So here's an awkward diplomatic moment: Taiwan just told Washington that its plan to move 40% of semiconductor production to the United States is, to put it diplomatically, not happening. At all.

Taiwan Semiconductor Manufacturing Company (TSM) is already pouring $165 billion into building fabrication plants in Arizona, which sounds like a lot of cooperation. But Taiwan's government wants to make something crystal clear—the country's semiconductor crown jewels are staying put.

Why 40% Is a Fantasy Number

In an interview that aired Sunday on CTS, Vice Premier Cheng Li-chiun delivered what might be the most polite "absolutely not" in recent trade diplomacy. She said Taiwan's semiconductor ecosystem, painstakingly built over decades, simply cannot be packed up and shipped across the Pacific.

"I have made it very clear to the United States that this is impossible," Cheng said, addressing the 40% relocation target that U.S. officials have been floating.

Her comments came as a direct response to U.S. Commerce Secretary Howard Lutnick, who has argued that America needs to bring chipmaking home because too much production sits uncomfortably close to China.

Cheng emphasized that Taiwan's domestic chip capacity will keep expanding, even while companies build out operations abroad. "Our overall capacity (in Taiwan) will only continue to grow," she explained. "But we can expand our presence in the United States."

What Taiwan Is Actually Willing to Do

Taiwan and the United States reached a tariff agreement last month that reduced duties on Taiwanese exports from 20% to 15%. That's progress, but it doesn't come with a side of wholesale industrial relocation.

Cheng made clear that Taiwan won't be moving its science parks—the physical and institutional infrastructure that makes the semiconductor industry work. Instead, Taiwan is offering to share expertise on building semiconductor clusters so the U.S. can develop its own ecosystem.

She also noted that Taiwan's total chip capacity, including projects currently under construction and in the planning stages for advanced manufacturing and packaging, will remain significantly larger than anything the country invests overseas.

The Math Doesn't Support a Big Shift

Economist Lien Hsien-ming recently crunched the numbers and reached a similar conclusion. He estimates that Taiwan Semiconductor will likely relocate less than 15% of its most advanced chipmaking to the United States—nowhere near Lutnick's 40% target for 2029.

The reason is simple timing. President Donald Trump's second term ends before Taiwan Semiconductor's Arizona facilities can ramp up to meaningful production levels. The company is investing $65 billion in three Arizona fabs, but the second facility won't hit mass production until 2027, and the third is still being built.

Even with discussions about a potential fourth fab, large-scale advanced chip output probably won't come online before Trump leaves office, according to Lien.

The Real Reason for Global Expansion

Here's the twist: Taiwan Semiconductor's overseas expansion isn't really about tariffs or political pressure. According to Taiwan Institute of Economic Research President Chang Chien-yi, it's about something much more mundane—Taiwan is running out of room.

The island simply doesn't have enough land to support unlimited large-scale industrial expansion. Space constraints in crowded areas like Taipei's Xinyi District mean companies can't keep adding advanced fabs domestically, so they're looking abroad out of necessity.

Chang also pointed out that overseas projects are driven largely by customer demand rather than government arm-twisting. Major tech companies want chip production closer to their operations, and TSMC is responding to that market reality.

Even with a new U.S.-Taiwan trade pact putting fresh scrutiny on where the world's most advanced chips get made, economists expect the vast majority of cutting-edge production to stay in Taiwan. Arizona facilities will take years to fully ramp up, and by then, Taiwan's domestic capacity will have grown even more.

TSM Price Action: Taiwan Semiconductor shares were down 0.24% at $348.00 during premarket trading on Monday. The stock is trading near its 52-week high of $351.33.