Written by Alexander C. Tan.
Image credit: Public domain.
The Shifting Sands of US-Taiwan Trade Relations
The economic relationship between the United States and Taiwan has been built on a foundation of strong trade and investment ties, evolving into a crucial partnership in the global technology and manufacturing supply chains. Taiwan has emerged as a significant trading partner for the US, particularly in the realm of electronics and semiconductors, while the US remains a key destination for Taiwanese exports. However, recent trade policies and the use of tariffs by the Trump administration have introduced a new layer of complexity and uncertainty into this relationship. This policy framework has been marked by a degree of unpredictability, with tariffs being imposed not only on perceived adversaries but also on long-standing allies.
In this evolving landscape, Taiwan finds itself in a uniquely vulnerable position. The Taiwanese economy is heavily reliant on international trade, with exports constituting a substantial portion of its gross domestic product. This dependence makes it particularly susceptible to shifts in global trade policies. Furthermore, Taiwan’s exclusion from major regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) limits its options for diversifying trade relationships and mitigating the impact of tariffs imposed by key partners.Compounding these challenges are US policies, such as the CHIPS Act and restrictions on AI chip exports to China, which incentivise Taiwanese semiconductor manufacturers, a cornerstone of Taiwan’s economy, to invest and produce in the US.
Taiwan’s economic prosperity has been fundamentally influenced by its position as a global semiconductor industry leader. This dominance, however, now creates a vulnerability as the US endeavours to bolster its domestic manufacturing capabilities and reshape global supply chains. Taiwan’s exclusion from key regional trade blocs further complicates its precarious situation, potentially leaving it isolated within a swiftly evolving economic landscape.
The Impact of Trump’s Tariffs on Taiwan’s Trade
On April 2, 2025, the Trump administration announced the imposition of so-called “reciprocal tariffs,” with Taiwan being among the targeted economies.This initial measure included a 32 per cent tariff on all imports from Taiwan. However, this tariff hike was subsequently paused for 90 days until July 9, 2025, with the exception of China, and a 10 per cent baseline increase was retained. However, the Trump administration has also threatened tariffs on semiconductor imports, a sector of prime importance to Taiwan. While semiconductors were initially reported to be exempt from the reciprocal tariffs, the possibility of future levies on this sector continues to loom, creating ongoing uncertainty.
The potential consequences of these tariffs on Taiwan’s trade are significant. Economic modelling suggests a decline in the value of goods exported to the US, a contraction in Taiwan’s manufacturing output, and a notable reduction in the GDP growth rate. These concerns arise against a backdrop of a significantly increasing trade surplus between Taiwan and the US in recent years, which reached $73.9 billion in 2024, making it the sixth-largest trade deficit for the US. The US administration’s strategy of imposing higher tariff rates on countries with larger trade surpluses directly affects Taiwan. The fact that Taiwan faces a higher tariff rate compared to some of its key competitors in the US market, such as Japan and South Korea, despite significant investments by Taiwanese companies in the US semiconductor industry, places Taiwan at a distinct disadvantage.
Investment Under Pressure: The Semiconductor Dilemma
US policies, particularly the CHIPS Act and the imposition of restrictions on AI chip exports to China, are significantly shaping the investment strategies of Taiwanese semiconductor companies, most notably Taiwan Semiconductor Manufacturing Company (TSMC). The US CHIPS Act provides substantial incentives to encourage semiconductor manufacturing within the United States. At the same time, the US government has implemented export controls aimed at restricting the flow of advanced AI chips and semiconductor manufacturing equipment to China. These measures directly impact Taiwanese companies that supply to the Chinese market, creating a complex regulatory environment for the semiconductor industry.
The US CHIPS Act and threat of impending tariffs may substantially reshape the global semiconductor landscape, compelling Taiwan’s leading firms to relocate vital operations to American soil. Though this strategic shift helps buffer against tariff risks and geopolitical uncertainty, it simultaneously raises doubts about the enduring effects on Taiwan’s economic sovereignty. Although this investment may be beneficial for the US by strengthening its domestic chip manufacturing capabilities and enhancing supply chain resilience, it simultaneously generates anxieties within Taiwan regarding the possible erosion of its “silicon shield” and the broader implications for its future economic and security landscape.
Caught in the Middle: Taiwan’s Exclusion from Regional Trade Blocs
Taiwan’s position is further complicated by its exclusion from major regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This exclusion from key regional trade blocs results in several economic disadvantages and lost opportunities for Taiwan, particularly in the context of the newly imposed tariffs. Taiwan’s absence from RCEP could weaken the competitiveness of its exports to RCEP member countries due to potential tariffs. Sectors such as textiles, petrochemicals, and automotive components are particularly vulnerable. Studies have indicated that Taiwan already suffers trade losses as a result of its exclusion from these regional trade agreements. In contrast, CPTPP membership is projected to boost Taiwan’s economy, potentially by as much as 2 per cent, while exclusion could lead to a 0.5 per cent loss. Given that Taiwan’s trade with RCEP member countries accounts for a substantial portion of its total trade (around 60 per cent), the economic significance of not being part of this bloc is considerable.
Taiwan’s exclusion from RCEP and the significant political challenges it faces in joining CPTPP place it at a distinct disadvantage as it confronts the US tariffs. While other nations in the Asia-Pacific region benefit from reduced trade barriers and enhanced economic integration through these agreements, Taiwan risks being economically isolated. This lack of access to regional trade networks could further exacerbate the negative impacts of the US tariffs by limiting alternative markets and investment opportunities for Taiwanese businesses. The ultimate success or failure of these efforts will have profound implications for Taiwan’s long-term political and economic trajectory.
Economic Prospects: Navigating Uncertainty
The overall impact of the Trump administration’s tariffs and related US policies on Taiwan’s economic growth projections presents a complex picture. While GDP growth forecasts for Taiwan in 2025 have been revised upwards following a strong first quarter driven by robust technology exports, considerable uncertainty persists due to the potential for US tariffs to be fully implemented and a possible inventory correction later in the year. Some analysts have projected a significant reduction in Taiwan’s GDP growth, ranging from 1.2 to 2.5 percentage points, specifically due to the imposition of these tariffs.
Taiwan’s economic prospects are inextricably linked to the global technology cycle, particularly the sustained demand for semiconductors and artificial intelligence-related products. The semiconductor industry is a critical pillar of Taiwan’s economy, contributing significantly to its GDP and accounting for a large share of its total exports. Taiwan holds a dominant position in the global semiconductor manufacturing sector, especially in the production of advanced chips. However, US policies are strategically aimed at reducing the reliance of American industries on Taiwanese semiconductors, which poses a long-term challenge to Taiwan’s continued dominance in this sector. In response to these challenges, Taiwan is actively pursuing strategies for economic diversification and strengthening its trade ties with other partners.
Taiwan’s economic future in this uncertain environment will depend heavily on its ability to navigate the complexities of global trade policies and geopolitical tensions. While the technology sector currently provides a strong engine for growth, the long-term impact of US tariffs and the strategic objectives of US industrial policy present considerable headwinds. Diversification of both export markets and the industrial base will be crucial for ensuring Taiwan’s long-term economic resilience. Although the US remains a vital economic partner, reducing over-reliance on this single market and cultivating stronger relationships with other regions and sectors will be essential for Taiwan to secure its economic future.
Alexander C. Tan., PhD., is Professor of Political Science and International Relations at the University of Canterbury and Founder and Principal Research Fellow at the Institute for Indo-Pacific Affairs.
This article was published as part of a special issue on ‘Trump’s Tariffs: What does it mean for Taiwan?‘.
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