Written by Tom Meinderts.
Image credit: Overlooking the Port of Keelung (基隆港) by Alexander Synaptic/ Flickr, license: CC BY-SA 2.0.
On April 2nd, the Trump Administration instated a new global trade policy by instating tariffs on virtually every trade partner of the United States through a Presidential Executive Order. In this Executive Order, President Trump declared a national emergency “arising from conditions reflected in large and persistent annual U.S. goods trade deficits.” The new Trump tariffs that arose from this are the most radical tariffs since the Great Depression in the 1930s. The Trump tariffs levy indiscriminate tariffs between 10% and 50% on trade partners of the United States. They are indiscriminate in that they do not target specific sectors of industry, as is usually the case when instating tariffs. Instead, the Trump tariffs are levied on any product imported into the United States, with its rate dependent on the country of origin. Taiwan’s tariff rate falls on the higher end of the tariff spectrum, coming in at 32%.
A week after introducing the tariffs, on April 9th, the Trump Administration suspended most of the tariffs for 90 days during which global tariffs have been set to a flat 10% for all countries except for China, Canada, and Mexico. Canada and Mexico’s tariff rates are set at 25%, justified by the Trump Administration as part of a separate strategy to limit fentanyl smuggling. China’s tariff rates were raised from 34% to 84% in response to China’s own retaliatory tariffs and have since gone up to a total tariff barrier of 145% in a major flare-up of the US-China trade war.
This suspension has created an opportunity for countries to negotiate with the United States, including Taiwan, which held its first tariff negotiations with the United States on April 12th. Forcing countries to the negotiating table has since been posited by the US Treasury Secretary as the strategy behind the Trump Tariffs. However, until these negotiations have been completed, Taiwan will still have to deal with a 10% trade barrier to the US, and if no new agreement is made by early July, the tariff rate will shoot back up to 32%. As such, in the absence of a deal being reached between the US and Taiwan, many industries will continue to suffer trade barriers to one of Taiwan’s top trading partner markets.
One of the industries that is especially reliant on the US market is the semiconductor industry. Around half of Taiwan’s exports can be attributed to the semiconductor industry, with the US being one of its key export markets. Taiwan, together with Japan, South Korea, China, and the United States, produces most of the world’s semiconductors, with Taiwan Semiconductor Manufacturing Company producing around half of the global supply. As of the publication of this article, semiconductors, together with other electronics, have been temporarily fully exempted from the Trump Tariffs. Nonetheless, the Trump Administration has repeatedly stressed the temporary nature of this exemption and plans to institute sector-specific tariffs within the next two months, including tariffs on semiconductors.
As semiconductors are a high-value, manufactured good which is used in the manufacturing process of other goods, they hold an important place in a plethora of supply chains. This places Taiwan as a central manufacturing hub within global electronics supply chains. For example, iPhones are designed by US companies, Taiwanese companies produce components, and they are then assembled in China before being sold back into the United States. Because of this, Taiwanese semiconductors play a major role in many supply chains, crossing multiple countries and continents.
This central role in the global electronics supply chain has caused Taiwan to be strongly affected by the US-China Trade War. China and the US are the two top trade partners of Taiwan, and both are key markets for semiconductor exports. As such, Taiwan is economically dependent on both countries and became wedged in between their trade war in 2018. With the semiconductor industry being in the middle of the electronics supply chain, it is indirectly but severely, affected by tariffs placed on China by the US. This is because the lower export from China to the US means that China’s imports from Taiwan go down as well. Taiwan’s semiconductor industry also became diplomatically enmeshed in the trade war, with the US pressuring Taiwan to move its production facilities away from China and regulating who Taiwan can sell their semiconductors to.
Under the previous Trump Administration, this led to Taiwan moving some of its semiconductor exports to China over to the US. This was further reinforced under the Biden Administration with the US-Taiwan Initiative on 21st Century Trade and FDI by the US in Taiwan through the CHIPS and Science Act. While this strengthened US-Taiwan trade relations, it also increased Taiwan’s already existing economic dependency on the United States. The current tariffs are seemingly causing this same dynamic to play out, with several Taiwanese companies moving their production away from China and into the US.
