The Economic Underpinnings of Taiwan-US Relations

Over the past eight years, and particularly since 2020, China’s aggressive approach to Taiwan has sparked increasing concern about the prospect of a war in the Taiwan Strait. That growing risk, in turn, fosters discussion and debate on whether – and how – the United States should intervene if conflict does break out.

These debates usually center on the reputational costs of letting a democratic partner fall to China’s control, or the security ramifications of China controlling the island of Taiwan, with unimpeded access to the western Pacific. Often overlooked is the economic value of Taiwan as a partner for the United States. While Taiwan’s role in the global semiconductor supply chain is well-known, this issue, too, is generally seen through a security lens.

Taiwan was United States’ eighth largest trading partner in 2023; as of October 2024, it had moved up one spot to seventh place.

By comparison, Ukraine – which the United States has supplied with weapons and diplomatic support amid the ongoing invasion by Russia – ranked 83rd on the list of the largest U.S. trade partners last year. Economically, Taiwan is of vastly more importance for the U.S.

The absolute numbers make the discrepancy even more apparent. Ukraine-U.S. trade in goods in 2019 (before the pandemic and Russia’s invasion upended trade flows) was worth just $3.7 billion, vs $85 billion for Taiwan-U.S. trade the same year.

Since then, Taiwan’s trade with the United States has skyrocketed, growing over 50 percent in four years. In 2023, total bilateral trade in goods was worth $127.7 billion; the services trade tacked on an additional $11.6 billion. That’s a total value of $139.3 billion at stake in any conflict involving Taiwan.

“The United States trades more with Taiwan than …  with, say, France or Italy or the Netherlands or even a larger country like India or Brazil,” Ambassador Alexander Tah-Ray Yui, Taiwan’s top representative in the United States, told The Diplomat in an interview. “So we're small [in terms of land mass] but we are a significant economic power.”

Trade in goods is lopsided in favor of Taiwan – of the $127.7 billion in bilateral trade last year, $87.8 (over two-thirds) consisted of Taiwanese exports to the United States. Indeed, much of the growth in trade has been driven by increased U.S. demand for Taiwanese products. According to a July 2024 U.S. International Trade Commission report, “During 2013-2022, U.S.-Taiwan merchandise trade more than doubled, reaching $136.0 billion in 2022, primarily driven by growth in U.S. imports from Taiwan.”

And most of that centers on semiconductors and other electronic goods. According to the same USITC report, “Merchandise trade (mostly computer and electronic products such as semiconductors) dominates the overall trade profile, comprising 86.9 percent of [the United States’] total goods and services imports from Taiwan in 2022.”

Beyond trade, bilateral investment is also soaring. As of 2022, U.S. companies had invested some $16.7 billion in Taiwan. Taiwan had nearly the same amount – $16.1 billion – invested in the United States, with $10 billion of that coming since 2013. Again, most of that money is concentrated in the manufacturing of computer and electronic products.

“Cisco and Amazon and and other companies, even Uber, have announced [they are] increasing their investments in Taiwan,” Yui said.

Taiwanese companies are also plowing money into the United States. “Obviously the most noticeable is TSMC in Arizona,” Yui noted. “They invested $65 billion and [in early October] they added $7.5 billion into their Arizona project,” bringing the total value to $72.5 billion. That’s the largest greenfield project involving foreign direct investment in U.S. history.

Yui also noted the knock-on effects of such investments: “It’s not only TSMC… when one of these companies comes to the U.S. it brings 10, 12, 20 companies along with it because they're part of this supply chain… It's an ecosystem of companies that makes the chips.”

“Two-way investment is thriving,” Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council (USTBC), told The Diplomat via email. “U.S. multinationals, led by technology companies, are increasing their footprint on Taiwan including IBM, Google, AWS and others. The centrality of Taiwan’s technology ecosystem to the global economy makes it an indispensable partner to global multinationals.

“This goes too for Taiwan investment into the States. The U.S. now receives approximately 35 percent of Taiwan’s outbound investment, a number that has been climbing.”

Hammond-Chambers is bullish on future investment due to continued efforts at the political level. “The prospect of a U.S.-Taiwan tax agreement in the next several years should accelerate the flow of investment two ways, further fortifying the bilateral relationship,” the USTBC president noted. Yui made a similar point in his interview with The Diplomat.

An agreement to eliminate double-taxation is only one of several processes underway to further bolster Taiwan-U.S. economic ties. Although it’s received far less fanfare than U.S. congressional delegations or arms sales to Taiwan, the U.S.-Taiwan Initiative on 21st Century Trade has been making steady progress since its launch in June 2022. The first agreement under the initiative was signed on June 1, 2023 – a year to the day after the talks began – and is expected to enter into force soon, after concluding the legislative processes.

Talks have already begun on a “Phase 2” agreement, which will cover agriculture, the environment, and labor – more sensitive issues in terms of domestic politics in Taiwan and the United States.

“On environmental and labor issues, U.S. business has been mostly un-engaged as the sector areas enjoy broad support amongst both sides,” Hammond-Chambers said.

“Agriculture has been and remains the most contentious and problematic, a long-standing thorn in the side of bilateral commercial relations.”

The Phase 2 talks are“an ongoing process,” said Yui, “but what I can say is both sides have a lot of will” to get a deal “concluded as soon as possible.”

Hammond-Chambers likewise noted “an effort to conclude Phase 2 negotiations as soon as is possible.” With that in mind, he said, “it’s possible that agriculture may slip into Phase 3 of negotiations so the second phase can be put to bed.”

The sensitivity over the agricultural sector is a reminder that the trade relationship is not without controversy – even in the much-vaunted semiconductor industry. Some in Taiwan fear that, by pushing for increased manufacturing on U.S. soil, Washington is trying to hollow out Taiwan’s position in the industry, which would weaken the island’s “Silicon Shield.”

Some U.S. politicians, meanwhile, have criticized Taiwan for “stealing” U.S. manufacturing and jobs. As an example, former President Donald Trump in July 2023 claimed that Taiwan “took our business away,” saying, “We should have stopped them. We should have taxed them. We should have tariffed them.”

In January 2024, Trump repeated the claim, this time specifically pointing to the semiconductor industry: “Taiwan did take all of our chip business. We used to make all of our own chips, now they’re made in Taiwan, 90 percent of [them]... Remember this, Taiwan took… our business away.”

What’s particularly alarming for Taipei is that both these comments came in the context of Trump being asked if the U.S. should defend Taiwan against China’s aggression. The implication is that Taiwan having “taken our business away” should factor into that calculation.

Industry experts, however, rebutted Trump’s framing of the issue. Yui himself gently pushed back on such rhetoric, while being careful not to name names.

“We've had some friends in the United States make comments about Taiwan taking U.S. jobs away, especially in semiconductors, and that’s not fair actually,” he told The Diplomat. “...Instead of adversaries or competitors, we’re actually very good partners. We complement each other very well.”

Yui pointed to the interconnected nature of semiconductor supply chains, where U.S. companies design high-end chips and sell the precision machinery needed to make them. Taiwan, in turn, buys that machinery to make semiconductors for U.S. firms and the world. The result is a far more complicated trade relationship than it might seem.

“In this semiconductor value chain, for every dollar that is sold in microchips, United States companies actually get 38 cents and our companies get 11 cents for manufacturing. So actually it’s a very good deal,” Yui asserted.

If forced to choose between comments like Trump’s and a continued lack of public attention to Taiwan’s economic importance, Taipei would probably prefer to fly under the radar once again. But the purely economic value of Taiwan to the United States – and to the world – cannot be overlooked in discussions of a Taiwan Strait contingency.