Written by Thung-Hong Lin and Chun-Yin Lee.
Image credit: Overlooking the Port of Keelung (基隆港) by Alexander Synaptic/ Flickr, license: CC BY-SA 2.0.
From Xi Jinping’s rise to power, through the U.S.–China trade war, to Donald Trump’s tariff war, global supply chains have experienced tremendous disruption. How have Taiwanese firms performed amid this turbulent landscape? In the first wave of the U.S.–China trade war in 2018, American firms sought to reduce their dependence on China by redirecting investments to Southeast Asia, while European firms aimed to increase their market share within China. Taiwanese firms, for the most part, followed their upstream clients in moving production out of China. To the surprise of many observers, after the “great escape” from China, Taiwan’s stock market—an indicator of investor confidence—reached a historic high in the fall of 2025. Why have investors shown optimism about Taiwanese firms’ profitability despite ongoing global instability and military threats from China? How have firms’ strategic responses shaped these outcomes? The Taiwanese experience may offer valuable lessons for global businesses and policymakers alike.
This article introduces findings from our 2025 publication in the International Journal of Taiwan Studies (IJTS), titled “Visible Fists: Political Risks and the Performance of Taiwanese Businesses in China, 1995–2022.” We further connect those findings to our ongoing research into the winners and losers among Taiwanese firms amid escalating U.S.–China competition. Our study revisits the classic debate on regime type and foreign direct investment (FDI). Conventional wisdom holds that democracies provide stronger protections for private property rights, thereby attracting more FDI and boosting economic growth. However, the rapid development of certain authoritarian regimes in recent decades has called this assumption into question.
China stands for one of the most prominent challenges to the theory that democracies are inherently better at attracting foreign capital. Since its reform and opening-up in 1978, and particularly after Deng Xiaoping’s market-oriented reforms in 1992, China has managed to attract massive foreign investment under an authoritarian regime. This has made China a key outlier in the literature. Jieh-min Wu, Distinguished Research Fellow at Academia Sinica’s Institute of Sociology, has argued that Chinese capitalism is indeed distinctive: through institutionalized rent-seeking mechanisms such as the household registration (hukou) system, the state has exploited migrant workers, transferring some of the resulting profits to both domestic and foreign capitalists, while also fueling the state’s fiscal capacity. Taiwanese firms were among the first wave of investors in China. Wu argues that they acted both as agents of global capital and as facilitators of China’s industrial upgrading, contributing to the country’s economic rise.
However, following Xi Jinping’s rise to power in 2012 and his later consolidation of political control, the landscape began to shift. Harvard sociologist Ya-Wen Lei characterizes this new phase as “The Gilded Cage”—a period in which the Chinese state keeps tight control over the market even as it pursues economic reforms. As captured by the Chinese Communist Party’s slogan “empty the cage to change the bird,” the state’s strategy involves phasing out traditional Taiwanese-owned “world factories” while promoting high-tech and value-added sectors such as internet technology. This approach has generated both innovation and disruption in China’s industrial development. At the same time, Beijing’s aggressive investment in advanced technologies has reinforced state control over both the economy and civil society, while also intensifying military threats abroad, particularly in the Taiwan Strait. Ironically, this strategy may undermine China’s long-term capacity for innovation and its access to Western markets.
Beyond internal political and economic transformations in China, external geopolitical shocks have compounded the challenges. Trump’s initiation of the trade war in 2018 added uncertainty to foreign operations in China. When Trump returned to office in 2024 and reintroduced “Liberation Day” tariffs, the risks intensified. Our article explores how worsening U.S.–China relations and China’s evolving governance strategies have affected Taiwanese business performance. Drawing on financial data from Taiwan’s top 500 business groups and 5,000 individual firms between 1995 and 2022, alongside Chinese macroeconomic indicators, we find that Taiwanese firms working in China have experienced significant revenue and profit declines since 2012. This reflects the negative spillover effects of Xi Jinping’s tightening governance. The performance of Taiwanese firms has worsened in proportion to their sunk investments in China, the increase in China’s autocratization index, and the escalation of U.S.–China trade tensions.
But have all Taiwanese businesses suffered equally, or have some managed to benefit from this geopolitical realignment? In our recent research, we further compare firm performance across different sectors. We distinguish between traditional electronics firms and members of the Taiwan Semiconductor Industry Association (TSIA), using other Taiwanese companies as the reference group. To measure political and economic risk, we consider China’s autocratization index, its military spending as a share of GDP, and its trade dependence on the United States. On average, labor-intensive electronics firms such as Foxconn show high revenues but low profit margins. In contrast, TSIA members such as TSMC—focused on high-end semiconductors—have invested less in China and report lower revenues, but their profit margins are significantly higher.
Since Xi’s rise to power, traditional electronics firms have seen declining performance, echoing Lei’s thesis: Taiwanese companies have been squeezed out or replaced by China’s “change the bird” strategy. However, TSIA members have shown counter-cyclical growth. Our data analysis reveals that increases in China’s autocratization and military spending negatively affect revenue and profitability in the electronics sector. Yet these same indicators correlate with improved performance among TSIA firms. A decline in China’s trade dependence on the U.S. harms electronics firms but boosts TSIA members—most of which run primarily from Taiwan. Under China’s tightening control and amid the spillover effects of the trade war, certain Taiwanese firms are clearly benefiting.
Finally, following the announcement of “Liberation Day” tariffs in April 2025, negotiations on U.S.–Taiwan and U.S.–China tariffs are still ongoing, and their long-term impact on industry performance remains uncertain. If U.S.–China negotiations move toward reconciliation, Taiwan’s firms may keep some of the spillover gains—but those effects are unlikely to grow. If the U.S. imposes moderate tariffs on Taiwan (e.g., under 20%), the impact may be manageable. However, if the U.S.–China talks break down again, Taiwan’s high-tech industries—especially in semiconductors—could continue to benefit from the restructuring of global supply chains.
Thung-Hong Lin is a research fellow at the Institute of Sociology, Academia Sinica, and the former director of the Center for Contemporary China at Tsinghua University (Taiwan). His research interests encompass social stratification, political sociology, and the sociology of disasters. He was the Stanford-Taiwan Social Science (stss) fellow in the Center for Advanced Studies of Behavioral Sciences (casbs) at Stanford University for 2023–2024. He also held a Fulbright Scholarship from 2023 to 2024.
Chun-Yin Lee is a doctoral student in the Joint PhD Program of Public Sociology, National Chengchi University and Academia Sinica, with research interests in life course studies and social stratification. He also serves as a research assistant at the Institute of Sociology, Academia Sinica. His recent publications can be found in Taiwanese Sociology, Taiwan Economic Forecast and Policy, Survey Research: Method and Application, and International Journal of Taiwan Studies.
This article was published as part of a special issue on ‘Transitions and Challenges in Taiwan’s Economy and Society‘.