not distinguish between theft of ordinary trade secrets and core technologies. The TSA’s lighter sentencing was also insufficient to deter Taiwanese engineers from taking critical technologies to China, attracted by higher salaries. In 2022, lawmakers amended the NSA to create NCCT theft as a separate category, imposing heavier penalties of 5 to 12 years in prison and up to a $3 million fine.
Taiwan’s prosecutions of current and former TSMC engineers mark a first test case of this law. Earlier this summer, several former and current TSMC employees allegedly stole secrets related to the company’s advanced 2-nanometer advanced node processes, taking them to Tokyo Electron. TSMC filed a complaint with Taiwanese prosecutors, and Taiwan’s High Prosecutors Office charged TEL and TSMC engineers with violating the Trade Secrets Act and the National Security Act (NSA).
In July, Lo Wei-jen, a high-ranking TSMC executive and close lieutenant to CEO C.C. Wei, retired from the company and almost immediately took up a post at Intel, allegedly taking 2-nanometer secrets with him. TSMC filed suit against Lo, and Taiwan’s prosecutors have initiated an NSA investigation.
Companies from friendly nations could, of course, unwittingly obtain trade secrets. Taiwan’s legal framework, similar to U.S. law, incentivizes companies to have sufficient internal compliance mechanisms, as they can be exposed to criminal liability when trade secrets fall into their hands. The charge against TEL, for example, does not accuse the company of theft but of insufficient preventive measures in managing third party information. In response to the charges, TEL promised to boost its internal compliance and fired the employees in question.
In this context, Taiwan’s moves to boost its legal toolkit for trade secret protections not only protect Taiwan’s critical technologies and economic security but also align with the long-held U.S. interest for its trading partners to adopt robust trade secret protections. In its annual special Section 301 reports on intellectual property rights, the United States Trade Representative (USTR) has long highlighted “the growing need for trading partners to provide effective protection and enforcement of trade secrets.” In its past two reports, USTR praised Taiwan for strengthening its trade secret regime.
Nevertheless, from a larger perspective, while important economic security tools, trade secret protections are insufficient to address the broader challenge of technology outflow to Taiwan’s adversaries.
The key constraint of the NSA’s NCCT list is that it is housed under trade secret protection rather than export control regulations. Even when hinging on national core technologies, trade secrets are a private right. This means that in practice, Taiwanese prosecutors need the cooperation of the rights owner in order to successfully prosecute a case. In other words, if a trade secret theft occurs with national security implications, prosecutors can launch an investigation – but if a company decides not to cooperate due to private commercial interests, the case will be difficult to prove in court.
What Taiwan needs is a modern, comprehensive export control system to stop the flow of sensitive technologies to adversaries. Taiwan’s existing export control system under the Foreign Trade Act with its own “strategic high-tech commodities” (SHTC) lists – wholly separate from the NCCT list – is primarily based off the old model of export controls under the Wassenaar Arrangement, which aims to prevent commodities from being transferred to countries subject to multilateral sanctions.
While Taiwanese companies using U.S. components or software must comply with U.S. export controls on advanced chips, for example, a large swath of sensitive products and technologies are not controlled by either U.S. or Taiwanese controls.
In 2022, the Tsai Ing-wen administration sought to address this problem by updating Taiwan’s export control framework to meet the emerging needs of technology competition with China, specifically to control intangible technology exports in addition to commodities.
However, due in part to industry lobbying, the final compromise amendments to the NSA ended up creating an NCCT list narrowly confined to trade secret protection. This strange amalgam of connecting a core technology list to trade secret protection, in effect grafting national security considerations to an IP rights law, is present in no other country and creates a mismatch of private and public interests.
This means that for technologies falling outside the scope of export control lists, Taipei is reliant on private companies to bring forward trade secret theft cases, even when litigation may run counter to corporate interest. The 2022 failure to adequately beef up the export control system contributes to the concern of some policymakers and scholars that Taiwan’s economic security agencies are too beholden to the private sector.
Taipei has made recent moves to align with U.S. export controls such as adding advanced semiconductor equipment and quantum computers to the SHTC list or blocking exports to Huawei and SMIC. But Taiwan needs a deeper reform of its outdated export control system to align with the United States and its partners. As we have suggested in our recent reports, Taiwan’s government could take action including establishing modernizing its export control list regime, clear export control principles, enhancing transparency in entity list updates, and leverage the Cross-Strait Relations Act to create a China-specific export control regime.
Taiwan’s 2022 NSA amendments strengthening of its trade secret protections are a good step in the right direction, and the TSMC trade theft cases do not change the fact that economic security depends on strong, aligned controls to prevent adversaries from gaining a lead in the race for strategic technologies. Taiwan needs the United States and Japan, and vice versa. Resilient, trusted semiconductor supply chains require robust commercial cooperation among partners.