Because of this, the new Trump Tariffs are all the more harmful for Taiwan. As a manufacturing economy Taiwan is already more prone to issues in international trade, but with the US placing direct, indiscriminate tariffs on imports from Taiwan, it caused Taiwan’s stock markets to plummet. While the decreased rate from 32% to 10% and the temporary suspension of tariffs on semiconductors and other electronic goods may have taken some of the edge off of the Trump Tariffs, it is nonetheless a massive hit to the Taiwanese economy. And while Taiwan’s rate may have been lowered, its semiconductor industry will still have to deal with the indirect effects of the increased tariff rate that the US placed on China.
Despite widespread criticism of the first Trump administration’s handling of the 2018 US-China Trade War, its tariff policy was guided by clear objectives, purpose, and strategy, with relatively contained effects on the US economy. However, the new global Trump Tariffs have caused a shock to the global stock market, including that of the United States and will undoubtedly have a strong long-term impact on the US economy. In the first place, this impact will happen through the higher prices for goods, both for businesses and consumers. It will become even more severe due to reciprocal tariffs that have already been imposed by China and are likely to be imposed by other countries if the full tariffs go into effect.
So, what does this mean for Taiwan’s trade policies? With Taiwan’s existing economic dependency on the US, it is unsurprising that Taiwan has already started negotiations to lower the Trump Tariffs. However, President Trump has been critical of the US-Taiwan semiconductor trade, previously stating that Taiwan “stole” the American chip business. This could mean that Taiwan will have to make severe concessions in their semiconductor trade with the US in a move that harkens back to the Reagan Tariffs on the Japanese semiconductor industry, which forced Japan to give up a large part of their hold on the global semiconductor industry. This move would reinforce Taiwan’s dependency on the US even more whilst simultaneously strengthening the American semiconductor industry.
Taiwan has another potential avenue: renewing trade relationships with China, where markets have become increasingly receptive to Taiwanese semiconductor imports due to the higher costs of American semiconductors resulting from the Trump administration’s tariff policies. However, this would sour US-Taiwan relations as the US has repeatedly expressed concern about the use of American and Taiwanese semiconductors for Chinese industrial and military applications. Moreover, pursuing this path would shift Taiwan’s economic dependence from the United States to China, creating a more pronounced reliance on its neighbouring power. Such a transition, particularly if accompanied by deteriorating US-Taiwan relations, carries significant military and strategic implications for Taiwan’s security. Considering these factors, Taiwan’s leadership is unlikely to pursue this approach.
But finding third markets is also easier said than done. Taiwan’s semiconductor industry is already integrated in the EU and Japan and while there has been further integration with these markets since the start of the US-China trade war, there is a clear limit for expansion. The Trump Tariffs could open up some opportunities for other countries to switch over from American semiconductors to Taiwanese ones, but it is unlikely to cushion the blow of the loss of access to the US market.
These ongoing negotiations between Taiwan and the United States may, therefore, rank among the most consequential diplomatic exchanges in Taiwan’s history. The Trump Tariffs have already significantly impacted Taiwan’s economy, and Taiwan’s ability to secure favourable terms with the United States will largely determine its capacity to reconcile competing economic interests with crucial strategic imperatives. However, if the negotiations go well, there may also be an opportunity for Taiwan to take over a larger share of the US market, as other semiconductor industries also have to deal with the tariffs. Although Taiwan has gone into the negotiations with a positive attitude, the Trump Tariffs have strongly impacted US-Taiwan relations, regardless of the outcome of the negotiations.
Tom Meinderts is a PhD candidate at Sciences Po, Paris and a lecturer in Political Science at the University of Amsterdam. His research focuses on US foreign policy on the nexus of Contemporary History, International Relations, and International Political Economy, with a particular focus on trade relations and foreign aid.
This article was published as part of a special issue on ‘Trump’s Tariffs: What does it mean for Taiwan?‘.
Taiwan Insight 